Biden Stimulus Plan Shores Up Weakest Multi-Employer Pension Plans Rather than Taking on Private Equity Abuses

Yves here. I don’t mean to be hard on Tom Conway, the international president of the United Steelworkers Union. The Democrats have taken organized labor for granted for so long that the gestures made by Biden so far, that of speaking out in favor of interference-free union elections, meaning scolding Amazon, and now shoring up a private pension guarantee fund, must seem like a sea change from the posture of the Democrats under Clinton and Obama. Hence it makes sense for Conway to applaud Biden moving in a better direction. However, his headline, The American Rescue Plan is for Real, is out over its skis.

To switch metaphors, just as one robin does not make a spring, so to do are one-off measures not sufficient to change economic and power relationships. Yet the Biden Administration, like the Obama Administration, is committed to preserving the status quo, but is willing to spend bigger to do so.

Despite the sweeping headline, the post is entirely about the partial rescues of really sick multi-employer pension plans, yet doesn’t explain clearly what the program is or how it works. Note that there are roughly 1,400 multi-employer plans and about 10% are in bad shape.

I had assumed the funds were going to the Pension Benefit Guaranty Corporation, which backstops these plans but its multi-employer program is projected to run out of money by 2026 or 2027. Instead, as CNBC explained, the $86 billion set aside for these troubled pension schemes will be for grants that go directly to the funds themselves, as opposed to the PBGC.

From CNBC:

The American Rescue Plan, which now heads to the House, would let certain pensions apply for federal grant funding, which would be used to help pay retirement benefits to workers….

However, 124 multi-employer pensions are in “critical and declining” status, according to the Pension Benefit Guaranty Corporation. They’re projected to have insufficient funds to pay full retirement benefits within the next 20 years.

About 1 million workers are in such plans, according to the American Academy of Actuaries…

Grants offered by the American Rescue Plan would cover full pension benefits for workers in ailing plans over the next three decades. The relief measure would also reinstate any benefits that had been suspended for recipients.

Multi-employer plan sponsors can apply for the aid through 2025. The PBGC can’t condition the aid on pension changes like benefit reductions or new funding requirements.

The funds must be invested in investment-grade bonds. They, along with any investment earnings, must be segregated from other plan assets.

The remark about the PBGC not being able to mandate pension changes give the impression that the reason for not simply topping up the PBGC was so that the American Rescue Plan could force revisions. But then we have this gripe:

Sen. Chuck Grassley, R-Iowa, criticized the measure as a bailout with no strings attached.

“It’s just a blank check, with no measures to hold mismanaged plans accountable,” he said.

So was the reason for bypassing the PBGC political, that employees in salvaged plans will know the money came from the Biden Administration, as opposed to the PBGC, where the Administration’s munificence might be missed?

The Boston Globe adds:

The Congressional Budget Office estimates 185 plans would receive grants under the measure, effectively ensuring the most dire plans can cover their retirees’ benefits for the next three decades. Many of those pensions can range between $15,000 and $25,000, providing relatively small but still critical lifelines for hundreds of thousands of former blue-collar workers, [Jim] Naughton [professor of business administration at University of Virginia] said.

But by prioritizing those most “critical” plans, it ensures those who score the biggest windfall are plans that “were the worst managed, the ones who made the stupidest investment decisions, [or] the ones who collected the least contributions,” Naughton said.

“People are relying on these pensions. To do nothing is not really a palatable option,” he said. “But it is absolutely a transfer from taxpayers to pension plans.”

Conversely, as part of the total $1.9 trillion package, state and local governments are barred from pouring their share of $350 billion in aid into their own public pension funds.

This $86 billion rescue will cover over a million workers. For a reference point, CalPERS has about $440 billion for its 1.9 million members and even on its best recent day is only 70% funded.

Regardless, Conway fails to mention that a reason so many private pensions have gotten in trouble is the tender ministrations of private equity firms, although the Supreme Court is about to hear an appeal of a 2012 case, decided in favor of Sun Capital, which had upheld Sun walking away from the pension liabilities of a company it bankrupted. Having Congress require investors to make good on the pension funds of the companies they wreck would considerably reduce how many pension funds get hopelessly under water.

