Multiemployer proposal a blueprint for others
The first multiemployer pension plan to win approval to reduce benefits offers lessons for other struggling plans facing insolvency.
After rejecting four other multiemployer pension funds' proposals, the Treasury Department on Dec.16 approved the rescue request of the Iron Workers Local 17 Pension Fund, Cleveland.
In Local 17's favor were the small size of the fund (about $90 million) and a revision earlier this year of its application that lowered expectations about investment returns, among other things.
Five more multiemployer plans are waiting to hear if their applications have been approved, and that has retiree advocates worried. “We are concerned the floodgates will open now that the Treasury Department has given the green light to Local 17,” said Karen Ferguson, director of the Pension Rights Center in Washington. The advocacy group notes that more than 60 additional multiemployer plans have notified the Department of Labor of their “critical and declining” status, which makes them eligible to at least consider applying for benefit reductions under the Kline-Miller Multiemployer Pension Reform Act of 2014, although not all will meet the criteria.
The MPRA allows trustees of deeply underfunded pension plans to reduce or suspend benefits — even for retirees — if it gives the plan a better-than-50% chance of staying solvent for 15 years, or in the case of funds with more retirees than active participants, 20 years.
The cuts can be no lower than 110% of the Pension Benefit Guaranty Corp.'s guarantee, which is less than $13,000 per retiree per year for someone with 30 years of service. Disabled or older retirees have further protections.
The law also requires plan participants to vote on the benefit reductions. But for large plans, Treasury officials must override a participant vote to reject cuts if the plans present a liability of $1 billion or more to the PBGC.
Participants in the Iron Workers Local 17 fund will vote in January and if the proposal is accepted by at least 50% plus one vote, the suspension plan goes into effect and the reduced payments start Feb. 1, giving the pension fund a projected 54.2% chance of staying solvent.The Local 17 pension fund had $86.9 million in assets and $221.8 million in liabilities as of April 30, 2015, for a funding ratio of 39%, according to its most recent Form 5500 filing. Of its 2,024 participants, only 640 were active. Without the suspension, the plan was projected to be insolvent by May 2025. With suspension in place until May 2055, the fund would still have $47.3 million in May 2025 and $16 million at the end of the suspension period, when its funded percentage is projected to be 16.7%.
“This is precisely the kind of plan that was MPRA was designed to provide assistance to. The plan can survive ... and they will be able to continue paying benefits,” said Randy G. DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans in Washington, which represents 1,400 multiemployer pension plans with more than $500 billion in plan assets and was instrumental in getting the 2014 act passed.
In addition to Local 17's small size, the application was revised earlier this year to improve its chances, including lowering expectations about investment returns. Where the original application called for 6.5% investment returns, the revised one started out much smaller, at 3.95% for plan year 2015 and does not break 7% until 2025.
“This approval provides a road map for what funds need to do in order to comply with Treasury's requirements, particularly as they relate to expected asset returns,” said Josh Shapiro, senior actuarial adviser with Groom Law Group in Washington. “Treasury has made it clear that they expect plans to project asset returns over the short term that are lower than what plans typically anticipate over long time horizons. This approach makes it more likely that implementing benefit suspensions will allow plans to recover, though it also forces plans to impose larger benefit cuts than might have otherwise been necessary.”
Some of Local 17's success also is about timing.
The first MPRA application to land at Treasury was the $17.8 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill. which at the time was 53% funded, with $35 billion in liabilities. Filed in September 2015, the Central States plan came even before Treasury officials had produced regulations called for in the law, and the decision was delayed after thousands of retirees and others wrote in to oppose the suspension plan. Treasury Special Master Kenneth Feinberg, who oversees MPRA applications, held a series of town hall meetings around the country to explain the process and the proposed cuts to Central States participants and their families.
In denying the application on May 6, Mr. Feinberg said the proposed plan would not reasonably avoid insolvency, and that its “fatal flaws” included a 7.5% rate of investment return and unreasonable entry age assumptions.
Critics of the MPRA approval regulations and process also attribute the denial in part to the political sensitivity of overriding the vote, as the law would have dictated, which would have resulted in up to two-thirds of the plan's 400,000-plus participants having their pensions cut — in some cases by 30% or more.
“The Iron Workers pension fund is not a systemically important plan. Treasury doesn't have to be on the hook for overriding” the participant vote, said Mr. DeFrehn, who will be succeeded Jan. 1 by Michael D. Scott, a former Treasury Department official. “With the new (Trump) administration, we believe that the applications will be viewed more objectively and with less of a political overlay,” said Mr. DeFrehn.
The next applications awaiting a decision in early 2017 are the $14.6 million Bricklayers and Allied Craftworkers Local 7 Pension Plan, Austintown, Ohio, with 460 participants and a funded ratio of 47%, and the $20.3 million Bricklayers and Allied Craftworkers Local 5 New York Retirement Fund, Newburgh, with 949 participants and $67 million in liabilities. Between their weak funded ratios and small number of participants, benefit suspensions would result in participant payments that are at least 10% better than if the plan were to wind up at the PBGC and its smaller benefit formula.
Two larger applicant plans present more of a challenge to the Treasury Department and potentially to the PBGC, whose multiemployer program's deficit got worse in fiscal year 2016, rising to $58.8 billion from $52.3 billion a year earlier. Those are the $1.46 billion New York State Teamsters Conference Pension and Retirement Fund, Syracuse, with nearly 35,000 participants and $3.14 billion in liabilities, and the $1.19 billion Automotive Industries Pension Plan, Alameda, Calif., with nearly 26,000 participants and $1.96 billion in liabilities. Their size and their prospects for solvency could be sticking points.
Joshua Gotbaum, a resident scholar at Brookings Institution in Washington and a former PBGC director, believes a lot rests in the hands of Treasury officials and how they interpret the MPRA when it comes to reviewing actuarial calculations like investment returns, mortality tables and other projections used in the applications. “There are some plans that can be approved under (the Treasury Department's) guidelines, but it seems that most of the plans that MPRA was designed to help were turned down by Treasury,” said Mr. Gotbaum. “Under the law, they have discretion as to how they review, and they used it to avoid approving proposals.” n
This article originally appeared in the December 26, 2016 print issue as, "Cleveland union becomes first for MPRA acceptance".