Multiemployer pension plans which are the product of the collective-bargaining process, offer employers, especially small businesses, the opportunity to provide retirement benefits to their workers without the administrative expenses and burdens of sponsoring a separate company retirement plan. The Employee Retirement Income Security Act (ERISA), enacted in 1974, established a pension plan termination insurance program whereby the Pension Benefit Guaranty Corporation (PBGC), a wholly-owned U.S. Government corporation, administered an insurance program for participants in both single-employer and multiemployer pension plans. Prior to the enactment of ERISA, multiemployer plans had broad discretion to modify provisions of the plan that, after adoption, were found to be unaffordable over time. Prior to the passage of the Multiemployer Pension Plan Amendment Act of 1980 (“MPPAA”), a company with union employees participating in a multiemployer plan could simply walk away from the multiemployer plan to which it had previously contributed and leave the remaining participants liable to fund past service liabilities, plus the costs of current and future service liabilities. The MPPAA created the concept of multiemployer plan withdrawal liability under which employers who left multiemployer plans with unfunded vested benefits were assessed a withdrawal fee based on their proportionate share of such underfunding.
10-year period created a "perfect storm"
By definition, multiemployer pension plans are jointly administered by representatives of the union and employers participating in the plan. However, unions have exercised much control over the plans. Historically, multiemployer pension plans have been relatively well funded. Three factors working together over the past 10 years – sometimes referred to as the “perfect storm”– have now resulted in significant funding problems for multiemployer pension plans:
- The economic downturn
- Historically low interest rates
- A significant reduction in the number of active employees covered by collective-bargaining groups and multiemployer pension plans
Most plans now have trouble meeting ERISA’s minimum funding requirements. Such multiemployer plans suffered massive asset losses, causing underfunding to increase significantly and are in serious trouble having already significant potential liability on the PBGC. Consequently, Congress enacted the Pension Protection Act of 2006 (PPA), which became effective in 2008.
The PPA imposed new, more stringent funding requirements for plans that faced significant funding challenges. In addition, the PPA provided some help to employers that participate in the most financially distressed plans from substantial additional contribution and excise tax requirements. The PPA required annual plan certifications based on standardized funding and liquidity measures for determining the financial health of plans.
Plans in financial distress are identified as:
|Critical – red status|
|Seriously endangered – orange status|
|Endangered – yellow status|
|Non-distressed – green status|
How it works
Critical status is triggered when a plan is less than 65 percent funded (on the plan’s actuarial basis) and projects a funding deficiency within five years or projects insolvency within seven years, or the plan has similar funding or insolvency characteristics; endangered status is triggered when a plan is less than 80 percent funded (on the plan’s actuarial basis) or projects a funding deficiency within seven years (including amortization extensions); seriously endangered status is triggered when a plan exhibits both endangered status triggers.
Pension Relief Act of 2010
According to the PBGC, the recession in 2008 resulted in a median net investment loss among multiemployer pension plans of 22.1 percent in 2008. The average funded status of all multiemployer plans moved from 76 percent of plans being healthy to just 20 percent of plans being healthy in the “Green Zone” under the PPA in the beginning of 2009. Congress once again attempted to provide statutory relief by enacting the Pension Relief Act of 2010 (the “Pension Relief Act”). The Pension Relief Act allowed certain plans to amortize net investment losses incurred during the 2008 crisis over a 29-year amortization period – rather than the 15-year period that would have otherwise applied. It also allowed multiemployer plans to increase the actuarial value of the assets for funding purposes by recognizing 2008 investment losses over 10 years rather than the regular five-year period. By 2012, the number of plans that had returned to healthy as measured by attaining “Green Zone” status under the PPA had improved to 62 percent of all plans. These actuarial changes simply provided relief from the funding requirements. They did not increase assets or reduce liabilities of the plan. As such, unless there is a significant rise in interest rates, or a major and extended economic surge occurs, these funding problems will continue into the future. Even with the actuarial funding relief provided to such plans, approximately 38 percent of them are still in “endangered” or “critical” status.
