Compliance September 1, 2017

PBGC Offers Financial Assistance to Union Plan Approved for Benefits Reductions

The agency says the financial assistance, together with benefit reductions that are required as a condition for receiving PBGC assistance, will help the United Furniture Workers Pension Fund A to avoid insolvency and to pay benefits to participants.

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The Pension Benefit Guaranty Corporation (PBGC) announced it has approved a partition application and will provide early financial assistance to the United Furniture Workers Pension Fund A, a Nashville-based multiemployer pension plan that covers nearly 10,000 participants.

The early financial assistance from PBGC, together with benefit reductions that are required as a condition for receiving PBGC assistance, will help the plan to avoid insolvency and to pay benefits to participants, the agency says.

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The U.S. Department of the Treasury approved a related application submitted by the plan for the required benefit reductions and certified the results of a participant vote on the plan’s benefit reduction proposal. PBGC’s approval of the partition and early financial assistance is the first under the Multiemployer Pension Reform Act of 2014 (MPRA), which rewrote the rules for partition. 

Under MPRA, troubled multiemployer pension plans that face insolvency are permitted to apply for benefit reductions and, if necessary, early financial assistance from PBGC to extend their financial viability. In its applications to Treasury and PBGC, the plan trustees said that the fund was in critical and declining status, that the plan’s assets and future income are insufficient to pay promised benefits, and that the plan would run out of money in 2021.

Under the partition, PBGC provides early financial assistance by moving a portion of the plan’s guaranteed benefit obligations to a new, separate plan that will have its costs reimbursed by PBGC. This will relieve some of the financial burden on the United Furniture Workers Fund and enable it to avoid insolvency. Plan participants whose benefits are moved to the new plan will be treated the same as participants whose benefits remain entirely in the original plan.

Under the law, benefits of 7,100 participants will not be reduced, because the participant is aged or disabled or has benefits that are not more than 10% greater than PBGC guarantees would provide. The remaining 2,800 participants will see future benefit reductions to 110% of the PBGC guaranteed amount, averaging a 12.7% cut in benefits.
Investing September 1, 2017

How More Retirees Could Affect Investment Returns

The CRR explores various ways investment returns and Social Security could be affected by an aging population.

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As the Baby Boomer generation nears retirement and draws down the assets they built in their working years, the retirement system in America and capital markets could go through some major shifts.

The Center for Retirement Research at Boston College (CRR) explores these concepts in several recent papers. One addresses the impact that shifting demographics can have on investment returns. The CRR notes, “Economic theory suggests that retirees draw down the assets they accumulated in their working lives, so a higher retiree-worker ratio reduces the supply of savings, thereby increasing investment returns.”

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However, the paper cites research based on the Health and Retirement Study, which suggests that retirees draw down savings at a slower rate than expected, especially the wealthy, who hold the majority of assets.

So as retirees retain much of their wealth, a higher retiree-worker ratio instead leads to a greater supply of savings and a decrease in investment returns, the CRR suggests. However, the organization notes that the extent of this potential decrease is uncertain. Clearly, to the extent that investment returns decrease, workers would need to save more to maintain their standard of living.

The organization points out that the shift in employer plans from traditional pensions to 401(k)s means the savings of the elderly would increasingly be held in 401(k)s or individual retirement accounts (IRAs). A smaller chunk of pension benefits could mean a heightened focus on contributions toward 401(k)s and IRAs. The need to save more in these accounts could be heightened by a weakening Social Security system.

The CRR notes that “the demographic transition is largely responsible for Social Security’s long-term financing shortfall. If it reduces investment returns, it will also weaken the other component of the nation’s retirement income system—private saving.”

In a separate paper, the CRR analyzed one potential remedy to the Social Security downfall: dedicating a portion of the Social Security Trust Fund to stock investments. Of course, this would mean the system, which currently invests in only bonds, would take on additional financial risk it has never experienced before. However, the CRR points to research supporting the notion that stock investments could benefit Social Security.

The paper notes that average geometric returns for the S&P 500 have been 9.5% from 1928 to 2016, as opposed to 3.4% for the 3-month Treasury bill, and 4.9% for the 10-year Treasury bond, in that same period.

The study concludes that “both retrospective and prospective analyses suggest that investing a portion of the Social Security trust fund in equities would improve its finances; little evidence exists that trust fund equity investments would disrupt the stock market; equity investments could be structured to avoid government interference with capital markets or corporate decision making; and accounting for returns on a risk-adjusted basis would avoid the appearance of a free lunch.”

“How Will More Retirees Affect Investment Returns?” by the CRR can be found here. 

“What Are The Costs And Benefits Of Social Security Investing In Equities?” can be found here.

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