After months of much discussion and debate, the Multiemployer Pension Reform Act of 2014 (MPRA ’14) became law this week when Congress passed and the President signed the “CRomnibus,” a catch-all appropriations bill for the 2015 fiscal year. Much about the form and substance of the CRomnibus was highly contentious, leaving the multiemployer plan portion in relative obscurity. When it surfaced as a possible addition to the bill, loud, but scattered, protests ensued from various “participant advocates,” who, however, had no alternatives to propose other than a taxpayer bailout.
The overall impact of MPRA’14, while substantial, is likely to be less than either hoped or feared. For a handful of very large, financially shaky plans, it provides a path to recovery that accepts short-term pain as the price for long-term survival. For most of the rest of the multiemployer plan universe, it offers opportunities but no panaceas.
MPRA’14 has three distinct parts. The first doubles the premiums that multiemployer pension plans pay for Pension Benefit Guaranty Corporation insurance and makes permanent, with modifications, the funding rules enacted by the Pension Protection Act of 2006, which were scheduled to sunset at the end of the current year.
The second part allows multiemployer plans in severe financial distress to reduce participants’ accrued benefits temporarily or permanently. Except for “systemically important” plans, these reductions will have to be approved by a vote of participants. Also included are measures to facilitate mergers of troubled plans into sounder ones and the partition of potentially insolvent plans. For many plans, those remedies may prove more feasible than benefit reductions.
A final part does not deal with multiemployer plans at all. Instead, it revises section 4062(e) of ERISA, under which the Pension Benefit Guaranty Corporation (PBGC) may require bonds or escrow payments from sponsors of single employer plans after a plant shutdown or similar event reduces participation by more than 20%. A few years ago, after this provision had lain dormant for decades, the PBGC revived it and began applying it vigorously. The new legislation, which will be discussed in a separate ERISA Advisory, responds to widespread complaints about the PBGC’s interpretation of the law and the way that it has gone about implementing it.
MPRA’14 is Congress’s third attempt to put multiemployer pension plans (collectively bargained plans covering workers of two or more unrelated companies) onto a sound financial footing. The Multiemployer Pension Plan Amendments Act of 1980 required employers that withdrew from plans to bear a portion of the plans’ unfunded liabilities. They do so by continuing to make contributions after withdrawal for a period of up to 20 years (or longer in exceptional circumstances).
The Pension Protection Act of 2006 divided plans into four categories, depending on their current and projected future financial condition. The categories have come to be associated with colors: “non-problematic” (green zone), “endangered” (yellow zone), “seriously endangered” (orange zone) and “critical” (red zone). Plans that are not in the green zone must adopt programs to improve their funding, termed “funding improvement plans” (for yellow and orange zone plans) or “rehabilitation plans” (for plans in the red zone). Improvements may be accomplished by increasing employer contributions, cutting future benefit accruals or, for plans in critical status, reducing early retirement and death benefits (even with respect to past benefit accruals, a cutback that is not ordinarily permitted by ERISA).
These “solutions” plainly did not succeed. Some commentators think that they made matters worse by discouraging new employers from signing up for multiemployer pension plans. In any event, they did not resolve two fundamental problems: the steady decline in union membership, which has reduced the contribution bases of many multiemployer plans, and the tendency during periods of prosperity, such as the tech boom of the late 1990’s and the housing boom of the early 2000’s, to increase benefits to levels that have turned out to be unsustainable.
The new Act goes further than its predecessors by making it possible, in some instances, to reduce benefits that accrued in the past, including even those in pay status. This dramatic step was largely prompted by fears for the PBGC’s multiemployer insurance program, which extends financial assistance to plans that become unable to pay benefits when due. The PBGC “lends” money to these insolvent plans (without much expectation of repayment, of course) to enable them to provide a guaranteed level of benefits, currently $11.00 per month plus 75% of the accrued benefit above that level, multiplied by the participant’s years of credited service under the plan, but limited to $35.75 per month times years of credited service. Hence, for example, a participant with 30 years of service could receive, at most, $1,072.50 per month.
Though these guarantees are relatively modest – for comparison, the maximum guaranteed benefit for a 65-year-old participant in a terminated single employer plan is around $5,000 a month – the multiemployer insurance program’s resources fall far short of prospective liabilities. The most recent PBGC annual report summarized the status of the program as of September 30, 2014, the end of the government’s last fiscal year:
The present value of multiemployer nonrecoverable future financial assistance of $44,190 million consists of 53 insolvent plans ($1,506 million), 61 terminated plans not yet insolvent but probable ($1,756 million), and 30 ongoing plans which are projected to exhaust plan assets within 10 years and are classified as probable ($40,928 million).
On the other side of the balance sheet, the multiemployer plan insurance fund holds less than $2 billion in assets. A study conducted by the PBGC in 2013 concluded that there was a 50% probability that the fund would be exhausted within 10 years and close to a certainty that it would run out by 2026.
The outlook is far from uniform among multiemployer plans. Only about one in four is classified as being in “critical” status. Unhappily, that quartile includes some of the very largest plans, such as the huge Central States Teamsters Fund.
