[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 115-638
THE HISTORY AND STRUCTURE OF THE MULTIEMPLOYER PENSION SYSTEM
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HEARING
before the
JOINT SELECT COMMITTEE
ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
UNITED STATES CONGRESS
ONE HUNDRED FIFTEENTH CONGRESS
SECOND SESSION
__________
APRIL 18, 2018
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Joint Select Committee on
Solvency of Multiemployer Pension Plans
_________
U.S. GOVERNMENT PUBLISHING OFFICE
37-183 PDF WASHINGTON : 2019
JOINT SELECT COMMITTEE ON SOLVENCY OF
MULTIEMPLOYER PENSION PLANS
Sen. ORRIN G. HATCH, Utah, Co-Chairman
Sen. SHERROD BROWN, Ohio, Co-Chairman
Rep. VIRGINIA FOXX, North Carolina Rep. RICHARD E. NEAL,
Sen. LAMAR ALEXANDER, Tennessee Massachusetts
Rep. PHIL ROE, Tennessee Sen. JOE MANCHIN III, West
Sen. ROB PORTMAN, Ohio Virginia
Rep. VERN BUCHANAN, Florida Rep. BOBBY SCOTT, Virginia
Sen. MIKE CRAPO, Idaho Sen. HEIDI HEITKAMP, North Dakota
Rep. DAVID SCHWEIKERT, Arizona Rep. DONALD NORCROSS, New Jersey
Sen. TINA SMITH, Minnesota
Rep. DEBBIE DINGELL, Michigan
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, co-chairman,
Joint Select Committee on Solvency of Multiemployer Pension
Plans.......................................................... 1
Brown, Hon. Sherrod, a U.S. Senator from Ohio, co-chairman, Joint
Select Committee on Solvency of Multiemployer Pension Plans.... 2
WITNESSES
Barthold, Thomas A., Chief of Staff, Joint Committee on Taxation,
Washington, DC................................................. 4
Goldman, Ted, MAAA, FSA, EA, senior pension fellow, American
Academy of Actuaries, Washington, DC........................... 8
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Barthold, Thomas A.:
Testimony.................................................... 4
Prepared statement........................................... 39
Responses to questions from committee members................ 47
Brown, Hon. Sherrod:
Opening statement............................................ 2
Prepared statement........................................... 51
Goldman, Ted, MAAA, FSA, EA:
Testimony.................................................... 8
Prepared statement........................................... 52
Responses to questions from committee members................ 61
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 88
Communications
Chamber of Commerce of the United States of America.............. 91
ILLOWA Committee to Protect Pensions............................. 122
Jefferson, Henry B., III......................................... 123
Reed, Bill R..................................................... 124
Spott, Thomas J.................................................. 124
UAW.............................................................. 125
Waggoner, James.................................................. 126
(iii)
THE HISTORY AND STRUCTURE OF THE MULTIEMPLOYER PENSION SYSTEM
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WEDNESDAY, APRIL 18, 2018
U.S. Congress,
Joint Select Committee on Solvency of
Multiemployer Pension Plans,
Washington, DC.
The hearing was convened, pursuant to notice, at 2:10 p.m.,
in room SD-215, Dirksen Senate Office Building, Hon. Orrin G.
Hatch (co-chairman of the committee) presiding.
Present: Senator Brown, Representative Foxx, Senator
Alexander, Representative Roe, Senator Portman, Representative
Buchanan, Representative Schweikert, Representative Neal,
Senator Manchin, Representative Scott, Senator Heitkamp,
Representative Norcross, Senator Smith, and Representative
Dingell.
Also present: Republican staff: Chris Allen, Senior Advisor
for Benefits and Exempt Organizations for Co-Chairman Hatch;
and Jeff Wrase, Chief Economist for Co-Chairman Hatch.
Democratic staff: Jeremy Hekhuis, Legislative Director for Co-
Chairman Brown.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S.
SENATOR FROM UTAH, CO-CHAIRMAN, JOINT SELECT
COMMITTEE ON SOLVENCY OF MULTIEMPLOYER PENSION PLANS
Co-Chairman Hatch. We will call everybody to order. I would
like to welcome everyone here to the first hearing of the Joint
Select Committee on Solvency of Multiemployer Pension Plans.
Today we will begin our work in developing a deep base of
knowledge on the issues surrounding multiemployer pension plans
and the Pension Benefit Guaranty Corporation, or what we refer
to as the PBGC.
We have an ambitious work plan, but like all great
endeavors, we need to start with the basics, and that means
reviewing what these plans are and how they operate; examining
why the plans were established; and investigating what
economic, demographic, and other forces have shaped and
impacted the plans. Going forward, the committee will bring in
experts from government and academia to help us better
understand the issues surrounding multiemployer pension plans
and the PBGC. This insight will be critical. We need to
understand the numbers that shape the plans and PBGC, because
the challenges we will look at fundamentally involve
arithmetic, however unpleasant that arithmetic may be.
After getting a sense of those basic numbers, this
committee will also examine the major legal and financial
issues with the multiemployer plans, how the governing statutes
have changed over time, and how finances have evolved for the
various plans and for the PBGC. Certainly, the issues involved
here are far broader and go much deeper, but to understand the
scope of the problems that we face, we need basic measures of
what is going on.
Looking ahead, we will likely have hearings in which we
will listen to various stakeholders concerned with the
operation of these plans. Those stakeholders include retirees,
active employees, businesses that sponsor the plans, actuaries,
plan managers, American taxpayers, and the PBGC. We will also
look at how multiemployer plans are designed and how their
finances are managed, along with the unique regulatory and
workforce environments they operate in.
Following stakeholder input, the committee will examine
policy options and the costs and benefits that come with them.
I do not doubt that the committee has a very heavy workload
ahead. I also do not doubt the sensitivity of the issues we
will discuss. The committee is charged with a very difficult
task. No matter what direction we take, we are bound to anger
some folks. But it is critical that we understand the core
financial features of multiemployer pension plans as well as
the PBGC to guide the path forward toward possible solutions.
For today's hearing, we have brought in two experts to
provide us with information on the history, structure,
operations, and evolution of the multiemployer plans since
their inception in the 1940s. Their perspectives and insight
will be critical as we begin this first phase of our process.
And I look forward to hearing from them and learning more.
Now, let me close my opening remarks by noting that the
staff of the Joint Committee on Taxation has prepared and
posted on its website a publication titled, ``Present Law
Relating to Multiemployer Defined Benefit Plans,'' which will
serve as one of many valuable resources to this committee. I
appreciate the work of the JCT and thank Dr. Barthold and his
team for what I am sure will be useful background information.*
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* For more information, see also, ``Present Law Relating to
Multiemployer Defined Benefit Plans,'' Joint Committee on Taxation
staff report, April 17, 2018 (JCX-30-18) https://www.jct.gov/
publications.html?func=startdown&id=5089.
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So with that, I will turn to our distinguished co-chair,
Senator Brown, and we will go from there.
[The prepared statement of Co-Chairman Hatch appears in the
appendix.]
OPENING STATEMENT OF HON. SHERROD BROWN, A U.S.
SENATOR FROM OHIO, CO-CHAIRMAN, JOINT SELECT
COMMITTEE ON SOLVENCY OF MULTIEMPLOYER PENSION PLANS
Co-Chairman Brown. Thank you. Thank you, Chairman Hatch.
And thanks to my colleagues on the committee.
Mr. Barthold, thank you for being here. Your insight is
always illuminating for us. Thank you, Mr. Goldman. Thank you
for your acumen and what you will bring to this. We are very
grateful to both of you.
We had a productive meeting the last time we met. It is
clear that people in both parties on this committee are ready
to work in good faith to find a solution to this crisis.
I spoke a moment ago to Congressman Buchanan about his
desire to find out what got us here. And I think today the
questions I will ask--and we have coordinated with Chairman
Hatch to elicit the information that we need to understand--
sort of build the framework so we understand these issues the
way that we need to to come up with a bipartisan solution.
So, Vern, thank you for your insight.
There are some hundred multiemployer pension plans on the
brink of failure. They have members in every single State in
the country. A number of us in our States and our districts
have literally thousands of people who could lose their
pensions and hundreds of businesses that will be affected.
A million and a half workers and retirees are at risk of
losing the security they earned at the bargaining table over a
lifetime of hard work. Small businesses are at risk of
collapsing if they end up on the hook for pension liability
they cannot afford to pay.
Groups as diverse as the Chamber of Commerce and labor
unions and the AARP are all pushing for a solution, because
they know what is at stake for them, their businesses, their
membership.
It is what we will explore here today: how we got here and
what is at stake as we work to solve this crisis for retirees,
for workers, for small businesses, for taxpayers.
These are workers and businesses who pretty much did
everything right. They joined with other businesses, companies
who thought that they were guaranteeing their workers a secure
retirement because experienced trustees were managing the
investment.
This year I talked with a small-business owner from
Mahoning Valley in Ohio, in the Youngstown area, whose business
participates in the Central States plan. He wrote me this
letter afterwards: ``I have owned my business for 18 years, and
the company has been in my family for over 60 years. It has
made contributions to this fund to ensure that the hard work
and dedication of our employees pay off in the form of a
pension.''
He then writes: ``Many employers that once contributed to
these plans have simply gone out of business, leaving the
remaining employers to support the remaining employees and
retirees of the companies that have closed.''
That is, in a nutshell, a pretty good explanation.
Then he says: ``Please, we are asking you to get together
with your colleagues, reach across the aisle.''
That is what we are doing; that is what this committee is
constructed to do. We need five votes minimum on each side.
And then he says: ``Find a solution that will help my
employees keep their jobs.''
These are the kind of business owners we are talking
about--honest men and women trying to do right by their
workers. We need to remember what workers gave up to earn these
pensions. Workers in these plans sat at negotiating tables.
They gave up pay and other benefits in the short term today,
money they could have used for their families, in order to
guarantee a pension 10, 20, 30, 35 years later when they
retired.
Too many people in Washington do not really understand what
happens during these negotiations. We have to be clear. These
workers earned these pensions, and they gave up pay to do it.
They paid into the system for years. Now these plans are about
to fail--again, through no fault of these businesses or these
workers.
Each plan is different. There are many factors that played
a role in getting them to this place. Many of these plans are
in the same industries that have been affected by decades of
bad trade deals, of outsourcing of jobs, of general shifts in
the American economy.
There is no question that the economic collapse of 2008
devastated these plans and the people and the businesses who
depend on them. Even the coal miners' pension--an industry that
has been badly hurt, as we know, over the past few decades--
even the coal miners' pension was nearly 90--nearly 90
percent--funded before the financial crisis.
If these plans fail, they take thousands of businesses and
jobs with them. And the Pension Benefit Guaranty Corporation is
supposed to step in. But the PBGC, as we know too well, is also
on the brink of failure--$67 billion in the red, $2 billion in
assets. If PBGC fails, it will be up to Congress to step in or
to allow the entire multiemployer pension system to fail.
Failure should not be an option in this committee or for
this Congress. Failure would wipe out the retirement of 10
million American workers and retirees and force American
businesses to file bankruptcy, lay off workers, and close their
doors.
The problem only gets more and more expensive to fix, and
the problem gets greater, the longer we wait. That is why
Chairman Hatch and I and this group of 14 others wanted to do
this committee, wanted to have an end date in December, wanted
it to be bipartisan, and wanted to fast-track this bill to the
floor if, when--I like to think when--we come to agreement.
That is why our work is so important. We must fix it now. I
am eager to hear from our witnesses today.
Thank you, Mr. Chairman.
Co-Chairman Hatch. Well, thank you.
[The prepared statement of Co-Chairman Brown appears in the
appendix.]
Co-Chairman Hatch. Well, we are prepared to move ahead.
Let us go to Mr. Barthold.
STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT
COMMITTEE ON TAXATION, WASHINGTON, DC
Mr. Barthold. Well, thank you, Mr. Chairman and members of
the committee. My name is Thomas Barthold. I am the Chief of
Staff of the Joint Committee on Taxation, and it is my pleasure
to present to the committee today an overview of the Internal
Revenue Code provisions governing multiemployer plans.
As Chairman Hatch has noted, my colleagues have provided a
detailed overview of present law related to multiemployer
plans. The testimony that I have submitted today is really in
outline form and works from general principles to specific
application of rules in the case of multiemployer plans. And to
make efficient use of your time, I will not go through every
page in the outline.
But just as basis, defined benefit plans--and that is what
we are really talking about when we look at multiemployer
plans--generally provide accrued benefits as an annuity
commencing at the normal retirement age of the individual.
The code and ERISA require that the benefits be funded
using a trust for the exclusive benefit of employees and
beneficiaries. And the Congress has created the Pension Benefit
Guaranty Corporation to help guarantee that such benefits are
available at retirement. An important aspect of these rules is
that cutbacks are prohibited. And if you are following in my
outline, I am on page 8.
Under the anti-cutback rules, plan amendments generally may
not reduce benefits already earned and vested--accrued benefits
as they are termed--or eliminate other forms of benefits linked
to an accrued benefit. Benefit reductions or eliminations must
be on a prospective accrual basis only.
Now, our topic today is multiemployer defined benefit
plans. They are a special type of plan--turning to page 10 if
you are trying to follow along with me. Multiemployer plans
provide benefits based on the service of all participating
employers and are common in industries where employees
regularly work for more than one employer over the course of
the year or over the course of their careers. But they also
cover employees who work for only one employer over their
entire career.
There are approximately 1,400 such plans now covering
approximately 10\1/2\ million participants. Many employers
participating are small employers and midsized to large
employers, but increasingly, the majority of plans have at
least one contributor providing more than 20 percent of their
annual contributions to the trust funding the benefits.
The Pension Benefit Guaranty Corporation has two different
programs, one for single-employer pension plans and a special
program that provides financial assistance in the form of loans
to insolvent multiemployer plans. This is in contrast to the
single-
employer program. When an underfunded single-employer plan is
terminated, the Pension Benefit Guaranty Corporation steps in
and takes over the plan and its assets and pays the benefits.
In addition to providing financial assistance to an
insolvent multiemployer plan, the PBGC has authority with
respect to mergers and asset transfers between multiemployer
plans and may partition existing multiemployer plans. The PBGC
provides a minimum guarantee level in the case of multiemployer
plans, which, as noted on page 12 of the outline, is the sum of
100 percent of the first $11 of vested monthly benefits plus 74
percent of the next $33 of monthly vested benefits multiplied
by the participant's number of years of service in the
industry.
To help finance these guaranteed amounts for multiemployer
plans, there is a per-participant flat-rate premium paid
annually, and for 2018 that premium amount is $28 per
participant.
Now, I mentioned the anti-cutback limitation as an
important part of the general principle of defined benefit
plans, because in multiemployer plans there are exceptions that
actually permit current benefits to be reduced. And this
depends upon a classification of the status of the plans.
Pages 13 through 16 in the outline define these
classifications. The first classification is a critical status
classification. To summarize, essentially, critical status is
when a plan is currently underfunded and it also appears that
the deficit is likely to increase. As noted on pages 14 and 15,
there are four specific criteria, but I think it is fair to
summarize those criteria in those terms.
The second status is insolvent status. Insolvency is when,
in the current year, the resources of the plan are insufficient
to pay plan benefits and the plan sponsor of a critical plan
determines that the plan's available resources are not
sufficient to pay benefits coming due in the next plan year. In
other words, in short, there is not enough money to meet
current need under the plan.
The final status is called critical and declining. This is
if a plan is first critical and also, based on actuarial
projections, it appears that in the current plan year or any of
the next 14 years that the plan is likely to become insolvent.
If a plan meets any of those statuses, then it is possible
for benefits to be reduced. So, for example, under critical
plan status, participants and beneficiaries who begin receiving
benefits after a notice has been given of the plan's critical
status have certain limitations on the benefits that they may
have expected to receive under the plan. For example, payments
in excess of a single-life annuity can be eliminated if a plan
is in critical plan status.
In the case of an insolvent plan--page 18 of the outline--
benefits must be reduced to a level that can be covered by the
plan's assets. The benefits may not be reduced below the level
guaranteed under the PBGC program, as I described a moment ago,
but there should be a suspension of benefit payments, and it
should be substantially uniform across all participants.
In the case of critical and declining status plans, the
plan sponsor may determine the amount of benefit suspensions.
Again, it cannot be reduced below, in this case, 110 percent of
the PBGC guarantee level. And there are special protections
based on the age of beneficiaries.
That describes special rules under multiemployer plans that
can affect benefits that are paid. There are also special
funding rules for multiemployer plans.
Basically, it is important to remember that funding is part
of a negotiated contract cycle. So in making projections about
necessary funding, it is part of the negotiation; often in a
union contract, it is a 3- or a 5-year cycle. This is in
contrast to single-employer plans, where you can always be
reviewing your status on an annual basis, and you are only
reviewing the status for one contributor to a plan with respect
to yourself, as opposed to having multiple contributors to the
plan. The basic funding is determined by calculating a funding
standard account, which is trying to make a projection of what
is coming in and what is going out of the plan over the life of
the contract.
Let me see. Let me skip ahead to page 22.
The annual minimum required contributions are the amount
that is needed to maintain a balance of the inflows and the
outflows. There is a deficiency if the accumulated charges
exceed the inflows. There is a credit balance if the opposite
occurs.
Additional funding may be required in the case of plans
that are deemed endangered or on critical status. And this
essentially sets in progress a procedure to review the funding
in the next cycle, where the employers and the employees in the
negotiation get together and try to improve the funding status
of the plan.
Key definitions here are, a plan's funding may be
considered in endangered status--looking at page 23 of the
outline--if the plan is not in critical status but the plan's
funded percentage is less than 80 percent, or the plan has an
accumulated funding deficiency for the plan year or is
projected to have an accumulated funding deficiency in any of
the next 6 plan years.
A plan would be deemed to be in seriously endangered status
if both one and two above--if you are less than 80 percent and
projected to have a funding deficiency in the current year or
any of the next 6 years--if both those factors are the case. A
plan that is already in critical status--remember, going back,
that was essentially where we are in decline in terms of what
is flowing in and flowing out of the fund. If plans are deemed
to be endangered, they have to adopt a funding improvement
plan. Critical plans have to adopt what is referred to as a
rehabilitation plan.
Generally speaking--and as outlined on page 24--a funding
improvement plan consists of actions that may include a range
of options to be proposed as part of the bargaining of the
parties, using reasonable actuarial assumptions to attain
certain benchmarks for improvement over the ensuing 10-year
period.
Likewise--as described on page 25--a rehabilitation plan,
again, is a series of actions, options, a series of options
proposed, again, to the bargaining parties, formulated on using
reasonable actuarial assumptions to enable the plan to cease to
be in critical status by the end of a 10-year period.
I know that is a lot of material in a short period of time.
It is probably best for me to turn the microphone over to my
colleague at the table. I would be happy to answer any
questions that the members might have when it gets to question
time. Thank you very much, Mr. Chairman.
Co-Chairman Hatch. Very nice; thank you.
[The prepared statement of Mr. Barthold appears in the
appendix.]
Co-Chairman Hatch. Our second witness is Mr. Ted Goldman, a
senior pension fellow from the American Academy of Actuaries.
Mr. Goldman, an actuary with 40 years of actuarial
retirement experience, has been the senior pension fellow at
the American Academy of Actuaries since January 2016. Prior to
that, Mr. Goldman was a retirement consultant with several
major benefit consulting firms.
In addition to being a member of the American Academy of
Actuaries, Mr. Goldman is also a fellow of the Society of
Actuaries, an enrolled actuary, and a fellow of the Conference
of Consulting Actuaries. He received an undergraduate degree in
mathematics from the University of Missouri Columbia.
I thank the witnesses for agreeing to join us today and
look forward to your testimony. And hopefully you can help us
to understand this better.
Go ahead, Mr. Goldman.
STATEMENT OF TED GOLDMAN, MAAA, FSA, EA, SENIOR PENSION FELLOW,
AMERICAN ACADEMY OF ACTUARIES, WASHINGTON, DC
Mr. Goldman. Thank you, Mr. Chairman.
And I apologize in advance if I repeat some of Tom's
testimony, but I think it is good to hear this more than once.
So here we go.
Distinguished Senators and House members, on behalf of the
Pension Practice Council of the American Academy of Actuaries,
I am Ted Goldman, senior pension fellow at the Academy. I
appreciate this opportunity to provide testimony to the Joint
Select Committee on Solvency of Multiemployer Pension Plans.
The Academy is a strictly nonpartisan professional
association representing U.S. actuaries before public
policymakers. The Academy's Pension Practice Council has
diligently been working over the past few years to analyze the
financial condition of troubled multiemployer plans.
In keeping with the purpose of today's hearing, I am here
to provide you with information regarding the history and
current status of U.S. multiemployer pension plans. Let me
begin with an overview. More than 10 million people participate
in about 1,400 multiemployer pensions plans. More than 1
million people are in approximately a hundred of these plans
that will be unable to pay benefits in full.
The Pension Benefit Guaranty Corporation, the government-
sponsored program designed to backstop troubled plans, is
likewise projected to be unable to pay all of the multiemployer
plan benefits that it guarantees. If the PBGC fails,
participants in these plans could see their benefits cut by 90
percent or more; in other words, retirees could get less than
10 percent of the benefits that they had expected. In addition
to impacting these million individuals, the reductions have
broader implications for our economy and our social safety net
programs.
Now let us talk about the basics. A multiemployer defined
benefit pension plan is a retirement plan sponsored by at least
two employers in the same industry or geographic region. These
plans are established by collective bargaining agreements and
managed by a board of trustees containing an equal number of
members appointed by both labor and the employers. Plans can be
local, regional, or national. These plans commonly cover
occupations such as construction workers, truckers, mine
workers, grocery clerks, and janitorial workers, among others.
Employers are required to fund the plans in accordance with the
negotiated contribution rates, subject to certain regulations.
The plans pay PBGC premiums for underlying financial support in
the event of a plan failure.
I now want to turn to a discussion of the rationale for
these plans. Multiemployer pension plans were created as a way
to deliver lifetime income retirement benefits to workers in
blue-collar industries. Employers tended to be small, and it
was common for workers to stay in an industry but work for many
employers over the course of their career. The multiemployer
approach captures economies of scale, offers benefit
portability, and pools risks--an intended win-win for the
employer and the employee.
Next, it is important to understand how we got here.
Negotiated plans appeared in the 1930s and 1940s in industries
such as the needle trades and coal mining. The Taft-Hartley Act
of 1947 created the concept of joint labor and management
trusteeship. Plans then grew in prominence during the 1950s and
1960s. Such plans covered about a million workers in 1950,
ultimately peaking at over 10 million workers in 1989. And the
system today still covers over 10 million participants.
In 1974, the Employee Retirement Income Security Act,
ERISA, brought a fundamental change to private-sector pension
plans. Among other provisions, ERISA protected benefits that
plan participants had already accrued, often referred to as the
anti-cutback rule. Employers contributing to multiemployer
plans became responsible not only for the negotiated
contributions, but also for any funding shortfalls that
developed in these plans. ERISA also established the PBGC.
During the late 1990s, very strong asset returns led many
plans to increase benefits in order to share the gains with
participants and to protect the tax deductibility of the
employer contributions. These years were followed by a period
of very poor asset returns that erased much of the investment
gains. While the investment gains proved to be temporary, the
increased benefit levels that plans adopted were protected by
the anti-cutback rules. This combination of temporary asset
gains and permanent benefit improvements is a contributing
factor to the challenges facing multiemployer plans today.
The Multiemployer Pension Plan Amendments Act of 1980 was
intended to prevent employers from exiting a financially
troubled multiemployer plan without paying a proportional share
of the unfunded liability. Under this law, withdrawals are
recognized as a potential problem that threatens the long-term
financial health of plans. As employers withdraw, the liability
for these employees, often termed ``orphan liabilities,'' will
become the ongoing responsibility of the employers remaining in
the plan. This is often referred to as ``the last man
standing'' problem and could result in significant financial
burdens for the remaining employers.
While this law took steps to address the problem of
employer exits, the new withdrawal liability rules were not
fail-safe. Bankruptcies, poor investment performance, and the
ability to collect the full amounts all resulted in additional
liabilities for the remaining employers in these plans.
The primary contributors to the current challenge relate to
investment performance, past benefit increases, the maturation
of plans, the decline of collectively bargained workforces in
some industries, and weaknesses in the withdrawal liability
requirements. Typically, a combination of these factors has
contributed to a projection that a plan will be unable to pay
benefits.
The Pension Protection Act of 2006, PPA, made certain
changes to multiemployer funding rules. The changes were
designed to give plan trustees more flexibility in dealing with
funding challenges and require plans to identify and address
problems early.
PPA classifies multiemployer plans into one of three
categories based on current and projected funding levels:
critical status, which is referred to as a ``red zone;''
endangered status, the ``yellow zone;'' and neither, which is
the ``green zone'' plans. Plans that are in critical or
endangered status are required to take corrective action. The
tools available under PPA were largely limited to increases in
employer contributions and reduction in benefits for non-
retired participants.
While these tools enabled many plans to recover from the
dramatic asset losses and economic contraction that immediately
followed the effective date of the law, they proved to be
insufficient for others. The severely distressed plans that
were unable to recover using the tools under PPA are often
characterized by high maturity levels. In other words, the
number of active participants in the plans is dwarfed by the
number of inactive and retired participants in those plans.
The Multiemployer Pension Reform Act of 2014, MPRA,
provided additional tools and strategies for these severely
distressed plans. MPRA added a fourth category of ``critical
and declining'' status to further differentiate those plans
projected to become insolvent within the next 20 years. Of
particular note, MPRA allows distressed-plan sponsors to
voluntarily reduce benefits that have already been earned.
While mandatory benefit reductions that occur when plans become
insolvent were part of the law prior to MPRA, the ability of
trustees to implement discretionary reductions in order to
prevent insolvency and preserve long-term benefit levels was a
significant departure from prior law.
The sponsor of a distressed plan that elects to suspend
benefits under MPRA must submit an application for review and
approval to the Department of the Treasury. Of the first 25
applications for benefit suspensions, however, only four have
been approved. While MPRA may remain a viable option for some
distressed plans, many others may be too far down the road
toward insolvency to take advantage of it.
Finally, I would like to wrap up with five important
observations. Number one, the status quo is not sustainable.
Taking no action will not keep things the same; it will result
in the loss of retirement income for many hardworking Americans
and the financial collapse of the PBGC multiemployer program.
These losses have the potential to impact the broader economy.
Second, many plans remain healthy, having withstood the
financial market collapse of 2008 and the Great Recession.
Plans and industries that are experiencing declines in their
collectively bargained membership, however, remain at risk.
Third, addressing employer withdrawal liability is
important. Withdrawal liability remains a barrier to attracting
new employers into the system, and it also contributes to the
``last man standing'' concerns of current participating
employers.
And fourth, there are several layers to the challenge: one,
delivering on PBGC guarantees; two, delivering on plan
commitments; and three, delivering on retirement security to
future workers, which is something important.
And finally, time is of the essence. The more time that
passes, the bigger this problem will become and the harder it
will be to restore multiemployer pension plans to stability and
sustainability.
Moving forward, possible actions can be grouped into one of
three categories: modify workers' benefits, increase funds
available to troubled plans, or shift risks from plans to third
parties. A combination of these actions would result in sharing
the burden.
Thank you for inviting me to testify before this
distinguished panel today. The Pension Practice Council of the
American Academy of Actuaries stands ready to help you by
providing our objective and nonpartisan input as you work to
fulfill your charge to address these challenging issues.
I thank you for this opportunity to appear before you
today, and I look forward to addressing your questions.
Co-Chairman Hatch. Well, thank you for your wise counsel.
[The prepared statement of Mr. Goldman appears in the
appendix.]
Co-Chairman Hatch. And we appreciate all of you there at
the table. Let me just ask a question of Mr. Barthold.
Funding rules for multiemployer plans, I am concerned
about. Under funding rules for multiemployer plans, actuarial
assumptions used by a plan must be, quote, ``reasonable,''
unquote. In addition, the funding rules do not specify the
interest rate or mortality tables that must be used.
Mr. Barthold, I would like you to answer two brief
questions about funding rules, which I will run through, after
which you may respond. First, do the same or similar funding
rules that apply to multiemployer plans also apply to single-
employer plans?
Mr. Barthold. No, sir. The single plans--there are specific
segment rates that are specified in terms of calculating
liabilities. Those are some of the changes that were enacted in
the Pension Protection Act in 2006.
Co-Chairman Hatch. Okay.
Mr. Barthold. So there are somewhat different rules.
Co-Chairman Hatch. Okay. Secondly, if the rules are not the
same across plan types, and you say they are not, then why are
funding rules for multiemployer plans different?
Mr. Barthold. Mr. Chairman, I could only speculate, as that
was a decision in terms of the rules that the Congress enacted
for different plans. One factor that I mentioned and that Mr.
Goldman mentioned is that multiemployer plans are collectively
bargained plans involving multiple parties. And so that might
be the basis for which you would enact different rules to apply
in a collectively bargained environment with multiple
employers.
Co-Chairman Hatch. Mr. Goldman, let me ask you this
question. One of the primary concerns of many on this committee
is the funding standards for multiemployer pension plans. The
issue is whether the funding standards are adequate and whether
they provide a reasonable, prudent, and actuarially sound level
of assets to cover future liabilities of the plans.
Let me briefly run through two related questions, after
which I would like you to respond. First, could you describe
the funding methods for the multiemployer plans prior to the
enactment of the Employee Retirement Income Security Act? And
second, could you discuss what new funding standards were
established by ERISA along with the impact those standards have
had on the funding of the plans themselves?
Mr. Goldman. Yes. Let me start at basics. The goal of
pension funding is to, as people earn benefits, make enough
contributions and invest those assets so that, by the time they
get to retirement, those assets are there to pay them. And then
how you determine that is the actuarial funding method, and to
do that requires a lot of assumptions.
If you think about it, we look at an entire population and
say, you know, what is the probability somebody is going to
make it to retirement? When are they going to leave? What is
the benefit going to be at retirement? How long are they going
to live? So the valuation is an estimate. And there are,
arguably, as many ways to make an estimate as there are
actuaries out there.
But having said that, before ERISA--to answer your
question--plans basically negotiated the contribution level in
multiemployer plans. And that contribution level then--from
there, the actuaries would work with the plan trustees to
determine the level of benefit that could be paid from that. So
there were not a lot of rules around that. And the plans
remained healthy for a long, long time without a lot of
requirements.
And then when ERISA came in, ERISA did several things. It
added the minimum funding requirements, which had a structural
way of saying, we want to make sure that that money is there in
time for people to retire. And later, MPRA introduced the
withdrawal liability piece. So the withdrawal liability is a
major differentiator from the multiemployer plans.
And another thing under ERISA--actuaries, as you said, make
their best estimate and determine the contribution based on the
expected return on the assets, which is the same as the
discount rate, and other assumptions under the plan.
Co-Chairman Hatch. Well, thank you.
Senator Brown?
Co-Chairman Brown. Mr. Chairman, thank you.
I know that a number of my colleagues on both sides of the
aisle in both houses want to talk about the impact of this
issue on working families and small businesses. To be sure,
that should always be the focus of our discussions.
It is pretty clear--I mean, you are laying out the history,
Mr. Goldman, Mr. Barthold, the reasons workers and employees
agreed to enter into these agreements. Employers wanted them
for the well-being of their workers, to attract good workers.
Employees wanted them to be there for retirement security.
So if the two of you would, lay out sort of general
purposes and just describe the basic structure of a
multiemployer plan. How are they governed? How are trustees
selected? Are they equally, jointly managed by labor and
industry? Just each of you, if you would, either of you, walk
through sort of the governing structure of these from the
moment they are set up to how they run year by year.
Mr. Barthold. A multiemployer plan is governed by a joint
labor and management board, Senator Brown. There is equal
representation of employees and employers. But as a qualified
plan, as is sort of the general rule, the assets have to be
administered for the exclusive benefit of the employees and
their beneficiaries.
And then as I noted, in terms of governing and planning,
the planning is done over the collective bargaining cycle.
Co-Chairman Brown. Okay. Go ahead, Mr. Goldman.
