PBGC girds for pending union plan catastrophe

Updated with correction

Only one struggling multiemployer pension fund has landed on the doorstep of the Pension Benefit Guaranty Corp. so far after failing to win Treasury Department approval to reduce benefits, but the agency's dire financial condition has officials predicting painful cuts for more than 1 million multiemployer plan participants projected to need its help.

When the Multiemployer Pension Reform Act was passed in 2014 to allow trustees of deeply underfunded pension funds to reduce benefits even for current retirees, the hope was that the cuts though unpleasant, would be better than the alternative of plan insolvency, which would hurt every participant and add to the PBGC's already-taxed multiemployer program.

It hasn't turned out that way yet, with only one applicant approved by the Treasury Department to reduce benefits under MPRA — the Iron Workers Local 17 Pension Fund, Cleveland, with $86.9 million in assets and $221.8 million in liabilities as of April 30, 2015. Another four applications were denied and three more were withdrawn due to dim prospects. Those denied — like the 270,000-participant Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., which is projected to become insolvent in 2026 — will need the PBGC once their assets are gone.

That has PBGC officials bracing for what they say will be a catastrophe that will sink the multiemployer program, which is projected to be insolvent by 2025. With $2 billion in assets to $60 billion in liabilities currently, it is only 3% funded.

For participants in the Road Carriers Local 707 Pension Fund, Hempstead, N.Y., whose February insolvency sent it to the PBGC after the its MPRA application was denied June 10, it means that full benefits promised to current retirees and beneficiaries that averaged $1,313 per month have dipped to the PBGC's average guaranteed benefit of $570.

Those cuts could be even deeper for them as well as more than one million participants in other insolvent multiemployer plans if drastic steps aren't taken, said PBGC Director W. Thomas Reeder in an interview.

The multiemployer plans that the PBGC has assisted financially so far are the tip of the iceberg, while the Road Carriers plan “is the actual ship rushing up against the iceberg,” he said.

And the worst is yet to come. The “707 is the harbinger of what is going to come. It's not the same order of magnitude of those plans that will be coming in. It will come down to pennies on the dollar, and nobody wants to see that happen,” said Mr. Reeder.

Once the program runs out of money, it can only pay out what it takes in each year in premium revenue. Modest benefits currently capped just below $13,000 per year for someone with 30 years of service could be slashed by 85%, according to the PBGC. That 30-year worker who once received $26,000 in annual pension benefits would only get $2,000.

Most multiemployer plans are not running out of money. Segal Consulting's most recent survey of multiemployer plans found that while the percentage of healthy “green zone” plans funded 80% or better held steady at 64% as of Sept. 30 from the previous year and were in better shape than 2009, when they accounted for only 38% of plans, the ones deemed critical and declining rose to 10% from 9% the year before.

Nearly half of those troubled plans were in the “red zone,” typically less than 65% funded, before the financial crisis, and may need approval to reduce benefits or partition their plans to survive, Segal said. There are more than 100 multiemployer plans designated as critical and declining, a first step in MPRA eligibility.

Although MPRA doubled PBGC multiemployer premiums to $26 from $13 per participant, staving off insolvency within 20 years would take increases up to six times the current level, and even larger ones after that, PBGC officials say. Unlike the single-employer program, which took in $6.4 billion in premium revenue last fiscal year, the multiemployer program brought in just $282 million. Like the agency's single-employer program, steep premium increases run the risk of scaring off employers that pay PBGC premiums from staying in defined benefit plans. They also have little chance of congressional approval.

It is also a question of fairness and affordability, multiemployer advocates note. While only 36% of multiemployer plan participants are active workers, they and their employers would be paying all of the premiums, which are collectively bargained.

Mr. Reeder hopes to work with the White House, Congress and other stakeholders to find solutions, but critics say the crisis is being ignored.

Mr. Reeder thinks members of Congress are becoming more aware of how many people will suffer in the not-too-distant future, and will be prepared to act. “I think the light that 707 is shining is going to help that happen more than anything in the past,” he said.

Karen Friedman, executive vice president at the Pension Rights Center, Washington, agrees. “Legislators are hearing from stakeholders of all sides of the issue, and I believe there is a recognition that something needs to happen sooner than later. Congress is going to have to address the (multiemployer) crisis and the time is now,” she said.

PBGC officials are also trying to find other ways to help soften the blow. In January, PBGC officials asked for public comment on whether to allow multiemployer plans more options for handling withdrawal liability when employers leave a pension fund.

At the request of several pension funds, officials have been studying the concept of two separate withdrawal liability pools to help pension funds attract new employers or retain employers who might otherwise leave, without incurring further risk for plan participants or the PBGC's own balance sheet.

The new approach would put employers in separate unfunded vested benefit pools, with all old liabilities in one pool and future liabilities of some employers, depending on when they joined the fund, in another. The PBGC would have to create terms and conditions for employers to make those moves and address their withdrawal liability payments.

Some struggling plans also could look elsewhere. “One of the things we are seeing are plans exploring options such as plan design modifications, and arrangements such as spinoffs or liability transfers, said Diane Gleave, senior vice president at Segal Consulting in New York. “The community is looking for creative ways to help these plans. To the extent the PBGC can partner with us, it's a positive.”

Another possibility is that Treasury officials work closely with future MPRA applicants to better shape the requests to cut benefits to avert insolvency, some of which were submitted before the regulations implementing MPRA even existed.

“It has been a learning process for everybody,” said Ted Goldman, senior pension fellow at the American Academy of Actuaries in Washington. “They really ask plans to thread the needle to get it just right, (but) I think they're interested in helping people succeed. I think we'll see a lot tighter applications and a lot more successful ones,” Mr. Goldman said.

“It may be,” said Christopher Bone, director of the PBGC's policy, research and analysis department, “that you have lots of little solutions that add up.”