The Secondary Reforms
As already noted, MPRA’14 contains a number of reforms less drastic than benefit reductions. These can be summarized as follows:
- The premium charged by the PBGC for “insuring” multiemployer pension benefits is increased to $26 per participant (from the current $13), beginning in 2015. As in the past, the rate will be indexed for average increases in wages (the same index used for Social Security cost-of-living adjustments).
- The PPA’06 funding rules will not sunset at the end of 2014. Previously, plans that were in the green zone on that date would never change color, though yellow, orange and red zone plans would have to continue the improvements already set in motion. As before, PPA’06 does not apply to plans that came into existence after July 16, 2006, an unimportant exception in view of the rarity of new multiemployer pension plans.
- Plans that are projected to be in critical status within five years may elect that status immediately. Doing so will let them increase employer contributions and reduce early retirement and death benefits sooner than would otherwise be possible.
- The standards for emergence from critical status have been tightened somewhat.
- Plans that are projected to emerge from the yellow zone within 10 years even if they do not take any action are elevated to the green zone, sparing them various reporting and administrative requirements.
- Resolving an ongoing legal dispute,1 the new Act provides that the automatic five percent contribution surcharge on employers in red zone plans (imposed for the year in which the plan enters red zone and each subsequent year until the employer’s next collective bargaining agreement) is not to be taken into account in calculating withdrawal liability installments. Since one element of the calculation is the contribution rate for the highest two of the seven years preceding withdrawal, the exclusion of the surcharges reduces the speed with which withdrawal liability is paid off. It may also reduce the total liability, because payments generally do not have to continue for longer than 20 years.
- Not only are surcharges to be disregarded, but so are contribution rate increases imposed as part of a funding improvement plan or rehabilitation plan. This exclusion expires after emergence into the green zone, when contribution rates again become purely a matter of collective bargaining.
- As a partial offset to the preceding concessions to employers, withdrawal liability will be artificially inflated by ignoring benefit cutbacks included in a rehabilitation plan and benefit reductions that are permitted by the rules discussed in the next section. In effect, withdrawing employers will have to pay the cost of unfunded vested benefits that no participant will ever receive.
- Current law allows the PBGC to partition plans that have suffered significant contribution losses as a result of employer bankruptcies. Partition separates the portion of the plan attributable to the bankrupt employers’ participants, in the hope of enabling the rest of the plan to survive. The separated portion typically becomes insolvent in short order and receives PBGC financial assistance to continue the payment of guaranteed benefits. The PBGC has recently made good use of this technique in several instances. MPRA’14 revises it significantly, making it more flexible in some respects, less wieldy in others. The details are discussed below in connection with the new rules for “critical and declining” plans. What is obscure is why Congress did not leave the present provision in place as an alternative. Throwing away a useful tool in favor of one that has yet to be tested may not be the most prudent strategy.
- Finally, the new law corrects a number of technical glitches and clears away some deadwood. For example, PPA’06 inadvertently subjected endangered plans to more onerous restrictions on accepting reduced employer contributions than applied to worse-funded plans in red zone status. MPRA’14 eliminates that anomaly. It also repeals the obsolete multiemployer plan “reorganization” rules, a rarely used predecessor to the PPA’06 reforms.
“Critical and Declining” Plans: The Quest for a Cure
In an effort to target the most deeply troubled multiemployer plans, MRPA ‘14 has created a new status, “critical and declining.” A “critical and declining” (hereafter “infrared,” though that is not yet its official color) plan is one that is in the red zone and is projected by the plan actuary to become insolvent within 14 years (or within 19 years if more than two-thirds of its participants are inactive or retired).
The most important new medicine for “infrared” plans is the ability to suspend benefits that have already accrued, a move that is otherwise strictly prohibited except in some extremely rare circumstances. Suspensions may be for a specified period or permanent. This right is, not surprisingly, hedged with special rules and limitations:
- As a first step, the plan’s trustees must determine that, without a benefit suspension, the plan will become insolvent, “although all reasonable measures to avoid insolvency have been taken (and continue to be taken during the period of the benefit suspension).”
- No participant’s benefit may be reduced to below 110% of the PBGC benefit guarantee level. Benefits may not be reduced at all for participants who are 80 or more years old when the suspension begins. For those between 75 and 80, only partial reductions, based on how close they are to age 80, are allowed. For example, someone who is 78 years old could not suffer a reduction of more than 40% of the difference between his current benefit and the reduced benefit that would otherwise apply to him. Disability benefits, too, are immune to reduction.
- Benefit suspensions may not be materially larger than necessary to achieve plan solvency.
- The plan’s actuary must certify that, based on reasonable assumptions, the suspensions will in fact prevent the plan from becoming insolvent.
- Benefit suspensions must “be equitably distributed across the participant and beneficiary population.” A list is provided of factors that may be considered without creating inequity. For example, reductions may be less severe for older participants, those with longer service or those with smaller pensions. Contrariwise, they could be greater to the extent that participants have been granted cost-of-living adjustments in the past or have benefits attributable to service with employers that withdrew without paying their withdrawal liability in full.