Mr. Goldman. Yes; I do not have a lot to add there.
Co-Chairman Brown. Okay. And trustees are selected--there
will be trustees both for the employer and the employee, I
assume. And how are they selected?
Mr. Barthold. That would be part of the bargaining.
Co-Chairman Brown. The collective bargaining agreement.
Mr. Barthold. The agreement.
Co-Chairman Brown. Okay.
Mr. Goldman, you talked about the flexibility provided in
the 2006 PPA Act. And shortly after that, the economy went into
recession. The new rules began to be eased, I guess were able
to, under the flexibility that was provided. How has the easing
of the rules contributed to the current financial condition of
the plans?
Mr. Goldman. The easing of the rules was an attempt to help
employers fund the plans. Keep in mind, the plans that have
experienced the biggest shocks, in terms of this maturity that
I talked about and having a smaller active participant base
supporting a higher retirement base, are the ones that are in
trouble.
And PPA gave them more tools. Look, think of it as giving
you more tools. Flexibility equals more ways to figure out how
to fund the plans and get them strong again.
Co-Chairman Brown. And the most serious shortfall, I
assume, came through these years post-2006, after the 2006 act
was signed by President Bush. The faltering of the plans was
mostly, I assume, because of the number of employers that went
out of business and quit paying into the plans?
Mr. Goldman. That was a component of it. Like I said, it is
the decline of industries, and also the decline in membership
in the collective bargaining too. We are finding a lot more of
the younger people are not joining the collective bargaining
agreement side, so you have a smaller and smaller base of
people. I would say, if I had to point to one issue, it is the
smaller base supporting the larger liability.
And a lot of it, you know, is these plans have been around
for a while. So if you think about it, to fund a plan, you have
to have enough money to pay all the benefits and the expenses
of the plan. And the only two sources of income are the
contributions from the employers and the investment earnings.
So when a plan is young, the contributions cover most of the
needs. But as a plan ages and the assets accumulate, more and
more of that income comes from the assets. So when there is a
shock to the system and those assets do not perform, you have a
shortfall that now has to be spread amongst the remaining
employers.
Co-Chairman Brown. So the smaller base is both employers
and employees paying in.
Mr. Goldman. That is right. Well, only employers pay in. It
is collectively bargained, so it comes out of the wage.
Co-Chairman Brown. I mean, excuse me, the smaller base is
the employers paying in and the employees who choose to be in.
Correct?
Mr. Goldman. That is right.
Co-Chairman Brown. And so were you seeing, as in cases
where employers were paying in, even in those companies that
did not go out of business, were you seeing employees withdraw
during that period? I think people withdraw more out of the
necessity. There are some withdrawals of healthy plans, so you
have two kinds.
That is just the last part of my question. So employers go
out of business, that is clear. Those employers that were in
business, their employees, in some cases, were withdrawing from
the plans because they wanted the income, they wanted the money
now? I mean, they did not want to pay any employee share at
that point, they just did not trust the health of the plan?
What was it mostly?
Mr. Goldman. Well, for employees who withdraw, there is the
withdrawal liability. And the withdrawal liability, in theory,
is the employer has to pay their fair share of the remaining
liability for the people who remain in the plan.
So if an employee withdraws, the employees who had benefits
in those plans stay in the plan. You do not pull out the
employees. And the reasons are probably all over the map in
terms of why. Some of it is, we want to get out now because we
do not like where this is going. Some get out for other
business purposes--a wide range of reasons.
Co-Chairman Hatch. Representative Foxx?
Representative Foxx. Thank you, Mr. Chairman.
I want to thank both of our witnesses here today.
Mr. Barthold, we know that employer contributions and
promised benefits for multiemployer plans, as you all have
described, are determined pursuant to collective bargaining
agreements.
In the context of multiemployer pension benefits, can you
discuss which parties are involved in the collective bargaining
process? Who determines the employer contribution and
participant benefit amounts?
Mr. Barthold. Well, in any collective bargaining situation,
employers and employee representatives, union representatives,
negotiate how much compensation will be in the form of current
cash wages, how much might be in terms of other benefits, such
as health benefits and retirement benefits. And so it is that
negotiation that then determines amounts of necessary
contributions to these plans, because if we are promising
certain pension benefits, the parties work with actuaries, such
as Mr. Goldman, to determine, well, what does that mean future
liabilities will be; what sort of funding is necessary?
And then in the current situation, as was noted, an
important part of the overall liabilities of these plans is
based on people who had previously worked in the industry,
covered by the plans and currently retired. So the current
retiree liabilities, that would also be a factor in the
negotiations that the parties have to consider, because they
are funding not just current employees, but also the legacy
employees.
Representative Foxx. When a multiemployer plan fails, what
liability attaches to unions, which are one half of this
bargaining operation, and what liability attaches to employers?
Mr. Barthold. In a bankruptcy? These are----
Representative Foxx. No, when a multiemployer plan fails.
Mr. Barthold. Oh, when a plan fails. If a plan goes
insolvent--as I noted and we have provided some detail on--the
Pension Benefit Guaranty Corporation provides loans,
guaranteeing certain minimum payments. It is not divided
between employers and employees. What has failed is the trust
that governs the pension benefits, and so this is a transaction
between, in this case, the Pension Benefit Guaranty Corporation
and the trust.
Representative Foxx. And the trust. Thank you.
Another question, Mr. Barthold. Changes made by the
Multiemployer Pension Reform Act of 2014 allowed plans in
critical and declining status to apply to the Department of
Treasury for suspended benefits in order to prevent plan
insolvency. How many plans have successfully applied for
suspension of benefits under this law and remain solvent to
continue providing the pension benefits that employers have
promised their employees?
Mr. Barthold. I do not have those numbers at my fingertips,
but I believe Mr. Goldman cited at least half of the answer to
your question in his testimony. So if I could defer.
Representative Foxx. Please feel free, Mr. Goldman.
Mr. Goldman. Yes. There have been four approvals to date
under the MPRA applications. And it is too soon to tell whether
the cutbacks are going to be effective long-term. The way MPRA
works is, the proposed cutbacks they present need to be
equitable and need to have at least a 50-percent chance of
being successful. So we are projecting things way into the
future, and there is a lot of scrutiny put over each and every
assumption that is used in those calculations. And time will
tell us what happens.
Representative Foxx. Thank you, Mr. Chairman. I will
continue to try to be a good role model and yield back the
balance of my time.
Co-Chairman Hatch. Great. Representative Neal?
Representative Neal. Thank you, Mr. Chairman.
In 2016, Central States applied to the Treasury Department
to cut retiree benefits, which gave us a glimpse of what
insolvency for a large national pension plan would look like.
A retiree from my home State of Massachusetts barely
escaped those benefit cuts. He worked as a car hauler for
almost 30 years. Then, years into his retirement, he received a
notice from his plan telling him that his benefit could be cut
by more than 50 percent. Fortunately, the pension plan's
benefit cuts application was denied, but the plan is still
troubled. And this retired Massachusetts couple's financial
security remains very much at risk.
I introduced legislation to address the multiemployer
crisis for retirees and workers just like Norman Proulx. And
while we are focused today more on understanding the
multiemployer funding problem than on solutions, I think
talking about solutions might help us to better understand the
issue.
In fact, the legislation that I introduced is bipartisan
and I believe has about 10 Republicans who are on the bill.
Mr. Goldman, last year, you and other members of the
American Academy of Actuaries provided a bipartisan briefing
entitled ``Multiemployer Pension Plans: Potential Paths
Forward.'' In your materials, you mentioned that a loan program
could help solve the multiemployer funding crisis by allowing
plans to borrow money at low interest rates and invest the
proceeds in the plan, which would, in your words, quote,
``provide a longer time frame for employers to pay the costs
and to provide leverage on plan investment returns relative to
the borrowing rate.''
As you know, Senator Brown and I also introduced additional
legislation which, if enacted, would create this loan program.
Mr. Goldman, it has been a year since you previously spoke
about loan programs. How has the landscape for multiemployer
plans changed during that time frame?
Mr. Goldman. Well, the looming multiemployer insolvency
crisis grows with each passing year. What my final comment on
the urgency of time was, you know, the car is going toward the
side, and it is getting closer and closer.
Most multiemployer pension plans had favorable returns in
2016 and 2017 in particular, but those gains have not
significantly changed the projected dates of insolvency for
those plans.
The healthier plans with more assets, that was a bigger
deal. But you have to keep in mind, the level of assets
relative to the liability in these plans is low. So a good
return for a year or two is not going to materially change the
outlook.
Representative Neal. Yes.
Mr. Goldman, I have proposed a solution, as I noted a few
minutes ago, that would work in terms of the recognition that
you have offered in terms of testimony, if we act now. In your
expert opinion, what will be the economic impact to retirees
and at large if we do not act in the near future?
Mr. Goldman. Well, we have said several times today there
are over a hundred plans that are in critical and declining
status and have projected insolvency within the next 20 years.
These plans facing insolvency cover a million participants and
beneficiaries and they pay over $7 billion in benefits each
year.
If these plans become insolvent, it will go to the PBGC.
They will be unable to uphold its guarantees, meaning that
these benefits for these participants will be reduced to near
zero.
There is another topic that is probably worth mentioning
called a ``contagion effect.'' And what the dynamics here are,
in some of the troubled multiemployer plans--there are perhaps
hundreds of employers in those plans. These employers also may
be in multiple other plans that are healthy.
So if the plan that they are in has a financial challenge
that they have to step up for and puts pressure on them, it
could actually start to impact the healthy plans as well and
then expand to bring down, to collapse, the whole system. So
that is another potential risk that is out there.
Representative Neal. Thank you, Mr. Chairman. I will yield
back my time.
Co-Chairman Hatch. Okay.
Congressman Roe, I believe, is next.
Representative Roe. Thank you, Mr. Chairman.
And I first of all thank both of you for being here. And I
think we pretty well understand.
Mr. Goldman, I want to just read from the last paragraph of
your testimony that you have given. It says, from a conceptual
standpoint, the options are straightforward. One of three
actions must be taken. Either benefits are to be reduced--this
is the current course if there is no intervention--or
contributions to the plan have to be increased, or as a third
option, more risk would be taken by plans to achieve
prospective investment gains.
So it is just an arithmetic problem. You have more going
out than coming in. And that is basically what it is, am I
correct?
Mr. Goldman. Right. It simplifies down to those three
choices. It is simple from that point. Anything beyond that is
not simple.
Representative Roe. Now, the solutions are not simple.
Mr. Goldman. Right.
Representative Roe. And I understand that.
Just a couple of quick questions, and this is maybe out of
your purview, but why are the PBGC premiums different for a
single-employer plan than a multiemployer plan? Why is there a
huge discrepancy?
Mr. Goldman. Yes, there is a huge discrepancy between the
two programs. I actually did some research on the background of
that. And part of the challenge, as PBGC looked at this back in
the late 1970s, was that if they made premiums too high, it
would chase employers out of the plan. So everything is about a
balance, right? We have to find the right balance of enough to
keep employers in the plan, but not topple things down.
And so they actually delayed the implementation of the
multiemployer program to get a couple of experiences. And in
the early days, they had, I think, the milk industry, the
people who used to deliver milk to your door--the industry
declined--and millenaries. So they had some data.
And people thought too, because of the joint trusteeship,
that there was a lot less risk. And the way these multiemployer
plans are set up with a lot of small employers, if an employer
goes out of business, that is fine. It is just when a whole
industry is impacted that it is a problem. So it was deemed as
a small risk.
Representative Roe. And it did not work.
Mr. Goldman. Right.
Representative Roe. If they had had those premium
increases, the PBGC might be able to cover these benefits at
the level of the single employer, which is a much higher level.
Mr. Goldman. Right.
Representative Roe. What assumptions are made when these
benefits are looked at? Actuarially, when you look at it, what
return? In other words, I can pencil in a 6-percent return, a
5-percent return, an 8-percent return, to get the number I
want. What are they using actuarially to calculate these
returns?
Mr. Goldman. Well, that is a great question. And the answer
is, there is no one right number. So there are a couple of
approaches.
One is to use a discount rate that is equal to the expected
return on the assets of the plan. And that has some risk
attached to it. It is all about risk/return tradeoff.
Others would argue that we should be valuing these
liabilities on a risk-free rate and that is a better measure of
the true obligation.
So there is not one number that is more right than the
other number, they just provide different types of information.
And the more information that is available, the better you can
understand the problem.
Representative Roe. You described in the 1990s, during the
dot-com boom, plans that were, quote, ``overfunded.'' I have
never seen a pension plan that had too much money. I have not
had anybody come to me yet and complain about that.
But the rules and the laws at that time prevented an
employer from funding it more. So we as employers will always
take a chance this year, because the gains have been so much
that you do not need to put anything in this year. That is a
temptation that is out there. That was a mistake also.
And that is one that Mr. Norcross and I, in a bill that we
have together, a hybrid plan going forward--but that is going
forward; that is not solving the problem with these plans right
here.
Is anyone from the government, since we are now being
looked to, as Mr. Neal says, for loan guarantees or whatever--I
think the PBGC has only had one loan paid back, so that is a
pretty stark reality. But is anybody from the government there
at this or is it just employers and the union representatives,
because we are now involved.
Mr. Goldman. Anybody where?
Representative Roe. From the Federal Government when these
benefits are determined, what they are going to be.
Mr. Goldman. No, the collective bargaining process
determines the level of benefit.
Representative Roe. Bargaining determines the level. And
the last question I have very quickly is, when I put money in--
I can certainly see the argument. I put this money in, I should
be getting it out. Why is that not true? In other words, I put
money in, I should have covered myself, just like a defined
contribution plan does. I have what I have. Why does it not do
that?
Mr. Goldman. And that is a fundamental difference between a
defined benefit and a defined contribution plan. Defined
contributions go into an individual's account that earns
however they choose to invest it, and then that is the money
they have at the end of retirement. In the defined benefit, it
is a pooled approach. So everybody in the plan contributes, and
those contributions are for everybody.
And then we project out who is going to get it and when
they are going to need it, and that drives the funding of that
plan.
Representative Roe. Yes. I yield back, Mr. Chairman.
Co-Chairman Hatch. Representative Scott?
Representative Scott. Thank you, Mr. Chairman.
Mr. Chairman, I would like to get some information on what
kind of problem we are in to kind of quantify the problem we
have. I mean, there is the old adage: if you do not change
directions, you are going to end up where you are headed. If we
do not do anything, where are we headed?
Mr. Goldman, if one of the plans becomes insolvent, does
the ``last man standing'' rule require all of the remaining
participating corporations to pay the benefits?
Mr. Goldman. It is complicated. In concept, I think that is
true: the fewer employers in the plan take on more, but there
are some complex rules that might limit how much people pay on
the way out. And there are payments over time.
Representative Scott. Well, if you are participating in a
plan and you owe some money, are all of the corporate assets
exposed to pay these benefits?
Mr. Goldman. I am not sure on that. I do not know. I will
defer to Tom on that. I know there used to be a 30-percent
limit; I am not sure what it is.
Mr. Barthold. Generally not, sir.
Representative Scott. They are not obligated to pay the
benefits if they are----
Mr. Barthold. Not with all the assets of the corporation.
Representative Scott. Okay. If the plan becomes insolvent,
are the Pension Benefit Guaranty Corporation's assets
sufficient to pay the hundred plans that you expect to become
insolvent? Does the PBGC have enough assets to pay those
benefits?
Mr. Goldman. No, they do not. And as we mentioned before,
the guarantee levels of the PBGC are already fairly low. The
maximum a 30-year employee could get is just under $13,000. And
if these plans all go as expected, the PBGC may pay less, 5 or
10 cents on the dollar from that smaller amount.
Representative Scott. Okay. So if that happens, the
retirees in the plans that become insolvent and the tens of
thousands who are already receiving PBGC assistance would see
catastrophic reductions in their income?
Mr. Goldman. You are saying the existing people?
Representative Scott. Well, the existing people and the
retirees who are in insolvent plans who are not going to get
anything, they will be getting less money than promised. And I
guess they will be paying less Federal, State, and local tax,
is that right?
Mr. Goldman. Yes.
Representative Scott. Do you know how much less they are
going to be paying?
Mr. Goldman. No; I have not done that analysis.
Representative Scott. Are they more likely to become
reliant on the social safety net programs like food stamps,
Medicaid, job training programs? Do you have an idea of how
much we are on the hook for?
Mr. Goldman. I do not, but I think that is an important
part to measure as you all move forward.
Representative Scott. Is it possible to get that number,
particularly with a contagion effect where one company is
jeopardized because of one plan and cannot contribute to the
next plan?
Mr. Goldman. There have been at least two places that have
tried to measure that, but I am not familiar with the analysis.
So it is possible to do an analysis, but you are going to have
to make a lot of assumptions.
Representative Scott. Are there other foreseeable costs to
the Federal Government if we do not do anything?
Mr. Goldman. I think you touched on the major ones.
Representative Scott. Just from an actuarial point of view,
I think following up on Dr. Roe's question, if these plans are
solvent, they should not have to rely on ongoing contributions
to pay out the benefits, is that not right?
Mr. Goldman. Well, ongoing contributions from the
collective bargaining?
Representative Scott. Yes. Like, you have workers today
paying into the plan.
Mr. Goldman. So solvent means that, assuming the
contributions continue to come in, that they will be able to
pay in the future.
Representative Scott. Well, no, no, no. If it is solvent,
they should be able to pay the benefits, even if people stop
paying.
Mr. Goldman. No, that is not necessarily true. Solvency
means that the plan is not expected to run short and will be
able to make good on its future obligations.
Representative Scott. So the plan assets, then--are you not
into a Ponzi scheme if you are relying on ongoing revenues?
Mr. Goldman. No, because what happens is, you only have to
pay benefits that accrue, that are earned.
Representative Scott. Right. And so if you stop, if
everybody stops paying in, you ought to have enough assets to
pay what you have promised.
Mr. Goldman. That is the ``last man standing'' problem,
yes.
Representative Scott. No, that is not the ``last man
standing'' problem. You ought to have enough assets to pay what
you have promised.
Mr. Goldman. And that is the maturity issue of a bigger
retiree base. And you know, the funding rules would take care
of that as long as there are not extreme events that take
place.
Co-Chairman Hatch. Okay.
Senator Heitkamp?
Senator Heitkamp. Thank you, Mr. Chairman.
Important and complicated information, and I think that is
one of the great problems that we have. This is a complex issue
with no simple solutions. This is a problem that has festered
for a long time without appropriate and proper attention.
And here we are, having people's retirement threatened,
having the economy, in many ways, threatened. I do not think we
can overstate that. I think these are incredibly challenging
times. And we are looking for creative solutions. We are
looking for ways that everybody can win and ways that we can
send a message to people who would save that their retirement
is going to be secure, that they will have something for all
the sacrifice that they make by doing the right thing in
America, and that is saving for their retirement.
And so I just have a couple of questions that I think,
hopefully--I had another committee hearing--have not been
overly discussed here, which involve timing.
When you look at the problem that we have, and let us look
forward--for either of the gentlemen who are testifying--what
is our window for a solution? What is our time envelope for a
solution to this problem? How much worse can it get if we wait
beyond the year that this committee has to try to resolve this
problem?
And we will start with you, Mr. Goldman.
Mr. Goldman. Timing is of the utmost importance. And the
longer you wait, the more that you think of it as plans going
off the side of the cliff. The closer you get to that side, the
less choices you have of slamming on the brakes or making a
turn. So the longer you wait--some of these plans are on the
precipice right now, others are farther up the hill, so one
issue is, the longer you wait, the more plans will go bad.
Senator Heitkamp. Yes. If I can just, I mean, going with
your analogy, how close to the cliff are we right now?
Mr. Goldman. Well, the PBGC's projection was 2025 before
they will run short of funds.
Senator Heitkamp. Do you agree with that?
Mr. Goldman. Yes.
Senator Heitkamp. Okay. So that would be a catastrophic
cliff event, 2025.
Mr. Goldman. It would give you some marker.
Senator Heitkamp. And so some of the options that we may
have had 5 years ago, 10 years ago, are no longer available to
us, is that correct?
Mr. Goldman. Right, or at least some of the plans will not
be able to be helped by those solutions.
Senator Heitkamp. Well, Mr. Barthold, do you disagree with
any of that?
Mr. Barthold. Senator, my colleagues and I have not
undertaken an independent analysis of the PBGC, so I really
should not comment.
Senator Heitkamp. Have not taken----
Mr. Barthold. We have not undertaken an independent
analysis of the PBGC.
Senator Heitkamp. Economic analysis.
Mr. Barthold. Correct.
Senator Heitkamp. Okay. When you look at additional tools
and you look at some of the plans--have either one of you had
an opportunity to look at some of the plans, even the 2014
plan, and analyze those? Obviously, the 2014 plan did not
result in approval of the Central States recommendation. But
have you had a chance to look at various methods and plans that
have been considered and evaluated? And do you have a
preference for any of those?
Mr. Goldman?
Mr. Goldman. And can you clarify that?
Senator Heitkamp. Have you looked at the Butch Lewis bill
that was introduced last year?
Mr. Goldman. Yes. I am going to keep my comments on kind of
what led up to it at this point, if that is okay.
Senator Heitkamp. Okay, that is fine.
Mr. Barthold?
Mr. Barthold. Senator, the Joint Committee staff does not
make policy recommendations to the Congress. We work with the
members on their policy recommendations.
Senator Heitkamp. But you do evaluate proposals. I am not
asking for a recommendation. I am asking because we need to
have a range of tools in our toolbox. Let us put it this way.
Are there tools that have been considered by the Joint
Committee that we should be considering right now?
Mr. Barthold. Well, things that lead to underfunding are,
what are the level of benefits that are promised and what are
the funding requirements? What are investment returns? What
risks are we willing to accept, both in terms of investment
plan and risks that might be borne by the residual guarantor of
the Pension Benefit Guaranty Corporation--and additional
funding from the outside were we just to supplement the assets
of the PBGC, for example? So those are all possible policy
tools that members may want to consider.
Senator Heitkamp. Yes, I think--if can just comment
quickly--I think when we look at this, I think one of the
questions is, this is not something that can happen independent
of intervention from the Congress, and I think that seems clear
in all the evaluation. And so I thank you for your answers.
Co-Chairman Hatch. Senator Portman?
Senator Portman. Thank you, Mr. Chairman.
And thank you both for your in-depth analysis today. The
information that you are able to provide us is critical to
figuring this thing out. And it is complicated, and there are
different rules for multiemployers, as we have talked about
today.
I think there is a consensus around the table, I hope, that
the status quo is not acceptable. And that was your first
summary comment, Mr. Goldman.
I think also, there is a deep interest in figuring out what
we can do going forward to not just provide some solvency for
Central States' plan and a PBGC that otherwise could go
insolvent as soon as 2025, but also to put rules in place going
forward that avoid some of the problems that have occurred, and
one is withdrawal liability. And you talked about that a little
bit, Mr. Goldman. I think it was your third point. You said the
status quo is not acceptable, though many plans remain healthy.
And you talked about withdrawal liability. And your point was
that it keeps employers from being able to effectively help
solve the problem, right?
Mr. Goldman. Yes.
Senator Portman. The key question I think we need to spend
a lot of time on is figuring out the extent to which this
insolvency is going to drive more employers into bankruptcy and
create more issues. And one of the issues that concerns me is
that, for the roughly 200 employers in Ohio in Central States,
they would be reducing contributions to other multiemployer
plans too, right, creating a contagion effect, as you all call
it.
Mr. Goldman. It could happen.
Senator Portman. Which threatens to compound the entire
multiemployer system. And there are many ways this could happen
under current law, as is evident from reading your report: the
withdrawal liability issue and the possibility of a mass
withdrawal once Central States becomes insolvent.
On page 46 of the Joint Committee report that we got, you
noted, Mr. Barthold, that the amount of an employer's
withdrawal liability is in theory determined by the plan
sponsor and generally based on the employer's portion of the
plan's unfunded vested benefits. However, it is my
understanding that the amount of withdrawal liability that
employers actually pay is calculated based on their previous
contributions to the plan and is payable with interest in
annual installments and that those can last up to a maximum of
20 years. It can also be paid in a lump sum based on the net-
present value of that 20 years or it can be a negotiated
solution between the plan sponsor and the employer for a
different amount.
Can either of you comment on how often employers pay the
full withdrawal liability, pay it off within the 20-year period
versus having some of the withdrawal liability forgiven at year
20? Do you know the answer to that?
Mr. Barthold. Senator Portman, I do not know the answer.
Mr. Goldman. I think it is not uncommon for employers to
not pay that full liability. There is a mechanism that has a
20-year payment cap, and after you have paid those 20 years,
you are done. It does not necessarily always align with the
total amount that you should have paid, so that is another kind
of leakage from the process. And sometimes there is a
negotiation up-front and a lump-sum settlement that is often
well below the total value of that withdrawal liability, mostly
dependent on the ability of the withdrawing employer to be able
to pay. So it is better to get something than nothing.
Senator Portman. Yes. So it is not uncommon, you are
saying, at year 20 to have the withdrawal liability forgiven,
and in fact it is leakage; the money never comes back in.
How would the employer withdrawal burden change in the
event of a mass withdrawal once a plan becomes insolvent?
Either one of you.
Mr. Goldman. In the mass withdrawal, then, let us see, I am
blanking out on how that works. Let me see.
I will have to get back to you on that one.
Mr. Barthold. Yes, I think when there is a mass withdrawal,
there is no 20-year cap on the payment.
Mr. Goldman. Right. That is right. There is no 20-year cap.
Mr. Barthold. That is the answer.
Mr. Goldman. And everybody has to pay up at that point.
Senator Portman. Yes, which is very hard to imagine, right?
Mr. Goldman. Right.
Senator Portman. So, I mean, look, we have lots of issues
here, but one is, you know, what is the current law with regard
to withdrawal liability doing to make these plans even riskier
and to take away some of the possibility of us solving this
problem?
Another question that I am not going to have time to ask
but I would like to get an answer for in writing if I could, is
on the rate of return. You know, what do we assume the rate of
return is? Which is really the discount rate. And I think in
multiemployer plans, it is about 7 to 8 percent. And how often
has that been true?
In other words, is part of our problem here just that we
have estimated that there be a much higher return on investment
than there actually has been?
Mr. Goldman. Yes. And by the way, on the cap, you are
right: the cap goes away and the payment is in perpetuity, in
theory.
Senator Portman. Yes.
Mr. Goldman. On the interest rate, one thing to keep in
mind is, this is very long-term; pension plans have a long
timeline, a long investment horizon. So you are funding for
people when they join the plan in their 20s and projecting out
when they are actually going to get their last payment at
death.
So the long-term rate reflects long-term expectations and
also reflects the investment mix of a plan. So it is unique to
a plan, and each plan has to go through a process of assuring
that the rate that they select is defensible and appropriate.
Co-Chairman Hatch. Representative Norcross?
Senator Portman. If you could give me some comments in
writing on how many times the 7 or 8 percent has been achieved,
that would be great. Thanks.
Thanks, Mr. Chairman.
Co-Chairman Hatch. Representative Norcross--is he here?
Representative Norcross. Thank you, Mr. Chairman and
others, for coming here today.
The history and structure of multiemployer plans in 15
minutes--it is almost an impossible task, yet we are asking to
understand not only the history, the structure, but the
problems. And so I want to move forward rather quickly.
The difference in this and other plans is you have a joint
board that is appointed by either the companies or their
employees. And the one thing that struck me--and something that
we know--is the funds that are accumulated in that joint plan
are for the exclusive use of the employees--the exclusive use--
which means it is the pensioners' money. Any use other than
that we see as a problem.
But let us go back a little bit further and start talking
about the very function of--how is it determined what the
pension numbers are going to be for an individual? Is it done
on a yearly basis? Every 10 years? How are those assumptions
made from day one for a pensioner?
Mr. Goldman?
Mr. Goldman. So you have, let us say, 1,000 people in your
pension plan, right?
Representative Norcross. Right.
Mr. Goldman. So the way the model works is, we actually
take each of those people--we know how old they are, if it is a
pay-
related thing--and you make assumptions probably of turnover,
of early retirement, and so forth. So all those assumptions go
into determining----
Representative Norcross. That is the human side.
Mr. Goldman. And there is value for each person, but it
rolls up to the present value of the liability for the whole
plan.
Representative Norcross. But the point is, who makes the
determination, okay, you are going to get one credit year, two
credit years? Who actually makes the determination? They do it
on a yearly basis as trustees, do they not?
Mr. Goldman. Yes, an annual valuation.
Representative Norcross. So on a yearly basis, they are
going to understand, taking all those factors in, and they are
going to throw a dart and hit a point.
Mr. Goldman. And the beauty of it is that you do not have
to be right, because every year you are redoing it and we have
what we call our experience gains and losses. So we thought
this was going to happen, instead that happened, and we are
able to quantify that.
Representative Norcross. Exactly the point. So you should
make those adjustments year by year.
Mr. Goldman. Yes.
Representative Norcross. So if you make a rosy assumption,
you end up paying for it later on if you do not make those
assumptions.
Mr. Goldman. That is correct.
Representative Norcross. Which takes me into the question
about bankruptcy which, to a large degree, is the ``last man
standing''--Chapter 7, Chapter 11. When an employer goes
bankrupt, Chapter 7, and has no appreciable assets to
distribute, what happens to its unfunded liability?
Mr. Goldman. It stays in the plan, and the remaining
employers----
Representative Norcross. It gets distributed to those
healthy employers that are left.
Mr. Goldman. Distributed to the healthy employers, correct.
Representative Norcross. Okay. If he wants to reorganize,
where in the bankruptcy position does the employer's obligation
to that plan lie?
Mr. Goldman. I am not sure of the answer to that; I will
have to get back to you.
Representative Norcross. Low--because that is part of the
problem. They end up reorganizing, shedding this massive
liability, and coming back healthy, which is part of the
problem.
So when a plan goes insolvent and there is a difference
between when we think about the end of the line, insolvent
versus terminating of the plan, if you terminate it, everyone
left there has to pay for that obligation. Correct?
Mr. Goldman. Correct.
Representative Norcross. If it goes insolvent, what happens
to the employers that are still left in that plan?
Mr. Goldman. The employers left in that plan continue to
make their contributions. The PBGC--this is probably important
too--the program for multiemployer plans works very differently
than the single employer. PBGC essentially makes a loan to the
plan for financial assistance to----
Representative Norcross. The trustees still operate it----
Mr. Goldman. Trustees still operate it, right.
Representative Norcross. They get the money from PBGC and
continue to pay. The maximum amount, no matter how much a
pensioner might be receiving--$20,000, $40,000, $70,000--the
most they can ever get is $12,870. Is that correct?
Mr. Goldman. That is correct.
Representative Norcross. So if you have a $70,000 pension
and it goes insolvent, the most you are ever going to get is
$12,870. And then, if a large one goes under, within a year
they might go down to zero because PBGC goes under.
Mr. Goldman. Right, exactly.
Representative Norcross. I think that is the most important
thing that we are talking about today: the costs of doing
nothing. Forget everything else. If we do not create this loan
program to smooth out the numbers, we are talking about, within
2 years of that plan going under, those pensioners, those
millions whom you are talking about, are going to get zero and
in fact will be worse off because that will contribute to other
plans going under, will it not?
Mr. Goldman. Yes, it could.
Representative Norcross. I yield back the balance of my
time.
Co-Chairman Hatch. Our next one is Representative
Schweikert.
Representative Schweikert. Thank you, Mr. Chairman.
Can we play--let us play a speed round, just to help me
sort of get my head around a number of things.
Mr. Goldman, give me, quickly, what are the attributional
differences between a plan we say is in the green and in the
red? So if I lay them side to side, what do I see is different?
Mr. Goldman. The red one is apt to be insolvent.
Representative Schweikert. But what did they do? Did they
make different baseline financial decisions, yield decisions,
NPV?
Mr. Goldman. Well, once they become red, they have more
options. They need to come up with an improvement plan, right?
So they really exhaust every possible avenue to get out of
being red. You can increase contributions. You can reduce
benefits, to a certain extent.
Representative Schweikert. Well, that is what they can do.