Financial distress increases
Since 2012, the number of financially distressed multiemployer pension plans continues to grow. Financially distressed participants in multiemployer plans often operate in declining industries or ultra-competitive markets. As employers fail, the remaining employers participating in the multiemployer plan must pick up the bill for pensions. In a declining or cyclical industry, this places a greater burden on the surviving companies to deal with the additional share of the underfunding imposed upon them. As a large number of employers go out of business, and as the participant populations mature, the contributions being paid by financially solvent participating employers on behalf of the shrinking number of current workers has become significantly smaller than the outflow of total plan benefit payments (including payments to retirees). Negative cash flows reduce the plan’s assets and ultimately, more multiemployer plans are now faced with potential insolvency. Some of these plans have already terminated and are expecting to receive financial assistance from the PBGC. Others are ongoing plans that operate under PPA funding improvement or rehabilitation plans. The rehabilitation plans of critical status plans often signal that they have exhausted all “reasonable measures” for contribution increases and reductions in adjustable benefits and do not expect to emerge from critical status; they are merely striving to delay insolvency.
The multiemployer funding relief contained in the PPA is scheduled to sunset in 2014. According to recent projections published by the PBGC on June 30, 2014, absent changes in the law, multiemployer pension plan insolvencies are more likely and more imminent. The failure of these insolvent multiemployer plans will significantly drain the PBGC’s available funds. Specifically, unless premiums are increased or other changes are made, the PBGC estimates that its multiemployer pension plan insurance program is more likely than not to run out of funds in eight years and highly likely to do so in 10 years. The multiemployer program’s deficit is expected to increase from $8.3 billion projected for 2013 to $47 billion by 2023.
Impact on financially stable plans
Financially stable multiemployer plans are asking for their own forms of flexibility. Understandably, the employers contributing to plans don't like contributing to the plan on behalf of their employees and then being hit with an unexpected large bill for their share of the plan’s underfunding should they withdraw from the plan or if the plan terminates. Even more bothersome is that the liability owed to a multiemployer pension plan is jointly and severally due from not only the company participating in such plan, but, from all of the other entities that are controlled by or under common control with such entity. Thus, a withdrawal liability owed by a company participating in a multiemployer pension plan can cause significant financial distress for the other members of such company’s controlled group of corporations. In addition, companies want to be able to offer new kinds of plans to attract new employers and to keep the ones they have. The potential for withdrawal liability is a significant barrier to attracting new employers into the plan. Financially sound participating employers are very concerned that their financial stability will be significantly impaired if they are the last person standing in a mature plan. Lenders have begun to assess potential multiemployer plan withdrawal liability as part of the loan underwriting process. Lenders are concerned that more stringent funding requirements coupled with potential exposure to withdrawal liability will force an employer to not only make contractually required contributions, but to insure the financial viability of the multiemployer plan.
Time is running out
Time is running out for Congress to address the sunset of the PPA in 2014. Potential options for Congress are:
- “Kicking the can down the road” by extending the term of the funding relief under the PPA;
- Revising the premium structure of the PBGC and its ability to raise revenue;
- Putting in place prudent financing mechanisms to allow multiemployer plans to amortize their existing obligations over a period of time and to minimize the short-term impact of those contribution obligations;
- Changing the plans themselves through structural reform;
- Eliminating or reducing the artificial ceiling on contributions that a plan may receive under ERISA so that financially health plans can save for the “rainy-day” event that may ultimately come;
- Allowing for the merger of plans;
- Eliminating or reducing potential excise tax exposure attributable to amortization extensions;
- Enacting legislation to reduce the exposure and liability of remaining participating employers in a financially distressed multiemployer pension plan; and
- Suspending or reducing the benefits provided under the plan.
It is likely that a combination of the above options will need to be implemented in order to save many multiemployer pension plans from ultimately being forced to terminate.
Employers considering participating in multiemployer pension plans should understand the status of such plans and the potential exposure they may be taking on by agreeing to participate in a multiemployer pension plan. Employers already participating in a multiemployer plan should investigate the funding status of their plan and pay close attention to what, if any, reforms or legislation are enacted by Congress to preserve multiemployer pension plans, to reduce potential withdrawal liability, and to protect the insurance program intended for failed plans under ERISA. In most cases, with careful planning, changes can be taken now that will ultimately reduce or even eliminate the potential exposure such employers may face in the event they eventually withdraw from their multiemployer pension plan or if the plan terminates.
We have a team of skilled business restructuring and ERISA attorneys who can address your concerns involving multiemployer pension plans.
For more information, please contact one of the attorneys listed below.