Compliance December 16, 2020

A Conversation With a Union Pension Funding Advocate

One outspoken advocate for the Butch Lewis Act says the time is ripe for addressing the funding challenges faced by union sponsored multiemployer pension plans.
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Russell Kamp, managing director at Ryan ALM, recently sat down for a wide-ranging discussion with PLANSPONSOR in which he spoke in no uncertain terms about the need to immediately address the union multiemployer pension funding crisis.

For context, Ryan ALM’s stated mission is to solve liability-driven problems faced by pensions and other institutional investors through the provision of “low-cost, low-risk solutions.” Additionally, Kamp himself was on the team of government and industry professionals that drafted the Butch Lewis Act. That legislation would, among other features, provide funds for 30-year loans and new forgivable financial assistance, in the form of government grants, aimed at supporting the most financially troubled multiemployer pension plans.

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As Kamp recalled, it was about a year and a half ago that the Ways and Means Committee of the U.S. House of Representatives marked up and voted along party lines to advance the Butch Lewis Act, which is formally titled the Rehabilitation for Multiemployer Pensions Act. About two weeks later, the full House approved the legislation in a 264 to 169 vote. That tally meant 29 Republicans—nine of whom co-sponsored the legislation—joined Democrats in voting for the measure. In Kamp’s estimation, this was one of the more solid shows of bipartisan seen during this Congress prior to the passage of the coronavirus stimulus package early this year.

“Sadly, getting this legislation through a Republican-controlled Senate seems next to impossible,” Kamp said. “This is a real shame. Failure to support these critically important pension systems jeopardizes the economic future for more than 1.3 million American workers and retirees.”

Kamp said he understands that people may have impassioned views about why some—though certainly not all—union pensions are so financially stressed. He agreed, for example, that it would be helpful to mandate more conservative accounting and return-projection standards for union pensions, akin to those required for single-employer pensions. However, he said, everyone should be able to agree that simply allowing these plans to fail and be taken over by the government’s already cash-strapped Pension Benefit Guaranty Corporation (PBGC) insurance program is not a good solution. Indeed, just this week, PBGC reported its multiemployer pension insurance program will become insolvent by fiscal year 2026, short of significant congressional action.

“Such a ‘pay-as-you-go’ approach will necessarily be costlier and messier than the solutions in the Butch Lewis Act,” Kamp said. “The bill is proposing a $64 billion loan package to be spent over 10 years. This seems a drop in the bucket given the estimated federal fiscal year budget deficit for 2019, which is estimated to be $1.09 trillion, while 2020’s budget shortfall will grow an estimated 1% on top of that figure.”

While Kamp said he is glad to see lawmakers on both sides of the aisle contemplating this challenge, he noted he is not necessarily a fan of the solution that seems to be favored by at least some Senate Republicans, including Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and Senate HELP [Health, Education, Labor and Pensions] Committee Chairman Lamar Alexander, R-Tennessee.

In simple terms, to help the “sickest plans” recover their financial footing, the Republican proposal creates a special “partition” option for multiemployer plans. According to the senators, partitioning permits employers to maintain a financially healthy multiemployer plan by carving out pension benefit liabilities owed to participants who have been “orphaned” by employers that have exited the plan without paying their full share of those liabilities. They argue that removing orphan liabilities allows the original plan to continue to provide benefits in a self-sustaining manner by funding benefits with contributions from current participating employers.

Kamp suggested this proposal has some points of merit, but he believes its fatal flaw is that it seeks to put too much of the “shared sacrifice” of solving the union pension funding crisis on the backs of the so-called orphaned participants and beneficiaries.

“It is certainly true that this group of orphaned participants is causing serious financial strain on union pensions, but it is not due to any fault or action of their own,” Kamp said. “These are people who worked hard and have contributed their fair share to the plans, and so to single them out this way is unacceptable, in my view.”

Kamp said the Butch Lewis Act is a better solution because it builds on the proven (though sometimes controversial) concept of pension obligation bonds (POBs). He noted that he has written extensively on the topic in his blog, as the issue rather quickly gets technical.

“Our appreciation for POBs is predicated on the fact that the proceeds from the bonds must be used appropriately,” he emphasized. “To be fair, POBs have had a checkered history, as many of these instruments have been issued at the peaks of market cycles.”

As Kamp has covered, compounding the problem of POBs being issued at poor times has been the fact that the proceeds have been invested in “traditional” asset allocations.

“The thinking was that there exists an arbitrage between the cost of the bond, or its yield, and the return on asset [ROA] assumptions,” Kamp said. “By investing the assets that cost 4% or 5% to borrow in an asset allocation with an assumed 7.25% ROA, the plan would ‘capture’ this differential. But, as I mentioned previously, these instruments were often brought to market at the peak of an investing cycle, dooming the implementation from the start.”

Kamp said he feels the current environment is the right one in which to confidently issue POBs to save stressed union pensions. He said the right approach is to calculate what it would cost a given pension plan to “defease” the retired lives liability (RLL). Once that amount is determined by the plan’s actuary, it becomes the amount that should be borrowed in the bond offering.

“When the proceeds from the POB become available, the plan should immediately use those funds to defease the RLL through a cash flow matching bond portfolio,” Kamp explained. “This action will ensure that the promised benefits are paid. The current assets in the fund and any future contributions can now be invested in a more aggressive implementation, as they are no longer a source of liquidity.”

