Unions ask Congress to let distressed
pensions trim retiree benefits
WASHINGTON, D.C. — Union and employer representatives are lobbying Congress to modify the Employee Retirement Income Security Act (ERISA) to allow severely underfunded multiemployer pension plans to reduce the paychecks of retirees and partially suspend accrued benefits for all vested participants in an effort to keep the plans from going under.
Nearly 100 multiemployer defined benefit pension plans (MEPPs) are headed for insolvency as a result of the dot-com crash of 2000-02, followed by the “Great Recession” of 2008. Participants in insolvent plans get some protection from the Pension Benefit Guaranty Corporation (PBGC), but it’s only fractions on the dollar — and the agency itself is facing insolvency.
About 10 million workers and retirees are covered by roughly 1,500 multiemployer pension plans in the United States. MEPPs are maintained under collective bargaining agreements between a union and multiple employers, typically smaller businesses.
At a hearing March 5 before the U.S. House subcommittee on Health, Employment, Labor and Pensions, representatives from management, labor, the federal Pension Benefit Guaranty Corp., (PBGC), and the non-partisan Government Accountability Office (GAO), painted a grim future for multiemployer pension plans.
Besides the two large stock market crashes, other contributing factors to struggling plans include a declining unionized workforce, more unionized employers going out of business, and – due to a still sluggish economy — fewer hours being worked by actives, thus fewer contributions going into the plans.
Joshua Gotbaum, director of PBGC, said 30 years ago, three-quarters of all participants were active and only one quarter were retired or waiting to retire.
“Today, the situation is largely reversed: by 2010, 39 percent of participants were active and 61 percent were inactive,” he said.
PBGC estimates that in the 2012 plan year, just over half of all multiemployer participants were in endangered (yellow) or critical (red) status plans. Further, the agency believes that 80 to 85 plans will be unable to recover.
According to a 2011 survey of 107 critical status plans conducted by the Segal Company, 28 plans had determined that no realistic combination of employer contribution increases and participant benefit reductions would enable them to emerge from critical status, and their best approach is to forestall insolvency for as long as possible. Among these plans, the average number of years to expected insolvency was 12, with some expecting insolvency in less than five years, and others not for more than 30 years. The majority of these plans expected to go under in 15 or fewer years.
Such is the case for the Western States Office and Professional Employees Pension Fund. Last month the trust told participants — many of them members of Vancouver-based OPEIU Local 11 — at a special-call meeting that despite implementing a rehabilitation plan in 2009 that increased employer contributions and reduced worker benefits, the fund will likely be insolvent by 2030.
When a multiemployer plan becomes insolvent, PBGC loans the trust money to pay participants a “statutorily guaranteed benefit” for the rest of their lives. (Unlike its insurance of single-employer plans, PBGC does not take over the plan, or its assets and liabilities; the agency funds the plan’s guaranteed benefits and operating costs, and audits to ensure they are reasonable.)
What happens when PBGC takes over: Retirees get a fraction of what they were promised. Click to enlarge
The problem with PBGC’s “guaranteed benefit” is that it doesn’t cover full benefits. It calculates the benefit based on the amount of a participant’s benefit accrual rate and years of credit service earned. Specifically, PBGC guarantees 100 percent of the first $11 of a plan’s monthly benefit accrual rate, plus 75 percent of the next $33 of the accrual rate, times each year of credited service. Currently, PBGC’s maximum gurantee is $35.75 per month times a participant’s year of credited service. Thus, a participant who retires at normal retirement age (65) with 30 years of service would receive $12,870 annually — $1,072.50 a month.
“Without PBGC, participants would be left with nothing when a plan runs out of money,” Gotbaum said.
Gotbaum said PBGC paid $95 million in financial assistance for benefits and plan expenses to participants in 49 insolvent multiemployer plans in fiscal year 2012. This allowed those plans to continue paying guaranteed benefits to about 51,000 retirees; 21,000 additional participants will receive benefits from those plans when they retire. There are 61 more plans that have terminated and will run out of money in the next few years.
Which only adds to the problem.
Charles Jeszeck, director of the pension section of the GAO, told lawmakers PBGC has been designated as a “high-risk” federal program, whose financial future is uncertain.
“Existing and anticipated plan insolvencies threaten to drive the PBGC’s multiemployer insurance fund into insolvency in about 2023,” he said. “If this occurs, retirees depending on the PBGC multiemployer insurance fund would see their pension payments reduced to a small fraction of their original value — or nothing at all.”
In an effort to prevent that from happening, the National Coordinating Committee on Multiemployer Plans (NCCMP) established a Retirement Security Review Commission more than a year ago to craft reforms that tackle the structural problems plaguing the system — and that have the support of both business and labor.
The report — “Solutions, Not Bailouts” — was presented to the House subcommittee on March 5.
It recommends modifying ERISA’s anti-cutback rule to allow for partial suspension of accrued benefits for active and inactive vested participants, and to partially reduce benefits of retirees already collecting a pension check. NCCMP says reductions would be limited “to the extent necessary to prevent insolvency,” but would never go below 110 percent of the PBGC guaranteed amounts.
NCCMP also seeks additional security for plans that weathered the crash; plans that are on the path to recovery measured by rehab blueprints; and plans “that, with expanded access to tools in the Pension Protection Act (PPA) and (in) subsequent relief legislation, will be able to achieve their statutorily-mandated funding goals.”
Additionally the report recommends giving trustees flexibility to create new multiemployer plan designs to help prevent insolvency.
Anthony Perrone, secretary-treasurer of United Food and Commercial Workers, testified before the subcommittee that his union recently worked out a new plan design with Kroger to let the grocery chain merge four shaky plans into one larger whole, and borrow $1 billion at low interest to bring it from 71 percent funded to 100 percent funded.
UFCW co-manages more than 60 plans with its employer partners, covering 700,000 active workers and another 700,000 retirees. The largest of them — the $5.2 billion UFCW Industry Pension Fund — covers 92,000 workers at more than 500 employers.
Critics have already surfaced, characterizing the proposals as a “union bailout.”
The NCCMP report itself notes up front “the clear message from Congressional leaders that no bailout would be forthcoming to protect the private multiemployer pension system overall, despite having provided enormous financial relief to those in the financial services industry whose actions precipitated the depletion of the pension funds’ assets.”
Harold Force, president of Force Construction of Columbus, Indiana, speaking on behalf of Associated General Contractors, told the House subcommittee that multiemployer pension plan relief is not a union bailout.
“Contributions to these plans are funded entirely by employers, not unions,” he said.
Trust plans are overseen by an equal number of labor and management trustees.
“Trustees of a plan must be given the flexibility to make changes,” Force testified. “New tools are needed to try to revolutionize the pension system and save the defined benefit system — both for the directly interested parties such as employers and participants, but also for the PBGC.”
Funding provisions of the Pension Protection Act of 2006 (PPA) expire on Dec. 31, 2014.