The Future Solvency of Multiemployer Benefit Plans
The Pension Benefit Guaranty Corporation (“PBGC”) used its partitioning authority recently for only the third time in its history to protect 350 former Hostess Brands employees from their distressed multiemployer pension plan—the Bakery and Sales Drivers Local 33. As a result of Hostess suspending its contributions to the pension, the funding level had plunged to 50 percent. The agency’s action was designed to preserve future pension payments to the pension’s members.
According to the PBGC, there are approximately 1,510 active multiemployer benefit pension plans in the country. Collectively bargained and maintained by more than one employer in a related industry and a labor union, these multiemployer plans cover about 10.1 million participants. Employees in these plans traditionally work in industries such as building and construction; film, television and theater; retail food; garment manufacturing; mining; trucking; and maritime.
Restructuring: Partitions & Mergers
Under current law, multiemployer benefit pension plans are allowed to appeal to PBGC for an “order of partition.” The process enables these plans to separate out a group of participants, such as the former Hostess employees in the Local 33, whose troubled employer has not been contributing to the plan. As a result, partitioned participants and beneficiaries receive only their PBGC-guaranteed benefit, while the benefits of the remaining participants continue.
One of the reasons partitioning has been a seldom-used tactic in the past is that there is an immediate impact on partitioned members that usually translates into a benefit reduction. Therefore, the statute imposes strict requirements that must be satisfied for the PBGC to authorize the partition, requiring that the plan is:
• Likely to become insolvent
• Has incurred a substantial reduction in contributions due to employer bankruptcies
• Is in the midst of or will likely be in reorganization requiring significant increases in contributions
• At a significantly reduced risk of insolvency as a result of the partition
Plan mergers are another option to protect benefits in multiemployer plans, which is eventually what happened with the Local 33. By pooling the monetary assets and administrative resources of two plans, participants have a better chance at a more secure retirement.
Outcome of the Bakery and Sales Drivers Local 33
Hostess was one of only two employers contributing to the Bakery and Sales Drivers Local 33 pension fund, according to a February 27 Crain’s Chicago Business article. The other was a 140-year old family run business, Ottenberg’s Bakery. When Hostess went belly up, Ottenberg’s was left to pick up a tab it could not cover.
That’s when the agency got involved. Under the new plan, partitioned Hostess participants will receive financial assistance from PBGC to pay benefits of up to $12,870 a year for someone with 30 years of service. The average Hostess retiree could see a reduction in benefits from $650 to about $520 a month. If the agency hadn’t intervened, however, the plan would have run out of money for all its members.
The remaining 360 people covered by the Local 33 plan have been merged into the more secure Milk Drivers and Dairy Employees Local Union No. 246 of Washington, DC, Pension Fund. This Landover, Md.-based plan covers about 830 people, has $64.2 million in assets, and is 101% funded.
PBGC: Making their Case for Partitions as a Means to Restructure
The PBGC has seen increased interest from other multiemployer plans seeking partitions, and the agency could be making more use of this approach to help in the restructuring of those plans.
However, the PBGC is facing its own set of financial burdens that make it difficult to more strongly pursue partitioning as a restructuring tool. In its most recent annual report, the agency published that its multiemployer program deficit increased to $8.3 billion from $5.3 billion the year before, and up from $2.8 billion in fiscal 2011.
The pension agency is hoping to overcome obstacles on the political front by making their case to Congress to let it raise premiums. Currently, PBCG charges companies in multiemployer plans an annual insurance premium of $12 per plan participant, less than one-fourth of what other pension plans pay. The agency has projected that 173 multiemployer plans will deplete their assets, at an estimated cost to the agency of $10 billion, potentially leading to the insurance program's demise in 10 to 15 years, the Crain’s article reported.
PBGC financial assistance in the amount of $89 million was dispersed to 44 multiemployer pension plans, representing almost 50,000 retirees, in FY 2013.
Partitioning advocates like the notion of the PBGC intervening earlier in the process to sort out plans with a troubled company, like Hostess. However, supporters also want stronger safeguards on defining which members make up the partitioned group, in addition to how sacrifices are better shared among participants.
Agency officials also hope the process paves the way for more mergers between multiemployer plans by making merger candidates healthier and more attractive. Consolidation could also lessen the burden on the PBGC.
In the end, "We're acting now to prevent a plan from failing in the future," said Sanford Rich, PBGC's Chief of Negotiations and Restructuring in a news release. "And if we had the resources, we could do this to help preserve multiemployer plans covering hundreds of thousands."
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.