Pension bailout legislation is of interest to our members who deal with unions, are targets of organizing attempts, or operate in an industry where future organizing attempts may occur. The financial situation of almost of 70 union-run Taft-Hartley Pension Plans, also called Multiemployer Pension Funds, is dire. Some are actuarially scheduled to run out of money to pay benefits. It is only a matter of time. Hundreds of thousands of employees are at risk of losing their hard-earned pension benefits. Employers of these workers might want to consider alternatives before it is too late to make a difference.
Multiemployer Pension Reform Act
To address the pension funding problem, Congress enacted a controversial law in December 2014 to permit multiemployer plans—for the first time since the Employee Retirement Income Security Act (ERISA) was enacted in 1974—to reduce plan participants’ accrued benefits. The Multiemployer Pension Reform Act of 2014 (MPRA) allows plans that need to cut benefits to petition the Treasury Department for authorization to do so. These plans must show that the proposed reduction in benefits, and future employer contributions, would prevent plan insolvency.
Regretfully, three of the five plans that have petitioned under MPRA to date have been rejected by the Treasury Department for failing to credibly prove they would avoid insolvency as required. So even the fix turns out not to work. What happened? How did these problems develop?
Multiemployer/Taft-Hartley plans are operated by unions and offer participation to employees of different employers who come under the same union umbrella. Individual employers contribute to the pension fund based on union agreements with members of their bargaining unit. One of the historic problems is that contributions were negotiated based on an annual amount (per hour, or per month, per person). While this may be adequate funding for a defined contribution plan, such as a 401(k), profit sharing, or other individual-account-balance-type plan, it is often inadequate for a pension plan.
Employer pension plans are funded according to an annual contribution range determined by an actuary during a plan’s valuation. On an annual basis, actuaries must perform a statistical valuation wherein they consider a host of variables, including the promised benefit on retirement; current assets; expected return on invested funds; the age, gender, salary levels, and predicted pay increases of beneficiaries; and death and disability rates. By projecting the promised payments well into the future, they determine what must be deposited today to fund those future benefits. This is very different and much more complex than an annual promised contribution amount, with investment gains and losses borne by each participant’s account.
Further, there has been a continuing decline in membership, which reduces the amount of contributions the plans receive. But the large number of retirees still drawing funds from the plans remains. Of course, the general economic decline many have experienced over the last eight or so years has also decreased earnings on plan assets, further contributing to the funding problems for many multiemployer plans.
Perhaps best-known of the troubled multiemployer plans is the Central States Pension Fund, in which several of our members participate. This was the first plan to apply for the government bailout by planning to significantly reduce promised benefits while shoring up funding for future benefits promises. The Treasury Department rejected the plan’s request late May 2016. One month later, in rejecting the second plan to request relief under MPRA, the Treasury Department stated that the Road Carriers Local 707 Fund’s proposal for relief presented unreasonably optimistic assumptions. The Road Carriers Local 707 advised the Pension Benefit Guarantee Corporation (PBGC) that without relief, they are due to run out of funds by February 2017. To date, there is no backup plan for their participants’ pensions.
The PBGC is the federal agency, overseen by both the Treasury and Labor Departments, that is tasked with providing a safety net of minimum benefits for participants of insolvent pension plans. PBGC is also facing a financial crisis. PBGC is funded by premium payments from all private pension plan sponsors. Interestingly, the per-person premium for single-employer pension plans is more than twice the per-person premium paid by the union multiemployer plans. PBGC premiums were also increased in August 2016 to help shore up this pension back-up program.
Some benefits experts warn that multiemployer plans looking at insolvency in just a few years may not have enough time to implement plans to reduce benefits sufficiently to avoid insolvency. This could leave their longer-term workers without funding to pay their pensions. Plans with more time before running out of money may well want to consider a plan and application under MPRA as one step to avoid insolvency and protect participants in the future. Alternatively, they might consider converting to a hybrid plan to ease funding requirements and to share the investment risk moving forward.
Any employer who participates in a multiemployer plan should take a close look at the current and projected funding situation of their plan. From there, determine whether it might be in the long-term best interest of your workforce to negotiate out of the union-sponsored plan and establish a company-sponsored, single-employer plan for those union employees. Some employee groups have actually chosen to leave their union altogether. Interested members might consider contacting MSEC Labor Relations attorneys, who have successfully worked with companies to move out of an organized environment and their associated multiemployer pension plans.