The multiemployer model is dead. Long live the multiemployer model.
That message is the essence of a new agreement between United Parcel Service Inc. and the $2.6 billion New England Teamsters & Trucking Industry Pension Fund. The agreement should serve as a model for troubled multiemployer plans to consider as a way to restore their viability.
The agreement creates a new model for the New England Teamsters fund, breaking away from the traditional multiemployer framework that has been based on the proposition: from each according to his ability and to each according to his need. That model sows seeds of trouble.
Under the agreement, UPS will withdraw from the New England Teamsters fund, paying $1.2 billion in withdrawal liability. And, the company and fund agreed to create a new structure for future benefit accruals in which all employers that join the new fund will be liable for only their own employee pension benefits.
Under the current multiemployer structure, employers share a collective liability. When participating employers face financial challenges and fail to contribute, the rest of the employers have to pick up the slack. In failing industries, a plan eventually consists of fewer and fewer employers, putting ever more funding obligations on the shoulders of stronger employers, while making the pensions of participants less secure.
When a large, strong employer like UPS is participating, the plan can become increasingly dependent on that employer, which then bears an increasing burden, often paying the pensions of participants who never worked at the company. At the same time, the growing burden on the employer puts at risk the retirement security of its own employees.
Such a structure doesn't provide the diversification or reserve funding necessary to better secure coverage. When it breaks down, that model is fair to neither employers nor employees, and is not a sustainable system for groups of employers in financially troubled industries.
That lack of fairness and sustainability was recognized both by the agreement between UPS and the New England Teamsters, and an August decision in the U.S. 2nd Circuit Court of Appeals that ruled the Pension Protection Act of 2006 doesn't prohibit an employer from leaving a multiemployer plan that is in critical status, defined by the PPA as less than 65% funded.
Even the Pension Benefit Guaranty Corp. recognizes the challenges of insuring multiemployer plans, offering a lower level of coverage than for single-employer plans.
In multiemployer plans, for someone with 30 years of service, the PBGC maximum guaranteed pension benefit is $12,870. For single-employer programs, the PBGC maximum guaranteed pension is $55,840.92 a year at age 65.
In addition, the PBGC doesn't assume the assets and liabilities of multiemployer plans that are unsustainable or terminated, as it does for single-employer plans.
The multiemployer plan is worth saving because it provides a collective arrangement to enable smaller employers an affordable mechanism to offer defined benefit plans, while allowing participants who might frequently change employers within the same industry to enjoy portability of their defined benefits.
The New England Teamster and UPS agreement could serve as a model for a modified multiemployer program.
The existing multiemployer model works in many instances, notably the Western Conference of Teamsters Pension Plan, which has been a strong, well-managed program. In fact, with $30.1 billion in assets, it is the largest Taft-Hartley multiemployer plan. It was 90.3% funded as of Jan. 1, according to a report by McGinn Actuaries Ltd., the plan's consulting actuarial firm.
But size is not a shield against unsustainability. The second largest multiemployer plan, the $16.5 billion Teamsters Central States, Southeast and Southwest Areas Pension Plan, is in critical status as defined by the PPA. The New England Teamsters plan is also one of the largest multiemployer plans and also in critical status.
(In its latest report, issued in spring 2011 and involving only its clients, Segal Co. found that of 227 multiemployer plans, 66% were certified at least 80% funded; 10% were in endangered status, or funded between 65% and less than 80%; and 24% were in critical status.)
The new structure does nothing to restore the financial health of the existing New England Teamsters fund, and the departure of UPS could likely worsen its finances. UPS will pay its $1.2 billion in withdrawal liability in installments for 50 years.
The only way for the existing fund to meet its liabilities relies on both a vibrant economy and creative management at the troubled participating employers to revive their competitive positions in the marketplace so they can afford their pension contributions.
But the modified structure offers a way forward that continues to embrace the multiemployer ideals of providing a way for smaller employers to afford a defined benefit program and portability to participants. n