Copyright © 2014 by The Segal Group, Inc. All rights reserved.

The Case for Pension Relief

Presented by:

Joseph A. LoCiceroHarold S. Cooper

July 16, 2014

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Main Multiemployer PPA Provisions of Pension Protection Act of 2006· Provided for zone status· More rapid funding (15 years)· Scheduled sunset – end of 2014 plan year

Effect of Sunset· Plans in Yellow and Red Zones continue

with funding improvement and rehabilitation plans· Plans in Green Zone – lose options if funding deteriorates· Funding rules continue

Background

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Solutions not Bailouts· Assumed no government bailout· Considered financial challenges of PBGC multiemployer fund· Designed to preserve the multiemployer system with regular and reliable lifetime

retirement income· Reduce the financial risks to employers in order to keep them in the plans and in

order to attract new employers

Employer Concerns· Ability to borrow· FASB exposure· Withdrawal liability· Last man standing

Background

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NCCMP Benefit Suspension Proposal

Plan has taken all reasonable measures to improve funding

Plan is expected to become insolvent within:· 20 years if ratio of inactive participants to active participants exceeds 2 to 1· 15 years otherwise· Insolvency can be avoided if benefits are reduced but not below 110% of PBGC

guarantee

Central States example — Can pay out $72 billion in benefits over next 50 years with suspension, compared to $28 billion before insolvency without

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Based on participant’s benefit and years of service· Determine participant’s average benefit per year of service· Guarantee per year of service is:

– 100% of first $11 of benefit– 75% of next $33 of benefit– Benefits in excess of $44 are not covered– Maximum benefit is $35.75 per year of service

· Sample maximum guaranteed benefits:– 20 years: $715/month– 30 years: $1,072/month– 40 years: $1,430/month

PBGC Guaranteed Benefits

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Midwest area construction plan

Expected to become insolvent in 2028· Insolvency date has been delayed due to favorable

investment performance

Contribution level of $10 per hour· Limited increases in contribution rate

(was $9 in 2006)

Benefit accrual rate of $50 per year of service, reduced from $100 several years ago· Many other cutbacks made as part

of Rehabilitation Plan

Case Study

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Average benefit (not including beneficiaries) of $1,700 per month· For service pensions, average benefit is $2,900· 25% of pensioners have benefits in excess of $2,500· PBGC guaranteed benefit maximum is $1,430 or less

Total benefits paid are $40 million

Total contributions are $20 million· Net outflows of $20 million per year

Market value of assets is $164 million· Expected asset decline of $8 million per year

and accelerating

Retiree and Cash Flow Statistics

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Projected Plan Assets with no Changes

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Trustees asked: What is minimum reduction required across the board (actives, inactive vesteds and retirees) that would keep the plan from insolvency?· Approximately 10%· A few beneficiaries were affected by the 100% of PBGC guarantee requirement,

so the average reduction was 9.8%· Other issues not considered, such as limited reductions to older or low benefit

participants

Potential Benefit Suspension

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PBGC Guarantee would result in average benefit cut of nearly 50%, once the plan is insolvent

After suspension, benefits much better than PBGC guarantee· Example: Service pension about

$2,600 vs $1,100 guarantee· Average benefit with suspension is

80% higher than Guarantee

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Projected Plan Assets After Suspension

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65% of plans are in Green Zone1

There are “Shades of Green”· Almost 10% of Green Zone plans are expected to migrate

into the Yellow and Red Zone in the absence of actuarial gains or corrective actions by the Trustees, assuming continuation of PPA rules

· Although favorable experience would decrease the percentage, unfavorable investment results and/or employment declines could increase the percentage significantly

Face significant increase in PBGC premiums.

These plans need the current tools, along with the other tools proposed in Solutions not Bailouts

Green Zone Plans

1Segal Consulting’s Survey of Calendar Year Plans’ 2014 Zone Status, Spring 2014