By Tom Conway, the international president of the United Steelworkers Union . Produced by the Independent Media Institute

The closer Doug Kamerer got to retirement, the more he feared that he’d never be able to afford it.

Kamerer steadily built up a pension during 35 years as a die setter at Etched Metal Company in Solon, Ohio, where he and his coworkers often accepted lower raises in return for contributions their company made to a multiemployer retirement fund.

But that fund began failing years ago, and if it crashed, Kamerer knew he and his wife, Toni, would end up spending their senior years just trying to scrape by.

All of those worries evaporated when President Joe Biden signed a historic stimulus package on March 11 that will not only lift America out of the COVID-19 recession but also help secure the nation’s future.

Biden and congressional Democrats vowed to make working people their top priority, and they delivered on that promise with legislation that addresses the pain and uncertainty the pandemic inflicted on the entire nation.

The $1.9 trillion American Rescue Plan delivers one of the boldest, most comprehensive investments in working people since the New Deal of the 1930s, and the United Steelworkers (USW) worked alongside other labor unions to ensure Congress passed it.

And just as the New Deal both stabilized a country in crisis and fostered prosperity, the stimulus bill will strengthen America for years to come.

The package extends $300-a-week unemployment benefits and health insurance to workers laid off during the COVID-19 recession, provides $1,400 stimulus checks and tax credits to millions of struggling families, earmarks funds to help schools operate safely and allocates billions for controlling the coronavirus.

But it isn’t enough to confront current hardships. It’s also essential to head off impending threats to the nation’s progress.

That’s why the stimulus includes $86 billion to stabilize about 130 multiemployer pension funds and secure the retirements of 1.3 million workers and retirees, including Kamerer, a member of USW Local 1-243 who’s enrolled in a plan that could go broke in a decade.

“This is huge,” Kamerer, who hopes to retire in four years, said of the pension support. “It’s such good news. What a weight off my mind.”

Multiemployer pension plans combine contributions from two or more employers in fields such as manufacturing, retail, truck driving and entertainment. Companies pay into these funds as part of their workers’ wage and benefit packages and promise to pay retirees pensions based on their wages and years of service.

Although many of the 1,400 multiemployer plans around the country remain financially stable, about 130 are speeding toward insolvencybecause of factors such as corporate bankruptcies, industry consolidation and investment losses.

The COVID-19 economic downturn put these plans in deeper peril, threatening the futures of workers already struggling because of the recession as well as those who put their lives on the line to keep the nation functioning during the pandemic. Kamerer is among those who reported for work each day while millions of other Americans did their jobs remotely.

“This is our money,” stressed Kamerer, a former local union officer who helped negotiate contracts in which he and his coworkers sacrificed wage increases for pension benefits they’d receive years down the road. “This is part of our compensation package. It’s important that’s understood.”

If the plans collapsed, workers and retirees would lose virtually everything they spent decades building. And a nation that experienced soaring unemployment and poverty during the pandemic cannot afford to let still more citizens get knocked off their feet.

The USW and other unions first sounded the alarm about failing multiemployer pension plans years ago—and fought to save them ever since.

Jim Allen, a retired Appleton Papers worker and USW Local 266 president whose survival depends on his pension, was among many union members who held rallies, lobbied Congress and testified in support of legislation to save the plans.

The Franklin, Ohio, resident and other advocates scored a partial victory last year when the Democratic-controlled House passed the Butch Lewis Act—named for a late union member who championed pension security—to shore up the funds. But the Republican-controlled Senate refused to even consider the legislation, leaving Allen and other pension plan participants ever more concerned about their futures.

“We had to not only hope but pray every day that they’d finally come to their senses and do something,” Allen said.

The Republicans never did, and when the pandemic hit, these plans took yet another blow as companies laid off workers and reduced payments to the funds.

