Central States Multiemployer Pension Plan Seeks Benefit Reductions
The Kline-Miller Multiemployer Pension Reform Act (MPRA) was signed into law December 2014. A key component of this legislation allows multiemployer pension plans that are in “critical and declining status” to apply for a temporary or permanent reduction of benefits to prevent plan insolvency.
Central States, Southeast and Southwest Areas Pension Fund—known as Central States Pension Fund—submitted a proposed ‘rescue plan’ to the Treasury Department on September 25, incorporating the reduction of benefits for Central States plan participants. It is the first multiemployer pension plan to file an application under the MPRA.
CENTRAL STATES PENSION PREDICAMENT
The Central States Pension Fund is one of the largest multiemployer pension plans in the country with more than 400,000 participants. Originally established in 1955 for Teamsters in the trucking industry, the fund now encompasses more than 1,500 contributing employers extending to a variety of industries besides trucking: carhaul, tankhaul, pipeline, warehouse, construction, clerical, food processing and dairy.
At the end 2014, Central States Pension Fund had assets of $17.8 billion with a liability for promised benefits of $35 billion. The Fund pays out over $2.8 billion in pension benefits each year. To date, nearly $62 billion in retirement benefits have been paid to Teamster retirees and their families. If no rescue option is taken, the Central States Pension Fund will likely run out of money by 2026 under current conditions.
The executive director and general counsel of the Central States Pension Fund called the reduction of benefits “painful,” but said that the rescue plan is the only viable solution to save the fund from financial ruin and preserve benefits for future retirees.
On average, participants may lose a quarter of their pension payments under the proposal. However, there are 43,400 plan participants whose employers failed to pay full employer pension withdrawal obligations. This portion of a multi-employer plan’s unfunded obligations is known as “orphan liability.” These “orphans,” who make up 12 percent of the total fund participants, are one of the more severely affected groups.
Under the new law, maximum benefit reductions—to 110 percent of the Pension Benefit Guaranty Corporation (PBGC) guaranteed benefit—must be implemented to this orphan group first. An additional 56,000 plan participants who have some work history with one of these employers, will also have a portion of their benefits subject to maximum reduction by the MPRA.
The Treasury, in conjunction with the PBGC and Department of Labor, will review Central States’ application to determine if it meets requirements set forth by Congress. They have up to 225 days to approve or deny the application. Once approved, plan participants and beneficiaries have the opportunity to vote on the reductions before they can occur. The Treasury has 30 days to administer a vote via U.S. mail on the proposed benefit reductions.
If approved by both the Treasury and plan participants, benefit reductions under Central States’ proposed pension rescue plan will become effective around July 1, 2016.
If plan participants vote “no,” the Treasury still has the authority to override their opposition. This is due to the considerable size of Central States Pension Fund and the far-reaching repercussions that a financial collapse could have on its participants and millions of other multiemployer pension fund participants.
A website has been launched for plan participants specifically to address the issues and frequently asked questions surrounding Central States Pension Fund proposed rescue plan.
HOW CENTRAL STATES GOT HERE
According to its rescue plan website, a variety of factors led to Central States’ stark reality:
• Deregulation of the trucking industry resulting in 10,000 fewer employers contributing to the fund.
• Half of all benefit payments currently going to “orphaned” retirees, whose employers never fully paid the fund to cover their pensions because they went out of business or went bankrupt.
• Baby Boomers retiring in record numbers and a union workforce that has been steadily on the decline. For every $3.46 that the Fund pays out, only $1 is collected from employers.
• Two major recessions since 2000 driving down the fund’s investment assets and pushing many contributing employers out of business or into bankruptcy.
Many of these market pressures are not exclusive to Central States. Similar financial challenges may be on the horizon for other multiemployer pension plans as well.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.
NOTE: ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.