Union pension funds face slow-motion crisis

By DON McINTOSH, Associate Editor

Two years after a severe Wall Street downturn, working people continue to suffer not just joblessness, but reduced chances for a secure retirement. About 10.4 million American workers are counting on retirement benefits from multiemployer union pension trusts, but the value of those trusts’ investment assets, on average, fell 22 percent in 2008.

The traditional “defined benefit” pension, a hallmark of union employment, is an employer promise of a fixed monthly sum for workers when they retire. It’s paid for with hourly or monthly contributions that are invested and held long-term. Union or nonunion employers can sponsor single-employer pensions, but multiemployer pensions are uniquely union. And nearly half of multiemployer pensions are in trouble.

“It’s really clear that our government officials aren’t aware of the magnitude of the problem,” says Joe Kear, Machinists District Lodge 24 business representative, and a trustee on the multi-state Automotive Machinists Pension Trust.

Of the 1,500 multiemployer pension trusts in the United States, about 45 percent have less than 80 percent of the assets they need to pay future benefits, and the hardest-hit, about 30 percent of the total, face funding deficiency or insolvency within seven years. The 80 percent threshold triggers a legal requirement: Trusts have to reduce employee benefits, and increase employer contributions. The intent of that requirement is to avoid insolvency and a bailout from the federal government’s Pension Benefit Guaranty Corporation (PBGC). But the required catch-up contributions may be costly enough to put some employers out of business, increasing the burden on those that remain.

The Automotive Machinists Pension Trust is a good example. The value of its investment assets fell from $1 billion to $650 million in the downturn. In terms of “actuarial value” the trust went from 95 percent funded to 75.9 percent. And like many other union trusts, it has a particular vulnerability: It’s a “mature” plan, heavy with retirees. About 5,000 retirees are collecting benefits and 3,000 vested former workers are owed future benefits, while just 2,000 “active” workers have employers contributing to the trust on their behalf. For the trust to make up for that $350 million investment loss tomorrow would amount to about $175,000 per active worker. Federal law requires the trust to adopt a 10-year plan to improve funding. So its labor and management trustees resolved to trim benefits and ramp up employer contributions starting July 1, 2009.

Two years ago, an assembly worker at Daimler Trucks North America’s Portland truck plant could retire at age 55 after 30 years on the job — and collect 71.6 percent of the full retirement benefit from the Automotive Machinists Pension Trust. Today, a worker in the same situation would get 35 percent of the full benefit.

The trust is now levying a 10 percent employer pension surcharge, an amount that will increase to 75 percent in the next three years. At UPS, that will mean paying an extra $11,630 a year for each union-represented truck mechanic. The money would fill a hole created by the financial market meltdown, not add to worker benefits.

Oftentimes, that extra “employer” contribution comes directly out of workers’ wages. That’s particularly the case in building and construction trades unions, which account for about half of all multiemployer pension trusts. The multiemployer pension trust model works well in the construction industry because it has many small employers and skilled workers who hire out to multiple employers over the course of a career. In many unions, the custom is to bargain with the employer group to set a fixed dollar-per-hour amount for wages and benefits, which the workers then decide how to divvy up.

With 381 actives and 111 retirees in four union locals in Oregon, Idaho, and Montana, the Cement Masons Employer Pension Trust had generous benefits and a healthy funding level as of 2007. But investment losses pounded the funding level down to 65 percent in 2009, and trustees determined employers would need to pay an extra $2.76 an hour, bringing the total pension contribution to $8.14 an hour. It meant, for members, giving up two years of wage increases.

The trustees also reduced the rate at which future benefits accrue, and cut the subsidy for early retirement. Cement masonry is physically demanding, said Cement Masons Local 555 Business Manager Brett Hinsley, and a number of members were expecting to use the early retirement benefit to leave the trade before the work took too great a toll on their bodies.

“They were very upset,” said Hinsley, who’s also a pension fund trustee. “It was a pretty emotional time for a lot of people.”

Adding to the frustration of trustees like Hinsley is that when the market was riding high, federal tax rules prevented pension trusts from building up reserves as a cushion against downturns. Until a few years ago, employers would lose the tax deductibility of pension contributions if pension trust funding levels were over 120 percent. The Pension Protection Act of 2006 increased that to 140 percent, but the rule change came too late.

Particularly during the bull market of the 1990s, pension investments often soared in value. Employers in single-employer pension plans would respond to the “overfunding” by halting new contributions, but employers in multi-employer pension plans were locked into continuing contributions by multi-year union contracts. So to keep their tax deductibility, trustees had to spend down assets by making benefits more generous. They mailed bonus checks to retirees, increased future benefit promises, purchased extra retiree health benefits, and gave lavish subsidies for early retirement. At one point, 55-year-old members of Cement Masons Local 555 with 10 years of service could retire with a full pension benefit.

“We would have kept the money in the fund, because we know the market goes in cycles, but we had no choice,” Hinsley said. “That extra 20 percent would have really helped us ride out these rougher times.”

That was Mark Holliday’s thought too. Holliday — business manager of Operating Engineers Local 701 — has been a pension trustee for 24 years. Holliday said the strategy of the Associated General Contractors-Local 701 Pension Trust Fund has been to maintain the maximum tax-deductible funding level, and to favor lower-risk investments. Before the 2008 downturn, the trust’s funding level was 114 percent. Because of that, the trust could lose $48 million in 2008 (16 percent) and still be at 93 percent funding a year later. It meant — for 5,667 active, former, and retired heavy equipment operators — no benefit cuts or additional employer contributions.

Much worse is the scenario faced by Western States Office and Professional Employees Pension Fund, which was 93.5 percent funded at the beginning of the downturn. The fund began 2008 with assets worth $507 million and ended with $325 million. It gets worse: When a large employer in the fund, Consolidated Freightways, went out of business early in the last decade, the pension fund was left with hundreds of “orphaned” retirees and vested participants who were employed by a company that no longer contribute to the pension. Today, the fund has over 3,100 retirees collecting benefits, 2,600 workers no longer employed by participating employers who are entitled to future benefits, and 2,278 actives. The burden on remaining employers to make up the shortfall is forecast to rise 15 percent a year for at least the next 10 years, with all contributions off-benefit.

“Once they get into trouble, mature plans have a hard time digging themselves out,” says Doug Holden, principal and consulting actuary at Milliman, a top employee benefits consulting firm. “I’ve been at this for 30 years,” Holden said, “and 2008 was the worst year in the financial markets I’ve ever seen.”

Pension trusts are in crisis nationwide. When a single-employer pension fails, the federal government’s PBGC (Pension Benefit Guaranty Corporation) takes it over and assumes responsibility for paying benefits. When a multiemployer pension becomes insolvent, PBGC gives it financial assistance — long-term loans that are rarely repaid. In 2008, 42 multiemployer pension plans received assistance, totaling $86 million.

But it’s not just the prospect of insolvency or the price-tag of the bailout that are worrisome for union pensions. It’s also the potential harm to the high-wage union share of the labor market. Union employers will pay heavy pension surcharges, making them less competitive with nonunion firms. And non-union employers will be all the more reluctant to sign union contracts that commit them to join multiemployer pension plans that have sizable pre-existing liabilities.

The traditional “defined benefit” pension, in many industries, is what separates union from nonunion employees. Will it now become an albatross for union employers?

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