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Challenges Confronting Multiemployer Pension, Health and Welfare Plans. Presented to: Quality Construction Alliance National Issues Conference May 9, 2011 By Randy DeFrehn Executive Director National Coordinating Committee for Multiemployer Plans . Overview. Current Funding Picture

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challenges confronting multiemployer pension health and welfare plans

Challenges Confronting Multiemployer Pension, Health and Welfare Plans

Presented to:

Quality Construction Alliance

National Issues Conference

May 9, 2011

By

Randy DeFrehn

Executive Director

National Coordinating Committee for Multiemployer Plans

overview
Overview
  • Current Funding Picture
  • Public Policy
  • Public Sector Pensions
  • Pension Relief Act
  • Transparency
  • Patient Protection and Affordable Care Act
market rates of return for 08 and 09
Market Rates of Return for 08 and 09

Median Returns

2009 Median Return 16.6%

2008 Median Return -22.1%

Source: NCCMP Surveys of Funded Status of Multiemployer Plans

while returns are up hours are down
While Returns are Up, Hours are Down

All Plans Down 13.2%

Source: NCCMP Surveys of Funded Status of Multiemployer Plans

changes in average funded status 2008 10
Changes in Average Funded Status 2008 - 10

Source: NCCMP Surveys of Funded Status of Multiemployer Plans

distribution of plan zone status 2008 2010
Distribution of Plan Zone Status 2008 - 2010

Source: NCCMP Surveys of Funded Status of Multiemployer Plans

plans response to financial crisis
Plans’ Response to Financial Crisis

Source: NCCMP Surveys of Funded Status of Multiemployer Plans

challenges confronting multiemployer plans declining union density
Challenges Confronting Multiemployer Plans – Declining Union Density

In 2010, 7.6 million public sector employees belonged to a union, compared with 7.1 million union workers in the private sector. The union membership rate for public sector workers (36.2 percent) was substantially higher than the rate for private sector workers (6.9 percent).

slide12

Recommendations

of the

Deficit

Reduction Commission

slide13
The National Commission on Fiscal Responsibility and Tax ReformRecommendation: Health Benefit Tax Exclusion
  • “…the Commission’s recommendations on tax reform regarding reducing and potentially eliminating the exclusion for employer-provided health insurance will help decrease growth in health care spending, according to virtually all health economists.”
slide15

Congressional Research Service –

Study of the Tax Exclusion for Employer Provided Health Insurance

implications of eliminating tax exclusion
Implications of Eliminating Tax Exclusion
  • PPACA includes an Individual Mandate
    • insurance companies may no longer exclude people with Pre-Existing Conditions
  • Mandate eliminates “Carrot” approach of tax exclusion
  • The Individual Mandate is under court Challenge
  • Worse case scenario:
    • Congress repeals Tax Exclusion
    • Mandate gets struck down by courts
the national commission on fiscal responsibility and tax reform recommendation retirement programs
The National Commission on Fiscal Responsibility and Tax ReformRecommendation: Retirement Programs
  • 4.4: GIVE PENSION BENEFIT GUARANTEE BOARD AUTHORITY TO INCREASE PREMIUMS
    • Primarily directed to single employer program
    • Sought to restore solvency
    • achieve mandatory budget savings in the near term, and
    • sharply reduce the likelihood of a government rescue in the future.
federal budget proposal fy 2012
Federal Budget Proposal FY 2012
  • Proposes to give the PBGC Board the authority to adjust premiums and directs PBGC to take into account the risks that different sponsors pose to their retirees and to PBGC.
the national commission on fiscal responsibility and tax reform recommendation social security
The National Commission on Fiscal Responsibility and Tax ReformRecommendation: Social Security
  • 5.1: MAKE RETIREMENT BENEFIT FORMULA MORE PROGRESSIVE
    • “Modify the current three-bracket formula to a more progressive four-bracket formula, with changes phased in slowly”… by adding new bend point at median income.
the national commission on fiscal responsibility and tax reform recommendation social security20
The National Commission on Fiscal Responsibility and Tax ReformRecommendation: Social Security
  • 5.4: GRADUALLY INCREASE EARLY AND FULL RETIREMENT AGES, BASED ON INCREASES IN LIFE EXPECTANCY .
public sector pensions23
Public Sector Pensions
  • Believes DB plans should be replaced
  • Contends that Liabilities are vastly understated
  • Believes liabilities should be valued at “risk free” (Treasury) –rates (about 4.5%)

Joshua rah

Professor

Kellogg School

Northwestern

public sector pensions24
Public Sector Pensions
  • Introduced House Resolution:
    • (1) the Federal Government should not bailout State and local government employee pension plans and other post-employment benefit plans; and
    • (2) State and local governments should immediately institute reforms to their employee pensions plans, including replacing defined benefit plans with defined contribution plans.

