It's back to the drawing board for multiemployer pension reform

The result of the first test of a new multiemployer pension reform law has left trustees of the Central States Teamsters pension fund reeling, other troubled multiemployer pension fund officials uncertain about their options and some politicians feeling the pressure to step in.

The Treasury Department on May 6 denied the benefit suspension application of the $17.8 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., citing three unmet criteria of the Kline-Miller Multiemployer Pension Reform Act of 2014, which created the suspension process and put Treasury in charge.

“If there's one good thing that has come out of this, it is that Congress now knows they have to go back and roll up their sleeves. It really is going to define this country,” said Teamsters International Vice President John Murphy in an interview.

Treasury Special Master Kenneth Feinberg, in a press call, said, “We found there were fatal flaws in this submission.”

Treasury officials found that the Teamsters' suspension plan did not distribute benefit cuts equitably and did not provide participants with easily understood notices, but above all, it would not avoid insolvency.

The top reason for that, Mr. Feinberg said in a letter to the pension fund's board of trustees, were the actuarial assumptions used to support the pension fund's claim. The plan's 7.5% rate of investment return and entry age assumptions were too optimistic for a plan that at the time of its September 2015 application was 53% funded, with $35 billion in liabilities and likely insolvency by 2026, Mr. Feinberg said in the letter. For a plan in that shape, he wrote, using a common return assumption of 7.5% over a 50-year time horizon didn't fly because it failed to give enough weight to near-term expected rates of return that would have led to “materially different results,” or to negative cash flow problems likely to reduce asset levels even further, among other reasons.

The demographic assumptions, Treasury officials said, should likewise have been refined to reflect the plan's cash flow and current data.

That could have a chilling effect on other distressed plans considering MPRA.

Treasury's denial of the Central States application “does make clear that they are going to scrutinize the assumptions. That might change the ability for plans to make the case,” said Jean-Pierre Aubry, associate director of state and local research with the Center for Retirement Research at Boston College, which identified 100 plans that could be eligible to apply for MPRA reductions, based on 2013 plan data.

Central States Executive Director Thomas Nyhan defended the plan's calculations, which he said were “middle of the road and reasonable,” noting the International Brotherhood of Teamsters called them too optimistic, and a major employer, United Parcel Service Inc., Atlanta, called them too pessimistic.

“Treasury is demanding a measure of actuarial precision that is not available,” Mr. Nyhan said in a press call following the application's denial, which he called “heart- and gut-wrenching.”

As Central States trustees regroup to decide whether to appeal the decision or prepare a new application, the only certainty for plan participants at this point is the money for benefits will run out by 2026 at the latest, he said.

“We hope the people who urged rejection will come forward now and seek solutions,” said Mr. Nyhan, who puts members of Congress at the top of that list. “Now is the moment for them to step to the plate and provide the funds. The time for rhetoric has passed; the moment for action is now.”

Treasury Secretary Jacob Lew echoed that call in a letter announcing the decision to leaders of the Senate Finance and Health Education Labor and Pension committees. Since Central States filed the first MPRA application, “many stakeholders, including members of Congress on both sides of the aisle, have recognized the harshness of the cuts needed,” Mr. Lew said, but the law does not allow Treasury to consider alternatives.

With the ball now back in Congress' court, “finding a balanced solution will require painful choices,” said Mr. Lew.

“There's a lesson for Congress here,” agreed Mr. Murphy of the Teamsters. “I know there is a recognition by a lot of members of Congress that the multiemployer pension system is in very serious trouble and there has to be some kind of solution that does not include reducing the income of senior citizens. If we can keep this issue on the front burner ... I think we can come up with some creative solutions.

“For this problem to be solved we have to come up with a new source of funding for financially stressed pension funds,” said Mr. Murphy, who predicted some ideas will come forth in the next few months.

Senate Finance Committee Ranking Member Ron Wyden, D-Ore., a critic of the MPRA, said in a statement supporting the decision by the Treasury that “there are no easy answers here and Congress needs to work harder on a bipartisan basis to develop other solutions.”

MPRA's co-author, House Education and the Workforce Committee Chairman John Kline, R-Minn., who is retiring this year, has pledged to continue working on legislation to strengthen the multiemployer system. Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans, Washington, whose multiemployer pension reform ideas led to passage of the MPRA, supports the application process as a way to avoid deeper cuts in the long run for plans without options.

Mr. DeFrehn is not betting on Congress right away. “Congress has had many opportunities to provide assistance (but) they have chosen not to do so and it is unlikely they will,” he said in an e-mail. He is more optimistic about legislation now before Mr. Kline's committee that would revisit withdrawal liability and allow for composite plans with both defined benefit and defined contribution features, which he said has broad bipartisan support.

“Chairman Kline has said that passing this is his top legislative priority. So barring any unforeseen legislative event, this may be one of the few pieces of legislation that can be passed this year,” Mr. DeFrehn said. “We hope that some way can be found to support the multiemployer defined benefit system and those who, through no fault of their own, now face a much less secure retirement than they had been promised.”

Sweeping solutions are not expected in an election year, particularly one that could change the balance of power in Congress. MPRA critics, including the Pension Rights Center in Washington and AARP, realize their victory in the Central States decision is short-lived, as many troubled multiemployer plans head toward insolvency, along with the Pension Benefit Guaranty Corp.'s multiemployer insurance program itself.

Four other plans —the $92 million Iron Workers Local 17 Pension Fund, Cleveland; the $123 million Teamsters Local 469 Pension Plan, Hazlet, N.J.; the $86 million Iron Workers Local Union 16, Towson, Md.; and the $27.8 million Road Carriers Local 707 Pension Fund, Hempstead, N.Y. — also have filed for benefit suspensions. The Pension Rights Center identified 52 multiemployer plans that have notified the Department of Labor of their “critical and declining” status, which allows them to consider applying for MPRA relief.

“It's not a rosy picture at all,” said Mr. Aubry with the Center for Retirement Research, who noted the funding deficits in multiemployer plans are collectively smaller than for public-sector plans, which are short by an estimated $1 trillion, and in the private sector.

If the MPRA is not an option and Congress doesn't find the political will and significant sources of money to rescue ailing multiemployer plans or the PBGC, it will be up to pension fund trustees to figure out which painful steps to take, he said. “That's the conversation that has to be had now. It's a difficult conversation to have.” n