Advocates push for more multiemployer reform

Multiemployer pension reform advocates continue to pursue what they consider a critical missing piece in new legislation: a regulatory green light to do more alternative plan designs.

These advocates would like congressional approval for composite plan models that would give plan trustees more tools for maintaining a balance between plan benefits and assets, such as reducing the rate of future accruals and trimming certain benefits, changes that now require lengthy regulatory approval. While reforms passed by Congress in December helped the most distressed plans, many more plans would benefit from variable models, said Dana Thompson, assistant director of legislative affairs for the Sheet Metal and Air Conditioning Contractors' National Association, Chantilly, Va.

Having new approaches sanctioned by Congress would give more pension funds the confidence to experiment, but some plans already are showing the way.

With variable, or adjustable, pension funds, the basic idea is that investment risk is shared by employee and employer. If investment returns drop, benefit accrual targets can be adjusted downward the next year. Another variation uses traditional accrual and benefit formulas, but part or all of the benefit rises or falls along with investment returns.

Participants in the $20 million Greater Boston Hospitality Employers/Local 26 pension fund get the greater of a floor defined benefit or a variable benefit that rises once investment returns exceed 5.5%. Returns above 10% are put into a reserve for future down years.

Local officials considered a variable plan because their defined contribution plan “wasn't working. It wasn't creating any meaningful benefits,” said Richard Hudson, principal consulting actuary in New York at Cheiron Inc. “So far, all the feedback has been very favorable.”

The local's experience convinced the international union, UNITE HERE, to roll out its version in January 2016.

“There's more activity today than there was a year ago and there will be more a year from now,” said Cheiron President and CEO Gene Kalwarski in McLean, Va. In Linthicum, Md., the International Organization of Masters, Mates & Pilots switched to a hybrid plan in 2013 with a fixed and variable component that allows for benefit increases if the new plan's conservative 5% assumed rate of return is exceeded. “It allows participants to share in the risk and rewards of investment returns, while providing a base benefit that participants can count on,” officials of the fund said in a letter to participants. The Masters, Mates & Pilots pension plan had $437 million as of Dec. 31, 2013; the adjustable plan had $6 million as of the same date.

A variable plan is working out for the $4 billion Sheet Metal Workers' National Pension Fund, Fairfax, Va., which in 2013 moved to a variable benefit accrual rate formula to stabilize the plan, which was 58% funded. Under the variable formula, trustees use the average investment return of the preceding three years to set benefit accrual rates. In 2014, that meant a reduced accrual rate of 0.75%, but thanks to a 20.6% return in 2013, the rate increases to 1.25% in 2015. The current funding ratio could not be learned by press time.

“VBAR, and mechanisms like it, show that pension funds now fully recognize that benefit design has to reflect the performance of a fund's investment portfolio,” said Marc LeBlanc, fund administrator and general counsel.

“I believe there's a lot of interest out there,” said David Blitzstein, a pension consultant based in Olney, Md., and trustee of several multiemployer plans. “There's a lot of hard decisions that are under consideration right now. I think they are going to catch on, but it's not a one-year decision,” Mr. Blitzstein said.

Part of the appeal “is that it's very rules-based, so if you generate a surplus there's a very systematic method to how you share that. It doesn't leave a lot to chance or to politics,” Mr. Blitzstein said.

Because multiemployer plans involve both employers and unions, where officials have their own political pressure particularly at the bargaining table, suggesting a new plan design for which benefits could be adjusted in a bad market can be tricky. “But if you're honest with rank-and-file workers and you share information with them, they get it,” Mr. Blitzstein said.

Unlike with traditional multiemployer defined benefit plans that have few options in economic downturns except to increase contributions, potential employers are more comfortable knowing that, with variable benefit plans, their potential obligations are not unlimited.

Proponents of variable plans argue they benefit everyone: labor, management and participants.

“It's a way to continue to provide reliable lifetime income and yet not place all the risk of the stock market onto the employers' bottom lines,” said Josh Shapiro, senior actuarial adviser with Groom Law Group in Washington and former deputy executive director of the National Coordinating Committee for Multiemployer Plans in Washington. “There definitely are plans seriously thinking about it.”

Tom Cliffel is a consulting actuary in the Cleveland office of Horizon Actuarial Services LLC, where several clients use variable benefit plans, including the $2.7 billion Major League Baseball Players' Pension Plan, Cleveland. He expects more conversations as plans become better funded to the point at which they start talking about improving benefits. “It's helpful to tie that to some conversation about plan design,” he said.

“We still have these discussions about whether plan design can help,” said Diane Gleave, senior vice president, actuary and New York regional manager for benefits consulting firm The Segal Co. “It's not something you can do lightly; there's a lot of education involved.”

Getting Capitol Hill's blessing would make a lot more people comfortable with the concept, advocates say. “We want to take advantage of the fact that this is the last piece” of reform, said Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans, Washington. “We are trying to enhance retirement security by removing some of the disincentives for employers to stay in the system, and it has safeguards for participants.”

Although some advocates worry the discussion could veer into premium increases for the Pension Benefit Guaranty Corp., Mr. DeFrehn and the sheet metal contractor association's Ms. Thompson are optimistic. “Nobody seems to have a problem with the concept of a composite plan design,” said Ms. Thompson. “For one thing it will be up to the board of trustees or the bargaining parties, which is a concept comfortable to both sides of the aisle. This gives the employers what they want and it gives the unions a lifetime benefit.”

Absent that legal certainty, current and potential trustees of multiemployer plans shouldn't give up, said Donald Fuerst, senior pension fellow at the American Academy of Actuaries, Washington, and a former Mercer consulting actuary. “It's an ideal design for a multiemployer plan because they don't have the same dependable source of revenue that single employers do. Trustees need the ability to adjust benefits if circumstances warrant. We will have another recession, so it's very important to remember that.” n