I am sort of trying to understand why, when you say there are
1,400 plans but only a couple hundred that are truly in the red
zone, okay, what are some of the green plans doing that the red
zones were not doing?
Mr. Goldman. The main difference is this industry decline.
Representative Schweikert. Okay.
Mr. Goldman. The decline of the active base versus the
retiree base.
Representative Schweikert. All right.
Mr. Goldman. A lot of the green plans survived all the
economic stress and did the exact same things; they did not do
anything different.
Representative Schweikert. In that same category, should I
be worried that a number of the green plans, if I actually used
a discount rate or net-present value that personally I would be
more comfortable with, all of a sudden, by my math, they start
to look a lot closer to the red plans?
Mr. Goldman. Yes.
Representative Schweikert. Okay. So we need to understand
that it is more than just the ones that are in the red. We have
a number that we are calling green, that if we were to all
agree that the benchmark is going to be high-quality corporate
bonds, and that is our net-present value calculation, a number
of those that today we are calling green would not look so
green.
Mr. Goldman. Yes.
Representative Schweikert. Okay. That is a real concern
that we need to understand. A lot of them we are saying are
healthy may not be nearly as healthy. And we also probably need
to set a standard of what that net-present-value dollar is.
Because the fact of the matter is, right now, the equal number
of employer representatives and union representatives act
functionally as an investment board.
Mr. Goldman. Yes. Keep in mind, though, that however you
decide to measure that liability, whether the plan is insolvent
or not depends on whether there are enough assets to pay all
the benefits back.
Representative Schweikert. Yes, and then your population
statistics.
Mr. Goldman. And the other point to keep in mind is, a lot
of these green plans have gone through a couple of hardships
themselves. So if we were to see another shock to the market, a
lot of the green plans may end up in the red zone as well.
Representative Schweikert. Yes; okay.
Mr. Barthold, so in a multiemployer plan, I have my union
representatives, my business representatives. Is it fair for me
to think of them sort of as an investment board?
Mr. Barthold. They select the managers and they oversee,
like the trustees.
Representative Schweikert. Okay. And as part of that
negotiation, do they also have an option of saying, hey, here
is what we are saying our NPV is or here is what we think we
are going to----
Mr. Barthold. It is supposed to be under reasonable
actuarial assumptions. So the trustees should be blessing the
reasonableness.
Representative Schweikert. Do they carry any personal
fiduciary liability that, like the rest of us, if we ever sat
on a pension or investment board for our charity or for our
school----
Mr. Barthold. The board is a fiduciary.
Representative Schweikert. Okay, so do they carry fiduciary
insurance?
Mr. Barthold. I would imagine they might, but I do not
know.
Representative Schweikert. Okay. That would be fascinating
to know.
Mr. Goldman. Yes, they do.
Representative Schweikert. So the investment board, Mr.
Goldman--if I came to you and said, right now I would love a
good population census--and these sometimes are very
uncomfortable to talk about, but it turns out workers from
certain professions often have variance in longevity.
Mr. Goldman. Correct.
Representative Schweikert. And so I have been curious on
the elegance and the quality of the calculations of what our
actual liabilities are. And are we seeing that this particular
fund had more individuals that were from a profession that
actually has different lifespans? And is that being properly
calculated in as we are actually starting to work out our math?
Mr. Goldman. Yes. Each assumption has to be reasonable. And
with the larger plans, there is usually enough data to do
experience studies.
Representative Schweikert. I am actually not asking for
reasonable, I am asking for population census data that you
would put in as an actuary. Because, you know, if I had only
1,000 or 2,000 or 10,000--I mean, you are going to have really
very good, down-to-the-individual population data.
Mr. Goldman. A lot of effort is made to get it correct. At
the same time, it is a large population, so there are blue-
collar tables, for example, in mortality that reflect certain
workforces. And the actuary makes sure that the mortality that
is used reflects that experience.
Representative Schweikert. At some point, for some of those
who are interested in that and staff, for some of those, we
think there may be a number of inputs that may not have been
discussed here completely, and some of that is also going to be
needed for us to get some calculations.
And I am already over time. Thank you for your patience,
Mr. Chairman.
Co-Chairman Hatch. Senator Smith?
Senator Smith. Thank you very much, Mr. Chairman.
And thank you very much for this testimony. This is a very
complicated issue, and I appreciate the questions that are
being asked today to really try to understand this.
And actually, many of my questions have been touched on, so
let me just see if I also can make sure I am understanding
this.
So the reason we have this problem, it sounds to me, is
complicated, right? We have industry decline and economic
stress as one issue. Another is just sort of the reality of
demographic changes and more people leaving the pension, not
enough people paying for the people who are still there. Right?
And then we have the impact of the 2007, 2008 market crash.
And then we also have this weird sort of the tax incentive
issue. Can you just explain that to me a little bit, either one
of you?
Mr. Goldman. Yes. So at the time when things were great and
the markets performed beautifully and the plan assets grew to
what we call a surplus, there were actually more assets than
you needed, and your minimum contribution might have been
zero--the government's concern about making sure you put in at
least enough to pay the benefits but not too much to take too
much of a tax deduction.
So the tax-deductible limits were getting in the way. And
the response to that was, well, let us increase benefits to use
up the surplus so we do not have excess taxes.
Senator Smith. So that was to make sure that companies were
not taking too big of a tax credit----
Mr. Goldman. Exactly.
Senator Smith [continuing]. For the money that they were
paying into the pensions. But the result was that then benefits
got increased at an unsustainable rate, just based on number,
right?
Mr. Goldman. Well, they were sustainable at the time.
Senator Smith. Right, they were sustainable at the time.
Mr. Goldman. But then the future events put that at risk.
Senator Smith. But not them, right?
Mr. Goldman. Correct.
Senator Smith. But there has also been this interesting
conversation about sort of assumptions that were made,
actuarial assumptions about rate of return. Is that sort of
another issue or problem here? Or is that not the right way of
characterizing that?
Mr. Goldman. I think your bigger issues are the points that
you raised.
Senator Smith. Okay. But there is nothing in here about--it
is not as if there was some sort of mismanagement or bad
acting.
Mr. Goldman. No, not at all.
Senator Smith. Right. And then also at the end, the
question is, what do we do? And not that this is simple. And
you say basically at the end--and I appreciated the simplicity
of this--we know either benefits can be cut or reduced or
contributions to the plans have to go up, or you can assume
more risk in the system, which basically is kind of like taking
the ``wish and a prayer'' approach. Right?
Mr. Goldman. Yes.
Senator Smith. And I have a couple of minutes left, but you
also say there are obviously pros and cons to each of these
approaches. And I do not mean to ask for your advice so much.
Could you just describe for us a few of the pros and cons that
you see for each one of these approaches?
Mr. Goldman. Well, let us start with the benefit cuts. That
is the easiest. The con of that is that you are impacting
people who thought they had a pension and now it is less and
puts them in a difficult position.
Senator Smith. And how much, roughly? Is there an average
dollar amount for the pension that we are talking about? Or
what is the range? I am not clear on that.
Mr. Goldman. It is all over the map. It could be $10,000 a
year to $60,000, $70,000 a year.
Senator Smith. Depending on how much they put in.
Mr. Goldman. Depending on the industry and how long the
person worked.
Senator Smith. Okay. All right. Continue.
Mr. Goldman. And then on the issue of more contributions,
the second one, again, the pro is, it puts more money into
these plans, which is needed. The con is, we have already
stretched the participating employers to the limit in many
cases, so asking them to contribute more brings the employers
down or pushes them out of the system.
And then the sharing of risk is a way to say, all right, we
all take risks every day, every time we walk out of our front
door. But how much risk? It is a tradeoff, it is a balance of
how much risk you are willing to take in order to solve the
problem. And the loans are a form of that, where somebody is
putting an influx of cash into the system. That is a good
thing, and if these plans have more money, it gives them an
opportunity to pay benefits for a longer time and work their
way out of the process.
Again, it ties back to the industry and what is going to
happen on those other factors that you mentioned.
Senator Smith. Right. One of the things that I think I
really struggle with on the question of reducing benefits is
that it is sort of the problem we have sometimes in health
care. You reduce the amount of money that you are paying, but
you do not reduce the need. So somehow the need has to be paid
for in another way.
Mr. Goldman. Right. And that is where you get into some of
the social insurance systems and so forth. Somebody has to pick
that up somewhere along the way or people reduce their standard
of living in retirement.
Senator Smith. Right. Okay, thank you. I appreciate it.
Co-Chairman Hatch. Representative Dingell?
Representative Dingell. Thank you, Mr. Chairman.
Like most of my colleagues, many of my questions have been
answered. But I want to try to fill in under them.
My district is one of those districts--I have the largest
number of members of the Central pension fund in the country,
and I see them every single weekend. And I have had grown men
just come to my front door and cry in my arms. Women too, but a
lot of them are men.
But I have small businesses that are threatened if these
pension systems go down. And you have talked about what the
impact is going to be, so this is really one of the most
serious issues we have. We have to work together. This has to
be nonpartisan, and we have to work together.
I want to follow up on my colleague's question about the
impact of the failure of a multiemployer plan on a union. It is
my understanding--and please clarify if I am wrong--that unions
are comprised of their members.
So, Mr. Goldman, do union members negotiate smaller current
wages in order to get this later benefit?
Mr. Goldman. That is absolutely how they would look at it,
sitting at the table. You have a choice between current
compensation, health care, retirement; you agree on something,
and you think you are going to get a payback from that at some
point.
Representative Dingell. So now they are losing that.
Mr. Barthold, would you classify that as deferred
compensation?
Mr. Barthold. Pension benefits are a form of deferred
compensation, yes, ma'am.
Representative Dingell. So I am going to ask both of you,
do a union and its participants face reduced benefits from the
PBGC at this point of insolvency?
Mr. Goldman. Can you clarify? Do they face reduced benefits
once the plan becomes insolvent----
Representative Dingell. Right.
Mr. Goldman. Once the plan becomes insolvent, then the PBGC
takes over at the lower guaranteed limits. So they would lose
some of their benefits at that point.
Representative Dingell. Mr. Barthold, did you want to----
Mr. Barthold. That is correct.
Representative Dingell. So let me, Mr. Goldman, go to
another point, although I want to follow up on Senator Smith's
questions, because I was going to ask those questions too.
A lot of people want to say that these funds were
mismanaged. Can we really be clear that that is not what we are
dealing with, that we are dealing with all of the other factors
and this is not mismanagement, especially as seen by those who
are supposed to be receiving these benefits?
Mr. Goldman. I mean, I think I cannot speak for all the
plans, but from my perspective, the issues you cited are the
ones that are responsible for this.
Representative Dingell. I think that that is really--you
know, we have talked about some of the economic impacts and the
reasons, but also, I mean, especially when you talk about the
single-employer pensions, they were underfunded quite frankly.
How much does underfunding of these funds contribute to this?
And what was the cause of that underfunding?
Mr. Goldman. Well, the underfunding is an outcome of all
these issues, and again, not enough money coming in relative to
the benefits that are getting paid.
Representative Dingell. Right.
Mr. Goldman. I also want to add, on your prior question,
just to clarify from an actuarial profession standpoint, we
have qualifications and standards that govern our profession,
and each actuary has to sign off and verify that the
assumptions they picked were reasonable and appropriate for the
purpose for which the calculations were made.
Representative Dingell. That does get into the other
questions about fiduciary responsibilities and who assumes that
ultimate liability.
I am going to ask one--I only have about a minute left, so
I will go to another question.
Mr. Goldman, in your testimony, you state that some plans
may be too far down the road to utilize the MPRA. Could you
elaborate on this?
Mr. Goldman. Well, Central States is a good example where,
had action been taken earlier, there would have been more
options, and other things could have been done. But as the
amount of assets that remain in the plan relative to the
benefits that are about to be paid gets smaller and smaller,
then the solution gets harder and harder.
Representative Dingell. Mr. Chairman, I do not have enough
time to ask another question, so I will follow my colleagues.
Co-Chairman Hatch. Thank you so much.
Senator Manchin?
Senator Manchin. Thank you. Thank you, Mr. Chairman.
Thank you all.
Again, a lot of good questions have been asked here. I
bring a little different perspective. I come from the coal
fields, UMWA pension plan--you know what we are doing. We would
be the first major pension plan to go defunct by 2022. If that
goes down, then it starts tumbling--PBGC, everything starts
happening.
And you have been talking about no fault of their own, this
and that. Where is the fault? Is the fault in bankruptcies?
What has caused this? I know we have had downturns, 2001, 2008
market crashes, but if it is no fault of the men and women who
work--they take it out of their pay, they pay for their
benefits, the company contributes and matches--at the end of
the day bankruptcy laws happen and they walk away with nothing.
The financial institutions get in front of the human being, and
there is nothing left for anybody.
Why? This is not going to change anything. And we are going
to fix something maybe for a short period of time, but the
pension plans that are coming after, we are going to be back in
the same hole. We need answers and help from you all, the
experts, Mr. Goldman. How do we prevent this from ever
happening again? How do we fix the wrong that we have? How do
we prevent it from happening?
To me, bankruptcy laws in America are the absolute
atrocities of what is going on. Do you agree or disagree?
Mr. Goldman. I will leave the fault question to the
committee.
Senator Manchin. Well, do you agree that it is a problem?
Just tell me the facts, sir; do not be politically correct. We
have enough people around here trying to do that. I need
answers. I need help here. We need people with your expertise
to help fix these laws that have caused the problems we have.
I do not think another miner, another worker in any type of
a factory, or any pension person should be faced with, hey,
everybody else got something, I got nothing. Where did my money
go? I mean, they have all worked for it. That is what we are
dealing with. And how do we subvert that?
So I know everybody has asked you some good questions.
There have been some good contributions, but I have a serious
situation. I have 63,000 miners in West Virginia, a pension
they are depending on. The average pension in West Virginia for
a miner--the average--is $595. Most of that is for widows;
their husbands are gone. You take any amount of that away from
them, and they are done; they cannot make it.
Now, I know there are some big pensions, and God bless
everybody. I am dealing with necessities now. I need your help.
Mr. Goldman. I am happy to provide it.
Senator Manchin. So could you help us change the bankruptcy
laws so the human being----
Mr. Goldman. That would be a ``no.''
Senator Manchin. Do you want to comment? Do you think the
human being should get the same type of consideration that a
financial institution does during a bankruptcy hearing?
Mr. Goldman. I am not going to answer that.
Senator Manchin. But you would if it was you.
Mr. Goldman. I will focus on explaining the reasons why we
got here.
Senator Manchin. Well, we are not going to get out of this
unless you all have enough guts to start speaking out. I have
to be honest with you. Unless you all who have the knowledge to
do something are willing to speak up and help us, we are not
getting out of this mess.
Mr. Goldman. I promise to contribute on the future
sessions.
Senator Manchin. Well, let me go into some other things;
maybe I can get an answer from you. Let me get off the
bankruptcy; I know you are not going down that path.
What happens to the insolvency at 2022? When does PBGC,
when do they go into problems, the way it is right now? You
have evaluated that, I am sure.
Mr. Goldman. Twenty twenty-five is what the PBGC has
projected to be----
Senator Manchin. That is because of the----
Mr. Goldman [continuing]. The likely date.
Senator Manchin. Is that the Central States pensions?
Mr. Goldman. That is even independent of Central States.
Senator Manchin. That is if nothing changes right now.
Mr. Goldman. Central States is, how big is the problem, not
necessarily, when is the problem?
Senator Manchin. So from the miners to the Central States,
this thing is on a doomsday course no matter what.
Mr. Goldman. Correct.
Senator Manchin. That is pretty daunting. Do you have a
recommendation of what we could do for the miners' pension to
prevent this domino effect by 2022?
Mr. Goldman. Not at this time. I think that is the
challenge that is ahead of us.
Senator Manchin. Yes, year 2025, there will be nothing left
by the time they get done with us--2022, we are all gone. We
are looking--I mean, we really are. I think this is a good
committee, wants to find answers. We can do all the history
that you want. We need to start getting to the crux of this
thing, because this thing is going to come to a head very
quickly.
And I have people right now, they do not know what to do. I
mean, they are in limbo. And we have to figure a way to fix it.
And we have looked at this loan program.
What are your thoughts on the loan? You know the bill that
we have in front of us. You have seen it, right?
Mr. Goldman. Yes.
Senator Manchin. Do you support that or not? Or would you
modify it, or do you have any contribution to that bill that
would make it better?
Mr. Goldman. Not at this time, no.
Senator Manchin. So you would recommend that the government
should loan us the money that it takes.
Mr. Goldman. I do not have a recommendation.
Senator Manchin. Does anybody?
Mr. Barthold, do you want to say something?
Mr. Barthold. No, Senator. [Laughter.]
Senator Manchin. What the hell are we having this meeting
for then? We are not giving up, but you guys have to help us.
Mr. Goldman. We are here to help. Today was about context
and background. We have to crawl before we walk.
Senator Manchin. I am done.
Co-Chairman Hatch. Okay.
Co-Chairman Brown. Mr. Chairman, I have gotten a request
from a number of people on our side about a second round.
Co-Chairman Hatch. I am not going to give you a second
round.
Co-Chairman Brown. I am co-chair: I think we should. I am
willing to stay, Mr. Chairman. And we are equally co-chairs,
and I have a couple more questions to tie up loose ends.
Co-Chairman Hatch. Well, I am not going to foreclose
questions, but I am not going to go through a second round.
Co-Chairman Brown. Okay. Well, however we do it.
Co-Chairman Hatch. If a few of you have some extra
questions----
Co-Chairman Brown. Okay, I have a couple of questions----
Co-Chairman Hatch [continuing]. You can stay here and ask
them.
Co-Chairman Brown [continuing]. And I know Representative
Norcross does.
Co-Chairman Hatch. Okay.
Co-Chairman Brown. All right. Thank you, Mr. Chairman.
Co-Chairman Hatch. Okay. Well then, let us turn to you.
Co-Chairman Brown. Yes, let us tie up a couple of loose
ends.
And, Mr. Barthold, who set the standard for the lower PBGC
premiums for the multiemployer program?
Mr. Barthold. Congress did, sir.
Co-Chairman Brown. Congress did? Okay, that is what I
thought.
Mr. Goldman, a handful of questions to you--and it will not
nearly take 5 minutes, Mr. Chairman.
We talked about rate of return. You are an actuary,
correct?
Mr. Goldman. Correct.
Co-Chairman Brown. Congress does not prescribe rates of
return is my understanding. Do you think Congress should
prescribe rates of return?
Mr. Goldman. The single-employer plan does prescribe rates
of return. But there are significant differences between the
single and multiemployer plans.
Co-Chairman Brown. And we do not, and you are not saying we
should prescribe them for the multiemployer plans.
Mr. Goldman. I am not.
Co-Chairman Brown. Okay. Briefly describe how an actuary
makes their assumptions on rates of return.
Mr. Goldman. In the case of multiemployer plans, it is
really a function of how the assets are invested and then
looking at capital market projections, you know, 10-, 20-, 30-
year projections. Usually with projections, it is hard to find
more than 10 or 20 years. And then based on the mix of your
portfolio, you align it back to the expected returns on each of
those.
Usually, they will look at a wide array of projections,
because there are surveys out there that will show a fairly
significant range of expected returns for each asset class.
Co-Chairman Brown. And you actuaries, you represent--you as
an actuary yourself, you are governed by professional
standards, I assume; correct?
Mr. Goldman. Correct.
Co-Chairman Brown. And if you violate those standards,
there is real punishment, I assume.
Mr. Goldman. That is correct. There is a standards board.
Co-Chairman Brown. Could you tell us, roughly, your view?
Do you know what the average, say, since ERISA and
multiemployer plans, what is the average, roughly, in these 40,
42, 43 years, what is the average annualized return of the S&P
500?
Mr. Goldman. I do not know, but probably 7 to 8 percent is
not a bad----
Co-Chairman Brown. Well, my understanding is, it is more
like 10 or 11 or even 12 percent. Would that be in the range,
do you think?
Mr. Goldman. That would be.
Co-Chairman Brown. That would sound like it could be right,
10 or 11, 12?
Mr. Goldman. Right, right.
Co-Chairman Brown. So it would not be unreasonable, that
being the case, for an actuary to assume a 7- or 8-percent
return on investment over those 4 decades on a long-term
investment. Correct?
Mr. Goldman. Right, but it is more than looking at history.
I think we are in an interesting economic time with very low
rates, so you may look at history for patterns and parts of the
process, but it is much more complicated than that to take into
account what you think is going to happen, what has happened in
the past, and how your assets are managed.
Co-Chairman Brown. When the return is significantly more
than assuming a 7- or 8-percent return, it is a pretty clear
signal, correct?
Mr. Goldman. Correct.
Co-Chairman Brown. Okay. Thank you.
Mr. Goldman. And a portfolio is made up of stocks and
bonds. And now we are seeing more alternative investments as
well into the portfolio.
Co-Chairman Brown. Thank you.
Co-Chairman Hatch. Any more last-minute questions?
Co-Chairman Brown. Mr. Scott?
Representative Scott. Thank you, Mr. Chairman.
Mr. Goldman, you are an actuary, but staff showed me what
the definition of insolvency is, and you are right, it is
cashflow. And so, if you have no assets in the trust fund but
you have enough money coming in to pay the benefits, you call
that solvent?
Mr. Goldman. Correct.
Representative Scott. That does not shock you?
Mr. Goldman. I had not thought about it before, but now
that you raise it----
Representative Scott. Zero assets, but you have enough
coming in so you can pay the bills.
Mr. Goldman. It is all about----
Representative Scott. And then you wonder why we are in the
trouble we are in when you call that solvent. [Laughter.]
Can you quantify the contagion problem?
Mr. Goldman. I cannot; I have not tried to quantify that,
no.
Representative Scott. Mr. Barthold, do you want to try to
make a comment about the contagion problem?
Mr. Barthold. As I noted before, we have not, my colleagues
have not, undertaken an independent analysis, anything
different from that done by the Pension Benefit Guaranty
Corporation.
Representative Scott. Thank you, Mr. Chairman.
Representative Norcross. Well, hopefully we are going to be
addressing some of the same issues, but let us talk about PBGC
premiums. Back during MPRA 2014, they more than doubled the
premium to $26 per, so that was a hell of a spike for those who
are paying it.
But let us talk about some of the causes, because we have
heard a lot of them. You had the decline of the industry or of
membership. Some of the older industries, we understand that.
The investment performance, the downturn, those are things
that, in some way, you can predict or at least use a history of
it.
Bankruptcy--bankruptcy is an issue that would be to the
individual company at the individual time, whether or not they
want to escape their liabilities. Some of these have the
potential to take down some of the biggest employers in our
country. They have to make a decision.
``Last man standing''--you have to be doing the right
thing, making all the right decisions. Those rosy assumptions
each year that we as trustees make might have been a little bit
too high, but somehow the company next to you bails out and now
you are not only carrying your weight, but carrying their
weight.
The assumptions--and this is something that we have to
touch on--should be reasonable. I would love to say that, if I
could make my mortgage payment reasonable, but that is a real
problem. Two different companies, two different pension plans,
two different trustees, can look at this. So the pension
smoothing issue, in many ways, is like a loan program.
But let us go on and talk about the tax issue. You were
allowed to increase the benefit because you did not want to go
over that 110 percent over funding and jeopardize your taxes.
But when things went south, there was no mechanism, not to take
you down below where you originally were, but you could not
even take it to where it was before you gave that. Is that
correct?
Mr. Goldman. That is correct.
Representative Norcross. So of all those issues--and we can
talk about a loan program, and I think it is so important to
help smooth out this issue. Because certainly, if you save the
banks, you save Wall Street, this is saving people, and I think
that is so important. But structurally, we have to make the
changes or we just come back here. Would you agree to that and
the fact that if you do not make structural changes moving
forward----
Mr. Goldman. I think you've got it.
Representative Norcross. A loan program to help smooth out
the spikes that we are looking at, is it reasonable to assume
that this can be done within the confines of some of the
programs that have been put forward to you?
In other words, if you look at the dollars and the rate of
return over the course of the program for 20, 25 years,
depending on what we end up with, the costs of doing nothing
would far exceed the cost of the loan program?
Mr. Goldman. That is possible. I have not done any of the
analysis on any of the specific loan proposals. We are actually
working on an issue brief that outlines the benefits and risks
of a loan approach in general, but not for any specific
proposal.
Representative Norcross. Well, just in rough numbers, you
talked about the 10 million if this were to go down, the cost
of the loan program versus the cost to our society--and the
human side of it far exceeds that.
And we will follow up on some additional questions at our
next hearing. But I yield back, and thank you, Mr. Chairman.
Co-Chairman Hatch. Well, thank you.
These are really tough questions at a really tough time to
try to figure all this out. But unless somebody has----
Co-Chairman Brown. Mr. Schweikert has a couple of
questions.
Co-Chairman Hatch. Do you have some questions?
Representative Schweikert. Do not look at me so
disappointed, Mr. Chairman. [Laughter.]
Co-Chairman Hatch. I am looking at you disappointed. And I
tell you----
Representative Schweikert. And I apologize to everyone in
the room and the committee. This is some of the most
fascinating stuff I have ever gotten to do, which probably
explains why I have no friends. [Laughter.]
Mr. Goldman. You could have been an actuary.
Representative Schweikert. And I will do this one quickly.
Some of the discussion from my brothers and sisters on the
other side, on the loan program functioning--the mechanism
there is almost the arbitrage of government loan, low interest
rate, we will actually invest it in equities or something like
that, and we basically pick up the arbitrage difference. And
that is where the yield kicker is.
Mr. Goldman. Some of the loan proposals have that as a way
to get additional cash. Others use the money to immunize and
either buy annuities or invest those assets in risk-free
investments and align them directly with the benefits.
Representative Schweikert. Okay. But the payback on that
actually becomes----
Mr. Goldman. You lose. Yes, it is all about balance and the
tradeoffs.
Representative Schweikert. Yes, because you lose the
benefit, and then with the time value, if there is, you know, a
yield back to the taxpayers----
Mr. Goldman. It is how much risk you want to take.
Representative Schweikert. Yes. Okay. Actually this goes
back to--we got our hands on something from PBGC. It is a
couple years old. And it was their calculations of how many of
our plans are actually in trouble if we used their sort of NPV.
And I am sure you have seen this. You are an expert on this.
But it is disturbing. If I will do something like my
corporate bond, which I seem to personally sort of like as a
benchmark or, you know, 30-year treasuries plus a couple of
kickers, you are starting to look at the vast majority of the
plans, even those we are calling green, as being 60, under 70-
percent funded. Am I being fair if I use that as my benchmark,
that many of what we are calling green plans are actually also
in trouble?
Mr. Goldman. Yes. The difference would almost double the
liability.
Representative Schweikert. Okay. That is actually a
brilliant way to phrase it.
Mr. Goldman. And there is actually some analysis being done
now--it is not ready yet--that will show you how many
participants and how many plans move based on the different
assumptions and different returns in the future too.
Representative Schweikert. Thank you. I think that is
really important as we are starting to put together what we are
hoping is a workable solution. It is not only just dealing with
those that we know to be in great stress, but those that, if we
actually set up some benchmarks, we pull just by the definition
of the benchmark, into the stress category.
Also, as you do that work, maybe just because I have been
around a lot of this, it is also helpful for a lot of those
members here to understand that there are lots of levers. There
is more than just the yield; it is the population, it is how
many workers, what their compensation is compared to previous
retirees' compensation. It is more complex than just rate of
return.
And you know, even dealing with lifespan calculations, you
have many levers you have to calculate.
Mr. Goldman. And one more consideration too. I think it is
worth mentioning, on the single-employer plan, that does use
the risk-free rates. Take a look at that system. And a lot of
the plans are now frozen, employers have exited from defined
benefit to defined contribution. It is arguable whether defined
contribution is going to give the same retirement security, so
you could almost make a case that by moving to lower rates and
increasing contributions, you have pushed some employers out of
the plan because they cannot afford it.
Representative Schweikert. But at the same time, I do not
have millions of my brothers and sisters who are looking at
retirement insecurity coming crashing down upon them. So I may
lose some employers, which we do not want, but I really do not
want people moving into the retirement age and realizing they
have such fragility in their future payments.
Mr. Barthold, is there anything you want to say before I
hit the button and make the chairman happy that I have stopped
talking? [Laughter.] My chairman would probably like you to
make him happy.
Mr. Chairman, I yield back.
Co-Chairman Brown. Mr. Chairman, I ask that members submit
questions for the record by 5 p.m. next Wednesday and that Mr.
Barthold and Mr. Goldman answer as quickly as they can.
Co-Chairman Hatch. Well, thank you. We will agree with
that.
I want to thank you all for your attendance and
participation today. As we have heard today, these are really
important and complex issues, and I look forward to working
with each of you on both sides of the Capitol as well as both
sides of the aisle.
So I ask any member who wishes to submit questions for the
record to do so by close of business Thursday, April 26th.
And with that, I want to compliment all my colleagues for
putting in the time on this, because this is important stuff.
And I wish I had the answers, but we will see what we can do to
keep this working.
And we are very appreciative of your patience down there at
the table. And we hope that you will think about it and help us
to find some answers to this as well, if there are any.
So with that, this hearing is adjourned.
[Whereupon, at 4:05 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Thomas A. Barthold, Chief of Staff,
Joint Committee on Taxation
My name is Thomas A. Barthold. I am the Chief of Staff of the Joint
Committee on Taxation. It is my pleasure to present to the Joint Select
Committee on the Solvency of Multiemployer Pension Plans an overview of
the Internal Revenue Code (``the code'') provisions governing
multiemployer defined benefit plans.
Most individuals covered by a pension plan are covered by single-
employer plans. These plans may be defined benefits plans or defined
contribution plans. The code provides rules governing employer funding
of the future pension benefits provided by defined benefit plans.
However, at present, approximately 10.5 million individuals are
participants in one or more of approximately 1,400 multiemployer
defined benefit plans. A multiemployer plan (also known as a ``Taft-
Hartley'' plan) is a plan maintained pursuant to one or more collective
bargaining agreements with two or more unrelated employers and to which
the employees are required to contribute under the collective
bargaining agreement(s). A multiemployer plan is not operated by the
contributing employers; instead, it is governed by a board of trustees
(``joint board'') consisting of labor and employer representatives. In
applying code and ERISA requirements, the joint board has a status
similar to an employer maintaining a single-employer plan and is
referred to as the ``plan sponsor.''
The outline that follows highlights the defined benefit code
provisions governing multiemployer plans.
Overview of Multiemployer Defined Benefit Plans
topics
Qualified Retirement Plans Generally.
Defined Benefit Plans.
Structures, general requirements, selected requirements
(including anti-
cutback rule).
Multiemployer Plans.
Background, Pension Benefit Guaranty Corporation (``PBGC'')
program.
Exceptions to anti-cutback rules.
Funding rules (including withdrawal liability).
History of multiemployer plan funding issues.
Appendix: Brief Legislative History of Significant Changes
Relating to Multiemployer Plans.
employer-sponsored qualified retirement plans
Tax-favored treatment applies to a deferred compensation plan
that meets qualification requirements under the code, as a ``qualified
retirement plan,'' of which there are two general types:
Defined contribution--benefits based on separate account for
each participant (employee), with contributions, earnings, and
losses allocated to each individual participant account;
participant benefits from investment gain and bears risk of
investment loss.
Defined benefit--benefits are under a plan formula and paid
from plan assets, not from individual accounts; employer
responsible for providing sufficient assets to pay benefits at
retirement.
Tax-favored treatment generally includes:
Pretax treatment of contributions, with current deduction
for employer (both subject to limits).
Tax-deferred earnings for participant.
Income inclusion to participant at distribution (with option
to rollover for certain plans)
Tax-exempt status for trust holding plan assets.
general requirements for qualified retirement plans
Plan qualification requirements:
Participant and beneficiary protections (e.g., age and
service conditions, vesting, spousal protections) that parallel
protections in Employee Retirement Income Security Act of 1974
(``ERISA'').
ERISA is within Department of Labor (``DOL'')
jurisdiction.
Limits on benefits and contributions (code only).