But Biden and congressional Democrats, who gained control of the Senate after the last election, worked with organized labor to make pension security an integral part of the nation’s recovery. In signing the stimulus into law, Biden said the legislation will give “the people who built the country” a “fighting chance.”

While his pension hung in the balance, Kamerer hesitated to think too much about his golden years.

Now, he’s one of millions of Americans who can look to the future with hope because of a stimulus package that will heal the nation and build prosperity.

“People are hurting enough already,” said Kamerer, who plans to travel with his wife and spend more time with family during retirement. “They don’t need more worries about the future.”

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  1. vlade

    “Having Congress require investors to make good on the pension funds of the companies they wreck would considerably reduce how many pension funds get hopelessly under water.”

    I’m not sure how this could work in practice, as the PE can build a chain of holding companies (across various jurisdictions) that can be very hard to unravel and find the bagholder, as the chain can be structured so as to go belly up for “minimal cost” (to the PE, of course. given it’s a zero-sum game…)

    The only way I can see this working is giving company pensions first-lien and + some hammer on directors *), but that’s politically impossible right now. The first-lien would have an interesting corrolary, which is that the banks would become much more careful as they would not be in the top positions anymore.

    *) this would have to cover at least gross negligence, and ideally even negligence.

    1. Yves Smith Post author

      That’s not how it works in practice. It was Sun Capital who was sued by the Teamsters in the case now about to to go to the Supreme Court.

      You forget that private equity firms are general partners in a limited partnerships. PE funds hold portfolio companies in their funds. The LPs would not tolerate being remote from the fund assets. US public pension funds already go to peculiar lengths to pretend they aren’t investing through Caymans or Bermuda entities when that happens.

      1. vlade

        I agree that such structures make it much harder to sell it to the LPs (as it of course substantially raises the risk of fraud by the GPs), and if the pension funds want to avoid it, that’s at least one sign of sanity.

        But if the company pensions could start coming back, the GPs may try to sell such structures to the LPs, as I’m sure that they (GPs) would try to hand over the bag to the LPs as much as they could, one way or another.

        1. Yves Smith Post author

          Over 60% of the GPs’ income is from fees that do not depend on the performance of the fund. That is why they are so cavalier about bankruptcies.

  2. Larry

    A reminder again that nothing will fundamentally change. For too many alums and aspiring PE mavens in the democrats upper echelons. Pampering over disasters is better than changing the reasons for the disasters in the first place. I doubt the parliamentarian or Joe Manchin would allow the Biden admin to do anything substantial anyway.

    1. Yves Smith Post author

      Agreed but the new talking point about Biden is that he’s a transformative president, basically reworked Obama PR. So it’s important to keep attention on the fact that he’s just as captured as all the other Democrat big dogs.

  3. cnchal

    > This $86 billion rescue will cover over a million workers – 1.3 million workers referenced in the article

    $66,000 per worker – minus admistrivia. Rest easy dudes. That will keep you in clover for a few decades /sarc

    Pirate Equity approved. They stole pensioner’s money first time around and now have the opportunity to steal the top up.

  4. Bob Hertz

    I would like to see more detail on the 186 plans that are being bailed out. I have read about this issue sporadically for several years, so I do not have a firm grasp of the real causes.
    I first read that plans were in trouble because their biggest corporate contributors went broke, went non-union, or otherwise dropped out of the plan.

    I have read that the plans in trouble often used 7 or 8 per cent investment assumptions, as a way to lower current contributions.

    Whether the cause is private equity or just our volatile economy, we do have to replace any pension program that depends on corporations being viable and unchanged for 50 years. It is going to be a defined-contribution world in the private sector, plus strengthening Social Security.

    1. Yves Smith Post author

      Corporate pension plans, unlike government pension plans, are supposed to be pretty fully funded. See this update on single employer plans:

      And when employers withdraw from plans, there are rules as to the adequacy of funding. I’m not up on current standards, but in the stone ages of my youth, they had to defease them, which meant have enough laddered Treasuries to satisfy the obligation. Clearly things have become more permissive since then.

