By Don McIntosh, Associate Editor
A new law passed by Congress in December could affect more than one million union workers and retirees who are covered by union-sponsored multiemployer pension plans. The law, which is now in effect, allows the trustees of severely distressed pension plans to reduce benefits for current and future retirees — if doing so can save the plan from future insolvency.
Plans that are allowed to cut benefits are those that are forecasted to run out of money within 15 years (or 20 years if they have more than twice as many retirees as active workers). There are restrictions on the cuts: Benefits can’t be cut at all for retirees aged 80 or over, or who are receiving a disability pension, and retirees ages 75 to 79 are subject to smaller cuts than those under 75. And when trustees reduce benefits, they are required to do so first for those whose employers went out of business or otherwise withdrew from the plan without paying all of their obligations, before they reduce the benefits of any other plan participants.
We’re breaking a fundamental tenet in our federal pension law that has been there for 40 years: You do not take benefits away from people that are already retired.” — Karen Friedman, Pension Rights Center
Before trustees can reduce promised benefits, they have to inform all plan members, and hold a vote. The proposed cuts can be rejected, but only by a “no” vote of a majority of plan participants (active, inactive vested, and retired), not just a majority of those voting. And even if a majority of participants vote no, the U.S. Treasury Department can override that vote and approve the cuts if the plan’s insolvency would increase the PBGC’s projected liabilities by $1 billion or more.
Solutions, Not Bailouts
The 161-page law making the changes is titled the Multiemployer Pension Reform Act of 2014, but it didn’t go through the normal legislative process of hearings and committee votes. Instead, it was passed, with almost no debate, as an amendment in the House Rules Committee to a bill to continue funding for the federal government.
The Multiemployer Pension Reform Act was crafted largely along the lines of a proposal called “Solutions Not Bailouts,” which was developed by a task force formed by the National Coordinating Committee on Multiemployer Plans. NCCMP, with offices at the AFL-CIO headquarters in Washington, D.C., is a kind of trade association for union benefit funds. But not all unions agreed with the legislation. The proposal was supported by the AFL-CIO Building & Construction Trades Department, Service Employees International Union, the Carpenters Union, United Food and Commercial Workers, United Association of Plumbers and Pipefitters, Operating Engineers, and the Painters, and by union employers like Associated General Contractors and Kroger. But it was opposed by the Machinists, United Steelworkers, Teamsters, and Boilermakers, and by AARP and the nonprofit Pension Rights Center.
“It’s a breach of faith,” says Karen Friedman, policy director for the Pension Rights Center. The Pension Rights Center, an advocacy group funded by foundations and individual donations, assembled an informal coalition with AARP and unions opposed to the Solutions Not Bailouts proposal.
“We’re breaking a fundamental tenet in our federal pension law that has been there for 40 years: You do not take benefits away from people that are already retired,” she said.
“When Congress passed ERISA 40 years ago, its principal aim was to put an end to disappointed pension expectations, to put an end to broken promises,” Friedman told the Labor Press. The 1974 law she refers to — the Employee Retirement Income Security Act — created the PBGC, and regulated benefit plans to make sure they invested prudently and treated participants fairly. It also barred the plans from reneging on promised benefits.
NCCMP executive director Randy DeFrehn says the Solutions Not Bailouts proposal wasn’t ideal: It came about after other proposed solutions got nowhere in Congress, and after a Republican House committee chair declared, in effect, that union pension funds would have to solve their own problems, and would not get any bailout from taxpayers.
DeFrehn has said previously that if no changes were made, pensions in troubled plans would be cut; it was only a question of when. The thinking of the NCCMP, therefore, was that if smaller cuts spread across the board could — as a last resort — preserve a pension plan for the long run, it would be better than to wait until the plan was insolvent, at which time the PBGC would inflict maximum cuts to everyone.
Multiemployer model works well, til plans get into trouble
Union multiemployer benefit plans, by law, are overseen by an equal number of trustees appointed by the union and participating employers. Trustees have a fiduciary duty to serve only the well-being of the beneficiaries, not that of the union or contributing employers. But severe distress among some multiemployer retirement plans has made it more murky how to interpret that legal obligation.
The beauty of the multiemployer model is that small employers can provide a generous benefit at a relatively low administrative cost. It works particularly well in industries like construction, where workers may go from project to project and from employer to employer, yet have each employer make a contribution to their benefits. Multiemployer plans work because they pool funds from many employers. They’re all in it together, and in general, multiemployer plans have proven much more stable than pension plans sponsored by single employers. But when the plans get into serious trouble, they run the risk of all going down together. To make up for losses, participating employers are made to pay heavy surcharges. That can lead to a vicious cycle, because new employers are reluctant to join the plan, and the heavy surcharges make participating employers less competitive with nonunion firms; they lose business, and thus contribute less to the plan, or they even go under.
Some union plans in the construction industry got into trouble because they were hit with a double whammy: Their assets lost value in the stock market at the same time that members were thrown out of work in the downturn, meaning fewer employers were contributing to make up the losses. Other union plans are suffering from long-term declines in union employment in their industries, which have made the plans top-heavy: They may have more retirees collecting benefits than active workers bringing in contributions.
Though many multiemployer plans are considered underfunded, most are expected to recover, and only a small fraction are projected to become insolvent — maybe 100 out of about 1,500 multiemployer pension plans total. It’s those failing plans, which account for over a million workers and retirees, which might make use of the new law to cut benefits if that can prevent insolvency.
Before the law passed in December, failing plans were required to spend down their assets paying current retirees every dollar they were promised. The plans would then get money from the PBGC to pay retirees under a reduced benefit formula. The formula guarantees 100 percent of the first $11 (per year of service) of a participant’s monthly benefit rate, plus 75 percent of the next $33. That’s the formula that generates the $1,072.50 monthly maximum for a worker who retires after 30 years of service.
To shore up multiemployer pension plans, the new law makes other changes besides allowing benefit cuts. It doubles the insurance premium plans pay to the PBGC (to $26 per member per year). And it makes it easier for plans to merge with other plans. It also allows plans to divide, carving out “orphaned” participants (workers whose employer went bankrupt or left the plan) into plans that would fail and then get the insurance benefit, rather than taking down the whole plan.
But Friedman, the Pension Rights Center director, says there were other solutions besides cutting promised benefits. For instance, Congress could have increased the PBGC premium much more, say to $120 per member per year, to prepare for a wave of defaults. She said her organization will try to repeal the new law.
NCCMP, for its part, will push Congress to enact another part of its Solutions Not Bailouts proposal: allowing a new kind of hybrid retirement plan that would combine the guarantees of the traditional defined benefit pension with the reduced employer investment risk of the newer defined contribution pension plans commonly known as 401(k)s. NCCMP’s proposed “target benefit” plan would guarantee a minimum benefit based on conservative assumptions about investment return, while aiming for returns that would provide benefits above that amount.