No discrimination in favor of highly compensated employees
(code only).
Requirements generally apply on a controlled-group basis.
Prohibited transaction rules, i.e., no self-dealing (code and
ERISA).
Limitations on employer deduction for contributions (code only).
Rules specific to defined benefit plans, and to multiemployer
plans.
defined benefit plans--in general
A defined benefit plan generally provides accrued benefits as an
annuity commencing at normal retirement age in the amount determined
under the plan's stated benefit formula (generally based on years of
service and compensation of participant).
The accrued benefit is the portion of the participant's
normal retirement benefit that has been earned as of a given
time.
Optional forms must provide payments that are not less than
actuarial equivalent of accrued benefit.
The code and ERISA require benefits to be funded using a trust
for the exclusive benefit of employees and beneficiaries.
The employer (or employers) must fund the trust by making a
minimum level of annual contributions.
Investment gains and losses on trust assets affect
employers' funding obligations.
Private plan benefits generally (and all multiemployer plan
benefits) are insured by the PBGC, subject to guarantee limits.
general requirements for defined benefit plans
Cannot make in-service distributions before earliest of normal
retirement age, age 62, or plan termination.
Spousal protections (applicable if present value of accrued
benefit is more than $5,000).
For married participant, benefit must be a life annuity for
employee with a survivor annuity for spouse (unless spouse
consents otherwise).
If employee dies before benefits commence, an annuity for
surviving spouse generally required.
Limits on benefits--Benefits under a defined benefit plan are
generally limited to lesser of 100 percent of high 3-year average
compensation or annual dollar amount ($220,000 for 2018), with
actuarial adjustments depending on form of benefit and age of
commencement.
However, the 100 percent of compensation limit does not
apply to multiemployer plans.
Nondiscrimination requirements--prohibit discrimination in favor
of highly compensated employees.
Collectively bargained plans, including multiemployer plans,
are generally deemed to automatically satisfy the
nondiscrimination requirements.
selected rules for determining a participant's
benefit in a defined benefit plan
Definitely determinable benefit--plan must specify the formula
for objectively determining normal retirement benefits (e.g.,
traditional formula or hybrid formula, such as cash balance) and
actuarial factors for determining other forms of benefit.
Cannot be subject to plan sponsor discretion.
Formula may include a variable factor, such as a market
index, as long as specified in the plan and determinable
without plan sponsor discretion.
Accrual rules for benefit--plan must specify the method used to
determine a participant's accrued benefit under of three permissible
methods (133\1/3\ percent, fractional, or 3 percent).
Vesting requirements--Participant's entitlement to accrued
benefit without additional service, i.e., as if terminating employment,
cannot be forfeited (``vested accrued benefit'').
Traditional plan: 5-year cliff (zero vesting before 5 years,
then 100-percent vesting at 5 years) or 3- to 7-year graduated
vesting (20 percent per year).
Hybrid plan: 3-year cliff.
Anti-cutback requirements.
anti-cutback requirements for defined benefit plans
Under the ``anti-cutback'' rules, plan amendments generally may
not reduce benefits already earned (accrued benefits) or eliminate
other forms of benefit linked to accrued benefit (e.g., subsidized
early retirement benefit or lump sum).
Benefit reductions or elimination of benefit forms must be for
prospective accruals only, subject to some exceptions, including for
underfunded plans.
Reductions in dollar amount of benefits allowed if resulting
from application of permissible variable factors.
defined benefit plan structures
Three structures:
Single-employer plan--maintained solely for employees of a
single employer with controlled group members treated as a
single employer.
Multiple-employer plan--maintained for employees of
unrelated but associated employers, such as employers in the
same industry (e.g., rural electric co-ops); subject to much
the same funding rules as single-employer plans.
Multiemployer plan (also called ``Taft-Hartley'')--
maintained under collectively bargaining agreements with two or
more unrelated employers, generally in the same industry (e.g.,
hotel and restaurant).
multiemployer plans--background
Multiemployer plans provide benefits based on service for all
participating employers and are common in industries where employees
regularly work for more than one employer over the course of the year
or over their careers, but they also cover employees who work for only
one employer over their careers.
A multiemployer plan is generally governed by a joint labor-
management board of trustees (``joint board'') with equal
representation of employees and employers; however, as a legal matter,
like all qualified plans, the plan (and plan assets) must be
administered for the exclusive benefit of the employees and
beneficiaries.
Multiemployer plans cover employees in many industries across
the economy, including construction, transportation, retail food, hotel
and restaurant, health care, manufacturing, and entertainment.
Based on PBGC premium filings for 2016, there are nearly 10.5
million participants in 1,375 multiemployer plans; some very large
(10,000 or more participants), some small (fewer than 250
participants), and some at all sizes in between.
Many employers participating in multiemployer plans are small
employers; many midsized and large employers also have employees
covered by multiemployer plans.
multiemployer program of the pbgc
The PGBC, a corporation within the DOL, was created under ERISA
to provide an insurance program for benefits under most defined benefit
plans maintained by private employers.
Insures pension benefits under separate programs for single-
employer and multiemployer defined benefit plans.
Board of directors consists of the Secretary of the
Treasury, the Secretary of Labor, and the Secretary of
Commerce.
The PBGC provides ``financial assistance'' in the form of loans
to insolvent multiemployer plans (plans unable to pay basic PBGC-
guaranteed benefits when due) in the amount needed for the plan to pay
benefits at the guarantee level (to be repaid if the plan's funded
status later improves).
Under the single-employer program, when an underfunded
single-employer plan terminates, the PBGC steps in, takes over
the plan and its assets, and pays benefits.
In addition to providing financial assistance to an insolvent
multiemployer plan, the PBGC has authority with respect to mergers and
asset transfers between multiemployer plans and partitions of
multiemployer plans.
For multiemployer plans, the PBGC benefit guarantee level is the
sum of (1) 100 percent of the first $11 of vested monthly benefits and
(2) 75 percent of the next $33 of vested monthly benefits, multiplied
by the participant's number of years of service.
For single-employer plans, the formula for the guarantee
level is determined differently (including being based on the
participant's age and payment form).
For a multiemployer plan, the per-participant flat-rate premium
for 2018 is $28.
For a single-employer plan, the per-participant flat-rate
premium for 2018 is $74; for a plan with unfunded vested
benefits, a variable rate premium of $38 per $1,000 of unfunded
vested benefits also applies; a termination premium could also
apply.
exceptions to anti-cutback rules for multiemployer plans of certain
status
Exceptions (subject to notice and other procedural requirements)
apply to three categories of plan:
Critical status plans.
Insolvent status plans.
Critical and declining status plans.
exceptions to anti-cutback rules: definition of critical status plan
Critical status--four separate standards. If as of the beginning
of the plan year:
The plan's funded percentage is less than 65 percent, and
the sum of (a) plan assets' market value and (b) the present
value of reasonably anticipated employer and employee
contributions for the current year and next 6 years (assuming
that the terms of the collective bargaining agreements continue
in effect) is less than (c) the present value of all benefits
projected to be payable during that same period of time (plus
administrative expenses);
The plan, not taking into account any amortization
extensions, either: (1) has an accumulated funding deficiency
for the current year, or (2) is projected to have an
accumulated funding deficiency for any of the next 3 years (4
years if the funded percentage of the plan is 65 percent or
less);
Either (1) the sum of (a) the plan's current year normal
cost and (b) interest for the current year on the amount of
unfunded benefit liabilities as of the last day of the
preceding year, exceeds (c) the present value of the reasonably
anticipated employer contributions for the current year, (2)
the present value of inactive participants' vested benefits is
greater than the present value of active participants' vested
benefits, or (3) the plan has an accumulated funding deficiency
for the current year, or is projected to have one for any of
the next 4 years, not taking into account amortization
extensions; or
The sum of (a) the plan assets' market value and (b) the
present value of reasonably anticipated employer contributions
for the current year and each of the next 4 years (assuming
that the terms of the collective bargaining agreements continue
in effect) is less than (c) the present value of all benefits
projected to be payable under the plan during the current year
and each of the next 4 years (plus administrative expenses).
If the plan is not in critical status under one of these standards,
but is projected to be in critical status in any of the next 5 years,
the plan sponsor may elect to treat the plan as in critical status.
exceptions to anti-cutback rules: definitions of insolvent and
critical and declining status plans
Exceptions apply to three categories of plan--(1) critical, (2)
insolvent, (3) critical and declining:
Insolvent status--occurs when available resources in a plan
year are not sufficient to pay plan benefits for that plan
year, or when the plan sponsor of critical plan determines that
the plan's available resources are not sufficient to pay
benefits coming due in next plan year.
Critical and declining status--occurs when the plan
otherwise meets one of the definitions of critical status and
is projected to become insolvent in the current plan year or
any of the next 14 plan years (19 years if the ratio of
inactive plan participants to active plan participants is more
than 2:1 or the plan's funded percentage is less than 80
percent).
exceptions to anti-cutback rules for critical status plans
For critical plans:
For participants and beneficiaries whose benefits begin
after receiving the notice of the plan's critical status:
Payments in excess of single life annuity (plus any social
security supplement, if applicable) can be eliminated.
Plan sponsor may make certain reductions to ``adjustable
benefits'' that the plan sponsor deems appropriate.
``Adjustable benefits'' include disability benefits not
in pay status, early retirement benefits or retirement-type
subsidies, and most benefit payment options, but not the amount
of an accrued benefit payable at normal retirement age.
exceptions to anti-cutback rules for insolvent status plans
For insolvent plans:
Benefits must be reduced to level that can be covered by
plan's assets.
Suspension of benefit payments must apply in substantially
uniform proportions to benefits of all persons in pay status
(although Treasury rules may allow for equitable variations for
different participant groups to reflect differences in
contribution rates and other relevant factors).
Benefits may not be reduced below level guaranteed under
PBGC's multiemployer program.
If plan assets are insufficient to pay benefits at the
guarantee level, PBGC provides financial assistance.
exceptions to anti-cutback rules for critical and declining status
plans
For critical and declining plans where (1) actuary certifies
that benefit suspensions are projected to avoid insolvency and (2) plan
sponsor determines (despite taking all reasonable measures) that plan
is projected to become insolvent unless benefits are suspended, then:
Plan sponsor may determine the amount of benefit suspensions
and how the suspensions apply to participants and
beneficiaries.
Benefits cannot be reduced below 110 percent of the
monthly PBGC guarantee level.
Limited reductions for those between ages 75 and 80; no
reductions for those age 80 and over.
In the aggregate, benefit suspensions must be ``reasonably
estimated'' to achieve--but not materially exceed--the level
needed to avoid insolvency.
general funding rules for multiemployer plans
Funding rules exist to ensure that plan trust maintains
sufficient assets to meet its anticipated obligations to pay current
and future benefits to participants and beneficiaries.
Each plan must maintain a ``funding standard account''--a
notional account maintained over the entire life of the plan into which
``charges'' and ``credits'' are made each plan year.
``Charges'' include the cost of benefits earned that year
(``normal cost''), increased liabilities from any benefit
increases, and losses from worse than expected investment
return or actuarial experience.
``Credits'' include contributions for that year (including
withdrawal liability payments), reduced liabilities resulting
from any benefit decreases, gains from better than expected
investment return or actuarial experience.
A multiemployer plan is required to use an acceptable actuarial
cost method (plan's funding method) to determine the elements included
in its funding standard account for a year.
Actuarial assumptions used in funding computations,
including interest rate, must be reasonable--but no specific
interest rate or mortality assumptions are prescribed by
statute.
Value of plan assets generally are determined using an
actuarial valuation method, which recognizes better or worse
than expected investment experience over a period of years,
thereby smoothing changes in asset values.
Charges and credits attributable to benefit increases or
decreases and actuarial experience are also amortized (that is,
recognized for funding purposes) over a specified number of
years (generally 15 years).
Annual minimum required contributions are the amount (if any)
needed to balance the accumulated charges and credits to the funding
standard account--calculated using an acceptable actuarial funding
method.
A ``funding deficiency'' results when accumulated charges to the
funding standard account exceed credits, which generally triggers an
excise tax on employers unless a waiver is obtained.
A ``credit balance'' results when accumulated credits to the
funding standard account exceed charges, which reduces the employer
contributions needed to balance the funding standard account in future
years.
additional funding requirements for significantly underfunded plans
(in endangered or critical status)
There are three categories of underfunded multiemployer plans:
(1) endangered; (2) seriously endangered; and (3) critical.
Endangered status generally means the plan is not in
critical status and as of the beginning of the plan year (1)
the plan's funded percentage for the year is less than 80
percent or (2) the plan has an accumulated funding deficiency
for the plan year or is projected to have an accumulated
funding deficiency in any of the next 6 years (taking into
account amortization extensions).
Seriously endangered status means the plan meets both
requirements of an endangered plan.
A critical status plan is defined as it is for purposes of
the exceptions to anti-cutback rules.
Endangered plans must adopt a funding improvement plan.
Critical plans must adopt a rehabilitation plan.
ERISA penalties or code excise taxes may apply (depending on
funding status and certain other rules) to violations of applicable
rules.
An annual actuarial certification as to the plan's status is
required within a certain time frame.
funding improvement plan for endangered plans
Generally, a funding improvement plan consists of actions,
including options (or a range of options), to be proposed to the
bargaining parties by the plan, based on reasonable anticipated
experience and reasonable actuarial assumptions for the attainment of
certain ``applicable benchmarks'' over the ``funding improvement
period.''
Possible actions include contribution increases and benefit
reductions, such as reducing future accrual rates and
elimination of benefits not protected under the anti-cutback
rules (for example, most disability and death benefits).
The funding improvement period is generally a 10-year
period--and may end earlier if the plan is no longer in
endangered status or if the plan enters critical status.
The funding improvement period generally cannot begin until
the plan year that begins after the second anniversary of the
date of adoption of the funding improvement plan. However, it
could begin earlier depending on when collective bargaining
agreements expire.
For plans that are endangered, but not seriously endangered, by
the end of the funding improvement period, the plan's funded percentage
must increase by 33 percent of the difference between 100 percent and
the funded percentage of the plan at the beginning of the first plan
year for which the plan is in endangered status.
The plan also must not have an accumulated funding
deficiency for the last plan year in the funding improvement
period.
For plans that are seriously endangered, different percentage
improvements and periods may be substituted in certain circumstances,
depending upon the plan's funded percentage at the beginning of the
funding improvement period and certain other facts.
rehabilitation plan for critical plans
Generally, a rehabilitation plan consists of actions, including
options (or a range of options), to be proposed to the bargaining
parties by the plan, formulated based on reasonable anticipated
experience and reasonable actuarial assumptions to enable the plan to
cease to be in critical status by the end of the rehabilitation period.
Possible actions include reductions in plan expenditures
including plan mergers and consolidations, reductions in future
benefit accruals, or increases in contributions.
The rehabilitation period is generally a 10-year period,
determined in the same way as the 10-year period for funding
improvement plans--and may end earlier if the plan emerges from
critical status.
Critical plans are generally required to adopt measures to
emerge from critical status, but if the plan sponsor (i.e., joint
board) determines emergence is not possible, instead reasonable
measures must be taken to emerge from critical status at a later time
or to forestall insolvency.
If a critical plan fails to make ``scheduled progress'' for 3
consecutive years or fails to meet the applicable requirements by the
end of the rehabilitation period, then for excise tax purposes (unless
the excise tax is waived), the plan is treated as having a funding
deficiency equal to (1) the amount of the contributions necessary to
leave critical status or make scheduled progress or (2) the plan's
actual funding deficiency, if any.
Certain surcharges (additional contributions) apply to certain
critical status plans, with specific rules on amounts and timing--and
are generally disregarded in determining an employer's withdrawal
liability.
withdrawal liability
Under ERISA, if an employer withdraws from a multiemployer plan,
the employer is generally liable to make ongoing payments to fund its
share of unfunded vested benefits under the plan, often based on the
employer's share of total plan contributions during a preceding period,
rather than benefits of the employer's own employees.
Withdrawal from the plan occurs for this purpose if the employer
ceases operations covered by the plan or if the employer's obligation
to contribute to the plan ceases or significantly declines.
Plan sponsor must determine amount of employer's withdrawal
liability and notify the employer, with a process for resolving
disputes if needed.
Withdrawal liability amount is generally paid (with interest) in
installments, determined in part by reference to the amount of the
employer's previous contributions.
Payment period is limited to 20 years, even if installments
during that period will not cover full liability amount.
Other exceptions and limitations apply.
history of multiemployer plan funding issues
The amount of employer contributions are specified in the
bargaining agreement (commonly based on hours worked or units of
production)--while the specified contribution level generally takes
into account benefits to be earned under the plan, it historically has
not been explicitly tied to the amount needed to satisfy Code/ERISA
funding requirements.
If the industry has contracted (resulting in fewer active
employees), the liabilities for benefits of retirees and other former
employees generally have become disproportionately large compared to
liabilities for benefits of current employees.
Also, liabilities under the plan include previously earned
benefits for employees of employers that no longer participate in
(i.e., contribute to) the plan.
Former participating employers may have withdrawal
liability, but payments may not be sufficient to cover unfunded
amount or former participating employer might no longer exist.
Underfunding in many cases is too great to realistically cover
with future investment income or ongoing contributions.
appendix: brief legislative history of significant
changes relating to multiemployer plans
Employee Retirement Income Security Act of 1974 (ERISA), Pub. L.
No. 93-406, September 2, 1974.
Established PBGC multiemployer insurance program and
provided multiemployer funding rules.
Multiemployer Pension Plan Amendments Act of 1980 (MPPAA), Pub.
L. No. 96-364, September 26, 1980.
Strengthened funding requirements, set new funding and
benefit adjustment rules for financially weak plans, revised
multiemployer insurance program, and established withdrawal
liability.
Consolidated Appropriations Act of 2001, Pub. L. No. 106-554,
December 21, 2000.
Increased benefit guarantee for multiemployer plans.
Deficit Reduction Act of 2005, Pub. L. No. 109-171, February 8,
2006.
Increased the flat-rate per participant premium for
multiemployer defined benefit plans from $2.60 to $8.00; for
2007 plan year and later, premium indexed to rate of growth of
national average wage.
Pension Protection Act of 2006 (PPA), Pub. L. No. 109-280,
August 17, 2006.
Established new funding requirements, including creation of
additional funding rules for plans in endangered or critical
status.
Also made revisions to amortization periods, changes to
funding waivers, and revisions to reasonableness requirement
for actuarial assumptions.
Enhanced reporting and disclosure requirements.
Worker, Retiree, and Employer Recovery Act of 2008 (WRERA), Pub.
L. No. 110-458, December 23, 2008.
Made technical corrections to PPA.
Provided funding relief to multiemployer plans in response
to economic downturn.
Preservation of Access to Care for Medicare Beneficiaries and
Pension Relief Act of 2010 (PRA 2010), Pub. L. No. 111-192, June 25,
2010.
Provided funding relief in form of extended amortization
periods for experience gains and losses, and also expanded the
asset smoothing period where certain requirements satisfied
(solvency test, additional benefit restrictions, and reporting
requirements).
The Moving Ahead for Progress in the 21st Century Act (MAP-21),
Pub. L. No. 112-141, July 6, 2012.
Increased the 2013 PBGC premium for multiemployer defined
benefit plans by $2 per participant; after 2013, premium to be
indexed for increases in annual rate of growth in national
average wage index.
Multiemployer Pension Reform Act of 2014 (MPRA), Pub. L. No.
113-235, December 16, 2014.
Repealed the December 31, 2014 sunset of, and made
permanent, the PPA multiemployer funding rules.
Established a new process for multiemployer pension plans in
critical and declining status to propose a temporary or
permanent reduction of pension benefits.
Provided for PBGC to facilitate mergers between two or more
plans (including providing financial assistance).
Expanded PBGC partition rules.
______
Questions Submitted for the Record to Thomas A. Barthold
Question Submitted By Hon. Orrin G. Hatch
Question. Under the funding rules for multiemployer plans,
actuarial assumptions used by the plan must be ``reasonable.'' In
addition, the funding rules do not specify the interest rate or
mortality tables that must be used. Is this same or similar to the
funding rules for single-employer plans? If not, how are the funding
rules for multiemployer different?
Answer. Generally, assumptions for both single-employer plans and
multiemployer plans are subject to ``reasonableness standards.'' That
is, actuarial assumptions are required to be reasonable taking into
account the experience of the plan and reasonable expectations, and
must, in combination, offer the plan's enrolled actuary's best estimate
of anticipated experience under the plan based on information
determined as of the valuation date. However, unlike multiemployer
plans, for single-employer plans the Internal Revenue Code of 1986, as
amended (the ``code'') and applicable regulations set forth prescribed
interest rates and mortality tables which must be used to determine the
valuation (present value) of plan assets. The code and regulations also
prescribe interest rates that must be used for certain funding
determinations for the plan year (called ``segment rates'').
Single-employer plans that are at-risk have additional required
actuarial assumptions. For example, all employees who are not otherwise
assumed to retire as of the valuation date but who will be eligible to
elect benefits during the plan year and the next 10 plan years must be
assumed to retire at the earliest retirement date under the plan but
not before the end of the plan year for which the ``at-risk funding
target'' and ``at-risk normal cost'' are being determined. Also, all
employees must be assumed to elect the retirement benefit available
under the plan at the assumed retirement age (determined as above) that
would result in the highest present value of benefits.
The at-risk funding target is the present value of all benefits
accrued or earned under the plan as of the beginning of the plan year
using the actuarial assumptions described above, with the addition of a
loading factor which arises when the plan has been in at-risk status
for at least 2 of the 4 preceding plan years. This loading factor is
equal to the sum of (1) $700 multiplied by the number of participants
in the plan and (2) 4 percent of the funding target (determined without
regard to the definition of at-risk funding target).
The at-risk normal cost for a plan year generally represents the
excess of the sum of (1) the present value of all benefits which are
expected to accrue or to be earned under the plan during the plan year
using the at-risk assumptions described above plus (2) the amount of
plan related expenses expected to be paid from plan assets during the
plan year, over (3) the amount of mandatory employee contributions
expected to be made during the plan year. In addition, where the plan
has been in at-risk status for at least 2 of the 4 preceding plan
years, a loading factor is added, which is equal to 4 percent of the
target normal cost (the excess of the sum of (1) the present value of
all benefits which are expected to accrue or to be earned under the
plan during the plan year plus (2) the amount of plan related expenses
expected to be paid from plan assets during. the plan year, over (3)
the amount of mandatory employee contributions expected to be made
during the plan year). Otherwise, generally assumptions for single-
employer at-risk plans are subject to reasonableness standards.
Endangered or critical status multiemployer plans are also
generally subject to reasonableness standards. Although the code
requires the actuary's determinations for endangered or critical status
plans to be based on the unit credit funding method for purposes of
certain determinations (the plan's normal cost, actuarial accrued
liability, and improvements in the plan's funded percentage), proposed
Treasury regulations--which taxpayers may rely upon--modify these
rules. The unit credit funding method bases its calculations on the
benefits earned (accrued) at the beginning of the year and earned
during the year, and as a result, is a more conservative method for
determining a plan's normal cost. Specifically, the proposed
regulations permit the plan to determine its accumulated funding
deficiency and status (as endangered or critical) based on
reasonableness standards and not the unit credit funding method. In
addition, the proposed regulations only require the unit funding method
for determining the plan's funded percentage and for purposes of one of
the tests to determine critical status (comparing the present value of
reasonably anticipated contributions for the current plan year to the
sum of the plan's normal cost and interest on the plan's unfunded
liability).
______
Questions Submitted by Hon. Rob Portman
Question. My understanding is that if a multiemployer pension plan
is certified as a ``critical status'' plan under the Pension Protection
Act of 2006, and the plan's trustees adopt and implement a
rehabilitation plan, the employer excise tax liability for the
accumulated funding deficiency is waived. If the pension fund takes all
reasonable measures to avoid insolvency but still becomes insolvent,
what happens to the excise tax? Under that scenario, docs the employer
become liable for the accumulated funding deficiency excise tax when
the plan becomes insolvent?
Answer. Generally, if a multiemployer plan has an accumulated
funding deficiency (determined based on assumptions under the
reasonableness standards), an excise tax equal to 5 percent of the
accumulated funding deficiency as of the end of the plan year applies.
In addition, an excise tax of 100 percent of the accumulated funding
deficiency applies if the accumulated funding deficiency is not
corrected within a certain period. However, these excise taxes are
waived for plan years when the plan is in critical status (also
determined based on assumptions under the reasonableness standards). It
appears that a policy intent behind waiving the excise taxes for plans
in critical status is to allow the money that would otherwise be used
for payment of the taxes to instead be used to rehabilitate the plan.
An exception to this waiver applies if a critical status plan fails
to meet the requirements of its rehabilitation plan by the end of the
rehabilitation period, or if it has received a certification for three
consecutive years that the plan is not making the specified ``scheduled
progress'' in meeting its rehabilitation plan requirements. The amount
of the excise tax will then be the greater of (1) the aunt of the
contributions necessary to meet applicable benchmarks or requirements
for each plan year until the benchmarks or requirements are met or (2)
the accumulated funding deficiency. It is our understanding that, in
practice, the excise tax is rarely (if ever) paid in these situations.
If a critical plan changes its status to insolvent, the code does
not indicate whether the excise tax would apply, nor has Treasury
issued guidance on this issue. As a result, it is unclear what occurs
in practice, but a reasonable assumption is that the excise tax is not
paid when this change in status occurs.
Question. On page 46 of your report (JCX-30-18), you note that in
determining an employer's withdrawal liability, ``a portion of the
plan's unfunded vested benefits is first allocated to the employer,
generally in proportion to the employer's share of plan contributions
for a previous period. The amount of unfunded vested benefits allocable
to the employer is then subject to various reductions and
adjustments.'' Can you elaborate on the reductions and adjustments that
could most significantly change an employer's annual withdrawal
liability calculation?
Answer. There are three ways that withdrawal liability can arise:
(1) complete withdrawal (generally where an employer permanently ceases
operations under the plan or ceases to have an obligation to make
contributions to the plan); (2) partial withdrawal (generally if, on
the last day of a plan year, there is a 70-percent contribution decline
or there is a partial cessation of the employer's contribution
obligation); and (3) mass withdrawal (generally where every
contributing employer or substantially all employers withdraw from the
plan pursuant to an arrangement or agreement).
To determine an employer's withdrawal liability, there are two
general steps: (1) determine the employer's withdrawal liability, and
then (2) determine the employer's annual installment amount.
1. Determining withdrawal liability: to determine a withdrawing
employer's share of the plan's unfunded liability (vested benefits
minus assets), this first step requires an allocation of unfunded
liability to the withdrawing employer as compared to all employers
contributing to the plan. This allocation is determined based on the
date(s) of the valuation of assets and liabilities, the actuarial
assumptions and methods used, and the allocation method chosen by the
plan. The basic allocation method generally looks at the change in the
unamortized amount of unfunded vested liabilities for each year in
which the employer is obligated to contribute to the plan, compares
that employer's amount of change to that of all employers contributing
to the plan, and then allocates this liability among the employers
required to contribute that year--based on what they were obligated to
pay over that year and the prior 4 years. This is the average of the
employer's contributions over the 5 years, divided by the contributions
to the plan by all employers over the 5-year period. Other rules apply.
However, as noted, there are a number of rules that can
reduce and adjust withdrawal liability, described further
below.
2. Determining annual installments: the annual installment
determination is generally determined based on the employer's
contributions in the preceding 10 years. It is the highest contribution
rate in the 10 preceding years including the year of withdrawal,
multiplied by the employer's average contribution base in the three
years (of that 10) in which the base was greatest. (``Base'' means
covered hours or days.)
Here are some of the more significant rule rules that permit
reductions and adjustments to an employer's withdrawal liability (this
list is not all-inclusive):
20-year cap
Unless a mass withdrawal occurs, the employer's liability is
limited to 20 annual installments. These are the annual installments
(in step 2 above) of the employer's total withdrawal liability which
are payable in level annual installments amortized over a specified
period. If the period exceeds 20 years, the payments are not required
after year 20.
insolvent employers
An employer undergoing a ``liquidation or dissolution'' (not a
reorganization) is liable for an amount equal to 50 percent of its
normal withdrawal liability (unfunded vested benefits). However, the
employer's exposure for the next 50 percent of its normal withdrawal
liability is limited to the employer's liquidation or dissolution
value. This rule is applied on a controlled group basis.
In addition, if an employer withdraws from more than one plan as
part of the same liquidation or dissolution, its liability is allocated
to each plan based on the ratio that its liability to each plan bears
to its total liability (calculated before applying any applicable
limitations).
``free look'' rule
This rule is intended to encourage new employers to join the plan
despite the risk of withdrawal liability. It permits employers that
meet certain conditions to enter the plan and later leave it without
incurring withdrawal liability, and only applies if a plan sponsor
specifically adopts the rule. This rule requires the employer to leave
the plan within the earlier of the plan's vesting period or within 6
years from the employer's date of entry into the plan. In addition; the
employer must have made less than 2 percent of the total contributions
to the plan in each year of membership and cannot have taken a previous
``free look.'' Other rules apply, including that an employer eligible
for free look nonetheless may be allocated liability upon a mass
withdrawal.
labor dispute
A labor dispute involving an employer's employees, such as a strike
or lockout, will not result in a withdrawal if an employer suspends
contributions under the plan during the dispute.
industry specific rules
Special rules apply to certain industries, including the building
and construction industry, the entertainment industry, the retail food
industry, the coal industry, and the trucking, moving, and public
warehousing industry. The Pension Benefit Guaranty Corporation may also
prescribe regulations for plans in industries other than the
construction or entertainment industries that are similar to the rules
that apply to the construction and entertainment industries.
For the building and construction industry (defined in the Taft-
Hartley Act), if certain conditions apply, a complete withdrawal is
only deemed to occur if the employer ceases to have an obligation to
contribute under the plan and the employer continues to work in the
industry in the same geographic area, or resumes such work within 5
years and does not resume contributions to the plan. The conditions for
eligibility are generally that substantially all union employees
participating in the plan work in the building and construction
industry and the plan--primarily covers employees in this industry or
is amended to provide that this particular rule applies. Other rules
apply for when a partial withdrawal is considered to occur.
For the entertainment industry (generally, motion picture, theatre,
radio, television, sound or visual recording, music, and dance), if
certain conditions apply, a complete withdrawal is only deemed to occur
if the employer ceases to have an obligation to contribute under the
plan and the employer continues to work in the plan's jurisdiction, or
resumes such work within 5 years and does not resume contributions to
the plan. The conditions for eligibility are generally that the plan
primarily covers employees in the entertainment industry, there is an
obligation to contribute to the plan for work in the industry primarily
on a temporary or project-by-project basis, and the plan has not been
amended to deny this particular rule to a group or class of employers
of which the employer is a member. Other rules apply for when a partial
withdrawal is considered to occur.
Sale of All or Substantially All Assets in Arm's Length Transaction
Between Unrelated Parties
If this rule applies, the employer's withdrawal liability is
limited to the greater of (1) a portion of the employer's liquidation
or dissolution value determined without regard to withdrawal liability
or (2) the unfunded vested benefits attributable to that employer (if
the plan uses the attributable method of allocating withdrawal
liability). The first prong is determined on a sliding scale from 30 to
80 percent of the employer's liquidation or dissolution value, based on
a value of $5 million to values that exceed $25 million. If the
employer withdraws from more than one plan, this limit is apportioned
among the plans (so it is the employer's aggregate limit).
mandatory de minimis reduction
A mandatory de minimis reduction applies to employers that meet
thresholds for minor participation in the overall plan, and where the
employer's withdrawal liability is less than $150,000. The de minimis
reduction amount is a maximum of $50,000 (it is less if 0.75 percent of
the plan's unfunded vested benefits is less than $50,000). If the
employer's withdrawal liability exceeds $100,000, the reduction is
adjusted downwards by the excess of the employer's liability over
$100,000. However, mandatory de minimis reductions are not permitted if
a mass withdrawal occurs.
elective de minimis reduction
If an employer's withdrawal liability is less than $250,000, the
plan sponsor can amend the plan to apply a de minimis reduction up to
$100,000 (or if less, 0.75 percent of the plan's unfunded vested
benefits). If the employer's withdrawal liability exceeds $150,000, the
reduction is adjusted downwards by the excess of the employer's
liability over $150,000. However, elective de minimis reductions are
not permitted if a mass withdrawal occurs.
