A Multibillion Thanksgiving Pension Bailout?

Erica Werner and Damian Paletta of the Washington Post report, Lawmakers consider multibillion-dollar bailout for troubled pensions, retirees:
Top lawmakers are considering a taxpayer-funded bailout for retirees who are members of certain failing pension plans, scrambling to solve a retirement crisis that threatens more than 1 million Americans.

A draft of the plan, obtained by The Washington Post, would direct the Treasury Department to spend up to $3 billion annually to subsidize payments for retirees from certain underfunded pensions.

It would also require benefit cuts, higher premiums and new fees levied against companies and union members in an attempt to make the pensions as financially solvent as possible. The proposal aims to require all parties involved to make significant concessions and caps taxpayer contributions.

The retirement programs are called “multiemployer” pensions, as workers from multiple companies pay into the same retirement benefit program. But many of these pensions lack the financial assets to cover the benefits they have promised retired workers, leading to a panic from retirees who were counting on the funds. These pensions often have been plagued by mismanagement, inaccurate economic projections and in some cases corporate bankruptcies.

In many cases, the companies these pensioners used to work for no longer exist or no longer participate in the retirement plan.

The plan using taxpayer money is one of multiple proposals being considered by a special congressional committee tasked with addressing the pension crisis. The committee has a Nov. 30 deadline to submit a proposed solution, and aides cautioned that negotiations were extremely fluid and that there is a risk talks will unravel.

The aide said the plan reviewed by The Post was one option under consideration and did not represent a final deal.

The committee, led by Sens. Orrin G. Hatch (R-Utah) and Sherrod Brown (D-Ohio), was created this year and charged with producing a plan by the end of this month that could be presented to the full House and Senate for passage.

“The hard-working men and women who are counting on this committee deserve a solution, and Chairman Hatch and I continue to negotiate with other members of the committee to reach a bipartisan agreement,” Brown said in a statement Tuesday.

Nicole Hager, spokeswoman for Hatch, said: “Joint Select Committee members are continuing to work in good faith to reach a bipartisan agreement before their Nov. 30 deadline. Members understand that the longer the problems facing the multiemployer system are allowed to continue, the more challenging and expensive they are to solve.”

White House officials have been briefed on the status of talks, but they have not expressed whether they would support the deal if it is finalized. A Treasury Department spokesman didn’t have an immediate comment on the plan.

Lawmakers for years have resisted using taxpayer money to backstop failing pension plans, saying that doing so would lead to a backlash from voters and create an expectation that the government will intervene whenever help is needed.

But the dire financial condition of many of these multiemployer plans has forced lawmakers to consider such a move as part of a broader package of changes. A growing number of multiemployer plans are now severely underfunded, and the issue gets worse every year as more people retire and seek benefits they believe they were promised.

Lawmakers from both parties, under pressure from many retired constituents and business groups, have expressed alarm that hundreds of thousands of older Americans could soon see their retirement savings plans vanish or become severely depleted because the pensions were mismanaged or underfunded.

Many people in these pension plans, such as retired truck drivers, grocery store clerks and delivery workers, were employed by companies that went out of business. And many of these multiemployer pensions were underfunded, meaning they anticipated higher returns and lower payouts than what occurred. As problems worsened, taxpayer assistance was seen by many experts as inevitable.

“We bailed out Wall Street in 2008 and 2009,” said Kenneth Feinberg, who was appointed to a top role at the Treasury Department in 2015 working on problems with multiemployer pension plans. “Bailouts have occurred before.”

The Pension Benefit Guaranty Corp. was created by Congress to provide a financial backstop for pension plans, but the PBGC’s program to insure multiemployer plans is severely underfunded. It had $67.3 billion in liabilities as of last year and just $2.3 billion in assets. The entire fund is projected to run out of money by 2025, although the agency said “there is considerable risk that it could run out before then.”

Last year, the PBGC provided $141 million in assistance to 72 insolvent multiemployer plans, and there are several others listed as “critical” and likely to soon become insolvent.

