The reduction and even suspension of pension benefits isn’t something anyone wants. However, a growing number of financially troubled multiemployer benefit plan managers may find it to be an inescapable eventuality.
The Teamsters Union’s troubled Central States Pension Fund is a good example of how bad things could turn out. Projections show that it will be insolvent by 2026, unless it takes the drastic step of cutting back benefits.
“Their leader testified before Congress that this is a time when arithmetic becomes reality,” said Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans in Washington, D.C. “The fund’s actuaries ran the numbers both ways. If reform legislation is enacted, they can pay $72 million in benefits over the next 50 years. Without it, they can pay only $28 million. That’s a big difference.”
DeFrehn’s committee has been promoting a string of “reforms” for multiemployer plans since it was formed in 1974, the same year the Employment Retirement Income Security Act (ERISA) became law.
Some of its recommendations have gained traction, others not so much, especially, predictably, the idea of suspension of benefits, which would require amending ERISA.
DeFrehn and other pension reform advocates fear that if Congress fails to intervene before the end of this year, employers will stampede out of the plans, leaving the Treasury on the hook for billions of dollars.
At the moment, more than 10 million American workers and retirees are covered by 1,510 multiemployer plans, according to the Pension Rights Center in Washington, D.C.
These are retirement plans negotiated by a union with a group of employers, typically in the same industry. Collective bargaining contracts dictate how much these employers must contribute to the plans for their employees. The plans are run by trustees selected by the union and the employers. The trustees typically determine the amounts that the plans will pay in lifetime monthly benefits.
Between 5 percent and 10 percent of these plans now face insolvency, the NCCMP estimates. Their problems are rooted in a number of factors that include industry shakeouts, the economy, overly optimistic income projections and conflicting government policies.
According to the Pension Benefit Guaranty Corp., 1.5 million people are in plans that will most likely fail.
Hoping to address the issues faced by these deeply troubled plans, as well as MEPs in general, DeFrehn and his organization a few years ago set out to find common ground among management, labor and Congress. And to a large degree, it did.
“Our objective was to allow benefits to be paid on a regular, monthly basis while not driving employers out of business,” he said. “At our first meeting, I said, `By the time we’re done, some of you won’t still be here.’ That didn’t happen. We all agreed we had to find a solution, and I am proud to have been a part of that non-confrontational approach.”
That said, the organization’s 2013 report, “Solutions Not Bailouts,” offers several provisions in its 35 pages that can best be described as tough love – not that it had much choice – and which face an uncertain future.
As the report was being produced, “commission members discussed the clear message from Congress that no bailout would be forthcoming to protect the private multiemployer pension system overall,” DeFrehn recalled. “The only practical alternative is to reduce the liabilities of the plan. Current rules that place the entire burden for liability reduction on the active employee populations are insufficient for the most troubled plans to recover.”
In other words, MEP retirees are going to have to feel the pain, too, hence the proposal to suspend benefits under certain circumstances – an always-controversial, if not explosive, idea.
“Suspending accrued benefits is a change to the social contract between the plan and participants,” the report acknowledged. “It must not be used arbitrarily, and its use must be restricted to plans that face inevitable insolvency. And only in situations where the long-term benefit to participants as a group after intervention is advantaged.”
According to the NCCMP proposal, plans that take this route would have to meet a number of criteria:
They would be projected to become insolvent within 20 years and have a ratio of inactive to active participants that exceeds 2-1; or they would be expected to become insolvent within 15 years.
After application of the suspension, the plan would be expected to avoid insolvency.
Plan sponsors and trustees would have exercised due diligence to determine that suspension is necessary.
Photo: Randy DeFrehn.
See also: Making sense of the pension gap
The NCCMP proposal also includes protections for pensioners:
No participant’s benefit could be reduced to below 110 percent of the Pension Benefit Guaranty Corp. guaranteed amounts.
Suspension must achieve, but not exceed, the level necessary to avoid insolvency.
Any future benefit improvement must be accompanied by equitable restoration of suspensions.
Congressional approval would be required for these changes to be implemented, and although some of the stakeholders have been promoting action since “Benefits Not Solutions” was released, DeFrehn understands that Congress moves on its on schedule.
“We realize that that final law is not going to be identical to what we proposed,” he said. “But we are encouraged that Rep. John Kline (R-Mich. and chairman of the House Education and the Workforce Committee) has been using our recommendations as a framework.”
Kline, however, is ending his term as chairman after this Congress.