Immediate multiemployer reforms urged

The increasing risk that some multiemployer pension funds will be insolvent is putting pressure on lawmakers to enact some sweeping reforms in the final days of the 113th Congress before their scheduled adjournment Dec. 11.

Multiemployer pensions are collectively bargained benefits typically covering a specific industry and administered by a joint board of trustees. According to the Department of Labor, there are 1,427 multiemployer defined benefit pension plans covering 10.5 million participants with $431 billion in assets. Many plans also offer defined contribution benefits.

Acting now could mean the difference between solvency and insolvency for many at-risk plans, and would give all plans more certainty going forward, said officials at the Partnership for Multiemployer Retirement Security, a business and labor group promoting a package of multiemployer pension reforms.

The group's package, which was a starting point for legislation that at press time was still being negotiated, would give plan executives more tools to improve their funding status and allow for innovative plan designs such as inclusion of variable benefits, annuities and target benefit plans, in exchange for more funding discipline. Sizeable Pension Benefit Guaranty Corp. premium increases also are on the table, to reduce the threat of a government bailout.

A bipartisan statement Dec. 4 from the House Education and Workforce Committee said that “members are still discussing the details about a possible legislative solution to the multiemployer pension crisis, and remain hopeful Congress will act before the end of the year.”

The most controversial piece of the possible reform package, which is supported by most unions, would allow for reduced benefits for future — and possibly current — retirees in deeply troubled pension funds. While proposed only as a last resort for plans that would wind up at the PBGC, that idea is vigorously opposed by AARP, International Brotherhood of Teamsters, Pension Rights Center and the Machinists' union participating in the $11 billion IAM National Pension Fund, Washington.

“The stakes are very high,” said former PBGC Director Joshua Gotbaum, now a guest scholar at The Brookings Institution, Washington. “If Congress acts this year, lets plans reorganize to preserve benefits and lets PBGC do its job, then multiemployer plans will continue to provide reliable lifetime income for generations to come. If Congress kicks the can down the road, it will go off a cliff — taking PBGC, hundreds of small businesses, and the pensions of more than a million people with it.”

The controversial idea of reducing benefits has kept lawmakers on the sidelines. That changed Nov. 17 when the PBGC released its annual report for fiscal 2014, which showed a record $42.4 billion deficit in its multiemployer program, up from $8.3 billion in fiscal 2013. Without congressional action, that program has a 90% chance of insolvency by 2025,according to the PBGC.

Another pressure point is the fact that provisions in the Pension Protection Act of 2006 that allow plan officials to take steps to improve underfunded multiemployer plans will expire Dec. 31.

If Congress runs out of time or nerve soon, multiemployer reform proponents are hoping at least for an extension of the PPA rules into 2015, which the House approved on Dec. 3 as part of a tax extenders bill, but at press time awaited Senate action and White House approval.

Even for plans not at risk, “if PPA sunsets, there will be a vacuum, and it will add to the uncertainty that plans have about how they're supposed to operate,” said Jason Russell, consulting actuary with Horizon Actuarial Services LLC, Silver Spring, Md., who works with several multiemployer plans.

The “wonderful outcome” of PPA, said Phillip Romello, Washington-based senior vice president and multiemployer retirement practice leader for The Segal Co., “is that it got trustees looking out to the horizon more. There has been a lot of action taken. This has become the new way to measure.”

The PPA rules for multiemployer plans created zones based on funding level and require annual review and certification of a plan's funded status.

Plans that are 80% funded or better are in the green zone. Plans classified as either endangered (yellow zone) or critical (red zone, typically less than 65% funded), must take specific corrective actions to improve funding status. Those actions could include benefit changes, higher contribution rates or new investment policies. That latitude allowed trustees to make tough decisions, including removing early retirement subsidies in troubled plans, because the PPA also insulated troubled plans from steep excise taxes for underfunding unless they fail to act.

“PPA gave them the discipline to do it and the cover to do it,” said Diane Gleave, New York regional manager for Segal.

“Trustees have been pretty aggressive in improving plan status and even biting the bullet,” said Vincent Sandusky, CEO of the Sheet Metal and Air Conditioning Contractors' National Association, Chantilly, Va. which represents 4,500 participating contractors in the $3.7 billion Sheet Metal Workers' National Pension Fund, Fairfax, Va. “That's a big deal to keep contractors confident and in the plan.”

If the PPA rules expire, pension funds in the yellow or red zones could continue under their remediation plans, but plans now in the green zone that might slip down would lose the ability to take remedial steps.

According to The Segal Co.'s 2014 survey of 218 multiemployer clients with combined assets of $100 billion, green zone plans rose to 65%, four percentage points higher than 2013. When the zone rules went into effect in early 2008, before the recession, that number was 83%. The plans also saw funding levels improve. In 2014, the average funded percentage increased to 88% from 85%. “This survey shows that (PPA) is working,” said Mr. Romello. “They're moving in the right direction.”

A similar analysis by the International Foundation of Employee Benefit Plans and Horizon Actuarial Services covering the 10 years ended Dec. 31,2012, also found improvement in many plans. For 1,383 plans representing more than $400 billion combined, the median annualized return was 5.9% for the 10-year period; a year earlier, that 10-year return was 4%. Many plans also saw significantly higher returns.

One of the biggest uncertainties employers would like Congress to address is withdrawal liability.

Designed to discourage employers from leaving plans, withdrawal liability now has the opposite effect as employers, seeing even larger costs down the road, leave the plans and makes recruiting more employers a challenge.

If Congress doesn't act on the reform package that is expected to be proposed employers are “going to head for the door,” said Mr. Gotbaum. “No one wants to be the last man standing — the one left with the bill.”

For United Parcel Service Inc., Atlanta, and the $2.6 billion New England Teamsters & Trucking Industry Pension Fund, Burlington, Mass., the solution was a novel 2012 deal that stopped the clock with a 50-year payment plan for $1.2 billion in withdrawal liabilities, and a separate pool just for UPS' Teamster-represented employees. Other options plan executives would like Congress to allow include a hybrid allocation method that insulates new employers from the legacy liability and caps current employers' exposure going forward.

Other new approaches like variable or target benefits that adjust to investment performance or other factors “are really important because we want employers to come into the system,” said Ms. Gleave of Segal.

While multiemployer pension plan experts estimate up to 10% of deeply troubled plans are beyond rescue, for the rest, extending the PPA rules and the proposed reforms “provide a framework to deal with many of the legacy issues ... and give plans the tools and the flexibility to allow for a more balanced sharing of the risk that is inherent in any defined benefit plan,” said Mr. Romello of Segal. “It provides a structure for these plans to survive and in a way to thrive.” n