      I need to retire but this might shed some light:

    2. tegnost

      “Strengthen” social security is kind of vague, how would you have biden do this strengthening?

  5. Sound of the Suburbs

    It might help to remember what the acceptable face of capitalism looks like.

    My friend runs a small firm and I can see capitalism has a very acceptable face.
    He wants a well oiled machine that runs well.
    There may be big cogs and small cogs, but this machine needs all those cogs turning together.
    He doesn’t want good people to leave, as he knows getting a good replacement is easier said than done. He will pay a good rate for good people to keep them.
    He tries to keep them happy and organises occasional social events for the staff so they feel valued. The last thing he wants is for his staff to think he is just using them, or that he is taking advantage of them.
    This is his money machine and he wants it to run in the best way it possibly can.
    Everyone does well out of this arrangement and he makes lots of money.

    Many people work for small firms and this gives capitalism its widespread support.
    When does it turn ugly?
    The Classical Economists could observe small state, unregulated capitalism in the world around them.

    Adam Smith
    “All for ourselves, and nothing for other people seems, in every age of the world, to have been the vile maxim of the masters of mankind.”
    “The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money.”

    “The interest of the landlords is always opposed to the interest of every other class in the community”
    In Ricardo’s world there were three classes.
    He was in the capitalist class.
    The more he paid in labour costs (wages) the lower his profits would be.
    He was paying the cost of living for his workers through wages, and the higher that was, the higher labour costs would be.
    There was no benefits system in those days and those at the bottom needed to earn money to cover the cost of living otherwise they would die. They had to earn their money through wages.
    The more he paid in rents to the old landowning class, the less there would be for him to keep for himself.

    From Ricardo:
    The labourers had before 25
    The landlords 25
    And the capitalists 50
    ……….. 100

    He looked at how the pie got divided between the three groups.

    There were three groups in the capitalist system in Ricardo’s world (and there still are).
    Workers / Employees
    Capitalists / Employers
    Rentiers / Landowners / Landlords / other skimmers, who are just skimming out of the system, not contributing to its success
    The unproductive group exists at the top of society, not the bottom.
    Later on we did bolt on a benefit system to help others that were struggling lower down the scale.

    Ever since the Classical Economists we have been pretending there is not an unproductive group that exists at the top of society. In the UK, we still have the aristocracy that highlights this, but we do very well in maintaining this pretence.

    My friends company just serves the two productive groups; he doesn’t have to pass profit out to anyone else, or repay investors.
    Neoliberalism / Thatcherism turns everything on its head and it’s all about passing money out to the unproductive group, and cutting workers to the bone.

    In the 19th century, when they still had some grip on the reality of the situation, they looked to use the money creation of banks to provide investment capital for business and industry. The old money, idle rich could be excised from the system.
    Capitalism would serve the productive and not the unproductive.

  6. A Renter in the American dream

    It is much worse than stated. The pension bailout does not extend to the owner/employers. The employers are financially tied to the poorly administered unfunded pension obligations in a multi-employer pension system. For example, as stated in a previous comment, the pension obligation is a nominal $66,000 per employee. To exit the union the employer must pay their portion of the previously unfunded pension obligation. Locally, this amounts to a couple million dollars for an small employer with 20-25 signatory employees.

    Now that the pensions are made whole – with the Biden bailout – the employers can exit without the liability of the unfunded pension obligations, right? Nope. The employers carry the ghost of the unfunded pension liability for the next 15 years. The unfunded pension obligation kept signatory firms tied to the union – this remains true even after the obligation was nullified. A privately held signatory firm is essentially worthless on the resale market due to the unfunded pension obligation. Locally, the fringe benefits (pension and health) exceed $26.00 an hour (this does not include the hourly salary of $51/hr) and yet, the union retirees have not had a raise in their monthly stipend since 2007. Signatory is a deal with the devil for an employer and the employee. The same $11/hr pension payment into the union pension plan would yield a few million dollars, even at 1.5% return, over a 30 year career. As it stands, most retirees will not live long enough to get their contributions back.

    Not anti-union, simply anti-scam.

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