2021 Retiree Health Cost Estimates
We present our latest numbers on how much healthcare will cost retirees going forward.
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Charlie Clark: Hello, and welcome to Milliman's Critical Point podcast. I'm Charlie Clark, I'm a Principal and a Director of Milliman's Employee Benefits Research Group. On March 11th, President Biden signed the American Rescue Plan Act, or ARPA, into law. Today, we're going to review the ways in which the law impacts the participants pension amounts, and the tax code financing of two common types of defined benefit pension plans. They're known specifically as single employer plans, and multi-employer plans. And what plan sponsors and the trustees need to think about as they choose to elect some or any of the provisions of ARPA. I'm joined today by my colleagues Vanessa Vaag. Vanessa is a Managing Principal and Actuary who specializes in single employer pension plans. Good morning, Vanessa.
Vanessa Vaag: Good morning, Charlie.
Charlie Clark: And Grant Camp, a Managing Principal and Actuary who specializes in multi-employer pensions. Good morning, Grant.
Grant Camp: Good morning.
Charlie Clark: So, before we get into any of the details of the legislation, let's first touch on why some of the pension law has been integrated into ARPA. Specifically, what was Congress hoping to address when it comes to pension plans? Grant, why don't you start us off today, please.
Grant Camp: All right, thank you, Charlie. So, really, for the multi-employer plans, which I'll be speaking to, there are two types of relief in the law. There's what I'll call the non-financial, and then the financial assistance provisions. And the non-financial assistance is really very similar to what we saw after 2008, when the market crashed back then. And primarily these provisions are designed to address the impact of COVID-19 on multi-employer plans. And give these plans some more time to really address the financial downturn and that impact. As you can imagine like many industries, there's bene kind of a varied response to COVID. Multi-employer plans cover a lot of different industries. I work with some plans in the hospitality industry, they've obviously had a much larger impact. I also work with quite a few plans in the construction industries, and they had a temporary decline and then actually quite a quick recovery and ramped back up in their work. Other industries like transportation and healthcare have also had a pretty varied impact. So, there's been kind of a mixed bag of what's been necessary for these plans. As I said, the relief is generally designed to give them some extra time. Each year the actuary's required to certify the plans, what's called zone status. And we generally refer to those with the stoplight colors, green, yellow and red. So, Green Zone plans, don't need to take any immediate action; Yellow Zone plans, which are also called Endangered, they have to start taking some action; and then what they're called Red Zone plans, they're critical, and they have to take more significant action. And those measurements happen at a point in time. And so, obviously, if you had to measure that point in time during the middle of the downturn back about a year ago, you were kind of measuring at a very low point, and so you had to take more action than was probably actually necessary based on the subsequent recovery. So, a lot of the legislative options here are to give plans either time to react to that or give them some extra time to recovery if they did withstand a financial downturn.
Charlie Clark: Vanessa, would you mind telling us how you think that the changes in the single employer plans are affecting some of the plans you work with, and are there any similarities with the multi-employer plans that Grant just mentioned?
Vanessa Vaag: Sure, so single employer plans have struggled to meet funding requirements in their retirement programs as well. And I think it's a mixed bag similarly with healthcare industries might have had more business and other industries like retail and food industries might have suffered, but ARPA combined with the earlier CARES Act allows for employers to reduce cash contribution requirements immediately and to defer them to a later date. So, sort of that, that sort of deferral of cost that Grant said was available for the multi-employers, and ARPA provides relief to single employer plans in two ways. And the first way is by permitting a longer time over which they can pay off any shortfall between the value of their pension promises and the assets that back them up. So, if you think of a shortfall as a new mortgage, ARPA lets the employer pay off the pension debt over 15 years instead of the current seven years. Now the seven-year amortization periods existed for pension deficits since the enactment of the Pension Protection Act of 2006. So, in effect that refresh will allow sponsors to more than double the time over which pension shortfalls can be amortized.
The second way that ARPA provides relief is with a temporary increase in interest rates that are required to be used to calculate pension values. So, the increase in those interest rates decreases the value of pension promises. They’re inversely related, and as a result the deficit between the promises and the assets goes down. But we have to keep in mind that relief is temporary. The biggest impact will be in the next few years. So, artificially, lower liabilities allow for lower short-term contributions, but they don't change the long-term cost of the plan. And they also don't affect the calculations of accounting liabilities or liabilities that drive PBGC insurance premiums.
Charlie Clark: So, are there any ways that employers get to choose which of the revised sets you-- you mentioned that there's two. Do they choose them all at once? Do they get to cherry pick? How does that work?