Kamp said this approach can help dramatically improve the funded status of stressed pensions, while enhancing liquidity to meet benefit payments. Other potential benefits are a likely greater allocation to risk assets, a longer investing period that protects the fund during choppy markets, and more stable contribution expenses.

Administration December 15, 2020

Establishing a Retirement Plan Committee

Why plan sponsors need a committee, what committees do and who to appoint to a committee.
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Art by James Albon

Plan sponsors need to establish who will be responsible for plan administration and plan and investment decisions.

Carol Buckmann, co-founding partner at Cohen & Buckmann P.C., says committees aren’t legally required, but if plan sponsors appoint a committee as a “named fiduciary,” as defined in the Employee Retirement Income Security Act (ERISA), they will not only see it pay more careful attention to plan issues, but a company’s owner or board of directors will be relieved of most responsibilities for the plan. The owner’s or board of directors’ responsibility would be limited to prudently appointing committee members and monitoring their overall performance, she says.

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Having a committee or committees can greatly help with defense if a plan or plan sponsor is sued, Buckmann adds.

“We say a committee is necessary,” says Millie Viqueira, executive vice president and manager of Callan’s Fund Sponsor Consulting group. “There are instances in which we see a sole trustee responsible for the plan, but the most common approach is a committee because—at a basic level—there needs be someone making sure the plan is managed according to ERISA and state or local guidelines.”

Viqueira says the most common instance in which there would be a sole trustee responsible for a plan is with public pensions, such as the New York State Common Retirement Fund. “However, the norm for both corporate and public retirement plans is to have a committee,” she adds.

Viqueira says retirement plan committee members’ rules and responsibilities are set out by a committee charter or investment policy statement (IPS). When committees get together, they make sure the plan is managed in a way that is consistent with the culture of the organization and existing laws and regulations, she says. The committee determines how to do this in a way that meets the plan sponsor’s fiduciary responsibilities.

Committees are also typically responsible for setting the plan’s asset allocation or investment policy and making sure the policy is being adhered to, Viqueira says. Committees are also responsible for the selection and monitoring of plan providers, including asset managers, custodians, recordkeepers and consultants or advisers. The committee manages all this with an eye toward creating good outcomes while mitigating risks, Viqueira adds.

For defined contribution (DC) plans that need to be ERISA Section 404(c) compliant, committees also ensure participant communications are available, and that clear and appropriate notifications are provided to participants, Viqueira says. “This is in addition to making sure the plan offers the right building blocks for participants to create effective investment portfolios,” she says.

Larger plan sponsors often appoint both administrative and investment committees, but Buckmann says she has seen one committee handle both duties effectively. More recently, larger employers might even set up settlor committees to handle things such as plan design decisions that aren’t treated as fiduciary decisions.

Individuals making settlor decisions are protected from ERISA’s fiduciary duty to act in the best interest of participants, Viqueira notes. On the other hand, individuals making plan investment decisions must do so with the best interest of the plan and its participants in mind, and they are fiduciaries.

Viqueira says she has one client that bifurcates its committee agenda to make clear which items are settlor decisions and which items are fiduciary decisions.

Committee members are often corporate officers, usually including the chief financial officer (CFO) and a representative from human resources (HR), Buckmann says. But if the plan holds company stock, it may be advisable to appoint an independent fiduciary rather than the top executives.

Viqueira says committees also often have some representation from the corporation’s legal team. She says that sometimes the legal representative is a voting member, but sometimes he is not and he just acts as a recording secretary. Other committee members could be from major departments. For example, Viqueira says, if the plan sponsor is a sales organization, it might include someone from the marketing department or business development team on the committee.

“Committees need broad representation without becoming unwieldy. Five to seven members is the sweet spot,” she says.

When considering committee members, it is important to have low turnover, Viqueira says. “Continuity of perspective is important. I’m not saying it should be like the Supreme Court, where terms are for life, but terms could be staggered so there is always a core group of people with institutional memory,” she explains.

Viqueira adds that having a dedicated committee staff is helpful, but it is not always doable, especially in the smaller plan market. Most committee members have to do their “day jobs” as well.

It is important to appoint people with a willingness to learn—since nobody is born knowing the ERISA rules—and people with the time to do the job properly, Buckmann says. It is also important to select people who will consult or appoint experts when they lack the expertise to handle matters, such as choosing plan investments. That is what ERISA requires.

Plan sponsors should select committee members who will be patient and are willing to own their decisions, Viqueira says.

Plan sponsors should also prepare to educate committee members. “There is fiduciary training for new and existing committees,” Viqueira says. “Plan sponsors should carve out time on an ongoing—maybe quarterly—basis for some kind of committee training.”

She says training is needed in both the corporate and public plan settings. “There may be a public fund committee made up of teachers or police officers, and retirement plan decisionmaking is not their day job,” Viqueira explains. “They need to understand their responsibilities and the correct process to be able to separate their personal views from what is best for the plan and its participants.”

Fiduciary liability insurance is always optional, Buckmann says. ERISA generally requires anyone who handles plan funds to be bonded. “So, if the committee members engage in activities such as transferring money, signing checks or authorizing payment of expenses or benefit distributions, they would be handling funds and required to be bonded,” she explains.

But Viqueira says it would be a challenge to get individuals to stick their necks out if the plan sponsor doesn’t secure fiduciary liability insurance.

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