COLUMN-Do no harm: Protecting retirees in shaky pension plans
By Mark Miller
CHICAGO, June 26 (Reuters) - We've all heard the physician's Hippocratic oath: "First, do no harm." But there's a similar, less-well-known principle in the world of pensions: First, do no harm to retirees.
When pension programs are changed, it's almost unheard of to cut benefits for retirees in their seventies, eighties or beyond, who would have trouble adjusting to abrupt reductions in income. The principle is a cornerstone of the Employee Retirement Income Security Act (ERISA), which governs private-sector pension plans.
It's also a guiding principle in other areas of retirement policy. For example, when Social Security's retirement age was raised in 1983, the changes were phased in over a 20-year period - and the increases didn't start kicking in until 1990.
But all that could change soon.
Congress is expected to consider changes to ERISA later this summer that could open the door to benefit cuts for current retirees for the first time in recent memory. The cuts would hit pensioners covered by multi-employer pension plans. These are plans that are jointly funded by groups of employers in industries like construction, trucking, mining and retail food companies.
There were 1,369 active multi-employer plans in 2009, according to the Pension Benefit Guarantee Corporation (PBGC), the federally sponsored agency that backs up most private sector pensions. At the market's nadir following the 2008 crash, 2.4 million retired participants were in plans considered endangered, according to data provided to Reuters by PBGC. But improving conditions probably have shrunk that number somewhat since then.
The changes are being proposed by a coalition of business and labor groups in response to a very real problem that is going to be tough to solve. The reasons vary, but the culprits include near-zero interest rates that have made it difficult for pension plans to earn healthy returns on their assets.
And employment in some of the industries - like trucking and construction - have been hard-hit by the economic downturn, which has left them with a growing proportion of retirees to current workers paying into the pensions funds.
If these plans go belly up, benefits would be paid by the PBGC. But the level of PBGC protection for workers in multi-employer plans is much lower than for single-employer plans.
That's by design. Multi-employer plans historically have been very stable, so policymakers set insurance premiums paid by employers, along with benefits, at a much lower level than for single employer plans. This year, multi-employer plans pay $12 per participant annually; single employer plans pay $42 per head, plus a variable rate of $9 per $1,000 of underfunded assets.
The maximum PBGC payout this year for a worker in a single-employer plan (retiring at age 65) is $57,477. The maximum PBGC benefit for the same worker in a multi-employer plan is $12,870 - and many are receiving benefits three or four times higher than that, which means they'd see very steep benefit cuts if their plans become insolvent and PBGC steps in.
Meanwhile, the PBGC's multi-employer fund isn't sufficient to cover the potential insolvencies. In 2012, its multi-employer insurance fund had $7 billion in liabilities from plans that are expected to become insolvent, but just $1.8 billion in assets.
The odds that Congress will bail out the funds look small. So the National Coordinating Committee for Multiemployer Plans (NCCMP), which includes plan sponsors and labor unions, convened a commission with diverse representation that spent a year hammering out a plan to address the problem.
Their plan is expected to be the foundation of legislation amending ERISA, and it has a number of commendable recommendations. For example, it would allow healthy plans to consider adopting flexible new plan designs aimed at encouraging them to continue their commitment to defined benefit (DB) pensions.
That's a good thing, because the guaranteed income feature of DB plans provides a much higher level of retirement security than 401(k)s or IRAs, and they do it with a much higher degree of efficiency because of the pooled risk among all participants and professional money management.
The commission's plan would give trustees wide latitude to cut benefits for current retirees, and that's very troubling. But the plan promises to keep benefits slightly higher than PBGC guarantees.
Some retirement policy advocates see that as a bridge too far. "Congress should look to other alternatives before cutting benefits for an 86-year-old old who is barely making it on his current pension," says Karen Ferguson, director of the Pension Rights Center, a non-profit advocacy group.
The plan's advocates argue that including retiree cuts makes more sense than letting the plans go into insolvency. "Doing something now means retirees would take less of a hit down the road, and active workers who are still contributing have something to look forward to when they retire," says Randy DeFrehn, NCCMP's executive director and co-author of the commission report.
Critics want to explore other options. AARP, for example, has argued for specific limits on cuts for retirees at advanced ages, and with very low benefit levels. The nonprofit group, which advocates for those 50 and older, also is pushing for increased financial resources to help PBGC fund insolvent plans - specifically, low-interest loans by the banks and investment houses that played such a big role in the 2008 financial meltdown.
Steps like that could help make sure we do no harm to our most vulnerable seniors.