As advocates for an increasingly stressed multiemployer defined benefit system seek permission from Congress for fundamental reforms, new ways to deal with the withdrawal liability issue are gaining attention.
Suggested reforms include new benefit and plan design options — including a defined benefit/defined contribution hybrid, as well as earlier access to remediation measures for troubled plans.
Like other defined benefit plan executives, those in the multiemployer world have seen liabilities increase because of market losses. But in the multiemployer world, solutions to address unfunded liabilities, such as increased contributions, can also boost an employer's potential exposure to withdrawal liability, because a higher contribution rate results in a higher assessment rate for withdrawal liability. Another risk occurs if one employer goes bankrupt and that employer's liabilities cannot be collected, which adds to the costs for remaining employers, who become understandably nervous about their fellow employers' financial health.
In recent years accountants and credit rating agencies have sought to highlight withdrawal liability obligations. “It goes from theoretical to very real on the balance sheet, which is read by your banker, your bonding company, and others,” said Vincent Sandusky, CEO of the Sheet Metal and Air Conditioning Contractors' National Association, Chantilly, Va. While the association's members are now aggressively educating their lenders on the difference between probable and possible liability, “the best option right now we believe is to get some type of reform,” said Mr. Sandusky, whose trade association represents 4,500 signatory contractors in the $3.1 billion Sheet Metal Workers' National Pension Fund, Fairfax, Va. which is roughly 57% funded.
Withdrawal liability was designed to discourage employers from leaving the plans, but now is having the opposite effect with some employers preferring to get out now instead of worrying whether their share will increase.
“Some sponsors are finding it worthwhile to borrow the money to pay their withdrawal liability tab and get out now,” said Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans, Washington. Mr. DeFrehn said rising withdrawal liability costs also makes it harder to bring new employers into the pension funds. “That's contrary to what we were trying to accomplish.”
Increasing unease about withdrawal liability volatility prompted United Parcel Service Inc., Atlanta, and the $2.6 billion New England Teamsters & Trucking Industry Pension Fund, Burlington, Mass., to strike a novel deal in 2012 to stop the clock on $1.2 billion in withdrawal liabilities by agreeing to pay it off to the union pension fund in monthly installments over 50 years, and to create a separate pool just for UPS' Teamster-represented employees.
Another option that more plans are considering is a hybrid allocation method that insulates new employers from the legacy liability, by setting up a separate pool for new employers and a formula for current employers to pay some of the withdrawal liability to date, and then start fresh in the new pool without the fear of escalating costs. Jim Locey, a consulting actuary with Horizon Actuarial Services LLC, Silver Spring, Md., who specializes in withdrawal liability issues for multiemployer plans, sees the approach as a way to save some plans. “The purpose is threefold: cap employers' withdrawal liability exposure going forward; give the plan a much-needed infusion of immediate cash;, and attract — or at least stop scaring off — new employers.”
Some multiemployer plans also are now encouraging prepayment of withdrawal liability as a way to manage the uncertainty while others are working on their own variations. All the changes are subject to approval by the Pension Benefit Guaranty Corp., where officials declined to comment on requests received to date.
“Being able to segment off existing liability is really vital to attract new employers,” said Charles Jeszeck, director of education, workforce and income security for the Government Accountability Office, “but it's not a panacea for severely underfunded plans.” The GAO has been studying multiemployer pension plan challenges as Congress considers possible reforms.
For ideas on how to tackle the withdrawal liability question and the broader multiemployer pension system challenges, the NCCMP created in August 2011 the Retirement Security Review Commission, with 40 labor and employer organizations, multiemployer plan officials and large employers spending a year looking at ways to stem employer withdrawals and to attract new employers. When the commission studied other countries with joint labor-management multiemployer plans, including Canada, Switzerland, The Netherlands and Finland, they found that except for the province of Quebec, withdrawal liability is not used.
In place of withdrawal liability, one solution the commission is promoting is called a target benefit plan, which would require contributions at a higher rate than current practices, but which would also serve as the limit of an employer's exposure.