Lawmakers have been particularly alarmed about one faltering plan called Central States Teamsters, which has 400,000 participants and whose members include retired truck drivers, among others.

Once the PBGC’s fund to pay multiemployer plans runs out of any money, the agency would be able to pay only a “small fraction” of the pension benefits that retirees were expecting, the agency said last year. Because PBGC was created by Congress for the purpose of protecting pensions, some experts believe that emergency government assistance was always anticipated.

“When . . . people’s livelihoods will be lost, government has always stepped up to back its own creations,” said Joshua Gotbaum, who served as director of the PBGC from 2010 until 2014.

The proposal under consideration would protect payments for beneficiaries in Central States and other failing plans by drawing on taxpayer funds and also by significantly boosting fees on workers and retirees in healthy pension plans. That approach could emerge as a roadblock for certain Democrats and for some outside groups representing pension plans that don’t want to pay additional fees.

The proposal could shift up to $90 billion in additional liabilities to the PBGC, creating major new responsibilities for the agency, according to an analysis by some outside stakeholders.

The special congressional pensions committee was proposed by Brown this year after he was unsuccessful in getting Congress to act on the solution embraced by Democrats, which would create a Treasury Department loan program for pension plans to borrow from.

There are basically two types of private-employer pensions, those that are run by individual companies and those that multiple companies participate in as a way to spread the membership and risk. Several multiemployer plans are in extreme financial turmoil because they are underfunded and a shrinking number of members is responsible for paying the benefits of a rising number of retirees.

The PBGC was created in 1974 as a backstop for pension plans, but Congress has resisted extending taxpayer money to subsidize benefits up to this point.

There are more than 1 million Americans who participate in severely distressed multiemployer pensions and another 9 million who are in healthier programs that could be affected by changes.

Fights over the fate of multiemployer pension plans can be very divisive, pitting workers and companies against each other even when neither group did anything to cause the financial problems.

This year, The Post chronicled a messy fight between Just Born Quality Confections and its union workforce. Just Born is a Pennsylvania company that makes Peeps candy, and it was trying to change its union contract in a way that allowed it to direct new workers toward a 401(k) plan and not allow them to participate in the faltering multiemployer pension.

That multiemployer pension faced severe financial constraints because of the bankruptcy of Hostess Brands several years earlier.

Because of that bankruptcy, Just Born was required to make additional payments to the pension, even though it had nothing to do with the other company’s mistakes. A federal judge ultimately intervened, ruling that Just Born could not unilaterally block new workers from being members of the pension.
NewsMax Finance also reports, Lawmakers Eye Multibillion-Dollar Bailout for Collapsing Pensions:
Top lawmakers reportedly are considering a taxpayer-funded bailout for retirees who are members of specific collapsing pension plans in a mad dash to avoid a retirement crisis that threatens more than 1 million Americans.

A draft of the plan, obtained by The Washington Post, would direct the Treasury Department to spend up to $3 billion annually to subsidize payments for retirees from certain underfunded pensions.

The proposal "would also require benefit cuts, higher premiums and new fees levied against companies and union members in an attempt to make the pensions as financially solvent as possible," the Post explained. The plan would force all parties to make significant concessions and caps taxpayer contributions, the Post explained.

The programs in question collect money from workers at more than one and company and put those funds toward the same retirement benefit program. However, many of the plans do not have enough funding to cover some of the promised benefits.

The Post reported that the companies the pensioners used to work no longer exist or stopped participating in the pension programs.

To be sure, Newsmax Finance Insider Peter Reagan recently warned that public pensions could turn into a retirement crisis for everyone.

"Worldwide, pensions are set to reach a shortfall of $400 trillion. This is a larger amount than 20 of the world’s largest economies," he recently warned.

"It was even reported that Congress is planning for pension fund failure in the U.S. Not to mention, Philadelphia has considered tapping public utility payments to cover their shortfall," he said.

