Federal trust pays $18.1 million to Arkansas retirees in 2017, pension bubble fears grow

The federal Pension Benefit Guaranty Corporation (PBGC) paid out more than $18.111 million to 4,580 Arkansas retirees in failed pension plans in 2017. The payments came despite fears that rising deficits for some of the nation’s largest employer programs will cause the government-funded trust to run out of money in the next decade.

Earlier this year, the PBGC reported in its 2017 report that it paid out $5.65 billion to more than 868,196 retirees in terminated, single-employer plans. An additional 504,687 Americans will get their pension from PBGC when they’re eligible to retire.

Despite the payout to retirees in Arkansas and other pensioners in the agency’s single-employer insurance program, PGBC officials recently warned that its larger multiemployer program had liabilities of $67.3 billion and assets of only $2.2 billion as of Sept. 30, 2017. That resulted in a negative net position or “deficit” of $65.1 billion, a rising concern that the fund could be insolvent in less than 10 years.

“Our attention is focused on the dire financial condition of the Multiemployer Program. We are engaged with trustees of troubled plans to help them protect benefits and extend plan solvency,” said PBGC Director Tom Reeder. “We will continue to work with the (Trump) Administration, Congress, and the multiemployer plan community to create solutions so that PBGC’s guarantee is one that workers and retirees can count on in the future.”

Created as a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private-sector defined benefit plans, PBGC runs two programs so insurance retiree receive their benefits. Those funds have dwindled in recent years as a growing number of pension plans are projected to become insolvent in the coming years.

RUNNING OUT OF MONEY
The federal trust guarantees payment of basic pension benefits earned by nearly 40 million American workers and retirees in nearly 24,000 plans. While PBGC encourages companies to maintain their plans, the government steps in and pays benefits when companies cannot. Since the trust was created, PBGC has become responsible for payment of guarantee amounts that cover more than 1.5 million people in over 4,900 failed single- and multi-employer plans, making average annual payments of $5.8 billion, officials said.

In 2017, the single-employer program, which cover plans generally sponsored by one employer, saw some improvement as its deficit dropped to $10.9 billion, compared to $20.6 billion at the end of fiscal 2016. The primary drivers of the continued improvement include premium and investment income and increases in the interest factors used to measure the value of future liabilities, officials said.

According to Reeder and other industry actuaries, the multi-employer program is in dire straits with a $6.3 billion deficit in 2017, resulting largely from 19 with plans with probable claims because they either terminated or are expected to run out of money within the next decade. Claims that covers plans created through a collective bargaining agreement between employers and a union, officials said, were somewhat offset by a “reclassification fix” that reduces some benefits under the federal Multiemployer Pension Reform Act of 2014.

In 2017, the PBGC provided $141 million in financial assistance to 72 insolvent multiemployer plans, up from the previous year’s payments of $113 million to 65 plans. In the coming years, the demand for financial assistance from PBGC will increase as more and larger multi-employer plans run out of money and need help to provide benefits at the guarantee level set by law. By the agency’s own internal projections, absent any legislative changes, Reeder said the program is likely to run out of money by the end of 2025.

“The longer the delay in making the changes needed to improve the solvency of the Multiemployer Program, the more disruptive and costly they will be for participants, plans and employer,” he warned.

Elliot Dinkin, president and CEO of Pittsburgh-based consulting firm Cowden Associates, told Talk Business & Politics that Congress inserted a provision in the recent government spending deal that creates a select congressional committee to craft a federal rescue plan for as many as 200 multi-employer pension plans. Dinkin said the congressional committee’s work is to be completed by November 2018, noting that feasible options on the table include loans to the funds or other similar techniques. He said the 2014 legislation allowing employers to reduce benefits after receiving permission from the government has been widely used.

“At the end of the day, the severely underfunded pension plans will fail and become the responsibility of the federal government absent drastic measures. These plans cannot invest their way out and hope that the problem will go away,” Dinkin said.

LOOMING CRISIS
In recent years, a few companies with ties or operations in Arkansas have reached agreements with the PBGC to protect employee pension funds. In March 2016, the federal agency and Sears Holding Corp. signed a pact to protect the pension plans for more than 200,000 employees of the struggling retailer that has closed hundreds of locations across the U.S. over the past two years.

Later in October 2016, the PBGC also reached an agreement with Alcoa Inc. to provide an additional $150 million in pension contributions to the company’s two largest pension plans, which cover more than 83,000 people. That deal came after the aluminum manufacturer split into two separate publicly traded companies. Alcoa and sister company Arconic sponsor eight pension plans that cover more than 102,000 workers and retirees.

A July 2017 story by Bloomberg News shows that 93%, or 186 of the 200 largest defined-benefit plans in the S&P 500, are not fully funded, creating a possible $383 billing funding gap for some of the nation’s top companies and dire consequences for thousands of Baby Boomers heading into retirement.

According to Bloomberg, 70,000 participants in the United Parcel Service Inc., pension plan learned in the summer of 2017 that they will not earn increased benefits if they work after 2022. Six months earlier, DuPont Co. announced it would stop making payments into its pension plan for 13,000 active employees, and Yum! Brands Inc., offered some former employees a lump-sum buyout to offload some of its pension liabilities.

Ailing industrial conglomerate General Electric Inc. (GE) also revealed in late 2017 it has a growing $31 billion pension shortfall but doesn’t have the ability to fund those obligations. In January, GE said it would take a $6.2 billion pretax charge and set aside $15 billion in reserves to help cover insurance. Since then, a Teamsters-backed pension fund has filed a class action lawsuit accusing GE of securities fraud and the SEC has initiated an investigation into how the industrial giant has handled its pension commitments.

“I don’t know what General Electric should do,” said Dinkin. “That situation is just going to have to play out. I do, however, know exactly what the leaders of any corporation should do if they see this kind of problem looming on the horizon: get help — and get it now — from a qualified, experienced outside advisor. Don’t wait for Congress to do whatever they’re going to do.”