Abstract
Multiemployer pension plans are negotiated between a union and two or more (usually many) employers in an industry. There are over 1,400 of them covering 10.4 million participants and they are insured by the Pension Benefit Guaranty Corporation (PBGC). In the aggregate, they are now woefully underfunded, as is the PBGC’s Multiemployer Program. Congress has enacted several laws in an effort to strengthen the financial position of multiemployer plans and to protect the PBGC. The most recent is the Multiemployer Pension Protection Act of (December) 2014 (MPRA).
One of the tenets of pension law has been that retirement benefits once accrued and vested are inviolable. They cannot be curtailed or rescinded. The MPRA allows the trustees of certain distressed multiemployer plans to reduce the benefits of active and inactive participants including retirees in pay status. This paper examines the developments leading up to the MPRA and the underlying problems of multiemployer pension plans and the PBGC.
On December 16, President Obama signed the Consolidated and Further Continuing Appropriations Act for FY 2015 (Pub. L. 113-6), Division O of which is the Multiemployer Pension Reform Act (MPRA) of 2014. The MPRA is the most recent effort to rescue the foundering multiemployer pension plans insured by the Pension Benefit Guaranty Corporation (PBGC). Among other things, the MPRA grants the trustees of certain troubled multiemployer plans the power to cut earned and vested pension benefits of active and inactive participants including retirees in pay status.
This article examines multiemployer pension plans and the developments leading up to the passage of the MPRA. In the social sciences, we understand things largely by comparing them to other things. The logical comparison for multiemployer pensions is single-employer pensions.
Background
Multiemployer pension plans result from collective bargaining agreements (CBA) between a labor organization and two or more (usually many) employers in an industry, related industries or a geographical region. The antecedents of today’s multiemployer plans go back to the early 1900s. They were founded by craft unions to provide superannuation benefits for union members too old to find employment in the trade. The first plan to survive was that of the International Typographical Union, established in 1908. It was followed by a number of other unions in the construction, railroad and printing trades. Such plans were usually financed by assessments on union members and benefits were viewed as a form of charity. Most of these plans failed during the Great Depression of the 1930s.
During World War II, many unions and their contract employers established pension plans as a way to attract and retain employees in a tight labor market under wage controls. However, multiemployer plans were mainly adopted in the 1950s and 1960s.
Labor Law
Section 8(a)(5) of the National Labor Relations Act of 1935 (Pub. L. 74-198; NLRA) established the employer’s duty to bargain and Section 8(d) defined the scope of bargaining to be “wages, hours and other terms and conditions of employment.” In 1947, the National Labor Relations Board held that pensions were a “mandatory subject of bargaining” and in 1949 the Supreme Court agreed (Inland Steel v. NLRB). This sanctioned the many pension plans adopted during the war and prompted other unions to demand pension benefits as well. Nonunion employers followed suit to remain nonunion.
Author’s Comments
From my experience, working in industrial relations in the 1960s, pension plans are not exactly “negotiated.” In a single-employer relationship, the employer and its actuary(s) design the plan or amendments to the plan and the result is then “peddled” to the union(s) on a take-it-or-leave-it basis. Pension plans are too complicated and technical to be negotiated piecemeal by the bargaining parties.
In a multiemployer arrangement, the union and a few large employers and their respective actuaries agree on the details. The plan or its amendments are then imposed on the other employers by the union.
Most items in the collective bargaining “package” are “costed” in cents-per-hour and as a percent of the “ASTHE” (average straight time hourly earnings). Estimating the cost of a pension plan or a plan modification is complicated and highly technical. It requires actuarial skills, access to participant demographic data and is based on a number of assumptions including mortality tables and earnings on invested assets. For purposes of the collective bargaining “package” pensions and their amendments are “priced.”
I was once told that the “price” would be the largest number that anyone in the room can say with a straight face. That may be an exaggeration. I remember one pension improvement that our actuary estimated would cost 1.6 cents per hour (estimated cost ÷ ASTHE). It was “priced” at 3.1 cents per hour. Who would or could challenge it? Both the employer’s industrial relations staff and union leadership want the package to look as good as possible to gain ratification by the affected employees/members. It is called “wrapping the package.”