Jason Chaffetz

Congressman

Utah 3rd Dist.

public sector pensions25
Public Sector Pensions
  • Agrees with Financial Economists
    • DB plans should be terminated
    • Liabilities should reflect “Risk-Free” Rates
  • Introduced H.R. 567

“Public Employee Pension Transparency Act “

  • Cosponsors: (among others)
    • Paul Ryan
    • Daryl Issa
    • Michelle Bachman

Devin Nunes

Congressman

CA 21st Dist.

slide26

“…Public employee pension plans will also have to report their liabilities using a uniform accounting standard that provide realistic rates of return and tie assets to more reasonable fair market valuations.”

public sector pensions27
Public Sector Pensions
  • “This bill will provide a much-needed dose of financial transparency”

Jordan Forbes

National Taxpayers Union

Jordan Forbes

National Taxpayers Union

public sector pensions28
Public Sector Pensions
  • “provide a choice between the current Social Security system and Personal Retirement Accounts… -- it's your money and your choice.”

Steve Forbes

Publisher, Forbes Inc.

Director

National Taxpayers Union

public sector pensions29
Public Sector Pensions
  • “…would address the underlying deficiencies that have allowed states and municipalities to be fiscally reckless with their pension plans,”

Grover Norquist

President

Americans for Tax Reform

public sector pensions30
Public Sector Pensions
  • “…legislation should allow states to file for bankruptcy, as a result of which trade unions would be forced to agree to cuts in benefits. If they refuse to agree, the bankruptcy judges could impose cuts.”

Newt Gingrich

Former Speaker

U.S. House of Representatives

public sector pension opponents
Public Sector Pension Opponents

Joshua Rauh

Devin Nunes

Jordan Forbes

Jason Chaffetz

public sector pension opponents32
Public Sector Pension Opponents

Joshua Rauh

Jason Chaffetz

Devin Nunes

Jordan Forbes

Steve Forbes

Grover Norquist

Newt Gingrich

public employee pensions
Public Employee Pensions
  • Time to Focus on Facts not Rhetoric
    • Pensions are Deferred Compensation employees receive for lower pay
    • Most systems require employee funding as well as employer
    • Many employees do not participate in Social Security
    • Employers did not make required contributions
    • Problem compounded by market collapse
effect on multiemployer plans
Effect on Multiemployer Plans
  • When PPA Funding rules sunset in 2014 the Financial Economists will press for reporting by our plans at “Risk Free” rates.
  • Using Rates of 4.5% instead of actuarially assumed rates will Raise liabilities exponentially
2014 ppa funding rules
2014 – PPA Funding Rules
  • Funding rules sunset in 2014
  • Need to lead reform process
  • Alternatives to traditional DB plans under review
  • Current Media Assault on Public Sector plans will adversely affect our plans
at risk plans
At Risk Plans
  • Plans which are projected to reach insolvency
  • Still require targeted relief
    • Will benefit plans, participants, sponsors and the PBGC
    • Focus on Short term Deficit Reduction makes relief less likely
  • General Opposition to DB plans will spill over to Multiemployer Plans
slide37

2014 – Expiration of PPA Multiemployer Funding Rules

  • Concern by lawmakers that multiemployer plan liabilities are next “Bailout” after public employee plans
  • Pressures by financial economists to recast liabilities in terms of “risk-free” interest rates
  • Pressures by FASB / IAS requiring greater transparency for employer financial disclosures
  • Proposals by some within the Multiemployer community to allow reductions in pensions already in pay status
primary provisions
Primary Provisions
  • 30-Year Amortization of 2008 /09 Investment Losses
  • 10-Year Smoothing of 2008/09 Investment Losses
  • Temporary Expansion of Asset Smoothing Corridor to 130%
irs guidance
IRS Guidance
  • Solvency Test –
    • Plan must be projected to have sufficient assets to pay all expected benefit payments and other expenditures over 30 years
    • Must use same assumptions and plan of benefits in effect at time of certification
conditions
Conditions
  • Benefit Restrictions
    • Plans that elect any of the relief provisions are prohibited from adopting any benefit improvements within 2 years of a plan year to which the relief provisions apply
    • Each portion of loss recognized begins a new 2 year period
    • effective restriction period to obtain full relief - 12 years
defacto regulation
DeFacto Regulation
  • Accounting Profession’s Transparency Proposals
    • IAS 19 – Accounting for Defined Benefit Plans
    • FAS 450 : Loss Contingencies
    • Subtopic 715-80: Proposed Exposure Draft on Multiemployer Withdrawal Liability
accounting rules
Accounting Rules
  • IAS 19 –
    • Eliminates Deferred Recognition of market gains and losses
      • “Mark to Market” Accounting
    • Requires Companies to disclose Multiemployer plan participation by:
      • If information is available, by treating their portion of the plan’s liabilities as a separate plan of the employer; or
      • If not, reporting contributions to plan
    • Fails to recognize long-term nature of pension obligations
accounting rules46
Accounting Rules
  • IAS 19 – Joint Comments
    • Do not eliminate smoothing
    • Balance the desires of investors with public retirement policy in local jurisdiction
    • Recognize long-term nature of pension obligations
accounting rules47
Accounting Rules