- Suspensions must be approved by the Secretary of the Treasury “in consultation with the Pension Benefit Guaranty Corporation and the Secretary of Labor” and after public notice and comment. (Why final decision making authority was given to Treasury rather than to the PBGC, whose finances are directly affected, or the Labor Department, which has general jurisdiction over participants’ rights, is a mystery.)
- If approved by the government, the suspension must then be submitted to a vote of plan participants. The ballot, which is subject to government approval, must include a statement in opposition compiled from the public comments. If a majority of all participants (not just a majority of those who cast ballots) vote “no,” the suspension cannot go into effect – with one important exception: The government may override the vote if the plan is “systemically important,” defined as “a plan with respect to which the Pension Benefit Guaranty Corporation projects the present value of projected financial assistance payments exceeds $1,000,000,000 if suspensions are not implemented.” Central States is one such plan; there are not many others.
- The Act includes a provision for judicial review of benefit suspensions but states, “A participant or beneficiary affected by a benefit suspension under this paragraph shall not have a cause of action under this title [Title I of ERISA].” That restriction, if it is not a drafting error, effectively immunizes suspensions from lawsuits. The Secretary of Labor would still have standing to sue, but the Secretary is part of the approval process and hence an unlikely plaintiff.
- For the first 10 years after they take effect, benefit suspensions will be disregarded when calculating the withdrawal liability of employers that withdraw from “infrared” zone plans.
- During a period of benefit suspension, benefit improvements for active participants are permitted only if they are either (i) fully funded by additional employer contributions or (ii) matched by comparable improvements for retirees and not projected to prevent the plan from avoiding insolvency.
- Plans with 10,000 or more participants must appoint a “retiree representative” within 60 days after applying to suspend benefits. The representative must be a participant in pay status. His/her duty is to “advocate for the interests of the retired and deferred vested participants and beneficiaries of the plan throughout the suspension approval process”. Both the selection of the advocate and his performance of his/her role are, strangely enough, exempted from ERISA’s fiduciary standards.
- A special rule (written in general terms but apparently applicable to only this particular situation) puts employees of United Parcel Service last in line for any reductions that may adopted by the Central States Teamsters Pension Fund. When UPS withdrew from Central States in 2007, it paid a lump sum of $6.1 billion to satisfy its withdrawal liability. It also agreed to set up its own pension plan that would take on a portion (almost $2 billion) of the Central States liability, provide comparable benefits in the future, and top up benefits if Central States reduced them for UPS retirees in the future. By making reductions less likely for that group, MPRA’14 limits the new UPS plan’s potential exposure.
- With inveterate optimism, the Act instructs the ERISA agencies to adopt implementing regulations within 180 days after enactment, that is, by June 15, 2015. Do not hold your breath.
MPRA’14 also offers two lesser, but perhaps more often practicable, remedies for “infrared” zone plans. First, the PBGC is authorized to grant them financial and technical assistance to facilitate mergers with better funded plans, if doing so will reduce the multiemployer insurance program’s long-term exposure. The hope is that some well-funded plans will be willing to take over the assets and liabilities of nearly insolvent plans in return for a PBGC subsidy.
Second, the Act revises the partition procedure. In one respect, it is made more flexible. Instead of being limited to plans that have lost employers to bankruptcy, it can now be utilized by any plan in the “infrared” zone. Against this are a number of additional requirements. Participants must be given advance notice of the partition. Following partition, the solvent successor plan must subsidize benefits in the insolvent plan, so that the participants in the two plans suffer comparable benefit reductions. For 10 years after the partition, the solvent plan must pay PBGC premiums with respect to participants in the insolvent plan, plus a steep penalty premium if it increases benefits, and the liability of employers that withdraw during that period will be based on the unfunded vested benefits of both the solvent and the insolvent plans. The upside is that this process may make it possible to save plans that would otherwise be doomed to insolvency at a lower cost to the PBGC.
Some critics have suggested that MPRA’14 was devised by someone who thought that the Titanicneeded a new paint job for its lifeboats instead of more of them. As a matter of arithmetic, benefit suspensions can balance plan assets and liabilities. Whether the plan will be sustainable is a separate question.
Except for the few huge “systemically important” plans, reducing benefits will depend on participant consent. Because abstentions effectively count as “yes” votes, the process is weighted toward approval, but it is extremely far from a sure thing, and the attempt can be expected to generate dissatisfaction among affected participants.
Plans that contemplate benefit reductions will need to consider carefully how much of a cut is needed to restore long-term solvency and how the reductions should be allocated among different groups of participants. This will be partly an economic and partly a political decision. Participants are not likely to vote in favor of reductions unless it is clear to them that the loss they suffer now is significantly less than what insolvency, accompanied by the reduction of benefits to PBGC-guaranteed levels, would entail.
For smaller plans, the benefit reduction process will often be too burdensome to undertake. Their best recourse will be to seek merger partners or apply to the PBGC for partition.