In 1947, the Taft-Hartley Act (Pub. L. 80-101) amended the NLRA and renamed it the Labor-Management Relations Act. Among other things, its Section 302 addressed multiemployer pension plans.
Section 302 required that multiemployer plans be governed by a board of trustees composed of an equal number of employer and union representatives. The employers or the employer association and the labor organization were allowed to choose their trustees in their own way. The parties were allowed to add one or more neutral member to the board to break tie votes. If no neutral board member had been chosen, the parties could agree on an impartial umpire to break a deadlock. Failing that, either party could petition the district court to appoint a neutral umpire.
In other areas, multiemployer plans were left essentially unregulated as were single-employer plans. A minor exception was the toothless Labor-Management Reporting and Disclosure Act of 1959 (Pub. L. 86-257). It required that pension plans report their activities and experience to the federal government.
Unions
Organized labor peaked in mid-1950s when 33% of civilian wage and salary workers, most in the private sector, belonged to unions. Unions were a major force in the development of multiemployer pension plans in the private sector. By 1980 (when important multiemployer pension legislation was enacted) unions represented 22% of the private sector labor force. Today, only 6.7% of wage and salary workers are unionized. The virtual absence of organized labor from much of the private sector has allowed employers to curtail or abandon traditional defined benefit pension plans almost unhindered.
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 (P.L. 93-406; ERISA) established minimum standards for participation, vesting, accrual, funding fiduciary responsibility and reporting and disclosure. These standards applied to all qualified pension plans. ERISA also created the PBGC to insure the vested benefits of failed pension plans. ERISA was primarily aimed at single-employer defined benefit pension plans. Multiemployer plans received little attention. One reason for that is that, as of 1974, none had failed.
It was assumed that multiemployer plans would not fail because the risk was pooled among a large number of employers. Individual employers could fail, but not whole industries. The PBGC had discretion as to whether to insure multiemployer benefits.
After ERISA was enacted, three multiemployer plans sought PBGC help. That ended the assumption that multiemployer plans could not fail.
Multiemployer Pension Plan Amendments Act
The Multiemployer Pension Plan Amendments Act of 1980 (Pub. L. 96-364; MPPAA) created the Multiemployer Program (MEP) as separate and distinct from the Single-Employer Program (SEP). The new law established different insurance premium rates, funding arrangements, separate trust funds, a different benefit guarantee, and different intervention procedures for multiemployer plans.
The MPPAA established that an employer could no longer walk away from a multiemployer plan and leave the remaining employers with its benefit liability. Rather, the plan would calculate the “withdrawal liability” that the departing employer would have to pay. An employer’s annual withdrawal liability payments are based on its proportionate share of the plan’s unfunded liability measured by its share of contributions and its highest contribution rate in the previous 10 years. In effect, the employer would have to continue to contribute to the plan for up to 20 years until its share of the unfunded liability was satisfied.
Prior to 2000, there was little withdrawal liability assessed because most plans were pretty well-funded and thus there was little unfunded benefit liability. That changed with the recessions of 2001 and 2008. As equity markets collapsed, asset values and funded ratios declined and employer contribution rates soared. Those increases were often delayed until after the expiration of current labor agreements, which further increased a plan’s underfunding. 1
Pension Protection Act 2006
The Pension Protection Act of 2006 (P.L. 109-280; PPA) classified multiemployer plans into four zones based on the extent of underfunding. Plans that are less than 65% funded or projected to have a funding deficiency within 5 years are deemed “critical” (red zone). Plans that are less than 80% funded or projected to have a funding deficiency within 7 years are considered “endangered” (yellow zone). If a plan is both less than 80% funded and projected to have a funding deficiency within 7 years it is classified “seriously endangered” (orange zone). Plans that are neither critical nor endangered are deemed to be not in distress and are in the green zone.
Under the PPA, any plan in the yellow, orange and red zone is required to develop a “funding improvement plan” or a “rehabilitation plan” and is required to meet certain specified benchmarks.
In an effort to accelerate funding, the PPA also shortened the amortization period to 15 years for all types of unfunded liabilities. Plans were allowed to extend the amortization period by up to 5 years without government approval.
