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Benefit clawbacks: Only way to avoid a pension cliff?

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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.

See also: Washington watchers see big retirement push in 2015


“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.

john kline

“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.

Pushing back

Adoption, however, is, again, far from certain and several influential organizations have pushed back. The Pension Rights Center states its objections bluntly:

“Proponents of the ‘Solutions Not Bailouts’ approach claim that these immediate cuts are preferable to the PBGC’s very low guarantees, but these plans are unlikely to run out of       money for decades. In the meantime, other steps could be taken to save the plans that would not jeopardize retirees’ retirement security. Allowing immediate benefit cuts would be devastating to elderly pensioners who may no longer be alive in 15 or 20 years. It would also be unprecedented and would undermine a fundamental protection of the federal private pension law.”

The AARP also is opposed.

DeFrehn, however, thinks that neither organization “really understands how critical the finances (of the most distressed MEPs) are.”

“They don’t understand that both labor and management were in the room and that for solvent plans, we would provide what is over and above the current law. Some people are so hung up on what’s in the past that they can’t see that the future may in jeopardy.”

Although unions had a seat at the table when the NCCMP drew up “Solutions,” two key organizations oppose the proposed solutions: The Teamsters and the International Association of Machinists and Aerospace Workers.

“James Hoffa said they can’t support it at this time,” DeFrehn said. “We had more Teamsters in the room than any other union when we worked on it for the first time. They made their decision several weeks later.”

The other union’s lack of support, DeFrehn said, “has been our biggest disappointment, because they traditionally had been strong supporters.”

“(But) they had several strikes against Boeing in Washington state, which had proposed doing away with defined benefits. They started to shop other states for a tax deal and then went back to the union to reconsider define contribution plans. The national union has followed the local in its stance.”

Photo: Rep. John Kline.

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Clock is ticking

Although DeFrehn is not sure if or how the recent midterm election results will affect NCCMP efforts, he hopes that all stakeholders will understand that neither time nor demographics are on their side.

“Younger union members are carrying the burden,” he said. “I recently talked to one young worker whose contribution was more than $18 an hour, and union members make a contribution for every hour worked. Their attitude is, ‘I am glad to take care of the guys who were here before me, but what about me? What am I going to live on?’

“If anything, the urgency of getting this passed has increased since the report was written.”

DeFrehn believes that the process he and the NCCMP have gone through offers lessons even for retirement professionals who don’t work with multiemployer plans.

“Make sure people who have spent a lifetime in a career can depend on security moving forward,” he said. “Focus on what is best for the workers, and keep all of the stakeholders involved. Many of our old plan models are getting old and don’t work, so let’s fix the problems.”

At a Bloomberg Government event earlier this year, Kline said, “If we do nothing, benefits will be cut. … It’s only a question of when and by whom. … The choice NCCMP offers is between an axe in the hand of a first-year med student or a scalpel in the hand of a trusted surgeon.”

A spokesman for Kline told Politico that the Education and the Workforce Committee hopes to resolve the question by year’s end. Others, including Dallas Salisbury, president and CEO of the Employee Benefits Research Institute, are less hopeful, suggesting the next Congress, not the lame-duck one, is more likely to tackle the NCCMP’s suggested reform.

See also: A new life for longevity annuities