Multiemployer Pension Plans to Legally Reduce Member Benefits under New Pension Reform
The Multiemployer Pension Reform Act of 2014 was enacted this past December as part of a larger omnibus budget and spending bill. Widespread changes are part of the new measure, which enables private sector multiemployer plans—concerned about financial solvency—to suspend benefit payments to retirees as well as accrued benefits for participants.
The legislation, which had bi-partisan support, is not without controversy. Suspending benefit payments (better interpreted as cutting or reducing benefit payments) could affect about 10 million participants of multiemployer pension plans. These plans, which are typically created through collective bargaining agreements between a labor union and two or more employers, have been hurt in recent years in the wake of a shrinking pool of unionized workers and significant fluctuations in the state of the economy as well as the investment performance and interest rate challenges encountered by all pension plans. Industries such as construction, trucking, and other small businesses hold a stake in these plans.
Reduce it or Lose it
The congressional action stemmed from the Pension Benefit Guaranty Corp. (PBGC), which had been raising red flags since last June when it warned that insolvencies of distressed multiemployer plans will be more likely and imminent in eight to ten years if nothing was done. The deficit for PBGC’s multi-employer insurance program has ballooned to over $42 billion dollars from just $8.3 billion in 2013. The PBGC’s insurance program for multiemployer plans, which pays lower annual premiums, is separate from the single employer insurance program.
The Multiemployer Pension Reform Act of 2014 has been positioned for that of the greater good, allowing trustees to continue to pay benefits to plan members without having to do the alternative – terminating accruals and reducing benefits to the far lower PBGC guarantee level for both current and future retirees.
The legislation has created a new status marker called “critical and declining status” that is given to multiemployer plans that are projected to become insolvent in the next 15 to 20 years. Sponsors of these designated plans can appeal to the Treasury to suspend benefits for retirees and reduce accrued benefits for active workers.
In order for the Treasury to authorize multiemployer benefit suspensions, plan sponsors must demonstrate that:
1. All measurable steps to prevent insolvency have been taken;
2. The proposed benefit suspension will guarantee future solvency of the plan.
The reform stipulates that benefits will not be reduced below 110 percent of the PBGC guarantee. Also, there are limitations on the amount that benefits can be cut. Retirees who are 80-years of age and older are exempt from benefit reductions, while individuals who are 75- to 79-years of age will have smaller reductions. Suspensions will first be allocated to those participants whose employers withdrew from the plan without paying its full withdrawal liability.
Trustees must notify all plan members. Plans with 10,000 or more participants are required to appoint a retiree to represent the interests of the pensioners.
Reform Not Without Controversy
The move to reform multi-employer pensions and its potential to reduce benefits have not been without controversy. Even if individuals are not affected, opponents warn the passage of this legislation is momentous and may have far-reaching implications because a new precedent has been set.
According to the Pension Rights Center, the prospect of cutting accrued benefits infringes on a central premise of the Employee Retirement Income Security Act (ERISA) of 1974—the anti-cutback provision. This provision is designed to protect plan participants’ accrued benefits and other forms of benefits offered under qualified plans, such as early retirement.
This change appears to override this provision. In addition, no provision has been put in place to reinstate lost benefits if the plan has a financial recovery. In the end, it has pensioners wondering what comes next.
Karen Friedman, executive vice president for the Pension Rights Center, recommends that concerned retirees visit the Department of Labor’s website and find the “2014 Critical Status Notices” list to determine the status of their plans. To calculate potential cutbacks, go to the multi-employer retiree cutback calculator at the Pension Rights Center’s website.
Ms. Friedman also notes that some pension plans undergoing suspended benefits may not be on the list yet as the particulars of the new law begin to filter through. For retirees and workers who have already received notification, it is anticipated that is could take as long as six months to one year for reductions to actually start.
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.
Copyright ERISA Benefits Consulting, Inc.
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.