The PPA also requires multiemployer pension plans to report annually the number of employers that had withdrawn during the past year (on Form 5500, Schedule R).
The PPA also required that the PBGC report to Congress on the MEP, including the number of employer withdrawals that occurred during the past year. The first report was stamp dated January 22, 2013; however, it may have been released after that. It contained data on employer withdrawals for the 2008. 2
As indicated in Table 1, of the over 1,400 multiemployer plans, 248 reported that 4,255 employers had withdrawn that year and that a total of $1.1 billion in withdrawal liability had been assessed. Most of the reporting plans and withdrawals were in the red zone. The provisions of the PPA that established the zones were to have expired at the end of 2014. They did not. 3
Employer Withdrawals From MEPs and Withdrawal Liability Assessments in 2008 ($ in millions).
Source. Pension Benefit Guaranty Corporation. Multiemployer Pension Plans: Report to Congress Required by the Pension Protection Act of Table 8, p. 21. Retrieved January 2, 2015, from www.pbgc.gov. The source table does not report data on seriously endangered plans.
Pension Relief Act 2010
The Pension Relief Act of 2010 (Pub. L. 111-192; PRA) allowed certain plans to amortize net investment losses from 2008 over 29 years, rather than 15 years thus significantly reducing employer minimum required contributions. The PRA also allowed multiemployer plans to smooth investment losses over 10 years rather than the usual 5 years. Thus, the PRA reversed some of the provisions of the PPA.
About 700 multiemployer plans elected relief under the PRA, 400 of which were in the green zone. This had the effect of increasing the plans’ funded ratios, creating large credit balances and delaying the date of projected future funding deficiencies. While helpful in the short run, these measures will probably make the funding of pension obligations more difficult in the longer run. 4
Premiums
Table 2 reports PBGC insurance premiums for both single-employer and multiemployer pension plans from 1974 through 2016. The single-employer per-participant flat rate started low, but has been increased substantially over the years. Effective 2015, it is $57 per participant and it will increase to at least $64 in 2016. In 1988, a variable rate premium of $6 per $1,000 of unfunded vested benefit liability was added. It too has been increased substantially. In 2015 it is $24 and in 2016 it will go to $29.
PBGC Insurance Premium Rates, 1974-2016.
Note. Effective 2016 all premiums will be indexed. Entries for 2016 may be higher due to indexing.
Per participant.
Per $1,000 of unfunded vested liability.
Premium increased from $13 to $26 by the Multiemployer Pension Reform Act of December 2014.
Source. Pension Benefit Guaranty Corporation. For 1974-2013: Pension Insurance Data Tables (2012) S-39 and M-17. For 2014-2016: PBGC Website. Practitioners. Premium Rates. Retrieved from www.pbgc.gov.
The Deficit Reduction Act of 2005 (Pub. L. 109-171) increased the multiemployer premium rate from $2.60 to $8.00 per participant for plan years beginning 2006. The rate was further increased a number of times until it was to have been $13 in 2015. However, as the result of legislation enacted in December 2014, the rate was double to $26 per participant. Multiemployer plans do not pay a variable rate premium.
Multiemployer insurance premium rates have always been much lower than single-employer rates. This reflects a perceived lower risk to the PBGC, different intervention procedures and much lower benefit guarantees.
Benefits
Single-employer plans typically pay a lifetime benefit to the retiree and surviving spouse (assuming a joint survivor option) based on years of credited service (participation), a multiplier (say 1% or 1.5%) and some measure of final average income (last 3 or high 3 consecutive years). In contrast, multiemployer plans use a “unit benefit” formula that pays a specified dollar amount per year of participation in the plan with no consideration of earnings.
The PBGC insures the vested benefits of both types of plans. However, the benefit maxima are quite different. Under the SEP, benefits are guaranteed up to a pretty generous maximum. The maximum is adjusted annually for inflation, though the retirement benefit once calculated is fixed. There is no Cost of Living Adjustment.