______
Prepared Statement of Hon. Sherrod Brown, a U.S. Senator From Ohio, Co-
chairman, Joint Select Committee on Solvency of Multiemployer Pension
Plans
WASHINGTON, DC--U.S. Sen. Sherrod Brown (D-OH)--co-chair of the
Joint Select Committee on Solvency of Multiemployer Pension Plans--
released the following opening statement at today's hearing.
Thank you, Senator Hatch, and thank you to all my colleagues on the
committee.
I'd like to welcome our witnesses, Thomas Barthold of the Joint
Committee on Taxation, and Ted Goldman, a senior pension fellow at the
American Academy of Actuaries.
We had a productive meeting the last time we met, and it's clear
that people of both parties on this committee are ready to work in good
faith to find a solution to this crisis.
There are more than 100 multiemployer pension plans on the brink of
failure, with members in every single State in the country.
More than 1.5 million workers and retirees across this country are
at risk of losing the retirement security they earned over a lifetime
of hard work.
Small businesses are at risk of collapsing if they end up on the
hook for pension liability they can't afford to pay.
Groups as diverse as the Chamber of Commerce and labor unions and
the AARP are all pushing for a solution, because they know what is at
stake.
And that's what we will explore here today: how we got here and
what's at stake, as we work to solve this crisis for retirees, workers,
small businesses, and taxpayers.
These are workers and businesses who did everything right.
By joining with other businesses, companies thought they were
guaranteeing their workers a secure retirement, because experienced
trustees were supposed to manage the investment.
This year, I talked with a small business owner from the Mahoning
Valley in Ohio, whose business participates in the Central States plan.
After we met, he wrote me a letter saying, ``I have owned my business
for 18 years, and the company has been in my family for over 60 years.
It has made contributions to this fund to ensure that the hard work and
dedication of our employees pay off in the form of a pension.''
But he goes on to say that, ``Many employers that once contributed
to these plans have simply gone out of business, leaving the remaining
employers to support the remaining employees and retirees of the
companies that have closed. Please, we are asking you to get together
with your colleagues, reach across the aisle, and find a solution that
will help my employees keep a job.''
These are the kind of business-owners we're talking about--honest
men and women trying to do right by their workers.
We also need to remember what workers gave up to earn these
pensions. Workers in these plans sat at negotiating tables and
sacrificed pay and other benefits in the short term, in order to
guarantee a pension when they retired.
Too many people in Washington don't really understand what happens
during these union negotiations. But we have to be clear--these workers
earned their pensions, and they gave up pay to do it. They paid into
this system for years.
Now these plans are about to fail, through no fault of these
workers or these businesses.
Each plan is different and there are many factors that played a
role in getting them to this place. Many of these plans are in the same
industries that have been affected by decades of bad trade deals,
outsourcing of jobs, and general shifts in the American economy.
There's also no question that the economic collapse of 2008
devastated these plans and the people and businesses who depend on
them.
Even the coal miners pension--an industry that has been badly hurt
over the past few decades--was nearly 90 percent funded before the
financial crisis.
If these plans fail, taking thousands of businesses and jobs with
them, the Pension Benefit Guaranty Corporation is supposed to step in.
But the PBGC is also on the brink of failure. It's $67 billion in the
red, with just $2 billion in assets. If the PBGC fails, it will be up
to Congress to step in, or allow the entire multiemployer pension
system to fail.
Failure is not an option. Failure would wipe out the retirement of
10.1 million American workers and retirees, and force American
businesses to file bankruptcy, lay off workers, and close their doors.
The problem only gets more and more expensive to fix the longer we
wait.
That's why our work on this bipartisan committee is so important--
we must fix this now, when we can still save these businesses, these
jobs, and these pensions.
I'm eager to hear from our witnesses today, from Chairman Hatch,
and from my fellow committee members.
Thank you.
______
Prepared Statement of Ted Goldman, MAAA, FSA, EA,
Senior Pension Fellow, American Academy of Actuaries
Distinguished Senators and House members, on behalf of the Pension
Practice Council of the American Academy of Actuaries, I am Ted
Goldman, senior pension fellow at the Academy. I appreciate this
opportunity to provide testimony to the Joint Select Committee on
Solvency of Multiemployer Pension Plans. The Academy is a strictly non-
partisan, objective professional association representing U.S.
actuaries before public policy makers. As a member of the Academy, I am
also bound by its Qualification Standards, its Code of Conduct and the
Actuarial Standards of Practice. The Academy's Pension Practice Council
has diligently been working over the past few years to analyze the
financial condition of troubled multiemployer plans and to provide
actuarial analysis of the challenges the multiemployer plan system
faces and potential ways forward to address them.
In keeping with the subject of today's hearing, I am here to
provide you with information regarding the history and current status
of U.S. multiemployer plans.
introduction
Of the more than 10 million people who participate in about 1,400
multiemployer pension plans,\1\ in excess of 1 million are in
approximately 100 plans that will be unable to pay the full benefits
they have been promised under current projections.\2\ The Pension
Benefit Guaranty Corporation (PBGC)--the government-sponsored program
designed to backstop these troubled plans--is likewise projected to be
unable to pay all of the benefits that it guarantees, which are already
typically much smaller than the underlying plan benefits. If the PBGC
fails, participants in these plans could see their benefits cut by 90
percent or more.
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\1\ Pension Benefit Guaranty Corporation (PBGC), ``FY 2017 Annual
Report,'' November 15, 2017.
\2\ PBGC, ``FY 2016 Projections Report,'' August 3, 2017.
As it stands now, participants in these failing multiemployer plans
will not receive the full retirement benefits they expect, nor will
they even receive the level of benefits guaranteed by the PBGC. Benefit
reductions could significantly affect the livelihoods of the retirees
and their families who will rely on this income during their retirement
years. In turn, these reductions could have broader implications for
our economy and our social safety net programs.
multiemployer plan basics
A defined benefit (DB) pension plan provides employees with
lifetime monthly payments in retirement. A multiemployer DB pension
plan is a retirement plan sponsored by at least two employers in the
same industry or geographic region, established by collective
bargaining agreements, and managed by a board of trustees containing an
equal number of members appointed by the union and the employers. Plans
can be local, covering employees working in a narrow geographical
region, or they can be national and cover employees working in crafts
and trades throughout the United States.
Multiemployer pension plans are found in private sector industries
that are often characterized by small employers and workers who switch
employers frequently. More than half of multiemployer pension plans are
rooted in the construction industry where workers tend to move where
the work is. Among construction industry workers, the median tenure
with an employer in 2016 is 4 years.\3\ In addition, about 82 percent
of construction establishments employ fewer than 10 workers; less than
1 percent of construction establishments employ 100 workers or more.\4\
In addition to construction, other industries that tend to have workers
covered by multiemployer pension plans are trucking, garment
manufacturing, and grocery stores.\5\
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\3\ Bureau of Labor Statistics (BLS), ``Employee Tenure in 2016,''
September 22, 2016.
\4\ BLS, ``Quarterly Census of Employment and Wages,'' accessed on
April 17, 2018.
\5\ BLS, ``Multiemployer Pension Plans,'' Spring 1999.
Multiemployer pension plans are distinct from single-employer
pension plans that are sponsored by one employer. Multiemployer pension
plans are also distinct from multiple employer plans, which involve
more than one employer but are not collectively bargained and do not
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necessarily cover a mobile workforce.
Contributions to multiemployer pension plans are collectively
bargained, and workers typically forgo some direct compensation in
exchange for contributions to retirement income plans. In turn,
employers are required to fund the plans in accordance with their
collective bargaining agreements and subject to certain regulations.
The contribution rate is usually a specific amount per hour or other
unit worked by or paid to the employee. The plans must pay PBGC
premiums for underlying financial support of an insured level of
benefit in the event of a plan failure. Assets are maintained in a
qualified trust, and trustees retain investment professionals to assist
with the management of fund assets.
Multiemployer pension plans are governed by a joint board of
trustees. As fiduciaries, the trustees must act for the sole and
exclusive benefit of the participants and beneficiaries. In general,
governance terms for multiemployer plans are defined in a trust
agreement, and the benefits provided by the plan are defined in a plan
document. Traditionally, the board of trustees has sole authority to
determine the plan design and level of benefits that will be supported
by the negotiated contributions. However, in some cases, collective
bargaining agreements may describe the plan design and benefits. In
these situations, the trustees are given the authority to collect
sufficient contributions to fund the benefits.
The amount of benefits can vary widely from plan to plan. In
addition, different plans use different formulas to define the level of
benefits. For example, a plan may define the benefit based on a flat
dollar amount for each year a participant works. Alternatively, a plan
may define the benefit as a percentage of the employer's contribution.
To illustrate, in the first example, a benefit equal to $60 per year of
service would result in a monthly benefit starting at retirement of
$1,800 ($21,600 per year) for an employee with 30 years of service. In
the second approach, a contribution-based formula could provide a
benefit equal to 2 percent of the total employer contributions. Thus if
the contribution was equal to $2 for each hour worked, an employee who
works 1,500 hours in a year would earn a benefit of $60 per year (2
percent times 1,500 hours times $2) and after 30 years be entitled to
$1,800 per month payable at retirement.
To help put the financial security of a pension plan into context,
it may be helpful to consider the following formula: Benefits +
Expenses = Contribution + Investment Earnings. In other words, the
benefits paid to plan participants and expenses paid to operate the
plan must be covered by employer contributions, accumulated with
investment earnings. If employer contributions or investment earnings
fall short of expectations, available resources may not support
promised benefits and required expenses. This dynamic stands true and
will be useful when considering options and understanding the events
that led up to the current situation.
Defined benefit plans differ from defined contribution plans, such
as 401(k) plans, in that the retirement income is distributed as a
lifetime income stream at retirement rather than as an individual
account balance that holds the employer contributions. Defined benefit
plans pool risks for investment as well as longevity whereas in defined
contribution plans risks are primarily borne by each participant.
In a DB plan, all of the money in the plan is available to pay any
of the benefits owed by the plan to any participant. In a multiemployer
DB plan, this sharing of risks occurs not just from one employee of a
company to another, but also across the employee populations of
multiple companies.
benefits to labor and management
Multiemployer plans incorporate risk sharing and portability to
provide retirement security to career union workers.
The pooling of employers provides stability, as the plan does not
depend on the financial position of a single company. If an employer
goes out of business, the multiemployer plan continues functioning as a
separate entity, and contributions from remaining employers continue.
Participation by numerous employers leads to more covered participants
and greater assets, allowing these plans to achieve economies of scale
and reduce operating expenses. Without the economies of scale of a
multiemployer plan, the same benefits could not be provided to
participants for the same cost, as more resources would be spent on
operating expenses.
Another characteristic of multiemployer plans is their portability.
With a multiemployer plan, service with all contributing employers is
aggregated for benefit calculation purposes, allowing employees
uninterrupted pension coverage as they move among companies
participating in the plan. Without the aggregation of pension service,
an employee changing jobs could lose benefits by not having enough
service to have vested rights to a pension. This aggregation feature is
especially important in industries such as construction and
entertainment, where it is common for employees to work for multiple
companies as they move from project to project. Furthermore,
multiemployer plans usually have reciprocity agreements with plans in
other geographic areas covering employees in the same industry or
trade, allowing pension portability with employers that participate in
other plans.
The reasons that prompted the adoption of multiemployer plans are
largely still relevant today. In particular, portability of benefits
and the economies of scale are still valid. As evidence of this
relevance, several recent bills introduced in Congress would expand the
availability of multiple employer plans to companies with no common
collective bargaining connection as a means of improving cost-effective
access to retirement plans for employees.
early history of multiemployer plans--pre-erisa
Multiemployer plans have evolved and adapted over time either to
strengthen areas of weakness or to respond to changes in the business
or economic environment. The following historical context provides a
baseline to addressing the current challenges.
The Bureau of Labor Statistics has occasionally done studies of
multiemployer pension plans, generally tracking their prevalence and
reporting on plan features. Only a few multiemployer pension plans
existed before the Taft-Hartley Act was enacted. Plans grew in
prominence during the 1950s and 1960s. Such plans covered about 1
million participants in 1950, 3.3 million in 1959, 7.5 million in 1973,
and 10.4 million in 1989. Throughout the 1990s and since, the number of
workers in such plans has been steady at just over 10 million.\6\
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\6\ BLS, ``Multiemployer Pension Plans,'' Spring 1999.
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The Beginning--Simplicity
The first employer-funded multiemployer pension plan is thought to
be one that was started in 1929 by Local 3 of the Brotherhood of
Electrical Workers and the Electrical Contractors Association of New
York City.\7\ Then in the 1930s and 1940s negotiated plans appeared in
industries such as the needle trades and coal mining. The employer's
responsibility was typically limited to the amount specified in the
collective bargaining agreement. Plans paid out benefits at a level
that could be afforded based on the available resources, and if those
resources proved inadequate, the employers were not liable for the
shortfall. It is of interest to note that in 1935 life expectancy from
birth was about 60 years and individuals who reached the age of 65
might expect to live another 12 years, on average,\8\ whereas today
U.S. life expectancy is over 78 years of age \9\ with individuals
reaching age 65 expected to live another 20 years on average.\10\
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\7\ Employee Benefits Research Institute, ``Multiemployer Plans,''
accessed on April 17, 2018.
\8\ William J. Wiatrowski, ``Changing Retirement Age: Ups and
Downs,'' April 2001.
\9\ National Center for Health Statistics, ``Life Expectancy,''
accessed on April 17, 2018.
\10\ Social Security Administration, ``Life Expectancy,'' accessed
on April 17, 2018.
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Joint Labor and Management Responsibility
In 1943 the War Labor Board ruled \11\ that fringe benefits were
not subject to the wage freeze resulting from the Wage and Salary Act
of 1942 that attempted to contain wartime inflation. This ruling
encouraged employers to offer pension, health, and welfare benefits as
an alternative means to attract workers. Then in 1947, the Labor-
Management Relations Act (also known as the Taft-Hartley Act) provided,
among other matters, for the establishment and operation of pension
plans administered jointly by an employer and a union. Multiemployer
pensions grew in popularity and continued to operate and provide
retirement benefits with relatively few statutory standards.
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\11\ Georgetown University Law Center, ``A Timeline of the
Evolution of Retirement in the United States,'' accessed on April 17,
2018.
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the passage of erisa--shift of employer responsibility
from contributions to benefits
In 1974, the Employee Retirement Income Security Act (ERISA) was
passed. ERISA brought a fundamental change to private sector pension
plans, including multiemployer plans. ERISA protected benefits that
plan participants had already accrued, often referred to as the ``anti-
cutback'' rule. ERISA also shifted the responsibility of the employer
from the negotiated contribution amount to an obligation to fund the
promised benefit. In other words, employers contributing to
multiemployer plans became responsible not only for their negotiated
contributions, but also for any funding shortfalls that developed in
the plans.
ERISA also introduced a number of provisions aimed at protecting
participants including minimum funding standards, expanded participant
disclosures, and fiduciary standards. Minimum funding requirements and
maximum tax deductible limits were also established. It was important
to make sure sufficient contributions were made to secure employer
commitments, but at the same time, prevent employers from using the tax
deductibility advantages of trusts beyond what was needed to secure the
benefits. Minimum funding requirements strengthened the financial
position of multiemployer plans.
ERISA also established the PBGC to provide mandatory insurance for
DB pension plans. Separate insurance programs were established for
single-employer and multiemployer plans. These programs have different
premium requirements and benefit guarantees. They are also structured
differently. For multiemployer plans, financial assistance is provided
to a plan that becomes insolvent, but plan administration remains in
effect. In the single-employer program, the PBGC takes over trusteeship
for a plan that terminates with insufficient assets.
Under ERISA, funding requirements for multiemployer plans are
primarily based on liabilities calculated using the expected rate of
return on plan assets. Under this approach, it is anticipated that
there will be periods of both strong and weak investment performance,
and over time these will tend to offset each other. ERISA does not
contain any provisions requiring that plans maintain the surpluses
created by investment gains for use as a buffer against future losses.
In fact, until 2002, the maximum deductible contribution rules strongly
discouraged multiemployer plans from maintaining funding surpluses, as
contractually required employer contributions would not have been
deductible unless the plan trustees found a way to eliminate the
overfunding.\12\
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\12\ Economic Growth Tax Relief Reconciliation Act (EGTRRA) of
2001, Pub. L. 107-16.
During the late 1990s, very strong asset returns led many plans to
improve benefit levels in order to share the gains with participants
and protect the deductibility of the employer contributions.
Unfortunately, these years were followed by a period of very poor asset
returns that erased much of these investment gains. While the
investment gains proved to be temporary, the increased benefit levels
that plans adopted were not, as they are protected by ERISA's anti-
cutback provisions. This combination of temporary asset gains and
permanent benefit improvements is a contributing factor in the
challenges facing multiemployer plans today.
introduction of withdrawal liability
While ERISA introduced the concept of minimum required contribution
levels for multiemployer plans, employers had the ability to circumvent
these rules by simply withdrawing from the plans. The Multiemployer
Pension Plan Amendments Act (MPPAA) of 1980 was intended to prevent
employers from exiting a financially a troubled multiemployer plan
without paying a proportional share of the underfunding liability.
MPPAA required a withdrawal liability assessment for employers exiting
a multiemployer plan that is less than fully funded. At the time, few
plans faced severe funding issues, but withdrawals were recognized as a
potential problem that threatened the long-term financial health of
plans because as employers left, the liability for their employees
(termed ``orphan liabilities'') became the responsibility of the
employers remaining in the plan. This could result in significant
financial burdens for the remaining employers for employees who never
worked for them. In addition, it could deter new employers from joining
a plan.
Prior to MPPAA, an employer that withdrew from an underfunded
multiemployer plan did not have to pay anything to the plan unless the
plan was terminated within 5 years of the employer's withdrawal. In
addition, the amount paid was limited to no more than 30 percent of the
employer's net worth. Under MPPAA, the employer must pay a withdrawal
liability equal to the employer's proportionate share of the unfunded
vested liabilities at the time of departure.
While MPPAA took steps to address the problem of employer exits,
the new withdrawal liability rules did not fully stem the growth of
orphan liabilities that remained in plans. Bankrupt employers often
were unable to pay the full withdrawal amounts. Changes to the size of
the liability due to economic or demographic factors also remained in
the plan. The withdrawal payment requirements include a payment
schedule with a 20-year cap that can leave behind unfunded liabilities.
And finally, for some industries, such as construction and
entertainment, there are no withdrawal liability assessments unless an
employer continues to perform the same type of work in the same
jurisdiction after withdrawing from the plan.
contributing factors to the current challenges
Following several decades during which nearly all participants
received their full benefit amounts from multiemployer pension plans,
weaknesses have been exposed which have demonstrated there are limits
to the stability and benefit security intended in the current system.
In 1985 and 1986 the first signs of distress were detected in a small
number of plans which exposed some of the weaknesses of the withdrawal
liability approach laid out in MPPAA. In spite of generally meeting the
ERISA funding requirements, serious challenges (described below)
emerged as plans matured, and these challenges were exacerbated by the
recession of 2007-2009. Today the guaranteed benefits that PBGC expects
to pay participants in troubled plans produce a liability of $65.1
billion on PBGC's financial statements.\13\
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\13\ W. Thomas Reeder, testimony before the House Committee on
Education and the Workforce Subcommittee on Health, Employment, Labor,
and Pensions, November 29, 2017.
The primary contributors to the current challenges relate to
investment performance, past benefit increases, the maturation of
plans, the decline of unions and some industries, and weaknesses in the
withdrawal liability requirements. Typically a combination of these
factors has contributed to a projection that a plan will be unable to
pay benefits.
Pension Assets Are Invested in Diversified Portfolios
Plans have invested in diversified portfolios to try to achieve
investment returns that can support higher benefit levels and lower
contribution requirements than would be possible if the assets earned
risk-free rates of return. These investment strategies, however, are
not guaranteed, and plans need additional contributions or reduced
benefits if the anticipated investment returns are not achieved.
In 2000, the price of technology stocks fell drastically. Like most
institutional investors, multiemployer pension plans had dot-com
investments, and the low returns reduced pension surpluses, not long
after the granting of benefit increases. By the mid-2000s, most plans
recovered, but some plans remained financially weakened. The recession
in 2007-2009 added further strain to the financial stability of most
plans.
Past Surpluses Led to Benefit Increases That Were Not Sustainable
Funding pension plans using diversified portfolios can strengthen a
plan's funding status when investment returns are robust. These
investment gains may be needed to offset losses when returns are weak.
However, following the large asset gains in the late 1990s, many plans
became significantly overfunded, and responded by increasing benefit
levels or taking contribution holidays. Both dynamics of the collective
bargaining process and regulatory policies were not conducive to
maintaining overfunded plans and contributed to this trend. These
benefit increases ultimately became unaffordable for many plans when
their assets declined dramatically in the subsequent decade.
Mature Plans Have Fewer Resources to Recover From Investment Losses, as
the Assets Grow Relative to the Contribution Base Supporting
the Plan
In young plans, contributions are the primary source of asset
growth and investment returns are comparatively small, while the
opposite is true in mature plans. As the plan relies more heavily on
investment returns, it becomes more difficult to make up for investment
losses through additional contributions.
Fewer Workers Are Employed in Industries Sponsoring Multiemployer Plans
Some unionized industries have seen significant transformations
over time. In some industries the workforce has shifted to more non-
union employees as a result of restructurings or regulatory changes,
while others have seen declines in the number of employees needed due
to global competition, automation, or general declines in the industry.
A decline in the active workforce results in a diminished economic base
for collectively bargained employer contributions. While pension assets
grew to historical levels, union membership started to see a steady
decline. Private-sector union membership in 1983 was 12 million. By
2015 that number had fallen to 7.6 million.\14\ While pension assets
were increasing due to the stock market, the contribution base was
beginning to decline due to fewer workers in the plans.
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\14\ Megan Dunn and James Walker, ``Union Membership in the United
States,'' BLS, September 2016.
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Employers Have Exited Multiemployer Pension Plans, Either Through
Bankruptcy or Withdrawal, Leaving Unfunded Obligations for the
Remaining Employers in the Plans
These orphan liabilities add to the maturity of a plan and subject
the remaining employers to additional risks related to the funding of
the orphan liabilities. Orphan participants make up a significant share
(about 15 percent, or 1.6 million) of total multiemployer
participants.\15\
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\15\ Alicia H. Munnell et al., ``Multiemployer Pension Plans:
Current Status and Future Trends,'' Center for Retirement Research at
Boston College, December 2017.
The majority of multiemployer plans remain healthy and have endured
many of the above challenges. However, these factors have created
significant stress and pressure on a number of plans and participants
which the Joint Select Committee is seeking to address during its work
this year.
actions taken to-date to address these recent challenges
In recognition of the growing risks associated with multiemployer
pension plans, a number of actions have taken place. The Pension
Protection Act of 2006 (PPA) amended ERISA and the Internal Revenue
Code to make certain changes to multiemployer funding rules. The
changes were designed to give plan trustees more flexibility in dealing
with funding challenges and require plans to identify and address
problems in time to prevent further deterioration of the short- and
long-term financial security of the plan.
PPA classifies multiemployer plans into one of three categories
based on current and projected funding levels. In short, a plan that is
projected to fail to meet its minimum funding requirements in the next
4 or 5 years is in critical status (the ``red zone''). A plan that is
not in critical status but is currently below 80 percent funded or
projected to fail to meet its minimum funding requirements in the next
seven years is in endangered status (the ``yellow zone''). A plan that
is neither in critical status nor in endangered status is considered to
be in the ``green zone.'' Plans that are in critical or endangered
status are required to take corrective action to rehabilitate or
improve their funding. While PPA's focus on the projected financial
condition and early adoption of corrective measures has helped many
plans gain a better understanding of their financial condition, these
tools were insufficient to deal with the dramatic asset losses and
economic contraction that immediately followed the effective date of
the law. Thus, the Multiemployer Pension Reform Act of 2014 (MPRA) was
enacted, which provided additional tools and strategies for severely
distressed plans.
In addition to the classifications defined under PPA, MPRA added a
fourth category of ``critical and declining'' status to further
differentiate those plans projected to become insolvent within the next
20 years. One of the benefits of this categorization has been a better
perspective on how many plans may be at risk and the degree of the
risk. Of the nearly 1,300 plans across all industries identified in one
study, 62 percent are green plans, 12 percent are endangered, 16
percent are critical, and 10 percent are critical and declining. The
construction, service, and entertainment industries have the lowest
percentage of critical and declining plans (4 percent, 6 percent, and 6
percent respectively). The industries with the highest percentage of
declining plans are manufacturing (36 percent), transportation (20
percent), and retail/food (10 percent).\16\ Keep in mind, however, that
a green plan today is still subject to the same risk factors that
caused other plans to enter a red or critical status.
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\16\ Jason Russell, ``Keeping Healthy Plans Healthy,'' April 12,
2018.
Of particular note, MPRA broke new ground with respect to pensions
by allowing plan sponsors, subject to an application process, to
voluntarily reduce benefits that have already been earned, including
for current retirees (with some exceptions). Only plans that face
inevitable insolvency are eligible for this provision, and after the
application of the reductions, all participant benefit must remain at
least 10 percent above the level guaranteed by the PBGC. These
``benefit suspensions'' offered a potentially effective way for plans
to avoid insolvency, acknowledging the adverse impact to participants.
MPRA also increased PBGC premiums from $12 to $26 (to be indexed in the
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future).
Between PPA and MPRA, the tool box for identifying and addressing
multiemployer plans' financial condition expanded to include:
Assessment of the level of plan risk through the zone status
classifications.
Plans in endangered status must develop a funding
improvement plan.
Plans in critical status must develop a rehabilitation plan.
Plans in critical and declining status may apply for a
suspension of benefits (benefit reductions) if doing so would
enable the plan to avoid insolvency.
Higher maximum tax-deductible limits to allow the buildup of
greater surpluses.
Partitions that allow plans to move a portion of the
liabilities to the PBGC prior to insolvency.
Mergers facilitated by PBGC to combine troubled and healthy
plans to generate economies of scale while saving PBGC
resources in the long-term.
effectiveness of recent legislation
On the positive side, the challenges facing the multiemployer plan
system are now out in the open and better data is being accumulated to
facilitate helpful analysis. Prompted by recent legislation, distressed
multiemployer plans have taken steps to address funding problems and
many have improved their financial health, but some have not. Of the
first 25 applications for benefit suspensions under MPRA, only four
have been approved and six are currently under review. The remaining 15
were either denied (five) or withdrawn (10). One of the largest plans,
the Central States Teamsters plan, was denied. Thus, while MPRA remains
a viable choice for plans, some plans may be too far down the road to
take advantage of it. The U.S. Department of the Treasury and PBGC have
taken steps to communicate feedback to those preparing applications to
help plans make decisions as to whether or not to apply and how best to
prepare applications if they choose to move forward. Treasury and PBGC
both now offer pre-application conferences to plan sponsors to further
facilitate the process.
Employers that have significantly increased contributions or
contribute to plans that have pared back benefit accrual rates and
ancillary plan features (such as early retirement or disability
benefits) have expressed concerns about their ability to remain
competitive. Many of them are in industries that have very thin profit
margins or are in competitive global markets.
A recent study \17\ indicates that aggregate contributions to
multiemployer pension plans from 2009 to 2014 increased by 6.9 percent
per year, significantly outpacing the average inflation rate of 2.1
percent over this period. Even though contributions are increasing, for
many plans, the amount of contributions is not closing the funding gap.
This can be measured on two bases--one that uses a discount rate tied
to the long-term expected return of the plan (46 percent of the plans
lost ground), and one based on a rate reflecting U.S. Treasury bonds
(75 percent of the plans saw an increase to the shortfall). At the same
time, roughly 75 percent of the plans had a minimum required
contribution of zero due to accumulated contributions being greater
than minimum requirements in the past years. According to the study,
between 89 percent and 94 percent of plans made contributions in excess
of their minimum.
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\17\ Lisa A. Schilling and Patrick Wiese, ``Multiemployer Pension
Plan Contribution Analysis,'' Society of Actuaries, March 10, 2016.
The partition and plan merger options available under MPRA have
been used sparingly. To date, there has been only one approved
partition.
overall status of the current system--historical and future trends
The applications for benefit suspensions under MPRA are very
thorough and detailed. As part of the application, the plan sponsor
must describe the key factors that led to the request. A few excerpts
from the descriptions provided by some of the plans that have filed
under MPRA illustrate the seriousness and state of affairs for these
programs.\18\
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\18\ Alicia H. Munnell et al., ``Multiemployer Pension Plans:
Current Status and Future Trends,'' Center for Retirement Research at
Boston College, December 2017.
Automotive Industries--Decline in automotive industry
businesses in the San Francisco Bay Area as a result of both
the decline over the last 10 years . . . and economic
recessions over the last 15 years. Plan employers engaged in a
fragmented, competitive industry and have higher labor costs.
Only four of the 149 original employers still exist. In 2000,
16 Ford and 10 Chrysler dealerships contributed to the plans.
As of 2015, only three of those 26 dealerships remain in the
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plan.
Bricklayers Local 7--Plan provides generous benefits
relative to non-union bricklayers. Experiencing increased
member attrition to nearby unions, which maintain plans that
are better funded. Decline in the number of union members in
the area.
Central States Teamsters--Deregulation of trucking in the
1980s and the economic and financial crisis since 2001 forced
many major trucking companies out of business. Of the 50
largest contributing employers that participated in 1980,
almost all are out of business and only three contribute today.
Ironworkers Local 16--Economic decline, loss of qualified
workers due to fewer opportunities, stagnant wages. Dramatic
drop in employers from 125 to 60 over the past 6 years. Large
bankruptcy from an employer that generated between 13 and 22
percent of work hours for members of the plan.
United Furniture Workers--The rapid increase in U.S.
furniture imports since the 1970s put increasing pressure on
U.S. furniture manufacturers and, thus, the pension plan. From
1981 to 2009, 35 contributing employers filed for bankruptcy.
Since 2008, 29 of 53 contributing employers have withdrawn from
the plan, and active participants have dropped from about 2,500
to 1,000.
Maintaining the financial health of multiemployer plans is an
important factor in stabilizing the multiemployer system. Three of the
most important indicators of vulnerable plans are:
Maturity levels--the ratio of inactive (retirees and vested
terminations) to active participants;
Funded status--commonly expressed as the assets divided by
the liabilities; and
Cash flow situation--a comparison of benefits paid out
versus contributions and investment earnings coming into the
plan.
Data is available from the required Form 5500 \19\ government
filings that offer information as to the health status of all plans.
Plans that have three or more inactive participants per active
participant have significantly more critical and declining plans than
those with less than a 3:1 ratio. Plans with funded ratios below 70
percent also tend to be in the critical and declining category.
Critical and declining plans have, on average, a negative annual cash
flow of 11 percent. By comparison, the average cash flow percentages
for yellow and green plans are a negative 1.2 percent and negative 1.6
percent respectively. Plans with two or more of these three
characteristics are especially vulnerable.
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\19\ Employee Benefits Security Administration, ``Form 5500
Series,'' accessed on April 17, 2018.
Pension plans also go through an aging process. In the early years,
assets are low and most of the growth in assets comes from the employer
contributions. There are very few retirees relative to active employees
and as a result contributions, which are generated based on the active
workforce significantly exceed benefit payments. As the plan matures,
more assets accumulate, and asset returns from investments become a
larger and larger source of the plan's income. At the same time, the
retiree population grows and in some industries there is a shrinking
contribution base. As this situation progresses, investment performance
becomes more and more important. Thus when actual investment returns
are lower than expected there is a resulting loss to the plan. There
are mechanisms to smooth out the impact of this volatility, but for
mature plans, these methods can create significant stress. This
situation is exacerbated if on top of the normal aging process, there
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are significant industry downturns and loss of participating employers.