Vanessa Vaag: Right, there are choices. And it is quite complicated. ARPA gives employers multiple options for implementing relief. So, sponsors can elect to start the 15-year amortization relief in 2019, 2020 or 2021, and if no election is made, it starts automatically in 2022. Interest rate relief starts automatically in 2020, but a sponsor can defer that to 2021 or 2022. For the most part, we'll expect that sponsors will find some advantage to adoption of relief as early as they can adopt it, but that's really in terms of maximizing contribution flexibility, because there are offsetting costs restating and refiling prior valuation results that also have to be considered. Some of my clients that have been able to weather the storm over the last few years, they don't want the hassle of restating historical valuation results. They don't even want to reduce future contributions, because they don't want to have higher accounting numbers, or increased PBGC premiums.
Charlie Clark: Before I go back to Grant, Vanessa -- you mentioned accounting. So, this particular change it doesn't affect your accounting calculations? I'll ask Grant the same question. But just before I move onto Grant, just can you just reiterate if these are just what the tax code rules?
Vanessa Vaag: Right, they're not going to affect our accounting liability measurement. Those are done on marked-to-market interest rates. The way that it can impact the accounting results is really if you're lowering your contribution, so that'll affect the funded status on the balance sheet.
Charlie Clark: Okay. So, Grant, there's been a lot in the news about the multi-employer plan provisions costing taxpayers $86 billion. Can you give us a little insight on how that works, please?
Grant Camp: Sure, so that's what I was referring to as the special financial assistance, and the 86-billion-dollar price tag that's been in the news is that's the portion of this law that's going to address the about ten percent of plans that are projected to fail within the next 15 to 20 years. Some of those are projected to fail actually within the next five years. And when I say fail, they're going to run out of money, and not have sufficient assets to actually pay the benefits. So, what would have happened absent any sort of financial assistance or government intervention is that these plans that are running out of money would then be turned over to the Pension Benefit Guaranty Corporation, the PBGC, which is the government agency that's responsible for effectively ensuring that the participants still receive some benefit in retirement. The benefits get reduced if the plans go to the PBGC. However, given the size of the plans and a couple of very large plans that are projected to fail in the very near future, the PBGC was actually projected to become insolvent by 2025 or 2026, which then would have further reduced participants benefits in those failing plans by 90 to 95%. So, participants would have been getting somewhere between five and ten cents on the dollar compared to what they expected to receive in retirement. So, clearly, that would have been a big hit to those participants and a big hit to the overall multi-employer industry. So-- oh, go ahead Charlie.
Charlie Clark: Yeah, I was going to ask you, so you're going through this list. So, how do multi-employer plans get in line to apply for this, technical issues, and how is the $86 billion actually paid out or allocated, please?
Grant Camp: That's a good question, and we don't know the full answer to that yet. The PBGC is supposed to be issuing regulations over the next 120 days. So, hopefully, around the Fourth of July, we'll be getting some more information on how this is going to work. But in general, it's going to be a one-time cash payment to the plan, and it's not considered a loan. So, it's not going to have to be paid back, it's just going to be cash paid to these plans. It's going to be coming from the Treasury. And when the plans get this money, they're going to have to segregate it and invest it in investment grade bonds or other investments that the PBGC will permit. And again, we'll be getting more regulations on that hopefully, and some information on that. But in terms of who's first in line, the PBGC, again, regulations forthcoming-- I'll be saying that a lot today probably-- the plans that are projected to fail within the next five to ten years and the very large plans that are expected to need over a billion dollars are going to be first in line. As well as plans that have actually already been approved for suspension of benefits under MPRA. So, MPRA is a law from 2014 that was intended to address these failing plans, and allow them to cut back the benefits, so that they could remain solvent, although of the 124 plans that are currently eligible that are in the what's called "critical and declining" status, projected to run out of money in the next 15 to 20 years, only 18 have actually been approved for suspension on their MPRA. So, clearly that law wasn't exactly the success that its authors had hoped it would be. But those are going to be the first plans through the gate and they're going to be the first ones in line. What's not clear is whether or not that $86 billion is just an estimate, or whether that's a hard dollar amount that once the $86 billion is up, then the relief is done. So, I think for the plans that I have that are going to be eligible for this, I'm going to recommend that they file and get in line, because there's always a chance that this money-- the pool of money runs dry at some point in the future.
Charlie Clark: Oh, that's really good insight. Can you make a comment about if there's any special treatment for the plans, and perhaps even the participants benefits, that have been reduced under prior law?
Grant Camp: Yeah, actually, that's a good question. Those 18 plans that have already been approved for benefit suspensions, which are really just benefit cuts, under the prior law, MPRA, if those-- if the trustees of those plans apply for this special financial assistance, they will actually need to roll back those MPRA benefit cuts and restore the benefits to all those participants, as well as make them whole for benefits-- the reduced benefits they've received since the suspension was enacted. So, those participants that previously had their benefits reduced, are going to be receiving either a lump-sum, or a pay-out over, I think, a five-year period after the special financial assistance. So, they'll be made whole, which is going to be a big deal for those participants. A lot of them have pretty significant benefit reductions, as much as 30% from what they previously expected to receive.