For 2015, the maximum guarantee under the SEP is $5,011 per month or $60,136 per year. Few retired participants of failed plans receive the maximum benefit. In 2012, when the monthly maximum was $4,653, the average benefit was $559 and the median benefit was $284. 5
The maximum monthly benefit guarantees for multiemployer plans are much lower. From 1980 to 2000, the formula was the participant’s years of service multiplied by:
100% of the first $5 of monthly benefit accrual rate (multiplier), plus
75% of the next $15 of the monthly benefit accrual rate.
The maximum benefit guarantee for a participant with 30 years of service was only $487.50 per month or $5,850 per year.
For insolvencies occurring after December 22, 2000, the formula was roughly doubled to the participant’s years of service multiplied by:
100% of the first $11 of the monthly benefit accrual rate, plus
75% of the next $33 of the accrual rate. 6
That amounts to a benefit guarantee is $35.75 per year of service ($11 + $24.75). For a participant with 30 years of service, that amounts to $1,072.50 per month or $12,870 per year. For 20 years of service it is $715 per month or $8,580 per year.
The PBGC publishes data on the average and median benefits of the surviving participants of the 10 multiemployer plans trusteed before 1980. As of FY 2012 there were 74 of them. 7 Since 1980, the significance of the multiemployer plan guarantee is in the context of the PBGC intervention procedures.
Intervention
Under the SEP, PBGC intervention takes the form of plan termination. There are three forms of plan termination. In a “standard termination” the sponsor voluntarily discontinues the plan after discharging all benefit obligations. A “forced termination” is initiated by the PBGC to prevent a troubled plan from incurring additional unfunded liabilities that will eventually be acquired by the PBGC. In a “stress termination” an insolvent plan is “trusteed” (taken over). The PBGC acquires its assets and liabilities. It may also claim up to 30% of the sponsor’s remaining assets in a bankruptcy proceeding. When the plan is terminated the PBGC pays its pension benefits up to the maximum guarantee level.
Intervention under the MEP is quite different. When a plan is terminated because it is unable to pay its scheduled benefits or because all its employer members have withdrawn, it is required to continue to pay its scheduled benefits until its assets are depleted. After that, the PBGC “lends” the plan the money to pay for administrative expenses and to pay its benefits at the PBGC guarantee level.
The word “lends” is a bit of a euphemism. There has been only one case in which a plan repaid its loan from the PBGC. That was in 1998 and the amount of the loan was $3.2 million. 8 It is unlikely that that will happen again.
Table 3 presents data on PBGC financial assistance to multiemployer plans from 1981 to 2014. Before 2000, the program was modest in terms of the number of plans helped and the amount of money involved. It then began to grow, peaking at 49 plans receiving $114.3 million in 2011. In 2014, 53 plans received $97 million. The table also shows the amount of PBGC premium income net of benefits paid and expenses.
PBGC Intervention Activity in Multiemployer Pension Plans, Selected Years, 1981-2014 ($ in millions).
Source. Pension Benefit Guaranty Corporation. For 1981-2012: PBGC Data Tables M-2 and M-4. For 2013 and 2014: FY 2014 Annual Report. Unnumbered table titled “Financial Summary—Multiemployer Program,” p. 24.
Participants
As reported in Table 4, there were 10.4 million participants in multiemployer pension plans as of 2013. That is up from 8.0 million in 1980 when the MPPAA was enacted. However, observe how the relationship among the three categories of participants has changed over time. In 1980, 75.9% of participants were active, 17.7% were retired and 6.5% were separated vested former employees with deferred pension benefit rights. By 2011, the last year for which such data are available, 38.3% were active, 33.7% were retired and 27.9% were separated vested. Thus, in 2011, 61.6% of participants in multiemployer plans were “inactive.” No doubt it is worse today.
Multiemployer Plans, Participants and Participants by Categories, 1980-2013 (Participants in millions).
Note. a. Calculated by author.
Source. Pension Benefit Guaranty Corporation. Pension Insurance Data Tables M-6 and M-7. Retrieved from www.pbgc.gov.
In general, employers sponsor pension (and other benefit) plans to attract and retain active employees. When three out of five participants are either retired or working for someone else, continuing to fund a pension plan and pay PBGC premiums while getting very little in return raises questions.