"Add it all up, and the situation doesn’t look good for public pension plan payees. Many police, fire, public education, and municipal personnel are (or will be) directly affected. But even if you’re not drawing a public pension — the majority of us do not — don’t think you’re safe. You might think failure of a state public pension wouldn’t affect you. It’s a reasonable thought, and partly correct. That’s because it likely wouldn’t affect you directly," he warned.

"But the indirect effects may prove to be a burden for anyone in or entering retirement."

Pensions seemingly spark doom and gloom headlines on a daily basis.

To be sure, a recent report from Fitch Ratings cited a “lackluster performance” by pension assets, combined with increases in the present value of future benefits, has pushed net pension liabilities beyond $1 trillion in fiscal 2017, from $892 billion the previous year.

The report also identified seven states with “long-term liability burdens” that are more than 20% of personal income, led by Illinois, which had liabilities that are 29% of personal income, the Chief Investment Officer reported.

“States like Illinois, Kentucky, and New Jersey are feeling the effect of insufficient contributions in the form of severely underfunded pensions and rising budgetary demands for pension contributions,” Douglas Offerman, a senior director at Fitch Ratings, said in a release, CIO reported.

I've already covered the problems at Teamsters' Pension Fund here and here. Multiemployer pensions have been an abysmal failure in the United States mainly because they weren't run properly, governance has been terrible and the Wall Street mob devoured them and left them for dead.

Now, Congress is stepping in to save these pensions in what I warned you exactly one year ago will be the Mother of all pension bailouts.

It's coming, I guarantee it. It will be a bipartisan bill and Trump will quietly sign it or face the wrath of angry blue collar workers, many of whom form part of his base.

We can debate whether or not it’s better to split up than prop up troubled multiemployer pension plans but the situation is so dire that politicians in Washington from both parties are extremely concerned.

And they should be, as these pensions fail, a million people stand the chance to lose their retirement income they were relying on to retire in peace and security. Already, many have faced serious cuts in their benefits and more cuts are unfathomable.

Again, it's crunch time, something has to be done, and it will be done, quietly so that irate US taxpayers fed up of bailouts don't come out with pitchforks to greet their representatives at the next town hall meeting.

All this could have been avoided if the US adopted a CPP-CPPIB approach a long time ago to bolster its Social Security and force multiemployer plans to invest in a large, well-governed state plan.

Instead, the sharks on Wall Street extracted a pound of flesh and left the mutltiemployer pension carcasses to rot.

About the only good news I read today is that while the US public pension crisis continues, there is a bit of good news out of the corporate pension world as the funding status for corporate defined pension plans hit a new post-crisis high, mostly owing to the Trump tax cuts:
Under the provisions of the tax cut, U.S. companies were able to deduct contributions to their pension funds from their taxable income through Sept. 15 at the 35% corporate tax rate. To be eligible for the deduction, the contribution must be made within 8-and-a-half months of the end of the pension plan year. The HSBC team believes the deadline provided enough motivation to convince U.S. corporations to make contributions.

The Federal Reserve estimated that private pension plans held approximately $3.4 trillion worth of assets as of June 30.
In the US, corporate plans are better managed than public pensions which still use absurdly high discount rates.

In Canada, large public pension plans are extremely well run and so are some top corporate plans like CN, Air Canada, and a few others.

Below, US Senator Heidi Heitkamp hears employer perspectives on multiemployer pension plans in the fourth hearing of the 16-person bipartisan, House and Senate Joint Select Committee tasked with solving the crisis facing multiemployer pension plans across the country, including threatening 2,000 North Dakotans and 400,000 pension fund participants nationwide who paid into the Central States Pension Fund. I also embedded the full hearings on employer perspectives below.

Update: An astute hedge fund manager shared this with me and was thinking about what I was thinking and should have posted above:
Pandora's Box opens. Watch Congress embrace such pension bailouts going forward as a means of securing votes of America's ageing population. Yet another pressure point for US Balance of Payment.
You have to wonder, if Congress bails out multiemployer pensions, what's to stop it from bailing out troubled public and private DB pension in the future?