The Pension Benefit Guaranty Corporation (PBGC) has issued new guidance for multiemployer pension funds that want to adopt alternative withdrawal liability payment arrangements.
In April, the Pension Benefit Guaranty Corporation (PBGC) issued guidance to assist multiemployer pension plans that request PBGC review of alternative plan rules for satisfying employer withdrawal liability.
Under pension law, an employer that withdraws from an underfunded multiemployer plan is responsible for a share of the plans unfunded benefit obligations and generally pays withdrawal liability over a period of years. Employer withdrawal liability payments help to compensate plans for the loss of future contributions from the withdrawn employer if the vested benefits earned by its employees are not fully funded.
By issuing this guidance, PBGC appears sensitive to the pressures facing multiemployer pension funds in collecting withdrawal liability and to some contributing employers.
Funds in certain industries have seen the number of contributing employers and covered workers decrease almost unilaterally and have been unable to collect withdrawal liability from employers that leave. In some instances, these trends have been caused by deregulation, increased nonunion and foreign competition, financial manipulations rendering an employer bankrupt and the remnants of a major economic recession. PBGC seeks to assist funds and encourage looking for inventive ways in which to collect every possible dollar owed them.
Calculating Withdrawal Liability
An easy way to think of the withdrawal liability calculation process is to view it as three steps:
(1.) An actuary conducts a valuation and compares a value of fund assets against a best estimate of liabilities for vested benefits earned to date. The excess of liabilities over assets, if any, is referred to as unfunded vested benefits (UVBs).
This may be thought of as a large pie to be divided under step 2.
(2.) Using an allocation method--usually one of the methods described by law that is selected by the funds trustees or a method of the trustees' own design--this pie is sliced up into pieces sized for each contributing employer so that, theoretically, the sum of all the pieces equals the amount from step 1.
(3.) A payment schedule is developed with which the withdrawing employer may satisfy its liability allocated under step 2. A required annual payment is calculated that is supposed to be not too different from the annual contributions the employer made to the fund during its contributory years. And then a payment period in years is determined (using logarithms!) over which the liability will be satisfied with the required annual payment, but it cannot extend beyond 20 years (unless, possibly, a mass withdrawal is declared, a subject beyond the scope of this article). Even though a lump sum may be paid up front, most withdrawing employers adopt the fund's payment schedule.
While PBGC promotes creativity within the law under which funds can apply steps 2 and 3 above, the recent PBGC guidance mostly focuses on step 3--developing the payment schedule. PBGC encourages the innovative use of existing statutory and regulatory tools to reduce risk to employers while protecting promised benefits and securing income to the fund. While PBGC likes to be called upon to review alternate payment arrangements, it is not required. The guidance published explains the review process, information needed and the factors under consideration. Perhaps the biggest factor is that several large funds are...