In December of 2014, the Multiemployer Pension Reform Act 2014 (MPR) further reformed ERISA by creating the new plan designation of "critical and declining" status. It allows sponsors of multiemployer plans in "critical and declining" status to decrease accrued benefits, whether or not the benefits are in pay status- meaning that the participant is eligible to receive or is receiving benefits
This is the first potentially meaningful effort at shifting the risk of benefit shortfalls from employers to participants in multiemployer defined benefit plans, and may already affect more than 100 plans.
Since its implementation, the Employee Retirement Income Security Act of 1974 (ERISA), operated to protect individuals' retirement benefits in qualified plans. ERISA has evolved to address issues surrounding vesting of benefits, benefit entitlement and employee healthcare, and laws have been enacted to place restrictions on underfunded plans. However, until MPR, little has been done to assist sponsors of underfunded plans. Historically, underfunded plans sought additional funds from employers to ameliorate the shortfall. The Pension Plan Amendment Act of 1980 required that employers withdrawing from plans bear a portion of the plan's unfunded liability. And the Pension Protection Act of 2006 increased employer funding, changed disclosure and reporting requirements, and amended plan designations. The new designation of "critical and declining" status of the MPR can shift the shortfall of a plan to its participants through reductions in normal retirement accrued benefits and benefits of retirees in pay status.
There are approximately 1,400 defined benefit multiemployer plans, with nearly 10 million participants. While many of these plans do not meet the "critical and declining" status, larger plans such as the Teamsters' Central States, Southeast & Southwest Pension Plan and the United Mine Workers Pension Plan could debilitate the entire system, and deplete the Pension Benefit Guaranty Corporation (PBGC), an insurance fund for pension plans.
What is "Critical and Declining" Status?
Economic downturn, higher ratios of retirees to working employees, and withdrawal of employers have destabilized multiemployer pensions. It was in response to this that MPR created the new designation.
For a plan to be eligible for "critical and declining" status:
- 1. It must be projected to become insolvent during this plan year or in the next 14 plan years; or
- 2. The plan is projected to become insolvent in the next 19 plan years; and
- a. The ratio between inactive participants and active participants exceeds 2:1; or
- b. The plan is less than 80 percent funded.
For example, as of 2014 the Teamsters' Central States, Southeast & Southwest Pension Plan covered about 340,000 inactive participants and 70,000 active participants- approximately a 5:1 ratio. Currently, the Teamsters' Pension Plan is only 53.9 percent funded. Accordingly, this fund would clearly fall within "critical and declining status."
Once it is determined that a plan meets the definition of critical and declining status, sponsors must still follow mandatory procedural steps before suspending benefits These steps generally include the following:
- The sponsor must determine that "although all reasonable measures to avoid insolvency have been taken," the plan will become insolvent.
- The plan's actuary must certify that he/she reasonable believes the proposed benefit suspension will prevent insolvency.
- The sponsor must apply to the secretary of the Treasury, who will publish the application for comments, and approve or deny the application within 225 days. The decision of the Treasury can be challenged through judicial review.
- The plan sponsor must notify participants, beneficiaries, contributing employees and the respective union representatives of the application to the Treasury.
- If the Treasury approves the plan, then within 30 days all participants and beneficiaries must vote on the suspension. If the proposal is rejected, the Treasury Department, Department of Labor and PBGC can determine that the plan is "systemically important," overriding the no vote. A "systemically important plan" means the PBGC has projected financial assistance of one billion dollars or more would be required without the benefit suspension.
Benefit Reductions + Limitations
Reductions must be distributed in an equitable manner. The MPR lists specific factors to consider, such as age, life expectancy and length of time in pay status.
Sponsors are prohibited from:
- Reducing monthly benefits below 110 percent of the PBGC's guaranteed benefits.
- Suspending benefits for participants age 80 and over.
- Suspending disability benefits as defined under the plan.
- Reducing benefits more than necessary to avoid insolvency.
A typical example of benefit reduction would be a person who worked for 30 years for a company with a plan's monthly benefit rate of $56 per year of service. His expected annual benefits would be $20,160. The maximum annual PBGC benefit guarantee would be $12,870. For a plan in critical and declining status, the sponsor could potentially lower the individual's annual benefits to a bottom threshold of $14,157.
The benefit reductions are further limited for participants between the ages of 75-80.
Purpose Behind the Benefit Reduction
The PBGC's annual report for 2014 indicates that the insurance fund for multiemployer pension has approximately $2 billion in assets. The PBGC estimated that the fund will be depleted in 10-15 years if it assisted all plans that have become insolvent or are close to insolvency. The PBGC stated that it is $42.4 billion short of what it will need to assist such plans.
What Will the Benefit Reduction Reform Mean for Employers?
Benefit reduction of critical and declining plans is the first meaningful attempt to salvage multiemployer plans that would otherwise become insolvent by passing measures on to participants. Rather than focusing on employers' contributions, sponsors can look to participants to decrease the gap between pension assets and vested benefits. These reforms are characterized as overall positive measures for participants, as they will safeguard current and future retirees from more drastic cuts, should the PBGC have to step in, because the PBGC could not otherwise save all plans.
What Plans are in "Critical and Declining" Status?
The Center for Retirement Researchat Boston College has compiled data identifying 100 plans that may be in "critical and declining" status and able to reduce benefits. This is not a comprehensive list and is based, in part, upon historical data. However, two major concerns jump out.
The first concern is the number of local union plans on the list with a higher ratio of inactive participants. This concern stems from our experience that local unions, once active membership declines, rarely rebound and increase membership- at least not to the level to remove the plan from critical and declining status.
Second, except for 2008 and 2013, union membership levels have continued to decrease nationwide this century, and the list of potentially critical and declining funds is already more than 100.Therefore, the second major concern is whether this remedial action is too late to make a difference. As union membership continues to decline and retirees continues to increase, additional plans are certain to meet the criteria. With a reduction of benefits to retirees, it could lead to a further decrease of active members participating in the plan.
While the overall ramifications will be determined over time, the reforms potentially have an immediate positive impact for employers because for the first time, the risk of shortfall in pension plans can be shifted to participants. If your fund is on the list, or if you want to discuss whether your fund may be added to the list and/or what you should do, please contact the attorneys at Kegler Brown Hill + Ritter.
You can find the complete list of plans that may be in "critical and declining" status here.