Plan sponsors need to find ways to improve the financial position
of the plan, but to do this without placing burdens on participating
employers to keep them in the plan as well as make the plan attractive
to new employers. One approach that is emerging is to adopt variable
benefits for future service to the extent permissible under current
law. In plans that utilize this method, benefits move up or down with
investment performance and thereby minimize future withdrawal
liability. Strategies that can maintain benefit security, but eliminate
or significantly reduce the threat of withdrawal liabilities will help
avoid adding further burdens to the system. These strategies, however,
do not address underfunding for legacy liabilities and create a
challenge for allocating new contributions between paying off current
unfunded legacy benefits and funding the new benefit accruals.
conclusion
Multiemployer pension plans were created as a way to deliver
lifetime income retirement benefits to workers in blue collar
industries. Employers tended to be small and it was common for workers
to stay in an industry, but work for many employers over the course of
their career. The multiemployer approach captures economies of scale
and pools risks--an intended ``win-win'' for the employer and employee.
For decades, these plans worked much as expected, with little
threat of insolvency (the PBGC multiemployer plan program has provided
periodic financial assistance to only 70 multiemployer plans through
2015). However, a combination of economic, demographic, and regulatory
changes have placed a small but material segment of these plans at
risk. Employees who negotiated for these benefits as part of wage and
benefit packages were expecting to benefit from these arrangements at
retirement. Now those expectations may not be met.
I hope my testimony provided the Joint Select Committee context and
history leading up to the development of the current financial
challenges facing the multiemployer pension plan system. Identifying
solutions is not part of the scope of today's hearing, but from a
conceptual standpoint the options are straight-forward. One of three
actions must be taken: Either benefits are reduced (this is the current
course if there are no interventions), or contributions to the plans
have to increase, or as a third option, more risk can be taken by plans
to achieve prospective investment gains. Each option presents pros and
cons with very different outcomes to different stakeholders.
Thank you for asking me to speak today. The Pension Practice
Council of the American Academy of Actuaries stands ready to help you
at each step of the way with objective and non-partisan input.
Appendix
American Academy of Actuaries background information regarding
multiemployer pension plans:
Issue Brief: Overview of Multiemployer Pension System Issues,
http://www.
actuary.org/files/publications/IB-Multiemployer.06.27.2017.pdf.
Capitol Hill Briefing: Multiemployer Pension Plans/Potential Paths
Forward, http://www.actuary.org/files/publications/HillBriefing-
Multiemployer_June_27_
2017.pdf.
Issue Brief: Honoring the PBGC Guarantee for Multiemployer Plans
Requires Difficult Choices, http://www.actuary.org/files/publications/
PBGCissuebrief10.20.
16.pdf.
______
Questions Submitted for the Record to Ted Goldman
Questions Submitted by Hon. Orrin G. Hatch
Question. Please describe what employer's withdrawal liability
responsibility is a mass withdrawal event?
withdrawal liability in general
Answer. When a contributing employer withdraws from an underfunded
multiemployer pension plan, it must pay ``withdrawal liability,'' which
represents the employer's share of the plan's unfunded vested benefits.
The amount of the plan's overall unfunded vested benefits is determined
annually by the plan actuary.
Under the Employee Retirement Income Security Act of 1974 (ERISA),
when an employer withdraws from a multiemployer pension plan, it is not
obligated to pay its withdrawal liability in a lump sum. Rather, the
statute requires the employer to pay down its withdrawal liability
obligation, with accumulated interest, through periodic payments. The
amount of the periodic payment is determined based on the employer's
historical contribution rates and contribution base units, such as
covered hours or wages.
In general, the statute limits an employer's withdrawal liability
payments to 20 years; this is often called the ``20-year cap.'' In
other words, if the statutory periodic payments are not sufficient to
pay down the employer's allocated withdrawal liability, with
accumulated interest, the payments stop after 20 years. Any unpaid
withdrawal liability must be reallocated among the remaining employers
in the plan.
withdrawal liability in a mass withdrawal
A mass withdrawal has occurred for a multiemployer pension plan
when every employer--or substantially every employer--has withdrawn
from the plan. In a mass withdrawal situation, different rules apply to
how employer withdrawal liability is calculated.
The plan's overall unfunded vested benefits must be
calculated based on assumptions prescribed by the Pension
Benefit Guaranty Corporation (PBGC) for plan termination
situations. These conservative assumptions could substantially
increase the amount of unfunded vested benefits allocated to
each employer.
The other notable difference under a mass withdrawal is that
the 20-year cap ceases to apply. In many mass withdrawal
situations, the removal of the 20-year cap means that employers
will be obligated to make their statutory withdrawal liability
payments indefinitely.
Question. Where do pension obligations fall in the order of
priority in bankruptcy?
Answer. The status of withdrawal liability claims against an
employer that has filed for bankruptcy protection is not expressly
dealt with in either the U.S. bankruptcy code or ERISA. However, in our
observation, courts have generally held that a claim for withdrawal
liability is not entitled to priority status as an administrative
claim. As a result, withdrawal liability does not have priority status
and withdrawal liability is treated as a general unsecured claim.
funding standards
Question. In our initial review of the issues surrounding the
multiemployer pension plans, one of the primary concerns the committee
plans to investigate are the funding standards for these plans. The
issue is whether the funding standards are adequate, providing the
proper level of assets to cover the future liabilities of the plans. As
a preliminary, can you describe the funding methods for the
multiemployer plans prior to the enactment of the Employee Retirement
Income Security Act? What new funding standards were established by
ERISA, and what impact did these standards have on the funding of the
plans?
Answer. Before discussing statutory funding standards and funding
methods, it may be helpful to define certain terms commonly used in
pension funding. The ``normal cost'' is the value of benefits being
attributed to the coming plan year, and it often includes an adjustment
for expected administrative expenses. The ``actuarial liability'' is
the value of benefits that are attributed to prior plan years, in other
words, past service liabilities. To the extent that plan assets are
less than the actuarial liability, there is an ``unfunded liability.''
Prior to the 1976 effective date of ERISA, there were no Federal
statutory funding standards. Actuaries would advise plan sponsors as to
whether contributions and benefits were in balance. In simplified
terms, it was desirable for contributions to cover plan costs, which
included the normal cost and some amortization of the unfunded
liability. To the extent contributions equaled or exceeded plan costs,
the plan would be projected to become 100 percent funded over time.
ERISA imposed new minimum funding requirements on private sector
pension plans. The minimum requirements are determined annually based
on a notional ``funding standard account.'' Under the funding standard
account calculations, employer contributions must cover plan costs,
which include the normal cost and amortizations of changes in the
unfunded liability over a fixed period. Currently, the amortization
period is generally 15 years from inception, though there are legacy
layers of liability that have a longer outstanding period. To the
extent that accumulated contributions exceed accumulated plan costs,
the funding standard account will develop a ``credit balance.'' If,
however, contributions fall short of plan costs, there will be an
``accumulated funding deficiency,'' meaning the plan is not meeting its
minimum funding requirements. In that case, excise taxes on
contributing employers and other penalties may apply until the
deficiency is corrected.
Focusing only on multiemployer pension plans, the funding standards
under ERISA--as amended by the Pension Protection Act of 2006 (PPA)--
have provided a framework to target improving funding levels and work
toward restoring a credit balance for plans that are facing a funding
deficiency. Overall, funding levels for multiemployer pension plans
have improved in recent years, after the damage rendered by the poor
investment performance of the early 2000s and the recession of 2008-
2009. Today, more than 60 percent of the nearly 1,300 multiemployer
plans are in the ``green zone'' under PPA. However, approximately 100-
120 plans approaching insolvency will not be able to pay promised
benefits without a legislative solution or enhanced access to
regulatory approval of the restructuring remedies provided by the
Multiemployer Pension Reform Act of 2014 (MPRA).
discount rates
Question. In your testimony, you note that the majority of
multiemployer plans remain healthy. Is this actually the case, when in
fact PPA zone status reflects pension liabilities discounted at the
plans expected long-term investment return assumption? Given a low
return investment environment, is the use of a long-term, higher,
discount rate appropriate? Would your assessment of the relative health
of the multiemployer plans change if we used investment return
assumptions that reflect current market valuations or other more
conservative measures?
Answer. Two major concepts are implicit in these questions: (1) the
selection of an investment return assumption and (2) how different
measurements can inform an assessment of the health of a multiemployer
pension plan.
investment return assumptions
Under actuarial standards of practice (ASOPs) No. 27, the purpose
of measurement is an important factor in selecting a reasonable and
appropriate interest rate or investment return assumption. For example,
an investment return assumption may be used as a discount rate--often
referred to as the valuation interest rate--to determine the actuarial
present value of benefits under a pension plan. Alternatively, an
investment return assumption may apply to the rate of return expected
to be earned on plan assets over a period of time. For some purposes,
the valuation interest rate and the assumed rate of return on plan
assets are the same; for others, they are necessarily different.
The following are three common measurements relevant to
multiemployer pension plan funding, each of which uses a different
investment return assumption.
Actuarial accrued liability. This is the measurement of the
plan's accrued liability for benefits earned to date and is
based on a valuation interest rate assumption that represents
the expected return on plan assets over the long term. Under
ERISA, the assumption is the actuary's best estimate. For most
multiemployer plans, the assumption is in the range of 7.0 and
7.5 percent, which is set considering the plan's investment
policy, asset class expectations, and other factors. The
actuarial accrued liability generally serves as the basis for
determining ERISA minimum funding requirements, budgeting for
long-term sufficiency of contribution rates, and PPA zone
status.
Current liability. This is a measurement of the plan's
accrued liability and is based on a discount rate and mortality
tables prescribed by statute. Current liability is used for
certain disclosures and for determining maximum tax-deductible
limitations. It is also similar--but not identical to--an
assessment of the value of plan liabilities in a settlement or
immunization situation. The current liability interest rate
represents a weighted average of 30-year Treasury securities,
which is considered to be a proxy for current risk-free
interest rates. In other words, the current liability interest
rate is set independent of the expected return on plan assets.
For 2017, current liability interest rates were slightly above
3.0 percent.
Actuarial projections. When performing projections of future
solvency or funding levels, actuaries often use an investment
return assumption that is the same as the valuation interest
rate. Increasingly, however, actuaries are performing
projections under different investment return assumptions. For
example, actuaries may perform sensitivity projections
reflecting higher or lower expected returns on plan assets over
the short term. There is no statutory requirement to perform
sensitivity projections, but actuaries may do so to reflect the
expectation that investment returns will be lower in the near-
term than their historical averages in the current low interest
rate environment. Additionally, actuaries may perform
sensitivity projections--such as sensitivity analysis, scenario
testing, and risk tolerance--for purposes of plan sponsor
education and planning.
assessing plan health
When assessing whether a multiemployer pension plan is ``healthy,''
it is often helpful to consider more than one single number or
perspective. The following are metrics often considered when evaluating
the health of a multiemployer pension plan.
Statutory requirements. Minimum funding requirements and PPA
zone status are largely based on a funded percentage (assets
divided by the actuarial liability) and the current and
projected funding standard account. These measurements are
designed to support the determination of a contribution amount
that balances considerations of long-term stability and
sufficiency.
Market-based measurements. Additional metrics can provide
further insight into the health of a plan. For example,
valuations can be performed using current bond market interest
rates rather than expected returns. Such an approach can
provide greater comparability across plans that have different
investment allocations or capital market expectations. It can
also help to illustrate the extent to which expected future
investment returns are relied upon to provide for the targeted
benefits outlined in the plan. The current liability measure
mentioned earlier is an example of a market-based measure
calculated and disclosed for multiemployer pension plans.
Current and projected funding levels. Rather than focusing
solely on the current funded status of a multiemployer pension
plan, an assessment of plan health should also consider what
its funding levels are projected to be in the future. For
example, consider a plan that is currently 90 percent funded
and projected to remain about 90 percent funded in all future
years. Next, consider a plan that is currently 80 percent
funded and projected to become 105 percent funded within the
next 15 years. All other factors being equal, one may argue
that the second plan is healthier than the first, in that its
upward trajectory makes it more likely to be resilient to
future adverse experience.
plan experience gains and losses
Question. In examining the financial status of the multiemployer
plans, the committee is compiling plan data on experience gains and
losses. Is this data gathered by plan administrators or trustees?
Answer. Actuarial gains and losses represent the differences
between actual plan experience and the actuarial assumptions. Actuaries
review gains and losses each year as part of the annual actuarial
valuation process. Historical gains and losses are often summarized in
the actuarial valuation reports, which are presented to the plan
trustees and retained by plan administrators.
When reviewing data on gains and losses, it is important to
distinguish between those arising from demographic sources and those
arising from investments. For multiemployer pension plans, investment
experience tends to be much more volatile than demographic experience
(such as mortality and retirement experience).
Annual gains and losses from demographic sources are usually
relatively small when compared to those related to investment returns.
It is also important to note that gains and losses related to
contribution levels may have a relatively small impact on a plan's
current funding level, but they can have significant effects on
projected funding levels. To get a more complete picture of experience
gains and losses and their impact on projected funding levels, it is
important to understand how contribution levels have changed over time,
and how they have compared with assumed levels over the years.
mortality
Question. In general terms, what are the mortality assumptions used
by these plans and how have these assumptions changed since 2000? How
are these assumptions established, and are they subject to any manner
of oversight, or legal or professional standards?
Answer. In general, actuaries who practice in multiemployer pension
plans use mortality assumptions that are based on published tables. In
rare cases involving very large plans that can demonstrate that
experience is fully credible and significantly different from the
mortality rates under the published tables, the actuary may develop a
table of mortality rates based on plan experience.
When setting a mortality assumption based on published tables,
actuaries who work with multiemployer pension plans may make
adjustments to rates in the published tables based on industry trends,
individual plan experience, and professional judgment. For example,
actuaries who practice in multiemployer plans often use the ``blue
collar'' version of the published mortality table, which may be a
better representation of anticipated experience for the participant
population than the ``white collar'' or general tables.
The published mortality tables most commonly used by actuaries are
developed by the Retirement Plan Experience Committee (RPEC) of the
Society of Actuaries (SOA). Since 2000, the RPEC has published the
``RP-2000'' and ``RP-2014'' mortality tables, along with a series of
different scales to project future improvements in life expectancies.
In general, the studies that the RPEC has published have shown
improvements in mortality over time--in other words, increasingly
longer life expectancies.
When selecting actuarial assumptions to be used in determining
minimum funding requirements under ERISA, actuaries must operate in
accordance with actuarial standards of practice (ASOPs). ASOP No. 35
deals with the selection of mortality assumptions and was recently
updated to provide actuaries with more specific guidance related to
selecting the appropriate mortality table, making adjustments to the
table as appropriate, and projecting future improvements in life
expectancies.
An actuary who is believed to have violated the ASOPs may be
reported to the Actuarial Board for Counseling and Discipline (ABCD).
After reviewing the situation, the ABCD may recommend disciplinary
action if the actuary is found to have violated the ASOPs or the Code
of Professional Conduct. Discipline may include reprimand or
recommendation of suspension of credentials by the issuing actuarial
organizations.
Question. How do mortality assumptions for multiemployer plans
compare to the prescribed single-employer/current liability mortality
tables? Have these assumptions changed in any manner since 2000?
Answer. In late 2017, the Department of Treasury and Internal
Revenue Service issued a new rule regarding mortality tables that must
be used in determining minimum funding requirements for single-employer
pension plans. The same mortality tables must also be used for
determining current liability for multiemployer plans. In general, the
new mortality tables must be used for plan years beginning on or after
January 1, 2018.
The prescribed current liability mortality tables are based on the
RP-2014 mortality tables, adjusted for expected future improvement in
life expectancies. Mortality assumptions for determining minimum
funding requirements for multiemployer plans will vary plan by plan--
again, based on industry trends, plan experience, and reflecting the
actuary's professional judgment. For that reason, the extent to which
the plan's own assumptions will differ from the prescribed current
liability tables will also vary plan by plan. The following are some
common differences between the current liability mortality tables and
the mortality assumptions developed by actuaries for purposes of
multiemployer plan minimum funding:
Blue collar adjustments. Current liability mortality tables
are based on the general population, in other words, all
pension plan participants regardless of occupation. Many
actuaries use a mortality assumption that reflects a ``blue
collar'' adjustment in multiemployer plans to reflect the
individual plan's demographic characteristics. Based on the
tables published by the RPEC, blue collar populations tend to
have shorter life expectancies than the general population.
Plan-specific adjustments. Similarly, currently liability
mortality tables include no provision to adjust for actual
observed plan experience. If experience for a multiemployer
pension plan is credible and differs from the mortality rates
in the published tables, the actuary may make appropriate
adjustments to those rates when setting the mortality
assumption.
Projected improvements. The current liability mortality
tables include a full projection of expected future improvement
based on the scale published by the RPEC. Many actuaries
working with multiemployer plans use a mortality assumption
that includes a provision for future improvement, but not all
do. It is difficult to predict how much mortality rates will
improve in the future. Rising obesity rates and the opioid
epidemic are frequently cited as factors that may shorten life
expectancies, at least for certain segments of the population.
Additionally, recent mortality improvements in the general
population have been heavily weighted toward higher-income
individuals, with substantially less improvement observed in
lower-income groups.
Question. In reviewing the actual mortality experience of these
plans, do you have any aggregate or summary data on the mortality gains
and losses for these plans since 2000? Is there any information
available that you could share or provide us access to that would show
to what extent actual deaths that have occurred or didn't occur versus
changes to the underlying mortality assumptions?
Answer. The American Academy of Actuaries Pension Practice Council
does not track data regarding mortality gains or losses.
Question. What actual mortality developments (whether within a plan
or in the wider population) cause plans to change their mortality
assumptions?
Answer. As described earlier, actuarial gains and losses represent
the differences between actual plan experience and the actuarial
assumptions. Actuaries review gains and losses each year as part of the
annual actuarial valuation process. If a pattern of consistent gains or
losses emerges, the actuary would be compelled to do a closer review of
plan experience and update the assumption if appropriate. This review
applies to all demographic actuarial assumptions, including mortality.
In addition, when new mortality tables are published, many
multiemployer plan actuaries will review the new tables to see if they
may offer a better representation of anticipated plan experience.
benefit accruals and contributions
Question. Could you provide information on the benefit accrual
rates in the multiemployer plans? Similarly, is there any information
available on the contribution levels of these plan for each year since
1974? Do you have information comparing plan contributions to other all
other compensation in CBAs that govern these programs?
Answer. Benefit accrual rates vary widely plan by plan, industry by
industry, and region by region. Often, the health of a plan can affect
the accrual rate. For example, an underfunded plan that must devote
more from each contribution dollar to pay down its unfunded liability
will likely have less left over to provide for future benefit accruals.
How the bargaining parties prioritize pension benefits within the
overall wage package is another important factor. Two otherwise
identical plans could have significantly different accrual rates due to
decisions made by bargaining parties over time.
The Academy's Pension Practice Council does not track historical
data on contribution rates and levels for multiemployer plans.
Furthermore, most plans themselves do not track this sort of
information that many years in the past (going back to 1974). Most
analyses of aggregate trends among multiemployer pension plans are
based on data from Form 5500 filings. Form 5500 data is available on
the Department of Labor (DOL) website, but only from 1999 or 2000
forward. Furthermore, while the Form 5500 data includes the aggregate
amounts of contributions made to the plan each year, it is limited in
what it can tell us about contribution rates and accrual rates for
multiemployer pension plans. It is also important to note that Form
5500 data does not provide information pertaining to the overall wage
package.
With those caveats, Form 5500 data \1\ does show the following
noteworthy trends in employer contributions made to multiemployer
pension plans since 2000:
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\1\ The figures that follow are based on an analysis of historical
Form 5500 data performed by Horizon Actuarial Services LLC. This
analysis serves as the basis for the Multiemployer Retirement Landscape
reports published by the International Foundation of Employee Benefit
Plans.
Aggregate employer contributions to all plans were about $28
billion in 2015. For comparison, aggregate contributions to all
plans were about $11 billion in 2001. Note that these aggregate
amounts are affected by changes in covered employment levels as
well as increases in employer contribution rates. These amounts
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may also include employer withdrawal liability payments.
While Form 5500 data does not include robust information on
contribution rates, it may be instructive to evaluate
contributions per active participant--in other words, the
plan's contributions in a given plan year divided by the number
of its active participants. Focusing on this measure, median
contributions per active participant increased 187 percent from
2000 to 2015, which represents an average compounded increase
of 7.3 percent per year over that 15-year period.
Question. In your experience, is it possible for plans to track
what benefits are attributable to which service and with which
employers? Likewise, is it possible to track the level of contributions
each employer has made in each plan in each year?
Answer. The ability to track which benefits are attributable to
different employers will vary from plan to plan. Some plans maintain
very detailed records to determine which specific portions of each
participant's benefits are attributable to service with different
employers. Other plans maintain records sufficient to determine the
total amount of each participant's benefit, but they may have
difficulty attributing portions of the total benefit to service with
different employers.
As for the level of contributions each employer has made to the
plan in each year, multiemployer pension plans do track this
information, as it is required for determining employer withdrawal
liability. The historical periods for which this data is readily
available may vary from plan to plan, due to a number of factors,
including the plan's withdrawal liability allocation method. For
example, some plans may need to track historical contribution data
(including contribution rates and contribution base units) for the past
10 or 11 plan years in order to accurately calculate employer
withdrawal liability. Other plans may need to track contribution data
for the past 25 years or more.
Question. Workers are protected under ERISA and the tax code to
receive the full benefit they are promised. What steps have plans and
employers taken to guarantee workers receive the full benefit they are
promised? Are liabilities calculated by actuaries in such a way as to
guarantee that workers will receive the full benefit they are promised?
If not, and it is in fact employees who bear much of the risk under the
current multiemployer system, are workers and retirees aware of that
risk? How is the risk disclosed to them?
statutory framework
Answer. As its name indicates, the Employee Retirement Income
Security Act of 1974 (ERISA) was intended to secure the retirement
benefit promises made to workers. It is important to understand,
however, that while ERISA provides a framework intended to ensure that
participant pension benefits are adequately supported, it does not
provide an absolute guarantee of these benefits.
ERISA first established minimum funding standards for private
sector pension plans. It also created the ``anti-cutback'' rule,
protecting workers from reductions to benefits they had already
accrued. However, ERISA contains provisions to address the possibility
that some plans might fail to fulfill their promised benefits. It
established the PBGC to assist insolvent plans in paying benefits, up
to ``guaranteed'' levels. ERISA also addresses what happens in the
event that PBGC itself might not be able to provide full support to
insolvent plans. If this event were to occur, ERISA provides that PBGC
will provide support not to the ``guaranteed'' levels, but only to the
extent its available resources will allow.
Both PPA and MPRA provided further exceptions to the concept of an
ironclad benefit guarantee for multiemployer pension plans. Most
notably, for plans in critical status, PPA provides for reducing
``adjustable benefits.'' PPA also permits plans to target delaying
insolvency--rather than emerging from critical status--but only if the
plan sponsor has determined that all reasonable corrective measures
have been exhausted. Perhaps more significantly and subject to certain
restrictions, MPRA enabled sponsors of plans in critical and declining
status to reduce already-accrued benefits if doing so would enable the
plan to avoid insolvency. (These developments are described in more
detail in our responses to other questions from the committee.)
steps taken by plan sponsors
When evaluating the steps that multiemployer pension plan sponsors
have taken over the years to ensure benefit promises were kept--as well
as in reviewing how actuaries measure plan liabilities--it is important
to also consider how statutory, financial market, and economic
conditions have changed over the past few decades.
ERISA was passed in 1974 and became effective in 1976, first
establishing funding standards for private sector pension
plans--a comprehensive contribution framework that is intended
to ensure that participant benefits are adequately supported.
Most multiemployer plan sponsors have taken steps to fulfill
the benefit promises made to workers in the form of having
contributions exceed ERISA requirements. (By definition, if a
plan has a credit balance in its funding standard account,
historical contributions have exceeded historical funding
requirements.)
At the time ERISA was passed, most actuaries were using
conservative interest rate assumptions, around 5 percent, to
determine minimum funding requirements. In about 1980,
actuarial interest rate assumptions began to receive scrutiny
for being too conservative. Market interest rates were in the
double digits, and many argued that lower interest rate
assumptions were overstating plan liabilities. From a Federal
tax perspective, employers were overfunding their pension
plans, and were therefore taking greater tax deductions on
contributions than was justified. By the mid-1980s, most
actuarial interest rate assumptions had been raised to the
range of 7 to 8 percent.
The investment returns of the 1980s and 1990s were strong.
Most private sector pension plans were close to full funding,
and many were overfunded. The Internal Revenue Code at the
time, however, limited the tax-deductibility of employer
contributions to plans that were fully funded. This point is
important, because as pension plans invest in assets that have
volatile returns, they need to be able to build up funding
surpluses following investment gains, so they can buffer
against investment losses that will inevitably follow. In the
case of multiemployer pension plans, many plan sponsors decided
to increase benefit levels in order to preserve the tax-
deductibility of already-negotiated employer contributions.
The 2000s brought investment losses, with the ``dot-com
bubble burst'' from 2000 to 2002 and the financial market
collapse from 2008 and early 2009. Having entered the decade
without much of a cushion, most multiemployer plan sponsors
spent the next several years developing strategies to restore
funding to its pre-2000 levels. At the same time, many
industries faced declining contribution bases, which were
worsened by the 2008-2009 Great Recession. These factors made a
path to recovery even more challenging.
While the American Academy of Actuaries Pension Practice
Council does not possess comprehensive data, anecdotally, the
Pension Practice Council has observed that multiemployer plans
that were hit hard by the economic climate of the 2000s have
responded with significant corrective measures. It is not
unusual to see plans where the contribution rates have more
than doubled while the rate of benefit accrual applicable to
future service is less than half of what it was previously. For
a majority of plans, these measures are expected to be
sufficient to ensure that all benefits will be paid. However,
some plans that have been hit the hardest by the economic
downturn will be unable to recover despite taking draconian
measures to protect benefits.
disclosures
ERISA requires the disclosure of ``current liability,'' which is a
proxy for risk-free liability measurements (i.e., current liability).
ERISA, however, does not require that plans fund to current liability
levels. A risk-free funding approach would make participants' benefits
more secure, but it would also dramatically reduce benefit levels, and
pension funding often involves striking a balance between security and
cost-efficiency.
ERISA also contains various disclosure requirements directed at
participants, but these requirements do not contain significant
information on benefit security risks.
plan resilience
Question. What are the consequences to the plans if the stock
market has a downturn/low returns over 2 or 3 years sometime in the
next 5 years?
Answer. If there is another market downturn, multiemployer pension
plans will no doubt be put under further stress. Many plans are in a
strong enough position to be able withstand another downturn, but
others are not. Even some plans currently in the ``green zone'' have
increased employer contribution rates and reduced participant benefit
levels as much as they reasonably can. These plans have limited
remaining actions they can take to cope with further adverse market
events.
Question. Which large plans are vulnerable if a handful of
participating employers encounters financial difficulties or withdraws
(even paying their full share of withdrawal liability)?
Answer. The Academy's Pension Practice Council has not done an
analysis of which specific large plans are most vulnerable to the
distressed withdrawal of a small number of employers.
Question. If another economic downturn similar to the 2008-2009
downturn were to occur again within the next 10 years, are plans
prepared to survive it? What about plans in the green zone? What steps
are plans, and their actuaries, taking to properly assess risk in
response to the lessons learned from '08, which you have cited as a
major cause of the downfall of certain plans such as Central States?
Answer. If another economic downturn similar to the 2008-2009
recession were to occur, some plans would be able to develop continued
strategies to recover. Many other plans would not be able to recover,
however, including many plans currently in the ``green zone.'' As
described earlier, the reality is that most multiemployer plans have
taken significant corrective action in recent years to improve plan
funding, including reducing the rate of future benefit accruals and
increasing employer contribution rates. While some plans have the
ability to take further corrective action if needed, others cannot
reasonably make significant changes on top of those they have already
made.
Many actuaries working with multiemployer pension plans are
actively discussing risk with plan sponsors, quantifying how projected
funding levels may be affected by future adverse events. A new
actuarial standard of practice (ASOP No. 51 \2\) provides guidance on
how pension actuaries should be discussing risk with plan sponsors, to
the extent they have not already been doing so.
---------------------------------------------------------------------------
\2\ http://www.actuarialstandardsboard.org/asops/estimating-future-
costs-prospective-property
casualty-risk-transfer-risk-retention/.
Question. You testified that ``[plans take money from actives and
pay retiree benefits; the contributions on behalf of actives are not
going towards guaranteeing their pension promises].'' Is this a
structurally sound model moving forward? Are employees fully aware that
the contributions coming out of their paycheck each week are not in
fact going towards their future retiree benefits? What other investment
---------------------------------------------------------------------------
plans use this model?
Answer. Contributions made to multiemployer pension plans are tied
to work performed by active participants. A portion of incoming
contributions will go toward paying for benefits being earned by the
active participants, and a portion will go toward further securing
benefits that have already been earned. (The portion of contributions
going toward securing benefits could go either to paying down
underfunding or to building up a funding cushion against future adverse
experience.) This is how pension plan funding works at a fundamental
level.
It is important to note that qualified pension plans under ERISA--
including multiemployer pension plans--must be prefunded. In other
words, the intent is for contributions, accumulated with investment
earnings, to prefund benefits as they are being earned. When experience
is worse than anticipated, however, the plan may become underfunded,
and a portion of incoming contributions must go toward paying down that
unfunded liability. Once the plan is restored to full funding, however,
ongoing contributions from active participants will not be needed to
pay down the unfunded liability, but rather to further secure the
overall funding of the plan or to pay for additional benefits being
earned by active participants.
To contrast, other benefit programs--such as Social Security and
Medicare--are not prefunded, but rather, largely pay-as-you-go. By
their design, these programs rely more heavily on incoming
contributions from the current active generation to pay benefits that
were earned by prior generations. Additionally all insurance programs
pool risk and therefore involve a sharing of program assets across all
participants.
withdrawal liability
Question. Are you familiar with and would you have access to
information on which employers have withdrawn from multiemployer plans
in each year since 1974? Is there any aggregate or plan specific
information available on the amount of these withdrawal liability
payments? (Preferably by employer to each such plan.)
Answer. The Academy's Pension Practice Council does not track data
on which employers have withdrawn from multiemployer plans. We are also
not aware of any aggregate or plan-specific information on withdrawal
liability payments. Focusing on Form 5500 filings, limited information
on employer withdrawals and withdrawal liability assessments can be
found on the Form 5500 Schedule R. However, this information has only
been required since 2009.
Question. In general terms, how do withdrawal liability payments
compare to each withdrawing employer's share of the unfunded
liabilities on an actuarial basis?
Answer. The amount of an employer's statutory withdrawal liability
payments (as defined under section 4219 of ERISA) is not directly
related to its assessed withdrawal liability amount, which represents
the employer's allocated share of the plan's unfunded vested benefits.
In general, the amount of the payment increases as employer
contributions increase. (Under MPRA, contribution rate increases
required under a rehabilitation plan that take effect after 2014 are
excluded from determining withdrawal liability payments.) In the case
of a plan with a relatively small unfunded vested liability, the
employer's statutory withdrawal liability payments will pay down its
withdrawal liability assessment, including applicable interest, in less
than 20 years.
In general, the statute limits withdrawal liability payments to 20
years, often referred to as the ``20-year cap.'' (The 20-year cap does
not apply in a mass withdrawal situation.) Therefore, if a plan is
deeply underfunded, 20 years of statutory payments will often not pay
down the employer's withdrawal liability assessment. In general, the
worse funded the plan, the bigger the unfunded liability that will not
be covered by the statutory withdrawal liability payments.
assets
Question. Is there information available on the portion of each ME
plan's assets that have a readily ascertainable market value such as
publicly traded stock, Treasury bonds, or cash versus items whose value
is not readily ascertainable?
Answer. There is limited publicly available data regarding the
asset allocations for multiemployer pension plans. Perhaps the best
data source is the Form 5500 Schedule R, which was recently updated to
require plan sponsors to provide basic information regarding their
asset allocations.