Orphans
Another participant-related concern occurs when an employer, that is party to a multiemployer plan, goes out of business. The withdrawal liability provision of the MPPAA is based on the assumption that the employer will remain in business and be able to pay the cost of the withdrawal or would be deterred from withdrawing. If the employer is in bankruptcy, chances are it is in arrears to the pension plan and that there is little or no money available to pay for the benefit liabilities left behind.
If the employees are hired by other employers in the industry that are party to the pension plan, it is not a problem. This happens in a hiring-hall situation (construction, shipping, long shoring). However, if the employees lose their jobs or go to work for nonunion employers, they become orphaned participants. Orphans are a subset of separated vested participants.
Orphaned participants may become a drain on the plan even if the departed employer prepaid withdrawal liabilities in full. If the financial markets subsequently contract and/or if the funds are not well-invested, asset values will contract and unfunded liabilities will increase and the plan will have to increase employer contributions of the remaining employers to cover its benefit liabilities, including those of the orphans.
Table 5 reports data on orphan participants by PPA status categories of the plans as of 2010. The 418 plans reporting had a total of 1,323,537 orphans. The average number of orphans per reporting planwas 3,166.
Orphan Participants by Plan Status, 2010.
Note. a. Calculated by author.
Source. Pension Benefit Guaranty Corporation. Multiemployer Pension Plans: Report to Congress Required by the Pension Protection Act of 2006. Dated January 22, 2013. Table 6, p. 17. Retrieved from www.pbgc.gov.
This is no small matter. Of the 10.4 million total participants in multiemployer pension plans, 1.3 million or 12.5% (one in eight) are orphans. Most likely, the problem is larger today than it was in 2010. With a smaller number of employers contributing to multiemployer plans on behalf of a dwindling number of active employees (Table 4), the potential for a downward spiral is quite real.
One possible approach to dealing with the orphan problem is “partition.” A multiemployer plan can petition the PBGC to transfer its orphans to a portion of the plan that receives financial assistance from the PBGC. The requirements for approval are stringent. One reason for this is that the orphaned participants, including affected retirees in pay status would receive an immediate reduction in benefits to the PBGC guarantee level. Thus far, only two partitions have been approved; the second one in 2010. Another reason is that the PBGC does not have the funding needed to relieve the large number of plans of their orphan problem. 9
Funding
In single-employer pension plans, an actuary calculates the cost of projected benefit obligations, converts that to present value (current liability), relates it to plan assets (assets / liabilities) to get the plan’s funded ratio (percentage funded), which drives the employer’s annual required contribution.
In multiemployer plans, the contracting employers’ contribution results from the collective bargaining process and the employers’ funding requirements are part of the collective bargaining agreement or, more likely, a separate document referenced in the collective bargaining agreements. The plan or the parties engage actuaries to calculate the amount needed.
Employer contributions are usually based on so much per hour worked. As the number and percentage of active participants in multiemployer plans plummeted over the years (Table 4; and especially during the recessions of 2001 and 2008), so did their hours worked. This resulted in precipitous increases in employer contributions per hour worked.
Table 6 reports the funding experience of multiemployer plans from 1980 through 2011 in terms of assets, liabilities, net position and funded ratio. The funded ratio captures the aggregate financial health of plans. Multiemployer plans were generally well funded through about 2000 and many plans increased benefits. Then the recession of 2001 occurred. By 2007, the financial markets had recovered only to he hit again by the Great Recession in late 2008.
Funding Experience of Multiemployer Plans, Selected Years, 1980-2011 ($ in Millions).
Note. a. Calculated by author.
Source. Pension Benefit Guaranty Corporation. Pension Data Table M-9. Retrieved from www.pbgc.gov.
While the 5-year intervals of Table 6 miss much of the impact of the recessions, plan assets generally grew over the period. But liabilities grew more. The relationship is captured in the increasing negative net position and declining funded ratio.
By 2011, assets had begun to recover from the Great Recession that began in 2008. Note, however, the rapid growth in liabilities and the decline of the aggregate funded ratio after 2000. By 2011, the aggregate funded ratio was 49.8. An aggregate funded ratio of 50% is alarming. Even more alarming is the fact that 1,030 of the 1,461 multiemployer plans (70.5%) are less than 60% funded.
