Congress made the right decision to allow severely financially distressed multiemployer pension plans to cut retiree benefits.
The decision — part of a comprehensive spending bill approved by the Senate Dec. 13 and the House Dec. 11 — is designed to prevent plans from becoming insolvent and being taken over by the Pension Benefit Guaranty Corp.
The decision is not cause for celebration, considering the potential hardship participants could face in retirement with lower retirement benefits than they were promised.
But there was no other practical solution for a better outcome.
The Employee Retirement Income Security Act was supposed to prevent such a pension cuts.
But the PBGC — the insurance guarantee created by ERISA to backstop multiemployer and single-employer private-sector pension plans with little hope of making up severe underfunding of promised benefits — likely would cut benefits more severely and could leave participants with even lower pension payments should it assume the plans. The PBGC would require termination of the plans, ending any future pension benefit accruals for active participants.
The Partnership for Multiemployer Retirement Security, a coalition of business and labor, proposed allowing the financially distressed plans to cut benefits. The members of the group believe that by taking action now, they “would preserve greater benefits in the long run for all participants and ensure the continuation of many of these plans for current and future generations of workers,” according to the partnership's report, “Solutions Not Bailouts.”
When Rep. George Miller, D-Calif. — a champion of employee benefits — recognizes a need to protect benefits, the situation must be desperate.
The congressional action allowing pension cuts will help shore up the plans. Benefit reductions give the plans a better chance to improve their financial footing and protect the remaining benefits of retirees and those participants who are still active or who are inactive and haven't yet retired.
The financial ability of the PBGC to pay an even more reduced benefit in the long run than the legislation provides is in doubt. The PBGC's fiscal year 2013 Projections Report for its multiemployer program shows that its “risk of insolvency rises over time, exceeding 50% in 2022 and reaching 90% by 2025.”
The legislation includes doubling the annual PBGC insurance premium to $26 per participant for all multiemployer plans.
That increase will help shore up the PBGC multiemployer program's financial resources. But the increase comes at the expense of employers in the plan, many of whom struggle to make pension contributions and now will have an additional financial burden.
Pension plans have long time horizons, but the horizons can become dangerously short as plan funding levels continue to fall. Even if many legacy liabilities are still far off, there are benefits that need to be paid in the short term that drain the pension funds of the ability to earn investment income.
The multiemployer model was designed as a collective arrangement for generally smaller employers challenged to finance plans of their own. But it doesn't take into account the adverse dynamics of the competitive marketplace. As the number of member employers shrinks, newer employers are reluctant to join and help assume the collective burden of a multiemployer plan. As a result, the collective security of the multiemployer arrangement becomes increasingly dependent on the viability of fewer financially stronger employers. The model requires them to make larger contributions to subsidize other employers that no long contribute but still have participants in the plans.
In 2012, the $2.6 billion New England Teamsters & Trucking Industry Pension Fund, Burlington, Mass., created a structure for future benefit accruals. Under that new framework, all employers that join the new fund will be liable for only their own employees' pension benefits. It breaks away from the traditional framework in which employers share a collective liability, even for participants who have not worked for their companies. Regardless of this new structure, the current liabilities still have to be paid from the traditional model, whose contributions fall short of providing the necessary funding of earned benefits.
The desperate condition of some multiemployer plans reveals the limits of ERISA in protecting pension benefits.
For its protection to be viable, ERISA needs a thriving economy, including favorable investment markets as well as favorable interest rates for valuing pension liabilities. The multiemployer plans were in trouble before the Federal Reserve embarked upon its economic stimulus effort by lowering interest rates. The protracted low rates just exacerbated the funding challenges of multiemployer plans.
ERISA cannot surmount a weak economy in the long run. ERISA made no provisions for structural changes in the economy with resultant changes in industries with defined benefit plans.
More directly, ERISA doesn't give multiemployer plans the same level of prefunding that single-employer plans get. Single-employer plan sponsors may bolster funding levels when economic conditions are good.
As a result, multiemployer plans have a greater challenge to maintain funding levels.
Critics of the multiemployer pension relief, including some labor groups not part of the coalition, lambasted the provision allowing plans to cut benefits. But they had no viable proposal that could achieve support in Congress. A federal bailout was not possible with Republicans in control of the House and, after the new year, the Senate as well. A bailout would be unattractive, considering the already deep federal deficit. It also would be unfair, considering the millions of taxpayers who don't have pension coverage but would be compelled to bail out multiemployer plans.
A greater increase in member employer contributions wasn't possible. Severely distressed multiemployer plans have already raised contributions but it hasn't been enough and some have struggled to pay the increase.
Cuts in benefits now give the plans needed time to bolster their funding levels. There are no other resources and no other recourses. n