The following table provides the average asset allocations for
multiemployer pension plans, based on the asset classifications on the
Form 5500 Schedule R. Note that the allocations are expressed as
percentages of plan assets, and only plans with at least 1,000
participants are included. Results are for Form 5500 filings for plan
years ending between June 1, 2016, and May 31, 2017.
Average Asset Allocations for Multiemployer Pension Plans
----------------------------------------------------------------------------------------------------------------
Investment Grade
Stocks Debt High-Yield Debt Real Estate Other
----------------------------------------------------------------------------------------------------------------
47.7% 18.9% 5.1% 9.6% 18.7%
----------------------------------------------------------------------------------------------------------------
liabilities
Question. When valuing plan liabilities, are actuaries routinely
given information regarding employers in the plans? If not, would it be
helpful for them to have this information to better assess risk of the
plans and ability of employers to pay should the plan become insolvent?
Answer. Plan sponsors do not generally have information regarding
the financial health of its participating employers, as there is no
statutory requirement for employers to provide such information to the
plans in which they participate. It is also important to keep in mind
that providing financial information could be quite burdensome for
small or privately held companies. While detailed financial information
on contributing employers could help multiemployer plans assess
employer-related risks, the practical aspects of gathering and
analyzing this information could make such assessments extremely
complex, time-consuming, and expensive.
plan alternatives
Question. For employees who do not wish to take on the risk that is
disclosed to them, would there be a way of providing the employees with
different options to bear less risk going forward, such as the choice
of having their contributions going either into a separate pool with
lower discount rates, or a 401(k) plan in which the employee can make
his or her own retirement decisions?
Answer. We are not aware of any examples where employees covered
under a multiemployer defined benefit pension plan can opt out of that
plan and into an alternative arrangement. There have been a small
number of opt-out arrangements in the public plan sector and single-
employer plans to allow employees to move into a defined contribution
arrangement.
When evaluating alternative plan designs, it is important to
consider the risks associated with those designs--to both the plan
sponsor and the employee. Specifically:
Defined contribution plan. With a defined contribution plan
(such as a 401(k)-type plan), the employee has reduced or
eliminated risk associated with the financial health of the
participating employers or industry in which they work. In
exchange, the employee now bears all the investment risk and
longevity risk for the rest of his or her life. Without the
pooling of risk inherent in a defined benefit pension plan, the
employee is now subject to risk factors such as the ability to
invest wisely and his or her own life expectancy.
Lower-risk defined benefit plan. The sponsor of a
multiemployer pension plan could elect to move toward a more
conservative investment policy, which would provide a lower
expected return but also lower volatility. Such a move would
lead to a lower discount rate associated with the actuarial
funding measurements. This arrangement would increase the
likelihood that the plan would be able to deliver the promised
benefit amount. However, with a lower expected return on plan
assets, either the promised level of plan benefits would be
lower, the level of contributions needed from employers would
be higher, or both. In other words, under a more conservative
defined benefit arrangement, an employee would have a higher
degree of certainty in the promised benefit being delivered,
but the level of that promised benefit would be lower.
If the Joint Select Committee wishes to consider an ``opt out''
provision, there are many factors to be considered, including
participant education, whether the options provide lifetime income,
anti-selection (participants selecting the option most beneficial to
them, thus raising costs and diluting the benefits of pooling risks),
and the possibility of individuals making decisions that are not in the
interest of their long-term financial security. If employees are
allowed to opt out to a defined contribution plan, the contribution
base available to support the benefits of the remaining active
employees in the defined benefit plan will be reduced, which increases
the risk to those choosing to remain in the defined benefit plan. The
potential administrative complexities related to providing participant
choice between different defined benefit and defined contribution
options is another important consideration.
______
Questions Submitted by Hon. Sherrod Brown
Question. Please describe the advantages and disadvantages to the
various discount rates that could be used for valuing the liabilities
of multiemployer pension plans for minimum funding purposes, such as
the current rate based on long-term investment return expectations, the
rates applicable to single-employer plans based on corporate bond
yields, and rates based on Treasury bond yields.
Answer. In addition to the response below, we refer to the response
to Question #2 from Senator Hatch, which covers similar topics.
Actuarial methods and assumptions should be appropriate for the
purpose of the particular measurement. It is critical to note that the
advantages and disadvantages of a discount rate for minimum funding
purposes, which is what the question asks and this response provides,
may be very different in other contexts. The same quality that supports
one measurement objective may be contrary to a different objective.
Comprehensive understanding of plan dynamics is unlikely to be derived
from any single measurement.
Two American Academy of Actuaries pension issue briefs \3\--
released in November 2013 and July 2017--compared and contrasted
various liability measurements. These papers made use of the following
terminology.
---------------------------------------------------------------------------
\3\ ``Measuring Pension Obligations: Discount Rates Serve Various
Purposes,'' http://www.
actuary.org/files/IB_Measuring-Pension-Obligations_Nov-21-2013.pdf, and
``Assessing Pension Plan Health, More Than One Right Number Tells the
Whole Story,'' http://www.actuary.org/files/publications/IB-
RightNumber07.17.pdf.
------------------------------------------------------------------------
Purpose Discount Rate Assumption
------------------------------------------------------------------------
Budget Value Expected long-term investment
return
------------------------------------------------------------------------
Immunized Value Current corporate bond yields
------------------------------------------------------------------------
Solvency Value Current Treasury bond yields
------------------------------------------------------------------------
As noted in the November 2013 issue brief, using the expected long-
term investment return determines a ``Budget Value.'' The Budget Value
is the theoretical asset amount that would be expected to be sufficient
to pay all currently earned (and future) plan benefits if that amount
is invested and earns the anticipated return of the plan's investment
portfolio, assuming that the current asset allocation remains in place.
The ``Immunized Value'' is an amount that is theoretically required
to fully immunize benefit payments accrued to date with a dedicated
high-quality bond portfolio. This is a common measurement for an
employer to use to value the pension obligations from single-employer
defined benefit pension plans under Financial Accounting Standards
Board (FASB) Accounting Standards Codification (ASC) Topic 715.
The ``Solvency Value'' is a current market-based measurement that
determines the amount that a pension plan theoretically would need to
invest in risk-free securities in order to provide the accrued benefits
with certainty to the affected participants, assuming no additional
contributions.
Key advantages and disadvantages of these discount rate assumptions
for minimum funding purposes follow:
Expected long-term investment return
Advantages:
Liability provides the asset value necessary to provide
promised benefit payments if the expected return is realized in
each future year.
May provide greater stability for minimum required
contribution amounts than other approaches.
Disadvantages:
Presumes that the sponsor can make additional contributions
if the assumed return is not achieved.
May incent a more aggressive asset allocation to decrease
the measurement of the liability.
Not comparable across plans with different investment
allocations.
Return expectations are subjective and can vary widely.
Corporate bond rates
Advantages:
Liability reflects what would be held on a corporate balance
sheet for a similar promise, if considered very low in default
risk.
Greater comparability of liabilities across plans.
Less incentive for risky investment.
Disadvantages:
Does not reflect the investment policy of the plan. If the
plan is fully funded with this liability measure and a typical
investment mix is used, the plan sponsor is likely to have
contributed more than is actually necessary to pay benefits.
Discount rate and resulting liability may be quite volatile,
presenting challenges for collective bargaining and other plan
management functions.
Treasury bond rates:
Generally the same advantages and disadvantages as for
corporate bond rates, but the liability reflects the value of a
promise with no default risk (as opposed to very low default
risk), consistent with Treasury bond pricing.
Question. Please describe in detail the role that the trustees of
multiemployer pension plans, employers, and unions representing
employees have in setting benefit and contributions levels for plan
participants and employers. If there is a range of customary practices,
please describe the most prevalent practices.
Answer. Contributions to multiemployer pension plans are
collectively bargained, and workers typically forgo some direct
compensation in exchange for contributions to retirement plans. In
turn, employers are required to fund the plans in accordance with their
collective bargaining agreements and subject to certain regulations.
The contribution rate is usually a specific amount per hour or other
unit worked by or paid to the employee. When a plan becomes
underfunded, the trustees may establish minimum contribution rates as
part of their funding improvement or rehabilitation plans.
Traditionally, plan boards of trustees have sole authority to
determine the plan design and level of benefits that will be supported
by negotiated contributions. However, in some cases, collective
bargaining agreements may describe the plan design and benefits. In
these situations, the trustees are given the authority to collect
sufficient contributions to fund the benefits.
Question. Please describe the procedures by which trustees are
selected to serve as such for a multiemployer pension plan.
Answer. Multiemployer plans' boards of trustees consist of an equal
number of employer trustees and union trustees. The employer trustees
are selected by the contributing employers, or from associations that
represent those employers. The union trustees are selected by the
participating union or unions. Multiemployer plans are typically
governed by trust agreements that can contain varying levels of detail
regarding the process that is followed for appointing trustees.
Question. Please describe what an investment policy is for a
multiemployer pension plan, including how it is created and how it is
used.
Answer. An investment policy is a vital document for multiemployer
pension plan governance. As the trustees of a multiemployer pension
plan are fiduciaries to the plan, they must act with care and in the
best interest of plan participants and beneficiaries in all matters--
including those related to plan investments. For that reason, the
investment policy is important in documenting the objectives, duties,
policies, procedures related to the plan investments.
A plan's investment policy is typically created by the plan's board
of trustees, with guidance from professional advisors such as the
investment consultant and legal counsel.
Some of the key features of an investment policy include the
following:
Objectives: The general investment-related goals for the
plan, which may include the targeted annual return,
minimization of volatility, and adequate liquidity to pay
benefits and expenses.
Duties: Who is responsible for making certain decisions and
taking certain actions related to plan investments? Parties
typically include the board of trustees, an investment
committee of the board of trustees, the plan administrator, the
investment consultant, investment managers, or custodian.
Asset allocation: The targeted percentage allocations to
various asset classes (such as stocks, bonds, and alternative
investments) designed to meet the goals of the investment
policy. Typically, the policy will also define acceptable
ranges for the asset allocation, as well as procedures for
rebalancing the portfolio.
Manager selection: The policies and procedures for selecting
investment managers--the firms responsible for investing a
portion of plan assets according to a specified strategy, the
manager's approach (for example, active versus passive) and
fees, are important considerations.
Monitoring and review: The metrics for regularly evaluating
the performance of the overall strategy relative to the stated
goals, and the performance of individual investment managers
relative to specified benchmarks.
Question. Please explain the risk to the multiemployer system in
the aggregate if an employer that participates in numerous
multiemployer plans goes bankrupt.
Answer. If a major contributing employer that participates in
numerous multiemployer plans goes bankrupt, each of those plans will be
left with unfunded ``orphan'' liabilities, as well as a diminished
contribution base. These factors will create additional strain on those
plans.
The Academy's Pension Practice Council has not done an analysis of
the possible impact to the multiemployer pension system in the
aggregate if a single employer that participates in several plans were
to go bankrupt. The magnitude of the risk to the multiemployer system
depends on the size of the employer, the number of plans in which the
employer participates, and the current strength of those plans.
Question. Please describe the characteristics of better-funded
plans from those that are facing financial troubles.
Answer. The current funded status of a multiemployer pension plan
is likely to have been shaped by many factors, both internal and
external. Decisions by the board of trustees with respect to the plan's
investments, participant benefit levels, and employer contribution
rates all contribute to the current and future health of the plan.
There are also significant factors in play that are beyond trustees'
control, such as market volatility, plan maturity, overall industry
strength and activity, and the financial health of participating
employers.
Investment performance: Some multiemployer pension plans
have performed better than others with respect to investment
returns. That said, the vast majority of plans--which by and
large are invested in diversified, balanced asset portfolios--
were similarly affected by market volatility in recent decades.
Benefit and contribution levels: Many boards of trustees
have taken proactive measures to strengthen plan funding levels
in recent years through a combination of increases in employer
contribution rates and reductions in participant benefit
levels. It is important to note, however, that some plans are
so distressed that no reasonable corrective measures available
under current law can restore them to good health.
Plan maturity: One measure of plan maturity is the ratio of
the number of inactive and retired participants to the number
of active participants: this is often called the ``support
ratio.'' In other words, more mature plans have more inactive
and retired participants supported by fewer active
participants. Plan maturity is perhaps the most significant
factor in distinguishing healthy plans from those in distress.
The mere fact that a plan is mature does not mean that the plan
will be distressed, but mature plans tend to be less resilient
to adverse experience.
Industry activity: ``Industry activity'' is a term often
used to refer to overall covered employment levels. Declining
industry activity can accelerate plan maturity--it causes there
to be fewer active participants in the plan and a smaller
contribution base, and also increases the support ratio
described above. Plans in declining industries tend to be less
resilient to investment volatility, due to the diminished
impact any changes to future contribution rates or benefit
accrual rates will have on the trajectory of the plan.
Employer health. A factor related to industry activity is
the financial health of participating employers. If employers
are distressed, they will be less able to afford increases in
contribution rates to strengthen plan funding levels. They are
also less likely to be able to pay their full withdrawal
liability obligation in the event of a withdrawal, creating
unfunded orphan liabilities that must be absorbed by the
remaining employers.
Question. Please explain whether it benefits a multiemployer
pension plan to have diversity in the industries represented by its
participating employers.
Answer. Multiemployer pension plans cover workers in a variety of
industries, such as construction, service, transportation, retail food,
manufacturing, and entertainment. In most cases, multiemployer plans
cover workers in a specific industry; they are not usually diversified
across industries.
Diversification is an important element in reducing risks
associated with multiemployer plans--both in pooling of risk among
employers, as well as in structuring a balanced asset portfolio.
Diversification across industries or trades may have similar benefits
for multiemployer plans, in that it would make them more resistant to
forces that may adversely affect one industry but not another. That
said, structuring multiemployer plans to cover workers in a variety of
industries, trades, or unions would represent a major shift in how
these plans are created and maintained.
Question. Please describe the current rules that allow
multiemployer plans to merge with other pension plans.
Answer. A merger is when two or more multiemployer plans join to
create a single ongoing plan. The plans are often in similar industries
or geographic regions and often have employers that contribute to both
plans. The trustees of both plans have to make a decision on whether a
merger is in the best interest of their plan and its participants, and
among other things decide on the future benefits and levels of
contributions and whether the underfunding, if any, is made up by the
individual plans or managed on a combined basis. The PBGC has provided
regulations for allocating unfunded vested benefits for merged plans,
where the individual liability is phased out over time.
Section 4231 of ERISA lays out several rules for mergers and
transfers between multiemployer plans. That is, the plan must notify
the PBGC 120 days prior to merger date, accrued benefits cannot be
reduced, benefits are not reasonably expected to be subject to
suspension under section 4245 (insolvent plans), and an actuarial
valuation must be completed for each of the affected plans before the
merger date.
PBGC may provide assistance to facilitate a merger if it's in the
best interest of the participants and beneficiaries of at least one of
the plans and is not reasonably expected to be adverse to the overall
interests of the participants and beneficiaries of any of the plans.
PBGC's facilitation may include financial assistance, training,
technical assistance, mediation, communication with stakeholders, and
support with related requests to other government agencies.
PBGC may provide financial assistance to facilitate a plan merger
if: (1) at least one plan is critical and declining, (2) financial
assistance will reduce PBGC's expected long-term losses from the plans
involved, (3) financial assistance is needed for the merged plan to
become or remain solvent, (4) PBGC confirms the financial assistance
will not impair its ability to meet existing obligations, and (5) any
financial assistance is paid out of the PBGC multiemployer guarantee
fund.
Question. Please describe the steps, if any, that individual
workers could have taken to prevent multiemployer plan funding
shortfalls. Please describe if it were possible for workers to
anticipate or prevent the insolvency of the multiemployer plans in
which they participate.
Answer. We are not aware of any actions individual workers could
have taken that would have had a significant effect on preventing
multiemployer pension funding shortfalls.
______
Questions Submitted by Hon. Rob Portman
Question. Mr. Goldman, you noted that it is not uncommon for
employers to pay a negotiated withdrawal liability in the form of a
lump sum settlement that is often well below the amount of the
employer's withdrawal liability that would otherwise be calculated
under the statute. You further indicated that in reality, an employer's
actual payment is often based on its ability to pay, since as you said,
``it is better to get something than nothing.''
To further crystalize this point, what is your analysis of the
approximate percentage of employers who negotiate a lump sum
withdrawal, and how much of their full withdrawal liability is that
negotiated amount?
Additionally, among employers that pay their withdrawal liability
in annual installments, about what percentage have their withdrawal
liability forgiven after 20 years, and among these employers, how much
is typically forgiven?
Answer. Specific data on withdrawal liability payments is not
readily available. However, we can provide some anecdotal observations.
In very well-funded plans, there is no withdrawal liability.
In moderately well-funded plans, the withdrawal liability is
paid off in less than 20 years. In distressed plans, however,
withdrawal liability payments are often limited by the 20-year
cap.
The typical lump sum settlement amount is usually some
percentage (for example, 80 to 90 percent) of the present value
of the future withdrawal liability payments. Any settlement
below 100 percent of the present value of future payments would
likely reflect the uncertainty of the employer's ability to
make its required withdrawal liability payments many years into
the future. In evaluating proposed settlements, plan trustees
often weigh the amount of the discount against the added
certainty of receiving the entire amount upfront.
A very wide range of settlement terms have been negotiated
between withdrawn employers and multiemployer funds, and
unfortunately there is no data available that summarizes these
agreements.
Question. To follow up regarding the rate of return that
multiemployer plans currently assume in discounting their liabilities,
how often in the past 30 years have multiemployer pension plans
achieved a market rate of return of over 7 percent?
Answer. When reviewing investment returns for multiemployer pension
plans (or retirement plans in general, for that matter), it is
important to keep in mind that annual returns can be quite volatile,
even with a well-diversified portfolio. It is also important to note
that historical data on investment returns for multiemployer pension
plans is not broadly available.
With that said, we have prepared an analysis of historical median
investment returns for multiemployer pension plans. This analysis draws
on publicly available Form 5500 data where it is available,
specifically for calendar years from 2000 through 2016. For calendar
years from 1982 through 1999, and for calendar year 2017.\4\ (Note that
this data may include multiemployer plans other than defined benefit
pension plans.) For calendar years prior to 1982, investment return
data for multiemployer plans was not readily available. Therefore, for
those years, the analysis uses a 50/50 blend of index returns for the
S&P 500 and bond markets.
---------------------------------------------------------------------------
\4\ The analysis is based on market data for multiemployer benefit
plans gathered by Segal Marco Advisors, an investment consulting firm
in the industry.
---------------------------------------------------------------------------
Based on the above data and indexes:
Focusing on the 30-year period from 1988 through 2017,
median investment returns met or exceeded a 7.0 percent
benchmark return in 19 of 30 years. The annualized return for
that 30-year period is 7.7 percent. It is important to note
that even over a 30-year period, these statistics can be
endpoint sensitive. In other words, these stats may change
noticeably by simply shifting the period forward or backward by
one year.
Investment returns for multiemployer plans have varied by
decade, sometimes significantly. Median annualized returns
were: 6.7 percent for the 1970s; 13.1 percent for the 1980s;
11.2 percent for the 1990s; and 2.7 percent for the 2000s. The
median annualized return so far this decade (for the 8 years
from 2010 through 2017) has been 8.2 percent.
______
Questions Submitted by Hon. Bobby Scott
Question. Please describe in detail the funding rules of the
single-employer pension plans and the multiemployer pension plans.
Answer. Below is a comparison of the general funding rules for
single-employer plans and multiemployer plans:
Comparison of U.S. Single-Employer and Multiemployer Pension Plan
Minimum Funding Rules
------------------------------------------------------------------------
Single-Employer Multiemployer
------------------------------------------------------------------------
Relevant Internal Sections 412, 430, 436. Sections 412, 431, 432.
Revenue Code
Sections
------------------------------------------------------------------------
Actuarial Assumptions:
------------------------------------------------------------------------
Economic Selection subject to Actuarial Standard of
PAssumptions Practice No. 27 \5\ P(ASOP 27)
------------------------------------------------------------------------
Assumed Rate of Generally based on
Return on expected return over a
PInvestments long-term investment
horizon (typically 20
or more years) for the
actual or target
investment portfolio
held in trust.
Generally based on
------------------------------------------------------------------------
Discount Rate Prescribed, based on 24- Selection is subject to
month average of high- ASOP 27, with a ``best
quality corporate bond estimate'' standard.
yields. However, The discount rate is
statutory relief based on the expected
measures adopted long-term rate of
following the 2008 return on investments
financial crisis have that will be used to
broken the link with pay all future benefits
current market rates by (including those not
extending the averaging yet accrued). For
period to 25 years. current liability, a 4-
year average of 30-year
Treasury bond yields is
prescribed.
------------------------------------------------------------------------
Other Economic Actuary selects Actuary selects
Assumptions Such as assumptions. assumptions.
Inflation or
Assumed Rate of
Future Salary
Increases
------------------------------------------------------------------------
Demographic Selection subject to Actuarial Standard of
Assumptions Practice No. 35 \6\ P(ASOP 35)
------------------------------------------------------------------------
Mortality Prescribed. In general, actuary
selects assumption,
however, ``Current
Liability'' measurement
uses prescribed
assumptions.
------------------------------------------------------------------------
Other Demographic Actuary selects Actuary selects
Assumptions assumptions, using a assumptions, using a
``best estimate'' ``best estimate''
standard. standard.
------------------------------------------------------------------------
Funding Method Selection subject to Actuarial Standard of
Practice Nos. 4 and 44 (ASOPs 4 and 44)
------------------------------------------------------------------------
Actuarial Cost Prescribed, a Selection subject to
Method traditional Unit Credit ASOP 4 \7\ and pre-PPA
method that results in rules. Most common
a Target Liability and methods are Entry Age
Target Normal Cost. Normal and traditional
Unit Credit.
------------------------------------------------------------------------
Asset Valuation Actuarial Value of Selection subject to
Method Assets (AVA) is Fair ASOP 44 \8\ and various
Market Value or may be rules promulgated by
calculated under a the IRS. Reflection of
restricted number of market returns over a
alternative methods period of 5 years is
outlined in Internal allowed, with AVA
Revenue Service (IRS) limited to within 20
Notice 2009-22 which percent of Fair Market
recognize market Value.
returns over not more
than 24 months, with
AVA limited to within
10 percent of Fair
Market Value.
------------------------------------------------------------------------
Amortization of Generally over 7 years; Generally over 15 years;
Unfunded temporary amortization certain pre-PPA amounts
Liabilities relief permitted; amortized over longer
extended amortization periods may continue to
periods of up to 15 be amortized over the
years for certain years remainder of those
between 2008 and 2011. periods.
------------------------------------------------------------------------
Calculation of Target Normal Cost (the Normal Cost plus
Minimum Required value of benefits amortization of
Contribution (MRC) expected to be earned unfunded liabilities.
in the year plus plan
administrative expenses
expected to be paid
from plan assets during
the year), plus
amortization of
unfunded Target
Liability (referred to
as the Funding
Shortfall). If the AVA
exceeds the Target
Liability, any Excess
Assets reduce the
Target Normal Cost.
------------------------------------------------------------------------
Credit Balances Plan sponsor may elect Accumulated past
Available to Offset to apply contributions contributions in excess
MRC in excess of MRC to of MRC can be used
``Prefunding Balance'' automatically (to the
(PFB), which may be extent needed) to
used to offset future offset MRC for current
MRC contributions. Plan and future years. Plan
assets are reduced by assets are not reduced
PFB and any pre-PPA by credit balance when
Carryover Balance (COB) determining funded
when MRC is calculated, percentage. Interest is
and use of COB/PFB is credited based on the
generally precluded if discount rate.
plan is less than 80
percent funded.
Interest is credited
annually on unused
balances based on the
actual return on plan
assets.
------------------------------------------------------------------------
Annual Certification Annual Adjusted Funding Annual ``Zone Status''
of Funded Status by Target Attainment Certification required.
Enrolled Actuary Percentage (AFTAP) Satisfactorily funded
Certification required. (generally 80 percent
funded with no
projected inability to
pay MRC in next 7
years) plans in Green
Zone. ``Endangered''
plans (generally less
than 80 percent funded
or projected unable to
pay MRC) in Yellow
Zone. Critical plans
(generally projected
inability to pay MRC in
near future) in Red
Zone. A critical and
declining subset are
projected to become
insolvent within 20
years (or within 15
years for certain
plans).
------------------------------------------------------------------------
Consequences of Plans with AFTAP less Plans not certified as
Lower Funding than 80 percent funded Green by Enrolled
Levels are subject to Actuary must adopt plan
restrictions on payment of action to reduce
of accelerated benefit benefits and/or
distributions (most increase employer
commonly lump sums), contributions to
amendments increasing improve plan funding
plan benefits, and and emerge from current
unpredictable zone status. Red Zone
contingent event plans have benefit
benefits. Plans less improvement
than 60 percent funded restrictions.
must freeze benefit
accruals. Additional
restrictions apply for
plans with an AFTAP
less than 100 percent
where sponsor is in
bankruptcy. Accelerated
contributions may also
be required if plan
deemed ``At-Risk'' or
to remove benefit
restrictions in some
cases.
------------------------------------------------------------------------
Quarterly Generally, plans less Quarterly contributions
PContribution than 100 percent funded not required.
Requirement must make quarterly Contributions are
payments toward the generally made
MRC. throughout the year
pursuant to collective
bargaining agreements.
------------------------------------------------------------------------
Failure to Excise taxes, Excise taxes and other
contribute MRC notification of penalties apply.
participants, the DOL, However, plans in the
IRS and PBGC, possible Red Zone operating
lien against plan under a Rehabilitation
sponsor's assets if Plan generally qualify
aggregate unpaid for waiver of excise
amounts exceed $1 tax.
million.
------------------------------------------------------------------------
\5\ http://www.actuarialstandardsboard.org/asops/selection-economic-
assumptions-measuring-pension-obligations/.
\6\ http://www.actuarialstandardsboard.org/asops/selection-of-
demographic-and-other-noneconomic-assumptions-for-measuring-pension-
obligations/.
\7\ http://www.actuarialstandardsboard.org/asops/measuring-pension-
obligations-determining-pension-plan-costs-contributions/.
\8\ http://www.actuarialstandardsboard.org/asops/selection-use-asset-
valuation-methods-pension-valuations/.
Question. What are the main differences between the two?
Answer. The main differences between the single-employer plan and
multiemployer plan funding rules are the following:
Differences Between U.S. Single-Employer and Multiemployer Pension Plan
Funding Rules
------------------------------------------------------------------------
Single-Employer Multiemployer
------------------------------------------------------------------------
Discount Rate Prescribed, based on Selection is subject to
modified ASOP 27. Typically the
(``stabilized'') high- discount rate is based
quality corporate bond on the expected long-
yields. term rate of return on
investments. Current
liability discount rate
prescribed based on 30-
year Treasury rates.
------------------------------------------------------------------------
Mortality Prescribed. Selection subject to
ASOP 35; however,
``Current Liability''
measurement uses
prescribed assumptions.
------------------------------------------------------------------------
Asset Valuation Investment gains/losses Investment gains/losses
Method smoothed over no more smoothed over no more
than 24 months; AVA than 5 years; AVA
limited to within 10 limited to within 20
percent of Fair Market percent of Fair Market
Value. Value.
------------------------------------------------------------------------
Amortization of Generally over 7 years. Generally over 15 years.
Unfunded
PLiabilities
------------------------------------------------------------------------
Credit Balances Available only when plan Automatically applied as
funded at 80 percent or needed to meet minimum
higher in the prior funding requirements,
year. Applied based on regardless of plan
plan sponsor elections. funded status. Credit
Existing balanced balances do not offset
offset AVA in some plan assets in funded
cases when determining status measures. Unused
funded status measures. balances carried at
Unused balances marked book value by crediting
to market by crediting interest based on
interest based on discount rate (i.e.,
actual return on plan expected return on plan
assets. assets).
------------------------------------------------------------------------
Consequences of Plans less than 80 Plans not certified as
Lower Funding percent funded are Green by Enrolled
Levels subject to restrictions Actuary must take
on accelerated benefit actions to reduce
distributions, benefits and/or
amendments increasing increase employer
plan benefits, and contributions to
payment of improve plan funding.
unpredictable Benefit improvements
contingent event are restricted for Red
benefits. Plans less Zone plans.
than 60 percent funded
must freeze benefit
accruals. Additional
restrictions when plan
sponsor is in
bankruptcy. Accelerated
contributions may be
also be required if
plan deemed ``At-Risk''
or to remove benefit
restrictions in some
cases.
------------------------------------------------------------------------
Question. What would be the key impacts to plans, employers, and
participants if multiemployer pension plans were funded like single-
employer plans?
plans
Answer. Use of the single-employer plan funding rules would
generally result in significantly lower funded status percentages.\9\
Many multiemployer pension plans would be subject to accelerated
funding requirements and restrictions on benefit payments. Some plans
would be required to freeze benefit accruals due to being under 60
percent funded. Plans could see a resulting decline in active
participation as bargaining units negotiate out of plans where their
members will receive no additional accruals.
---------------------------------------------------------------------------
\9\ Note that funded status is only one measure of plan funding or
financial health. Different measures of funded status may be used for
different purposes but are only estimates of the relative values of
plan assets and liabilities at a point in time, using a specified set
of assumptions to estimate the plan's liabilities. The true cost of a
defined benefit plan is based on the actual benefits that come due to
participants in the future, the pattern of which will inevitably differ
from any estimate developed to measure the cost of those payments.
---------------------------------------------------------------------------
employers
Use of the single-employer plan funding rules would generally
result in increased and unstable contribution requirements. Increases
to the contributions would need to be negotiated, and instability would
severely hamper employer viability, especially in construction and
other competitive industries. Failure to negotiate contribution
increases may result in excise taxes and other penalties owed by the
employers. If unfunded vested benefit liability were calculated using
the single-employer liability assumptions, the exposure to withdrawal
liability in some plans would increase for many employers (depending on
the actuarial basis used), and the instability of ongoing funding could
lead to a wave of employer withdrawals that would result in additional
plans becoming insolvent.
participants
Future participant benefits would likely be reduced from current
levels. Plans less than 60 percent funded under the single-employer
rules would be required to freeze benefits. Plans over 60 percent
funded may still need to reduce future benefit accruals in order to
meet the accelerated amortization of unfunded liability. Members would
be pressured to give up more of their wages to help meet higher funding
requirements, and be far less likely to support continued plan
participation.
Additional Details on the Primary Differences Between the Single-
Employer and Multiemployer Plan Funding Rules
discount rate(s)
Single-Employer: The single-employer funding rules require
discounting of future expected pension benefit payments using rates
based on the yields on high-quality corporate bonds, regardless of the
plan's actual investments, in order to develop the actuarial present
value of accrued benefits as of a valuation date. Under the original
PPA 2006 rules, the bond rates could either be based on a full yield
curve incorporating a 1-month average of bond yields, or could be based
on three ``segment rates'' derived from a 24-month average of rates.
The three segment rates represent the average yields for periods less
than 5 years (the first segment rate), 5 to 20 years (the second
segment rate), and 20 years and beyond (the third segment rate).
The Pension Relief Act of 2010 (PRA) was the first of several
funding relief measures in the wake of the 2008-2009 financial crisis.
PRA allowed plan sponsors to extend the amortization period of the
funding shortfall for any 2 of the years 2008 through 2011, inclusive.
In 2012, the Moving Ahead for Progress in the 21st Century Act (MAP-21)
provided for ``Segment Rate Stabilization,'' which limited the segment
rates to within a corridor defined by a decreasing percentage (starting
at 30 percent and reducing in 5-percentage-point increments to 10
percent) of the 25-year average of the original PPA segment rates for
calculation of the MRC and AFTAP used to determine the applicability of
the PPA benefit restrictions. Segment Rate Stabilization raised the
allowable segment rates, which significantly decreased minimum required
contributions and provided relief from benefit restrictions for single-
employer plans. The phase-out of the corridor based on 25-year average
rates has been extended subsequent to MAP-21 by the Highway and
Transportation Funding Act of 2014 and again in the Bipartisan Budget
Act of 2015.
