Tell me, what would you rather receive; $100 a month for the next 10 years and $50 a month thereafter for the rest of your life; or, simply $75 per month for the rest of your life? Which one is worth more to you? That is basically the question trustees and participants of some troubled multiemployer pension plans, including the Iron Workers Local 17 Pension Fund in Cleveland, have recently been asked to answer.
Multiemployer pension plans are defined benefit pension plans, jointly operated by a union and participating employers, covering collectively-bargained employees of such employers. We have spent much time and ink discussing multiemployer pension plans and the financial problems they have been facing over the past several years. These financial problems have resulted from a variety of factors, including reduced employer contributions as a result of reductions in the number of active union-covered employees participating in the plans, less-than-anticipated plan investment results, low actuarial interest assumptions and, in some cases, historically poor management of the plans and the plan’s assets.
Without “belaboring” the issue, over 65 different multiemployer pension plans covering almost 1,000,000 participants (active and separated employees and retirees; and their beneficiaries) have recently filed annual reports indicating that their plan is in “critical and declining” status; a status indicating that the plan is in serious financial trouble and will, unless significant changes are made, become insolvent and unable to pay pension benefits within the next 20 years. In some cases, the plans are in such poor financial shape that it is anticipated they will become insolvent much sooner.
This multi-billion dollar financial issue is a huge concern to many different constituents (e.g., the U.S. government, unions, employers and, perhaps most significantly, the multiemployer pension plan-covered employees and retirees). When a multiemployer pension plan is insolvent and unable to pay its benefits, the Pension Benefit Guaranty Corporation (PBGC) steps in and lends money to the insolvent plan so that it can pay benefits owed by the plan. However, upon such event, the PBGC limits the benefits that can be paid by the plan to a guaranteed payment of an amount that is often significantly lower than the level of benefits being paid by the plan prior to it becoming insolvent.
As part of the 2015 budget, Congress enacted the Multiemployer Pension Reform Act of 2014. This Act permits the trustees of a multiemployer pension plan that meets the above criteria to voluntarily elect to implement cuts in its plan benefits in an effort to stave off insolvency. The amount of cuts that pensioners will face is up to the trustees of the plan and can be significant to many active participants and retirees in the plan. However, retirees who are at least 75 years old or receiving disability pension benefits face smaller or no cuts (for disabled retirees or retirees over 80 years old). In any circumstance, the voluntary implemented cuts cannot reduce benefits below 110 percent of the benefits that would be paid by the plan if it became insolvent.
Plans attempting to take advantage of the voluntary reductions must first provide information about the intended reductions to the participants in the plan. The participants then have an opportunity to vote on whether to approve the cuts. If more than 50 percent of the plan’s participants disapprove of such reductions, the reductions will not occur unless the Department of Treasury, in consultation with the PBGC and the IRS, determines that the plan’s insolvency will increase the PBGC’s projected liabilities by $1 billion or more. Since more than 50 percent of the participants must actually submit a vote disapproving the voluntary reductions in order for request to fail, it is a tough standard to meet.
In order to implement the reductions, the trustees of the plan must show that the planned reductions will result in the plan being able to avoid insolvency. The Teamsters' Central States Pension Fund, a multiemployer pension plan in critical and declining status with billions of dollars of unfunded pension obligations, attempted to implement such a voluntary reduction earlier this year. Absent the voluntary reductions, the trustees of the Central States Pension Fund have indicated the plan will become insolvent in approximately nine years. Thus, unless significant changes are made, the plan will become insolvent and participants in the plan will face significant reductions in their pension benefits. Earlier this summer, an independent fiduciary for the Treasury Department determined that the Central States Pension Plan failed to meet the requirement that the reductions would help the plan avoid insolvency. Thus, the voluntary reduction was disallowed. Several other requests from other multiemployer pension plans have also been denied since then.
Most recently, the trustees of Iron Workers Local 17 Pension Fund in Cleveland submitted a request for a voluntary reduction under the Act. Perhaps as a result of the lessons learned from the Central States Pension Plan submission, the trustees of the Iron Workers Pension Plan were able to meet the criteria required for the voluntary reduction under the Act and their request was approved on December 16, 2016. This is the first multiemployer pension plan that has received approval from the Department of Treasury to proceed with the voluntary reductions.
The success of the Iron Workers plan in implementing the voluntary reductions is an indication that plans now understand the standards they must meet in order to get Department of Treasury approval of their voluntary reductions. There are presently a handful of other plans with requests in to the Department of Treasury for such voluntary reductions. Hopefully, with dozens and dozens of other multiemployer pension plans in critical and declining status, more plan trustees will see that voluntarily implementing a reduction in pension benefits to avoid insolvency may be more advantageous to their participants than facing the more-significant benefit cuts that would be imposed by the PBGC.
Please contact the attorney below for more information about multiemployer pension plans.