Charlie Clark: So, Vanessa, Grant was talking a lot about regulations. So, how much information do you think that planned sponsors of single employer plans are going to need from the federal agencies, and which ones, and you know, maybe you could list a few of them that we're hoping to get, and how soon do we need them?
Vanessa Vaag: Right, I think we need guidance from the IRS to implement the relief, but honestly, this isn't the first-time relief's been passed where we need to operate without technical guidance. And likely issuing technical guidance is not on the top priority list for the IRS, but generally, they've been reasonable accepting good faith implementation, so I think people will proceed with the single employer relief without expectation of that any time soon. But again, I don't think that they're going to be unreasonable with good-faith compliance.
Charlie Clark: Grant is there a similar good-faith compliance history with multi-employer plans, and how did that work out?
Grant Camp: Yeah, I think for the non-special financial assistance variations that I talked about earlier where plans will get more time to recover from the COVID downturn, and some additional smoothing, like Vanessa was saying, paying off the losses due to COVID-19 over a longer period of time. We've seen similar provisions like that on the multi-employer side, like I said back in 2008. So, I think in terms of that, if plan sponsors assume that they can sort of react the same way they did back in 2008, and follow the guidance that was issued back then, I think that they're going to be fine. I think that's probably the good faith-- a good-faith effort. The issues that we don't know about, and that we really will have to wait for is how to go about applying for this special financial assistance, that 86-billion-dollar pool of assets. And in truth, how much money a plan is actually even going to be eligible for is a question that's up in the air. There's some differences in opinion on how the law actually reads. It says that the amount that the plan can get is going to be the amount required to pay all benefits that are due through 2051. Now what that means from an actuarial standpoint is not totally clear. Does that mean you take all of your benefit payments through 2051 and discount them to today, compare that to your assets? And then you get the difference? Or does that mean you project out to 2051 and make sure that your plan still has at least a dollar left over at the end of the year, so that you can make sure that the plan has paid all the benefits through 2051? So, there's a big-- could be a big difference in terms of what the financial assistance looks like and whether or not it actually ends up solving the problem for some of these plans.
Charlie Clark: So, as we're getting close to the end, I just wanted to ask each of you what type of administrative actions should plan sponsors or trustees be prepared for in the next, let's call it two- or three- or four-months, or even as late as the end of the year? So, let's start with Vanessa. Are there certain actions that planned sponsors should be ready to do - changes, plan amendments, administration systems?
Vanessa Vaag: I think for the single employer space, it's not as complicated, but I do think that there has to be a good evaluation of what it would mean to restate in which year the relief would apply, and what are the repercussions? Specifically, taking advantage of the deferral of cash, and how that could implement like a long-term cost of the plan. I mean, you're just kicking the can. So, I think just really understanding what you're doing by taking advantage of a short-term relief and how that will affect accounting numbers, PBGC insurance premiums, and ultimately the long-term sustainability of the plan.
Charlie Clark: Grant?
Grant Camp: Yeah, I mean, I think in terms of what plans need to do to get ready, for some of the provisions, I think it's going to be working with their consultant and making sure that they understand the repercussions, because there are some strings attached to receiving this relief on the multi-employer side. So, they want to make sure you understand what those strings are, how that's going to impact the operation of the plan going forward. In terms of receiving the special financial assistance, a lot of that is tied back to the certification the actuary did back in 2020. So, clearly, the legislators were trying to set this up so that you couldn't go make some changes to your assumptions to get eligible for this relief first. You know, if you weren't already eligible, you can't game your way into it. So, in that respect, I think it's mostly about just setting yourself up and confirming that all the assumptions you have are reasonable and getting ready to do a filing process. As we saw with MPRA, that filing process can be fairly significant, and undergoes a lot of scrutiny by the government when you file it. So, being prepared and getting all that documentation ready to go I think is going to be the main thing for plans that are looking to apply for that special financial assistance.
Charlie Clark: Okay, so as we're wrapping up, I'll just quickly summarize. It sounds like we have two quite complex laws that plan sponsors need to deal with, and they should certainly be having lots of discussions with their cadre of consultants, the actuaries and their lawyers and trustees. It seems we need for the federal agencies to issue some type of guidance, whether it's in general-- we would appreciate more if it's kind of a cookbook approach, and in particular on the multi-employer side, we want to make sure we know how that the trustees and the plan sponsors are quote/unquote, "in-line" to get the relief that's promised in the bill. Grant, Vanessa, thanks so much for joining me today.
Grant Camp: Thank you.
Vanessa Vaag: Thanks!
Charlie Clark: You've been listening to Critical Point presented by Milliman. To listen to other episodes of our podcast, visit us at Milliman.com. And you can also find us on iTunes, Google Play, Spotify and Stitcher. See you next time!
Critical Point Episode 30: How the American Rescue Plan Act can impact single and multiemployer pension plans
This podcast episode explores how the American Rescue Plan Act may impact single and multiemployer pension plans, and what plan sponsors should consider when taking potential action as a result of ARPA.