The Treasury Department on Friday denied the benefit reduction application of the $17.8 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill.
In a letter to the pension fund board of trustees, Treasury Special Master Kenneth Feinberg said the application was denied for failing to meet three criteria of the Kline-Miller Multiemployer Pension Reform Act of 2014, which created the benefit suspension process.
Central States' proposed benefit suspensions “are not reasonably estimated to allow the plan to avoid insolvency,” Mr. Feinberg said, because Treasury officials considered the plan's 7.5% rate of investment return and entry age assumptions to be unreasonable. “We found there were fatal flaws in this submission,” he said on a press call.
The plan also did not distribute benefit cuts equitably, and did not provide participants with easily understood notices, according to the letter.
The pension fund applied Sept. 25 for permission to reduce benefits in order to avoid insolvency that it projected would happen by 2026. At the time of its application, it was 53% funded, with $35 billion in liabilities.
The Congressional Research Service estimated that total benefits would be reduced by $11 billion under the proposed plan.
Central States Executive Director Thomas Nyhan said in a statement that the decision was disappointing, “as we believe the rescue plan provided the only realistic solution to avoiding insolvency.” The fund is projected to run out of money within 10 years “or even less,” he said. With the Pension Benefit Guaranty Corp.'s insurance program also facing insolvency, “Central States participants could see their pension benefits reduced to virtually nothing,” said Mr. Nyhan, who called on Congress to pass legislation protecting those benefits.
If Treasury had approved the application, an estimated two-thirds of the plan's 400,000 participants would have seen their benefits reduced, with nearly 40% seeing cuts of 30% or higher, while older and disabled participants would not see cuts.
The pension fund created three tiers of participants with different levels of benefit reductions. Tier I participants, whose employers left the plan, would have had the biggest cuts. Their benefits would be reduced to 110% of the PBGC guarantee, which is less than $13,000 for a participant with 30 years of service.
Tier III participants are current and former employees of United Parcel Service Inc., Atlanta, which paid $6.1 billion to withdraw from the pension fund in 2007 and set up a single plan jointly trusteed with the International Brotherhood of Teamsters. As part of a collective bargaining agreement at the time, UPS also agreed to a “make-whole” provision in the event that the pension fund reduced benefits in the future. An approved plan would have triggered that backstop, and cost the company between $3.2 billion and $3.8 billion in additional benefit payments, when recognized as an interim mark-to-market charges.
Tier II participants include all others, including some UPS workers who retired before the 2007 agreement.
UPS spokesman Steve Gaut said the company “regrets” the pension fund's economic challenges and uncertain future and encourages it to file a revised application “that follows the law and the binding legal commitments to UPS by the fund.”