Government Funding Proposed for Troubled Pension Plans
The number of relatively healthy multiemployer pension plans does not correspond proportionately to the number of participants who are in a healthy plan.
Recent legislative proposals suggest ways to allow troubled multiemployer pension plans, such as the Central States Southeast and Southwest Areas Pension Fund (“Central States”), to borrow from the federal government to strengthen their finances.
Pension Rehabilitation Administration ("PRA") Proposed
The Butch Lewis Act, introduced by Senator Sherrod Brown (D-Ohio) on November 16, 2017, offers assistance to the Central States fund through the use of loans and PBGC financial assistance.
Central States is one of the largest U.S. multiemployer pension funds. It provides pension benefits for International Brotherhood of Teamsters members, where there are about 200,000 participants and beneficiaries who currently receive benefits. It is estimated that in the future an additional 200,000 can also become entitled to benefits.
A loan of between $11 and $15 billion is proposed by Senator Brown, to be used in combination with financial support from the PBGC in the amount of $20 to $25 billion. The 30-year loan would involve interest-only payments for the first 29 years and a balloon payment at the end of the term. Proceeds from the loan would be invested to certain types of annuities and other highly rated investment options. The PBGC financial assistance would not require repayment.
The legislation is undergoing a review period, and the outlook for 2018 remains uncertain at this time.
Relief Efforts Target the United Mine Workers Pension Fund
Congress recently introduced legislation that would create an emergency loan program allowing the United Mine Workers of America (“UMW”) 1974 Pension Plan to avoid insolvency. The proposed legislation, which is called the American Miners Pension Act, calls for the U.S. Department of the Treasury to loan the pension fund up to $600 million over 30 years, with the fund paying one percent interest in the first 10 years.
Projections show that by 2022 the UMW fund would be insolvent. The proposed legislation, however, would require the fund to certify each year that it is in fact solvent and able to repay the loan. Also, the proposed legislation would allow excess funds from the Interior Department’s abandoned Mine Land Reclamation Program to be transferred to the UMW Pension Fund. The application of Mine Land excess funds to multiemployer pensions is not new, and was first used in the 1940s.
Since the 2008 recession, the UMW fund has suffered from several coal industry bankruptcies. Annual contributions have declined from $100 million to $25 million in recent years. UMW officials warn that if the fund becomes insolvent, the Pension Benefit Guaranty Corporation’s (“PBGC”) multiemployer program could jeopardize support for other PBGC-covered plans. In such an event, Congress may need to appropriate significantly more funds to maintain the PBGC.
Central States Draws UPS Pension Proposal
Under a pension legislation proposal that was originally submitted by the United Parcel Service (“UPS”), the federal government would provide a multi-billion dollar loan to Central States at a low interest rate of one percent. With the loan, it is hoped that Central States would be able to stabilize, rebuild its assets over time, and pay out pension plan benefits. The proposal would need to be approved by Congress before it takes effect.
Union membership has declined significantly in the Central States plan since the 1960s. This has left fewer employers with unionized employees to fund the plan, and many more retired individuals receiving monthly benefits. With a decreasing number of unionized employees and an increase in retired individuals receiving monthly benefits, Central States has been forced to provide benefits to “orphaned” retirees without adequate funding. As a result, unfunded vested benefits for Central States now exceeds $23 billion.
UPS Seeks Long-Term Funding Solutionss
UPS has been very active in trying to solve the pension plan crisis, partly because it could potentially be responsible for up to $4 billion in plan contributions, if the Central States plan becomes insolvent.
It is working on a pension proposal that might fix a potential insolvency crisis affecting pensions for unionized workers. The proposal consists of providing low interest five-year federal government loans to struggling pension plans to help cover cash flow shortages. Plan participants are projected to see a benefit decrease of 20 percent across the board as sponsors balance benefit reductions and insolvency risks. The pension plans receiving the loans would be required to begin interest-only repayments after five years. A risk reserve pool, funded by employers, participants, and unions, would be created to serve as a backup in order to guarantee loan repayments.
This proposal would affect more than one million plan participants. Employers, employees, and the PBGC have a lot at stake in terms of fixing the pension plan crisis. If the 400,000 member Central States pension becomes insolvent, plan participants can lose most or all of their earned pensions. It is projected that by 2024 the fund will be insolvent, which could lead to PBGC’s own insolvency.
PBGC 2016 Annual Report Stresses Need for Multi-Employer Solutions
The PBGC’s most recent Annual Report reported a $6.5 billion increase in the multiemployer program deficit to $58.8 billion as of the end of FY 2016.
Congress passed the Multiemployer Pension Reform Act (“MPRA”) in 2014, which for the first time allowed multiemployer pension plans to reduce benefit payments to retirees, subject to statutory guidelines and governmental approval.
The Cleveland-based Iron Workers Local 17 pension fund became the first to reduce retiree benefits. Retirees saw an average 20 percent cut beginning in 2017. The action was taken as an alternative to a projected 2024 insolvency.
In 2015 the Central States Pension Fund submitted a proposed pension reduction plan to the U.S. Department of the Treasury in 2015, which was rejected by the Treasury in 2016.
Background on Multi-Employer Pension Plans
Approximately 10.5 million retirees and dependents participate in 1,350 multiemployer pension plans across the country. While most of these plans are adequately funded, the PBGC estimates that 10 to 15 percent of plan participants are enrolled in multiemployer plans that are at risk of being depleted within 20 years. Troubled multiemployer plans are broken down into categories as follows:
• 72 insolvent plans, which received $141 million in PBGC financial assistance in 2017,
• 68 terminated plans that are not yet insolvent but likely to become insolvent, and
• 47 ongoing plans that are projected to exhaust plan assets within 10 years.
From a different perspective, more than 1 million participants are in critical and declining multiemployer plans as of 2017. By way of background, a multiemployer pension plan is established through a collective bargaining agreement between multiple employers and a labor union. They are commonly used in the trucking, construction, retail, manufacturing, hospitality, and entertainment industries, which rely on a large base of employees who tend to change employers within their industry.
ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.
ERISA expert Mark Johnson, Ph.D., J.D., is a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 firm, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.