Pension Benefit Guaranty Corporation
The PBGC’s MEP is in serious trouble. Table 7 presents data on its assets, liabilities, net position and funded ratio through 2014. The funded ratios were calculated by the author. The PBGC does not publish a funded ratio for itself. However, as is the case for a pension plan or an aggregate of plans, “assets ÷ liabilities” is a valuable metric that captures the financial health of a fund.
Funding Experience of the PBGC’s Multiemployer Program, Selected Years, 1980-2014 ($ in millions).
Note. a. Calculated by author.
Source. Pension benefit Guaranty Corporation. Pension Insurance Data Table M-1. For 2012 and 2013: FY 2013 Annual Report. Unnumbered table titled “Key Single-Employer and Multiemployer Results,” p. 28. Retrieved from www.pbgc.gov. For 2014: FY 2014 Annual Report. Same table, p. 22. Retrieved from www.pbgc.gov.
The MEP’s funded ratio declined from a very healthy 162.5% in 2000 to an alarming 4.0% in 2014. The fund is on the brink of insolvency. In spite of the substantial increases in PBGC multiemployer premiums in recent years, fund assets remained stable while liabilities have grown greatly, as has the negative net position.
The worsening problem of the PBGC’s MEP has been evident for a long time. Yet Congress failed to act in a meaningful way until forced to do so by the dramatic increase in liabilities from $10 billion to $44 billion between 2013 and 2014.
Multiemployer Pension Reform Act
One of the tenets of pension law is that retirement benefits once earned and vested cannot be taken away. This principle is enshrined in the ERISA as the “anti-cutback rule” (Section 402(g)) and in the Internal Revenue Code Section 411(d)(6). A pension plan sponsor may amend a plan to change the rate of benefit accrual prospectively or even terminate the plan; however, it may not rescind or curtail benefits once vested.
This principle was slightly weakened under the PPA. Plans that are in critical status (red zone) may reduce or eliminate certain previously earned “adjustable benefits” such as subsidized early retirement or optional forms of benefits, disability and death benefits (other than for a spouse) for active and separated vested participants, but not for retirees. 10
Another tenet of pension law is that the PBGC is funded by premiums paid by plan sponsors. There is no requirement for the taxpayer to come to the aid of the PBGC should it become insolvent. However, until recently many of us thought that, should the day ever arise when the PBGC could not pay its bills, the U.S. government would bail it out. After all, Congress enacted ERISA and repeatedly strengthened its funding requirements to protect retirement benefits. It also created the PBGC as the ultimate protector of those benefits. We were wrong.
As the PBGC’s MEP approached insolvency, as displayed in Table 7, the Retirement Security Review Commission of the National Coordinating Committee for Multiemployer Plans issued a report titled “Solutions not Bailouts.” In December 2014, as Congress was about to adjourn, and as another shutdown of the government loomed, Congress passed and the President signed (on December 16) the Consolidated and Further Continuing Appropriations Act of 2015 (Pub. L. 113-235). Division O of that law is the MPRA of 2014.
The MPRA’s most controversial element is that, within limits and with restrictions, it allows pension fund trustees to “suspend” (reduce) earned and vested pension benefits of active and inactive participants, including retirees in pay status. 11 The details are complicated. They include the following.
To reduce benefits, the plan must be in “critical and declining status.” This new classification was created by the MPRA. A plan is in “critical and declining status” if it is in critical status (red zone) under PPA rules and is projected to become insolvent within the 15 years, or within 20 years if the ratio of inactive to active participants is greater than 2 to 1 or if the plan is less than 80% funded. In 2011, 61.6% of multiemployer plan participants were inactive (Table 4) and the aggregate funded ratio was 49.8% (Table 6). Most, if not all, red zone plans will qualify for benefit reductions.
The MPRA permits a multiemployer plan that is not yet in critical status, to elect such status for a current plan year if the plan’s actuary projects that it will be in such status in any of the next five years. 12 This may significantly increase the number of plans in the red zone allowed to reduce accrued benefits.
