US lawmakers have drafted legislation to create the Pension Rehabilitation Administration (PRA), a new office within the US Treasury Department that would allow pension plans to borrow money to remain solvent, while providing retirement benefits for retirees and workers.
“With this bill, we responsibly shore up multiemployer pension plans and guarantee retirees the full benefits they earned,” said Rep. Richard Neal (D-MA), of the House Ways & Means Committee. “In previous times of crisis, the federal government has stepped in to assist savings and loans associations and Wall Street firms—now it’s time to do the same for American workers.”
The Senate and House Democrats who proposed the legislation said the money for the loans, and the cost of running the PRA, would come from the sale of Treasury-issued bonds in the open market to large investors, such as financial firms, and other institutional investors. The PRA would then lend the money from the sale of the bonds to the struggling pension plans.
To ensure that the pension plans can afford to repay the loans, the PRA would lend them money for 30 years at interest rates of around 3%. The 30-year loans are intended to buy time for the pension plans so they can focus on investing for the long-term health of the plan, while the loans pay benefits owed to current retirees.
Under the proposed program, pension plans would borrow money from the PRA to purchase conservative investments that will cover the cost of paying current retiree benefits each month. Annuities, cash matching with investment grade bonds, or duration matching with a suitable bond portfolio were cited as possible investments for these funds. Retirees and their families would be guaranteed their promised benefits, and the loan proceeds would be prohibited from being invested in risky investments.
The bill also requires plans that borrow money to submit reports to the PRA every three years to demonstrate the plans are on track to get back on solid ground. Pension plans would be allowed to borrow as much money as they need, as long as they can demonstrate the ability to repay the loan, and would pay interest comparable to that of a 30-year Treasury bond, although that rate may be slightly higher to cover operating costs for the PRA.
According to the proposal, the pension plans would pay only fixed interest rates on the money they’ve borrowed during the first 29 years of the 30-year loans. In the last year, the pension plans would pay interest on the loans and repay all the money borrowed.
Under the plan, for pensions that aren’t able to borrow enough to cover the costs of paying for retirees, the Pension Benefit Guaranty Corporation, (PBGC), the government-sponsored lifeboat for struggling pensions, would step in to fill the gap between what the plan can borrow and the additional funding needed to meet obligations to retirees.
According to the lawmakers, more than 200 multiemployer pension plans covering 1.5 million plan participants are projected to fail, many within the next 10 years. They also said the PBGC has an exposure of $59 billion and is projected to become insolvent by 2025. The Congressional Budget Office estimates that the cost of backstopping the PBGC if it fails would be $101 billion over 20 years.
The Teamsters Union, which represents 1.4 million workers in the US, Puerto Rico, and Canada, endorsed the proposed legislation. The creation of the PRA “would provide a path to fixing the country’s growing pension crisis by providing the financial support the plans need to avoid insolvency,” said Teamsters President Jim Hoffa in a video statement.