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PGBC Requests Information for Multiemployer Plans

The Pension Benefit Guaranty Corporation has issued a request for information (RFI) concerning the "two-pool" alternative method for allocating withdrawal liability under Title IV of the Employee Retirement Income Security Act of 1974 (ERISA), as amended (Title IV). PBGC is concerned that the two-pool methods may increase the risk of loss to participants and the PBGC. The request contains several specific questions, which are addressed below. The RFI may be found at https://www.gpo.gov/fdsys/pkg/FR-2017-01-05/pdf/2016-31715.pdf.

Action Needed Now: Trustees and plan administrators should decide whether they want to submit comments in response to the RFI. Comments must be received on or before February 21, 2017, to be assured of consideration.

Responses may be submitted:

BACKGROUND

Title IV of ERISA generally imposes liability on an employer that withdraws from a multiemployer plan that is not fully funded for vested benefits. In general, the first step in determining the amount of withdrawal liability of an employer is to allocate the difference between the value of vested liabilities and plan assets ("unfunded vested benefits" or "UVBs") among contributing employers. Once a withdrawing employer's allocable share of liability is calculated, the liability is paid in installments, with each installment based on the annual amount the employer had been contributing to the plan.

If all employers withdraw from the plan ("mass withdrawal"), the law and PGBC regulations impose even greater liabilities on the withdrawing employers. This includes a recalculation of the amount of UVBs after one year using conservative actuarial assumptions issued by PBGC and the allocation of any then uncollectable liability to withdrawn employers that are viable.

Title IV contains four statutory methods for allocating UVBs, one of which applies if the plan does not select another method. Generally, these methods allocate liability either on an aggregate or year by year basis based on employer contributions or benefits earned by an employer's employees. All methods also seek to identify UVBs that are uncollectable and contain a mechanism for reallocating those amounts to currently contributing employers.

In lieu of using one of the statutory methods, plans are permitted to develop their own allocation method subject to PBGC approval. PBGC issued regulations containing the rules that such methods must follow and a procedure for seeking its approval. Among the criteria for approval are that the alternative allocation method not increase the risk of loss to the plan or PBGC and that it allocate UVBs to the same extent as any of the statutory methods.

As a way of encouraging new employers to join a plan, and keep existing employers from withdrawing to escape growing liabilities and funding burdens, the trustees of some plans have adopted a method whereby the UVBs are separated into "two pools," one consisting of "old" liabilities and one consisting of "new" liabilities, which gives rise to the name "two-pool method." Employers in the new liability pool are not subject to old liabilities, i.e., the UVBs that existed at the time the two-pool method was adopted. In addition, under the two-pool method, existing employers are often given the opportunity of escaping from the old pool by paying some or all of the UVBs allocated to them in that pool. The escape terms may be generous both as to the amount of liability for which the trustees are willing to settle and the actual payment terms. In return, the trustees may seek a commitment from the employer that it will not withdraw, maintain its participation above a stated level, or provide some security.

Finally, in some cases, employers who are part of the new pool, including those that transfer from the old to the new pool, are given relief from some of the additional liabilities that would be incurred upon a mass withdrawal. PBGC has received about 20 requests for variants of the two-pool method to date. Early on it approved some such methods, but without being apprised of the special rules for settlement and payment of withdrawal liability or the relief from additional liability upon mass withdrawal. Apparently, many of the requests are still pending with the PBGC.

Cheiron Observation: The two-pool method creates the possibility that strong employers in shrinking plans will utilize the opportunity to settle their liability based on the current allocation as a means of avoiding increases in liability in the future as more employers withdraw. Absent a commitment from the employer to remain in the plan, the result may be to create a path for strong employers to escape from the plan with significantly less financial cost that would otherwise be the case. On the other hand, a properly designed two-pool method may well keep strong employers from fleeing the plan and thus stabilize its financial situation.

The Request for Information

PBGC is asking for answers to questions about the possibility that more plans will request approval of two-pool methods in the future, the nature of the relief granted employers transitioning to the new pool, other alternatives the trustees considered, the risk of loss to participants and the PBGC created by the two-pool arrangement, and what factors PBGC should take into consideration in assessing such risks.

Some of the specific questions posed by PBGC are:

  • Should PBGC anticipate more plans contemplating adoption of two-pool alternative withdrawal liability arrangements? If so, is this seen as a relatively temporary phenomenon or something that could be a lasting feature of plan risk management?
  • For a plan that has adopted a two-pool alternative withdrawal liability arrangement that allows existing employers to participate in the new pool, did the arrangement affect the plan's ability to retain existing employers that otherwise would have withdrawn? Please provide examples to the extent possible.
  • For a plan that has adopted a two-pool alternative withdrawal liability arrangement, did the arrangement affect the plan's ability to increase its contribution base as a result? Please provide examples to the extent possible.
  • In a two-pool withdrawal liability allocation arrangement that permits existing employers to be treated as new employers, how should discounted withdrawal liability settlements, or the potential for such settlements, factor in PBGC's significant risk analysis under 29 CFR 4211.23(a)?
  • In a two-pool withdrawal liability allocation arrangement that includes changes to a plan's mass withdrawal liability allocation rules, how should such changes factor in PBGC's significant risk analysis under 29 CFR 4211.23(a)?
  • Given that the terms for participation in a new employer pool may vary among plans, are there certain terms and conditions of two-pool withdrawal liability arrangements that raise particular issues of significant risk?
  • In a two-pool withdrawal liability allocation arrangement that permits existing employers to be treated as new employers, how should discounted withdrawal liability settlements, or the potential for such settlements, factor in PBGC's significant risk analysis under 29 CFR 4211.23(a)?
  • What types of actuarial and administrative information and data do multiemployer plans generally maintain that would allow PBGC to analyze the impact on the risk of loss to the plan and participants of settlement terms for mass withdrawal liability for employers jumping to a new pool? Is there some actuarial information, particularly cash flow information that is not readily available? How would widespread implementation of two-pool alternative withdrawal liability arrangements impact the larger multiemployer insurance system?

In an effort to assure potential responders, PBGC notes that the answers to its questions by a plan will not affect its consideration of any pending application for approval of a two-pool method.

Cheiron Observation: Given the number of questions asked in the RFI and the fact that many requests for approval are still pending, it is apparent that the PBGC has some concerns about the use of the two-pool method. Pending requests will likely get closer scrutiny, and new requests can expect the kinds of questions raised in the RFI. Applicants for approval should not expect a quick response.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.

 
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