ADOPTED

“NO COMMENTS WERE PERSUASIVE”

  • IAS 19 – Comments
    • Do not eliminate smoothing
    • Balance the desires of investors with public retirement policy in local jurisdiction
    • Recognize long-term nature of pension obligations
slide48
FASB
  • Organization that sets Rules for the Accounting Industry
    • Define What constitutes “Generally Accepted Accounting Principles” (GAAP)
    • Rules apply to Publicly Traded Companies and Private Companies
  • Indirectly accountable to Government through SEC oversight
slide49
FASB
  • U.S. Counterpart to International Accounting Standards Board (IAS)
  • Objective is to move to “Harmonize” the Global Accounting rules
    • Publicly Supported by:
      • SEC
      • Treasury Secretary Geithner
slide50
FASB
  • The People who brought you:
    • SOP 92-06
      • Required Disclosure of Fictional Retiree Health Liabilities
    • Corporate Equivalent Resulted in Termination of Retiree Health Benefits for 2/3 of Workforce that Previously enjoyed them
    • Additional Cost item to Multiemployer Funds of Little (if any) Value
accounting rules51
Accounting Rules
  • FAS 450 : Loss Contingencies
    • Two standards for disclosure
      • Asserted Claims – “Reasonable Probability”
      • Remote possibility– “Severe Impact”
accounting rules52
Accounting Rules
  • FAS 450 : Loss Contingencies
    • Two standards for disclosure
      • Asserted Claims – “Reasonable Probability”
      • Remote possibility– “Severe Impact”

Postponed

Will not be effective for 2010

accounting rules53
Accounting Rules
  • Subtopic 715-80: Proposed Exposure Draft on Multiemployer Withdrawal Liability
    • In Addition to and Exceeds FAS 450
    • All Employers to disclose withdrawal liability for every plan every year
    • 15 new disclosures – Quantitative and Qualitative
accounting rules54
Accounting Rules
  • Subtopic 715-80:
    • 15 new disclosures – Quantitative and Qualitative including:
      • The amount that is required to be paid upon withdrawal from the plan, as of the most recent date available;
      • A description of the risk under which the company can be liable to the plan for other participating employers’ obligations;
      • A description of any rehabilitation or funding improvement plans either in effect, or under consideration;
accounting rules55
Accounting Rules
  • Subtopic 715-80:
    • 15 new disclosures – Quantitative and Qualitative including:
      • Percentage of the active and retired participants of the plan employed by the company;
      • Future trends in contributions, if known, including the extent to which a surplus or deficit may affect future contributions; and
      • Description of the contractual agreement that govern the contribution rates.

Postponed

Agreed to Work Toward Alternative Rules

how do we respond
How Do We Respond?
  • Need to:
    • Combat Continuing media Disinformation campaign
    • Address Legitimate Concerns of Parties and Policy Makers
legitimate concerns
Legitimate Concerns
  • Economic uncertainty continues (especially in construction industry)
  • Political Uncertainty from Changing Composition of Congress
  • Protecting Jobs and Addressing Failing Industries and Plans
summary
Summary
  • Successfully gained funding relief
  • Further Sweeping Legislation on Retirement Security Unlikely
  • Accounting Industry Transparency efforts burdensome and misleading and threatens continuation of plans
    • Need to Keep Up Education Campaign
summary59
Summary
  • Continued Need to help Dying plans
  • Address Increasing Concerns of Employers
    • Funding Risk exposure (Real and/or Perceived)
    • Competitive Cost Concerns
  • Risk allocation must be restructured
  • PPA Sunset in 2014 presents opportunity
  • Interim period must be used wisely to evaluate alternatives
patient protection and affordable care act
Patient Protection and Affordable Care Act
  • Challenges:
    • Mandates:
      • Coverage of Dependents to age 26
      • Elimination of Annual and Lifetime Caps
      • Protection of Grandfather status
      • Automatic Enrollment
    • Exchanges
      • Can Multiemployer Plans be offered in exchange?
      • How will subsidies affect continuation of plans especially in low wage industries?
slide61

Questions???

Call: (202) 737-5315

E-Mail:nccmp@nccmp.org