1. In Search of Greater Retirement Security Essential Elements of Composite Retirement Plans
Presented to:
Cornell University ILR School
Labor and Employment Law Program
June 29, 2016
By:
Randy G. DeFrehn
Executive Director
National Coordinating Committee for Multiemployer Plans

2. Innovation Remaining Provision to Comprehensive Pension Reform–
New Plan Designs
Left Out for Jurisdictional Reasons
Proposal would encourage the adoption of alternatives to current DC plans
Offered two examples – Variable DB and “Target” or “Composite” plans
Today’s Focus is on Composite Plans

3. Comparable to Other “Shared Risk” Plans:
New Plan Designs
Comparable to Other “Shared Risk” Plans:
Dutch Shared Risk Model
New Brunswick shared risk plan
UK Defined Ambition

4. New Plan Designs Composite [Target] Plans:
Alternative for employers/ employer associations committed to exiting the defined benefit system
Designed to provide an option to current 401(k) plans
Think of it as “DC plus” rather than “DB minus “
New “composite” plans to consist of two parts:
past service previously accrued under existing DB rules and
Future service under new “adjustable” system

5. Composite (Target) Benefit Plan
technically is neither a defined benefit nor defined contribution plan
Not DC – Benefits are adjustable like DC, but no individual account
Not DB – not strictly “definitely determinable”
Benefit design can mirror DB structure
Designed as a better alternative to moving to current DC design
The reason for the change is that this is a form of a defined contribution plan which looks very much like benefit structures seen in Canada and parts of Europe, but does not use an individual account. The structure has been modeled to address the kinds of issues mentioned in the NIRS Study “A Better Bang for the Buck.”

6. Composite (Target) Benefit Plan
Addresses shortcomings of Defined Contribution, individual account plans
Longevity risks are pooled
Benefits are paid as lifetime annuities – No Leakage, no lump-sums
Trustees retain ability to negotiate fees comparable to current DB fees
Greater Asset diversification and professional investment management improves returns

7. Composite (Target) Benefit Plan
While investment risk is shifted, required funding standards are more conservative than current system
Requires funding at 120% of projected costs to build in buffer against market volatility
Eliminates withdrawal liability
Adjusting benefits incrementally will prevent funding distress
Options depend upon plans’ current and projected funding levels

8. Composite (Target) Benefit Plan
Enhances retirement security by removing obstacles to organizing new participating employers
Funding adequacy determined by 15 year actuarial projection
Benefit adjustments are required at various points based on current funding and 15 year projection
In the final analysis, the use of these new plan designs will provide better long-term retirement security by removing obstacles to new employer organizing, expanding the number of contributing employers rather than seeing them continually shrink.

9. Composite (Target) Benefit Plan
If a plan fails the long-term funding target, Trustees must take corrective actions to restore funding level to 120% at 15 years
1. Traditional Response
Negotiate higher contributions, or
modify future accrual rates and notify participants of possible implications
2. When that is not feasable
Can modify non-core pension benefits (anything but normal retirement benefit including post-retirement benefit improvements, other PPA adjustable benefits)

10. Composite (Target) Benefit Plan
3. If, despite having taken all reasonable measures, the plan is projected to become insolvent
In addition to the options described above, the Core retirement benefit (Normal Retirement benefit at Normal Retirement Age) may also be reduced

11. Protections to Preserve Legacy Plan Funding
Contributions must:
Meet PPA / ERISA funding and other compliance requirements (e.g. Withdrawal liability and payment of PBGC premiums), AND
Meet “Minimum Transition Contribution” rates (sufficient to amortize legacy plan liabilities over a period of not more than 30 years)*, AND
Continue contributions to the legacy plan for all employees, prohibiting exclusion of any group of younger or new employees from determining the contribution to the legacy plan
[*Contribution would be the greater of these two]
The thirty year amortization is critical so that an adequate benefit can be maintained for currently active employees – funded at the higher level to moderated market volatility. This is another aspect of the need to balance interests of all stakeholders to provide long-term retirement security.

12. Protections to Preserve Legacy Plan Funding
Elimination of Withdrawal Liability:
When legacy plan is fully funded for 3 of last 5 years and
projected to be funded for the following 4 years
The plan trustees may eliminate withdrawal liability*
*Absent this “Bridge” plan sponsors have an incentive to withdraw from the legacy plan as soon as it becomes financially feasible to avoid potential re-emergence of W/L

13. Cost Projections
In a study of 106 plans replicating the current plan design, a majority of plans it was found that:
Cost would decline
Cost would be below the current contributions
Plans closer to full funding would see less of a difference between current and new plan costs
Savings come from 30 year amortization of legacy costs

14. Is the Composite Model Right for Everyone?
Targeted to plans where the alternative is to abandon the DB plan and replace it with a 401(k)
Design is self-limiting
Poorly funded plans are unlikely to afford contributions using the Transition Minimum Contribution
May also be affected by ultimate decision on Fresh Start Amortization

15. Cornell University ILR School
MULTIEMPLOYER PENSION PLANS IN CRISIS: Is the Composite Plan the Answer?
June 29, 2016
Diane Gleave

16. Effective Minimum Funding Periods
Effective Amortization Period (Years)
Zone
# of Plans
Average
25th Pct
50th Pct
75th Pct
Green
171
13.87
8.84
11.15
14.60
Yellow 26
16.16
11.42
14.19
17.47
Red 58
10.31
7.50
8.96
12.64
Total
255
13.29
8.57
11.07
14.49
Based on Segal’s study from May 2016 using readily available information from 255 plans.

17. Cost of Composite Plan vs. Current Plan
100%+
100% – 90%
90% – 80%
80% – 70%
70% – 60%
<60%
On average, composite plans will need 33% less funding
Based on Segal’s study from March 2015 using readily available information from 106 plans.

18. Composite Plan Cost vs. Current Plan Contributions
100%+
100% – 90%
<60%
90% – 80%
80% – 70%
70% – 60%
Contributions are not always tied to the cost. At the median, composite plan will require 90% of current contributions
Based on Segal’s study from March 2015 using readily available information from 106 plans.