Cheiron's APP Featured in GAO Report
A recent report by the Government Accountability Office (GAO) identifies Cheiron's variable DB plan, also known as the "adjustable pension plan" (APP) as an option "for a flexible DB plan to address risks facing multiemployer plans." The NCCMP's "Target Benefit" model was also cited.
In very broad terms, an APP plan is developed on a conservative (e.g., 5%) rate of return and mortality assumption. Benefits are adjusted to account for varying economic conditions. The more conservative nature of the plan results in more stable financial costs for the employers. The pooled risks (mortality and investments) provide better benefits than a defined contribution plan would for the participants (learn more about the APP here).
The GAO report, prepared at the request of the House Committee on Education and the Workforce, is a comprehensive review of funding challenges facing many multiemployer plans, including the looming threat of insolvencies for several large plans. The report concluded that Congress "should consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system." That could include allowing "severely under-funded plans" to reduce accrued benefits.
"Longer term options," the report states, would provide plans with flexibilities and resources to help attain financial stability in the future. "These include encouraging the adoption of flexible benefit designs and reforming withdrawal liability policies," the report stated.
The report cited several benefits to flexible DB plans "which some stakeholders said are essential to the long-term survival of the multiemployer system." Chief among them included limiting employer liability. That, in turn, can "strengthen employers' commitment to the plan and reduce incentives for them to leave" and potentially draw new employers to the plan, improving plan demographics and promoting long-term viability.
The report also cited comments from "a group of employer representatives" who stated that a flexible DB plan, such as the one developed by Cheiron, in conjunction with the United Food and Commercial Workers (UFCW) International Union, "provides trustees more tools to prudently manage the plan to keep it well-funded and able to pay promised benefits even when faced with adverse events, such as poor investment returns or demographic shifts."
Additional benefits were cited including favorable comparisons to defined contribution plans due to:
- Pooled and professionally managed investments
- Risk-sharing among participants
- A minimum guaranteed benefit
The report notes that flexible DB models do entail tradeoffs, but highlights that these must be evaluated relative to the existing risk levels. So "a flexible benefit model that reduces risk might provide a somewhat lower promised benefit, but one that is more secure."
The GAO report also cautioned that flexible designs such as the APP would not address the immediate needs of severely under-funded plans (the principal focus of the GAO report), nor is it their purpose to do so.
Still, "given the potential long-term benefits of a flexible DB model, some experts said regulatory agencies [such as the PBGC] could do more to help plans adopt a design with these features," the GAO report suggests.