Retirees age 80 and above and disabled retirees are not subject to the benefit cuts. Retired participants’ ages 75 to 79 years are subject to smaller cuts than those below 75 years.
Benefits may be cut only if the trustees determine that all reasonable measures have been, and are continuing to be, taken to avoid insolvency indefinitely.
Plans with 10,000 or more participants (active and inactive) must allow the participants to vote on the cuts after they have been approved, but before they are implemented. A majority of all participants (not just those voting) is needed to block the cuts. Thus, all participants who fail to vote are effectively counted as favoring the cuts. Moreover, if the projected need for financial assistance from the PBGC is more than $1 billion, the Treasury Department can override a vote to block the cuts. In 2013, of the 1,435 multiemployer plans, 171 of them (11.9%) had 10,000 or more participants. Of the 10.4 million multiemployer participants, 8.0 million (76.9%) were in plans with 10,000 or more participants. 13 The provision allowing participants to vote on the cuts is a sham.
Benefits cannot be reduced below the level necessary to avoid insolvency or below 110% of the PBGC benefit guarantee level. Table 8 reports the potential percentage benefit reduction for a participant below the age of 75 years with 30 years of service. Participants with a monthly benefit of $500 or less will experience no reduction. Those with a benefit of $1,000 would see an 8.4% reduction and those with a $5,000 benefit a 76.4% reduction. That is, the benefit would shrink from $5,000 to $1,179.75. This is all a bit academic. There are very few multiemployer plan participants with a $5,000 per month ($60,000 per year) pension.
Maximum Amount that the Pension Benefit of a Participant Under Age 75 with 30 Years of Service Can Be Reduced.
Source. Dexter Hofing, LLC. Multiemployer Pension Reform Act of 1914. Retrieved from www.dexhof.com.
The MPRA did a number of other things not directly related to benefit reduction. They include the following.
Repeal of the sunset provisions pertaining to zones of the PPA. They were to have expired at the end of 2014. The zones are now a permanent part of ERISA.
Increasing the multiemployer PBGC premium rates for 2015 from $13 to $26 per participant. After that, they will be indexed to the National Average Wage Index, as will the single-employer rates.
The PBGC is required to report to Congress by June 1, 2016 as to whether the projected premium levels are sufficient to meet its obligations over the next 10 years and 20 years. If not, the PBGC is to propose revised rates that will.
In making benefit suspension decisions, trustees are exempt from the fiduciary-responsibilities requirements of the ERISA. They are “settlor decisions.”
Conclusion
A line has been crossed. While the MPRA only applies to multiemployer plans, the principle that benefits once earned and vested are inalienable has been compromised. The question as to whether the Congress would come to the financial aid of the PBGC facing insolvency has been answered. It will not. Given that it has declined to prop up the MEP with its many large plans involving numerous employers and much of what remains of the private sector labor movement, it will not do so for the SEP either.
Will the MPRA benefit cuts save the MEP? In my opinion, not likely. In an understandable effort to mitigate the impact of the benefit cuts, Congress exempted retired participants aged 80 years and more and, to a lesser extent, those aged 75 to 79 years. It has also, in effect, exempted low-benefit retirees by restricting cuts to 110% of the PBGC guarantee level.
Will the doubling of the multiemployer insurance premiums to $26 per participant be adequate? In the short run, probably. In the longer run, probably not. The additional expense will increase the financial burden on plan sponsors and encourage more of them to withdraw. More marginal firms will even be forced out of business leaving more unfunded liability and orphan participants to those remaining sponsors. If the PBGC proposed further increases in 2016, it will exacerbate the problem.
Will the MPRA be challenged in court? Undoubtedly. The Pension Rights Center and the AARP are already on record opposing benefit cuts. A class action suit based on property rights or the ERISA’s anti-cutback provision is almost certain.
Will employers or employer associations challenge the doubling of the insurance premiums? That’s less clear. Probably not.
In sum, the MPRA of 2014 is a band aid. Its most important provision is answering the question as to whether the Congress will bail out the PBGC should is face insolvency. The answer is “no.” So, where do we go from here?
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.