Notably, Segment Rate Stabilization did not apply to the funded
status measurements required to determine whether reporting to the PBGC
under ERISA section 4010 was required by a plan sponsor, and also did
not apply to the calculation of the unfunded vested benefits used to
compute a plan's PBGC variable premium. Thus, since enactment of the
PRA many plan sponsors have been able to satisfy the minimum funding
requirements but are faced with PBGC variable premiums sufficiently
large that a significant incentive exists for the sponsor to fund at a
higher level than the MRC (which may not be affordable for some plan
sponsors) or to remove liability from their plans through pension risk
transfer transactions (e.g., lump sum windows or annuity purchases).
As of March 31, 2018, the segment rates applicable for various
purposes are shown in the table below. For comparison purposes, the
``effective interest rate,'' which is the single discount rate that
would produce the same target liability as the segment rates, will
typically fall between the second and third segment rates.
------------------------------------------------------------------------
Segment Rate
Measurement Purpose Averaging Period -----------------------------
First Second Third
------------------------------------------------------------------------
Minimum Required 25 years.\10\ 3.92% 5.52% 6.29%
Contribution and PPA
Benefit Restrictions.
------------------------------------------------------------------------
PBGC ERISA section 4010 24 months. 1.94% 3.66% 4.46%
Reporting
Applicability.
------------------------------------------------------------------------
PBGC Variable Rate One month. 2.91% 3.99% 4.43%
Premiums.
------------------------------------------------------------------------
\10\ The actual 25-year average is made using 24-month averages of the
monthly segment interest rates, effectively extending the averaging
period beyond 25 years.
Multiemployer: Multiemployer plan actuaries generally use a
discount rate to value plan liabilities equal to the expected long term
rate of return on plan assets. Selection of this assumption is subject
to ASOP No. 27. Since most multiemployer plans invest in a diversified
portfolio that includes return-seeking asset classes such as equities,
discount rates tend to be higher than the single-employer discount
rates, even with Segment Rate Stabilization. The average discount rates
reported on the IRS Form 5500s used by multiemployer plans in 2015 was
approximately 7.4 percent.
mortality
Single-Employer: The mortality rates (and allowance for improvement
over time) to be used to calculate the Funding Target and Target Normal
Cost are prescribed. These rates are generally based on studies
performed by the SOA, but until a recent update in 2018 were based on a
study published in 2000 and had not been revised since PPA was enacted.
The mandated assumptions do not vary by industry, geographical area or
other plan-specific demographics. Only very large plans may use their
own mortality experience to set assumptions, if they can show that
their plan experience is statistically significantly different from the
mortality rates under the standard prescribed tables.
Multiemployer: The selection of the mortality tables and
improvement scales to be used for multiemployer plans is subject to
ASOP No. 35. The recent SOA studies published in 2014 (with subsequent
updates to the improvement scales in 2015, 2016, and 2017) have
included mortality tables that vary by ``collar'' and many
multiemployer plans may use some variation of these ``blue collar''
tables, although those tables were not based on multiemployer
experience. The SOA's RP-2014 blue collar mortality rates may result in
slightly lower plan liabilities than the prescribed tables for single-
employer plans. There are studies indicating that plans, and many
industries in which multiemployer plans are prevalent, experience
mortality rates that are significantly higher than the SOA blue collar
table would indicate, so actuarial judgment is often used to modify the
SOA tables.
asset valuation methods
Both single-employer and multiemployer funding rules allow for an
AVA to be used for funding calculations. Generally, this is allowed to
smooth out volatility in investment returns so that plan costs are less
volatile than what would be calculated if the fair market value of
assets was used in the calculations.
Single-Employer: The allowable AVA methods are narrowly defined in
IRS Notice 2009-22. Actual investment returns differing from expected
investment returns must be fully recognized in the AVA within 24
months. The expected rate of investment returns is limited by the third
segment rate as of each valuation date, and the AVA must lie between 90
and 110 percent of fair market value.
Multiemployer: The range of allowable AVA methods is subject to
ASOP No. 44 and pre-PPA regulatory guidance. Actual investment returns
differing from expected investment returns are typically recognized
over a period of 5 years or less. The expected rate of investment
return is based on a best estimate of expected returns for the plan's
investment portfolio. The AVA must lie between 80 and 120 percent of
fair market value.
One of the PRA 2010 funding relief measures allowed for 10-year
recognition of 2008-2009 investment losses in the AVA and longer
amortization of those losses after they are recognized for
multiemployer plans that elected the relief.
amortization of unfunded liabilities
Single-Employer: The single-employer funding rules define the
``Funding Shortfall'' as the Funding Target minus AVA, where AVA is
reduced by any PFB or COB. Each year, the Funding Shortfall in excess
of the unamortized balance of prior Funding Shortfall amounts is
amortized over 7 years. A single annual amortization base is
established, such that changes due to experience gains/losses, plan
amendments, and assumption changes are not separately identified.
One of the PRA 2010 funding relief measures allowed for
amortization of Funding Shortfall amounts for 1 or 2 of the plan years
beginning in 2008, 2009, 2010, and 2011 to be amortized over 15 years
or over ``2 plus 7'' years (where amortization was interest only for
the first 2 years).
Multiemployer: Under the multiemployer funding rules, the unfunded
actuarial liability (UAL) is defined as Actuarial Liability (AL) minus
AVA. The PPA 2006 multiemployer funding rules allowed for the
previously established amortizations of past plan amendments and
assumption changes to be amortized over the remainder of their original
30-year amortization periods. Pre-PPA 2006 gains or losses continued to
be amortized over the remainder of their 15-year amortization periods.
All post-PPA 2006 changes in UAL due to experience gains or losses,
plan amendments, or assumption changes are amortized over 15 years.
Changes in UAL are separately identified and amortized by source, even
though the amortization period is the same for each of these sources.
Funding method changes are amortized over 10 years.
Another of the PRA 2010 funding relief measures allowed for
amortization of 2008-2009 investment losses to be amortized over a 29-
year period.
calculation of the mrc
Single-Employer: Under the single-employer funding rules, the MRC
is generally equal to Target Normal Cost plus Shortfall Amortization,
where, as discussed earlier, Target Normal Cost (TNC) is calculated
using prescribed discount rates based on corporate bond yields and a
prescribed mortality table, Shortfall Amortization is over 7 years, and
the Funding Shortfall is calculated based on AVA reduced by PFB and
COB. The TNC includes an estimate of the administrative expenses
expected to be paid from plan assets during the year, and is reduced by
any Excess Assets (defined as the AVA-COB-PFB-TL).
Multiemployer: Under the multiemployer funding rules, the MRC is
generally equal to Normal Cost plus amortization of UAL, where, as
discussed earlier, Normal Cost is calculated using a discount rate
equal to the expected rate of return on plan assets and a best-estimate
mortality table, and UAL is amortized generally over 15 years. The
expense load for expected plan administration expenses may be defined
explicitly by inclusion in the normal cost (as with single-employer
plans) or implicitly through a reduction in the discount rate.
credit balances available to offset mrc
Both the single-employer and multiemployer funding rules allow plan
sponsors to offset the MRC by past contributions made in excess of past
MRC amounts.
Single-Employer: The use of COB or PFB is restricted in a number of
ways under the PPA 2006 single-employer funding rules, to reduce the
ability of a plan sponsor with a seriously underfunded plan to rely on
a large credit balance to meet minimum funding requirements. PPA 2006
does not allow a plan less than 80 percent funded to use these balances
to satisfy minimum funding requirements. PPA 2006 requires the funding
shortfall to be calculated deducting PFB and COB from AVA, so
maintaining these balances actually increases a plan sponsor's
calculated MRC amounts by increasing the shortfall amortization
amounts. A plan sponsor may also waive these balances to increase the
funded percentage, for example to avoid benefit restrictions or
restrictions on plan amendments under IRC section 436 or reporting to
the PBGC under ERISA section 4010.
The COB and PFB are credited annually with interest at the actual
rate of return on plan assets, to the extent not used to offset the MRC
or reduced to improve the funded percentage. This mark-to-market
approach precludes a plan sponsor from incurring large losses while
still increasing its future funding credits with an assumed rate of
return. Plan sponsors must actively elect to use the balances to
satisfy the MRC, and must specify the exact amount to be used each
year.
Multiemployer: The PPA funding rules for multiemployer plans
retained the credit balance concept from the pre-PPA funding rules. Any
prior years' contributions in excess of prior MRC amounts are
accumulated at the valuation interest rate (i.e., an expected return on
assets) and are automatically used to satisfy current minimum funding
requirements to the extent not otherwise satisfied with cash
contributions. If the credit balance ever becomes negative, this amount
is called a ``funding deficiency.'' If a funding deficiency occurs or
is projected to occur in the next 4 or 5 years, the plan will be
considered to be in critical status (in the Red Zone) and must adopt a
rehabilitation plan, which reduces plan benefits and/or increases
employer contributions to correct the funding problem, if possible. If
a funding deficiency is projected to occur within 7 years, a plan is
considered to be endangered (in the Yellow Zone) and must adopt a
Funding Improvement Plan, reducing the rate of future benefit accruals
and/or increasing employer contributions to correct the funding
problem.
consequences of lower funding levels
Single-Employer: Plans less than 80 percent funded are subject to
restrictions on (a) payment of accelerated benefit distributions (such
as lump sums and other amounts paid more rapidly than in equal
installments over a participant's lifetime), (b) amendments increasing
plan benefits, and (c) unpredictable contingent event benefits. Special
``At-Risk'' funding measures accelerate the minimum funding
requirements for certain plans that are less than 80 percent funded on
the regular funding assumptions and less than 70 percent funded using
special ``At-Risk'' assumptions.\11\ Plans less than 60 percent funded
must freeze benefit accruals. Additional contributions in excess of the
minimum funding requirements may be made to remove these restrictions,
and cannot be added to the plan's PFB. A plan sponsor in bankruptcy
will be subject to the accelerated benefit restrictions unless the
plan's actuary has certified the funded percentage for the current year
to be in excess of 100 percent. The only remedial actions available for
underfunded single-employer plan sponsors are to reduce or eliminate
future benefit accruals, waive PFB and COB, or contribute their way out
of underfunding.
---------------------------------------------------------------------------
\11\ The special ``At-Risk'' assumptions reflect accelerated
retirement timing and an election of the most valuable form of benefit
payment at the assumed retirement date.
Multiemployer: Plans not certified as Green by the Enrolled Actuary
must take actions to reduce benefits and/or increase employer
contributions to improve plan funding. Within 30 days of certification
as endangered or critical, the plan must notify all participants and
beneficiaries, the bargaining parties, the PBGC, and the Secretary of
Labor. Certain improvements are to be made over a funding improvement
period or rehabilitation period of about 10 years. Annual certification
of ``scheduled progress'' under the funding improvement plan or
rehabilitation plan must be certified by the Enrolled Actuary or
further corrective action is required. The guidelines and applicable
timelines for establishing the funding remedies were designed to work
---------------------------------------------------------------------------
under the collective bargaining process.
Generally, endangered plans may reduce future benefit accruals and
increase employer contributions. Critical plans may reduce optional
forms of benefit subsidies, amounts payable at early retirement ages
and disability benefits payable prior to normal retirement age, in
addition to reducing future benefit accruals. Some severely underfunded
critical plans may not be able to restore funding within the
rehabilitation period and in that case may conclude that all
``reasonable measures'' to restore plan funding have been taken.
MPRA allows critical and declining plans to apply for benefit
suspensions to reduce all benefits, but not below 110 percent of the
PBGC guaranteed level, if this is projected to restore solvency after
all reasonable measures have been taken to attempt to restore funding
without benefit suspensions. Another MPRA measure allows the PBGC to
consider applicants for a ``partition,'' in which the agency provides
immediate resources to pay for the benefits of a segment of the
participants, in combination with a maximum suspension for all
participants, enabling long-term solvency to be projected for the non-
partitioned segment.
quarterly contributions
Single-Employer: Plans less than 100-percent funded must make
quarterly payments toward the MRC to accelerate the payment of minimum
required contributions to the plan. Plan sponsors may elect to use PFB
or COB to cover the quarterly requirements, in certain circumstances.
Failure to make a quarterly contribution or a timely election to use
PFB or COB to cover the quarterly requirement is a PBGC-reportable
event, and requires participant notification (unless promptly
corrected).
Multiemployer: There is no quarterly contribution requirement for
multiemployer plans. Employer contributions are generally made
throughout the year based on hours or other units worked for which
employer contributions are due under the applicable collective
bargaining agreements.
failure to contribute mrc
Single-Employer: There are several consequences of failure to
satisfy the minimum funding requirements.
Additional interest penalties apply when quarterly
contributions are paid late. When the full MRC is not paid by
the final contribution due date (8\1/2\ months after the end of
the year), interest on the late amount continues to accrue
until paid. For late quarterly payments, an additional 5
percent interest penalty applies in addition to the regular
interest accrued.
An excise tax equal to 10 percent of the unpaid MRC is due
for failure to pay the full amount by the final contribution
due date. Amounts remaining unpaid continue to accrue
additional 10-percent penalties as of each final contribution
due date for subsequent years, until corrected. Amounts that
remain uncorrected after several years may become subject to a
100-percent excise tax.
The PBGC must be notified of the failure to pay the MRC in a
timely fashion. Special reporting applies when the aggregate
unpaid amount of any quarterly and final installments (with
interest) exceeds $1 million.
When aggregate unpaid contributions (with interest) exceed
$1 million, the PBGC may place a lien against the plan
sponsor's assets.
Plan sponsors experiencing temporary financial hardship may apply
for a minimum funding waiver, allowing them to defer and amortize the
waived contribution over a period of 5 years, if they can demonstrate
an ability to make the amortization payments in addition to their
projected funding requirements in future years.
Multiemployer: Excise taxes and other penalties apply. However,
plans in the Red Zone operating under a Rehabilitation Plan generally
qualify for a waiver of the excise tax.
Question. In the PBGC's multiemployer program, the ``insurable
event'' is plan insolvency. What does that mean in practice? Please
describe in detail the corrective action specified under the Pension
Protection Act (PPA) and the Multiemployer Pension Reform Act (MPRA)
requiring plans to identify and take steps to remedy funding challenges
before insolvency is reached.
plan insolvency and pbgc
Answer. A multiemployer pension plan is insolvent when it will have
insufficient liquid assets and revenue to pay next year's benefit
payments to retirees and beneficiaries in pay status. When a
multiemployer pension plan becomes insolvent, triggering PBGC's
insurable event, PBGC will provide the plan with financial assistance
to enable the plan to make benefit payments, but only up to the PBGC-
guaranteed levels. The amount of the financial assistance considers the
plan's available resources--any liquid plan assets and cash inflow such
as employer contributions and withdrawal liability payments--that can
be used to pay at least a portion of guaranteed benefits.
Technically, the financial assistance provided by PBGC is
structured as a loan, but it is highly unlikely the insolvent plan will
be able to repay that loan. (To date, only one insolvent plan has
repaid the financial assistance provided to it by PBGC.)
corrective actions under ppa
PPA provided multiemployer pension plans a framework and new tools
to address their underfunding that did not previously exist under
ERISA. Most notably:
Required remedial action plans in endangered or critical
status: PPA requires annual actuarial status certifications for
multiemployer pension plans. Certifications are based on
current and projected funded levels. The sponsor of a plan
certified to be in ``endangered'' status must adopt a ``funding
improvement plan,'' and the sponsor of a plan in ``critical''
status must adopt a ``rehabilitation plan.''
Required contribution increases: A critical status
rehabilitation plan or endangered status funding improvement
plan may include schedules of required increases in
contribution rates, which must be adopted by the bargaining
parties. Prior to PPA, multiemployer plan sponsors could
encourage bargaining parties to adopt increases in contribution
rates, but there was no specific statutory authority providing
for this.
Reductions in adjustable benefits: A rehabilitation plan
(but not a funding improvement plan) may include reductions to
``adjustable benefits,'' which include early retirement
benefits, ancillary benefits, and other subsidies. These
reductions may apply to benefits that have already been
accrued, but generally may not apply to participants in payment
status. Prior to PPA, accrued benefits were protected under the
anti-cutback rule first established under ERISA.\12\ With very
limited exceptions, accrued normal retirement benefits and
benefits already in payment status when a plan enters critical
status remain protected under PPA.
---------------------------------------------------------------------------
\12\ Internal Revenue Code section 411(d)(6) prohibits the
reduction or elimination of any accrued benefit, early retirement
benefit and retirement-type subsidies, and optional forms of benefit.
Exhaustion of all reasonable measures: Under PPA, the
primary goal of a rehabilitation plan is to enable the plan to
emerge from critical status by the end of a 10-year
rehabilitation period. If, however, a plan sponsor determines
that it has exhausted all reasonable measures, it can instead
adopt a rehabilitation plan that takes reasonable measure to
enable the plan to emerge from critical status at a later date,
---------------------------------------------------------------------------
or to forestall the projected insolvency.
The financial market collapse of 2008 and the Great Recession put
significant strain on multiemployer pension plans, but most were able
to work within the framework provided by PPA to restore funding levels.
Some plan sponsors, however, found their plans were too severely
distressed to develop a remedial plan that enabled the plan to emerge
in a timely way from critical status or avoid projected insolvency.
For these severely distressed plans, even after significant benefit
reductions, the contribution rate increases needed to emerge from
critical status within the required statutory time frame were so
immense that they would cripple or bankrupt the participating
employers. Therefore, these plan sponsors relied on the ``exhaustion of
reasonable measures'' clause under PPA and adopted rehabilitation plans
that focused instead on emerging from critical status at a later date,
or perhaps delaying insolvency for as long as possible. Those plan
sponsors acknowledged the reality that unreasonable required
contribution increases and unreasonable benefit reductions would be
counterproductive. In other words, overly burdensome contribution
increases could actually reduce plan revenue by triggering employer
withdrawals or the rejection of plan participation by active employees.
corrective actions under mpra
When MPRA was passed in late 2014, it targeted those plans in
critical status that had exhausted all reasonable measures and were
still on the path toward insolvency. MPRA intended to provide these
severely distressed plans with additional tools to enable them to
remain solvent. Specifically:
Critical and declining status: MPRA established a new status
for severely distressed plans: critical and declining status.
In general, a multiemployer pension plan is in critical and
declining status if it is in critical status and also projected
to become insolvent (in other words, run out of money) in the
next 20 years.
Suspension of benefits: MPRA permits sponsors of plans in
critical and declining status to elect to suspend benefits if
doing so would enable the plan to be reasonably expected to
avoid projected insolvency. For this purpose, a suspension of
benefits is a temporary or permanent reduction in benefits that
would otherwise be protected under ERISA, including benefits
that have already been accrued and benefits already in payment
status. Certain classes of participants--for example, those
over a certain age or those who are or will be receiving
disability benefits under the plan--are fully or partially
protected from suspensions. Additionally, suspensions must not
reduce benefits below 110 percent of PBGC guarantee levels.
Plan sponsors that decide to suspend benefits must submit an
application to the Department of Treasury for review and
approval.
Partitions and facilitated mergers: MPRA also permits
sponsors of plans in critical and declining status to apply to
PBGC for special assistance in the form of a partition or a
facilitated merger. Under a partition, PBGC would provide
financial assistance to cover a portion of plan benefits, but
only up to PBGC-guaranteed levels. A precondition of a
partition is that the plan must suspend benefits to the maximum
extent permitted under law. Under a facilitated merger, PBGC
may provide financial assistance to enable a merger between two
plans, with the goal of extending plan solvency and reducing
PBGC's overall anticipated losses related to the plans
involved. PBGC may only approve a partition or facilitated
merger if the transaction would not impair PBGC's ability to
provide financial assistance to other insolvent plans. Given
the financial condition of PBGC's multiemployer program, the
impairment requirement significantly limits the level of
available financial assistance from PBGC.
Question. In any case where all but one employer withdraws from a
multiemployer pension plan, is that one remaining employer's withdrawal
liability equal to the entire unfunded liability of the plan? Please
describe in detail the ``last man standing'' rule.
Answer. Many refer to the ``last man standing'' rule as meaning
that the final remaining employer in a multiemployer pension plan is
responsible for the entire unfunded liability of the plan. When a
multiemployer plan is suffering from a declining employer base, the
remaining employers tend to bear a larger proportional share of the
plan's underfunding. However, it is also important to understand that
there are provisions in the statute that significantly limit the actual
exposure to the last remaining employers. Most notably:
Under ERISA, as amended by PPA, the sponsor of a plan in
critical status may determine that it has exhausted all
reasonable corrective measures to emerge from critical status
within the required number of years. In that case, the plan
sponsor may develop a rehabilitation plan that includes
reasonable measures that target emergence from critical status
at a later date, or forestall possible plan insolvency. This
provision provides relief to plans with only a few remaining
participating employers, in that it does not force them to
provide unreasonable contribution increases to rectify
underfunding that may be associated with employers that have
previously withdrawn.
Under ERISA, an employer's withdrawal liability assessment
is not required to be paid as a lump sum. Instead, the statute
establishes a withdrawal liability payment schedule based on
historical contribution rates and contribution base units.
Furthermore, under ERISA, withdrawal liability payments are
generally subject to the ``20-year cap,'' meaning that they
stop after 20 years if the statutory payments have not paid
down the employer's withdrawal liability assessment, with
accumulated interest. In a mass withdrawal situation, however,
the 20-year cap no longer applies, meaning that the statutory
payments could continue indefinitely. Even if statutory
withdrawal liability payments continue forever, however, an
employer's withdrawal liability assessment may not be fully
satisfied. In other words, the statute does not require an
employer to pay its withdrawal liability assessment, even in a
mass withdrawal situation.
Finally, under ERISA, a mass withdrawal may be triggered if
``substantially all'' employers have withdrawn from a
multiemployer pension plan. Furthermore, mass withdrawal rules
may ``claw back'' certain employers that have withdrawn in the
3 years prior to a mass withdrawal. These provisions may help
mitigate the unfunded liability exposure to the final few
employers participating in a multiemployer plan.
Question. Please explain why the risk to employers participating in
multiemployer pension plans could occur sooner than plan insolvency
dates if accounting rules eventually require such employers to record
their contingent withdrawal liability on their balance sheets.
Answer. Under current accounting rules, there are required
disclosures for employers that participate in multiemployer pension
plans, including information regarding the employer's total
contributions to all multiemployer plans in which they participate.
Withdrawal liability is not a balance sheet liability, nor is it a
required financial disclosure. That said, some employers voluntarily
disclose contingent withdrawal liability in their financial reporting
footnotes.
If employers were required to record contingent withdrawal
liability on their balance sheet, it would likely result in lowered
valuations for publicly traded companies. Many employers, both public
and private may experience increased difficulty in securing financing.
In some cases, these factors could add additional financial pressures
to companies already facing challenging economic conditions.
Question. In your written testimony, you concluded by saying
``[o]ne of three actions must be taken: either benefits are reduced
(this is the current course if there are no interventions), or
contributions to the plans have to increase, or as a third option, more
risk can be taken by plans to achieve prospective investment gains.
Each option presents pros and cons with very different outcomes to
different stakeholders.'' Please describe in detail the key
considerations of each option.
Answer. All available solutions to avoid the insolvency of plans in
critical and declining status, which have not found a means to resolve
their funding distress, will involve one or more of three actions,
broadly defined. In each of these approaches, equity and fairness to
participants, employers, and taxpayers--and the ability to accept and
withstand risk--all need to be considered.
option 1: benefits can be reduced
There are many ways this could be accomplished on a targeted basis.
It would be necessary to decide whose benefit is reduced (e.g.,
everyone, future retirees, or current retirees, or even current
retirees under a specified age), and by how much to reduce benefits.
The reductions could vary by group or even by individual. If no action
is taken, benefit reductions to the PBGC guarantee limit are the
default, upon insolvency. However, if the PBGC is unable to honor its
guarantee, then further drastic reductions will take place.
This option relies on sacrifices from plan participants in order to
resolve the funding crisis.
option 2: provide financial assistance
Financial assistance provided to troubled plans could be in the
form of more contributions--from employers, existing participants, or
even retirees--or from other sources. There are practical limits on how
much employer contributions can be increased and still be affordable
(i.e., not contribute to bankruptcy or withdrawal), and limits on how
much can be paid from participants; in general, critical and declining
plans have determined that they have already reached that limit--they
have no recourse in the absence of other sources of assistance.
The PBGC offers financial assistance that, per the statute, is a
loan (that is realistically not anticipated to be repaid); however, the
PBGC's multiemployer program is itself currently projected to become
insolvent by the end of 2025 if another solution is not found to stave
off several pending insolvencies from systemically significant plans.
An alternative is for financial assistance to come from outside the
current multiemployer system. To the extent that this option draws on
taxpayer money, it represents a sacrifice from the associated
taxpayers.
option 3: take on more risk
The option of taking on more risk could reduce the amount of
benefit reduction or additional financial support needed to avoid
projected insolvency. It is important to note, however, that taking on
additional risk could still result in plan insolvency. It should also
be noted that taking on additional risk must be done in combination
with other measures. In other words, plans currently in critical and
declining status cannot reasonably expect to alleviate their projected
insolvency solely by taking on more investment risk in hopes of
achieving higher returns.
An example of taking on additional risk would be to use funds from
a government-backed loan at a lower interest rate but then investing
the borrowed amount in return-seeking assets (including stocks) with
the potential to earn a better return than the fixed rate of the loan,
which would shift the risk to whatever entity provides or underwrites
the loan.
This option will likely involve a taxpayer cost that is expected to
be less than would be required under Option 2, but that cost will not
be known in advance, and could be higher than expected or could result
in unanticipated benefit losses if future experience is poor.
Question. Is present law sufficient to address the looming failure
of several systemically important multiemployer pension plans and the
insolvency of the PBGC's multiemployer program? Or are additional
legislative tools necessary?
Answer. As described above, the provisions under PPA and MPRA are
not sufficient to avoid the looming insolvency for roughly 100 to 120
multiemployer plans. For some plans in critical and declining status,
Treasury and PBGC may be able to provide a means of survival via
approval of plan applications for benefit suspensions and partitions.
For other plans the existing tools are insufficient and additional
legislative measures will be needed to avoid the insolvency and to
prevent the failure of the PBGC guarantee program. However, it is
important to not jeopardize the survival of the 90 percent of plans
that are doing well, or are far along the path to recovery from the
financial crisis.
______
Prepared Statement of Hon. Orrin G. Hatch, a U.S. Senator From Utah,
Co-Chairman, Joint Select Committee on Solvency of Multiemployer
Pension Plans
WASHINGTON--Joint Select Committee on Solvency of Multiemployer Pension
Plans Co-Chairman Orrin Hatch (R-Utah) today delivered the following
opening statement at a committee hearing examining the history and
structure of America's multiemployer pension system.
Today, we will begin our work in developing a deep base of
knowledge on the issues surrounding multiemployer pension plans and the
Pension Benefit Guarantee Corporation, or PBGC.
We have an ambitious work plan, but like all great endeavors, we
need to start with the basics. That means reviewing what these plans
are and how they operate; examining why the plans were established; and
investigating what economic, demographic, and other forces have shaped
and impacted the plans.
Going forward, the committee will bring in experts from government
and academia to help us better understand the issues surrounding
multiemployer pension plans and the PBGC. This insight will be
critical: We need to understand the numbers that shape the plans and
the PBGC, because the challenges we will look at fundamentally involve
arithmetic--however unpleasant that arithmetic may be.
After getting a sense of those basic numbers, this committee will
also examine the major legal and financial issues with the
multiemployer plans, how the governing statutes have changed over time,
and how finances have evolved for the various plans and for the PBGC.
Certainly, the issues involved here are far broader and go much
deeper, but to understand the scope of the problems that we face, we
need basic measures of what's going on.
Looking ahead, we will likely have hearings in which we will listen
to various stakeholders concerned with the operation of these plans.
Those stakeholders include retirees, active employees, businesses that
sponsor the plans, actuaries, plan managers, American taxpayers, and
the PBGC.
We will also look at how multiemployer plans are designed and how
their finances are managed, along with the unique regulatory and
workforce environments they operate in.
Following stakeholder input, the committee will examine policy
options, and the costs and benefits that come with them.
I do not doubt that the committee has a very heavy workload ahead.
I also do not doubt the sensitivity of the issues we will discuss.
The committee is charged with a very difficult task. No matter what
direction we take, we are bound to anger some folks.
But it is critical that we understand the core financial features
of multiemployer pension plans, as well as the PBGC, to guide the path
toward possible solutions.
For today's hearing, we have brought in two experts to provide us
with information on the history, structure, operations, and evolution
of the multiemployer plans since their inception in the 1940s.
Their perspectives and insight will be critical as we begin this
first phase of our process, and I look forward to hearing from them and
learning more.
Now, let me close my opening remarks by noting that the staff of
the Joint Committee on Taxation has prepared, and posted on its
website, a publication titled ``Present Law Relating to Multiemployer
Defined Benefit Plans,'' which will serve as one of many valuable
resources to this committee. I appreciate the work of the JCT and thank
Mr. Barthold and his team for what I am sure will be useful background
information.
______
Communications
----------
Chamber of Commerce of the United States of America
1615 H Street, NW
Washington, DC 20062
202-463-5769
April 18, 2018
The Honorable Orrin Hatch The Honorable Sherrod Brown
Co-Chair Co-Chair
Joint Select Committee on Solvency
of Multiemployer Pension Plans Joint Select Committee on Solvency
of Multiemployer Pensions Plans
U.S. Senate U.S. Senate
Washington, DC 20510 Washington, DC 20510
Dear Co-Chairs Hatch and Brown:
Thank you for your work to address the multiemployer pension plan
crisis, which affects retirees, participants, and employers with plans
and, potentially, the entire retirement system.
The Chamber has issued a report, ``The Multiemployer Pension Plan
Crisis: The History, Legislation, and What's Next?'', which provides an
in-depth analysis of the events leading up to the crisis, and various
proposals to fix it. Please include this report in the record of your
hearing on the ``The History and Structure of the Multiemployer Pension
System.''
There is no easy solution for this crisis. However, if nothing is
done, the consequences will be devastating. We look forward to working
with Congress to find a solution that minimizes the negative impact of
this crisis. Thank you for your consideration of our comments and this
report.
Sincerely,
Glenn Spencer
Senior Vice President
Employment Policy Division
CC: Members of the Joint Select Committee on Solvency of Multiemployer
Pension Plans.
______
The Multiemployer Pension Plan Crisis:
The History, Legislation, and What's Next?
U.S. CHAMBER OF COMMERCE
December 2017
EXECUTIVE SUMMARY
There is a looming pension crisis in the U.S. that unless addressed
quickly by the federal government could jeopardize the retirement
security of hundreds of thousands--if not millions--of Americans.
Multiemployer pension plans provide pension benefits to over 10 million
Americans in industries as diverse as construction, mining, trucking,
and retail and a significant number of these plans find themselves in
seriously distressed financial condition. If these funds become
insolvent--and the time frame for that insolvency ranges from 2 to 8
years--the results could be devastating for retirees, for current
employees, for the companies that contribute to the plans, and for the
communities in which companies and beneficiaries reside.
The financial crisis is not limited to one region or industry. It
potentially will affect companies, workers, retirees, and communities
throughout the U.S. and would include states as diverse as Ohio, Texas,
New York, Wisconsin, Kentucky, West Virginia, Kansas, and North
Carolina.
The narrative is bleak. A recent report found that 114 multiemployer
defined benefit plans (out of approximately 1,400 nationally), covering
1.3 million workers, are underfunded by $36.4 billion. Without a
solution, most of these plans will be bankrupt within the next 5 to 20
years. Moreover, the federal agency that backstops pension benefits--
the Pension Benefit Guaranty Corporation (PBGC)--is itself in financial
distress. It is projected that the PBGC could be insolvent in a mere 5
years and, if that occurs, the retirement security of multiemployer
plan beneficiaries could be wiped out entirely. Action is needed now to
avert this pending crisis.
This report chronicles how the multiemployer pension plan system
arrived at this point. It provides a history of the multiemployer plan
system, the demographic issues that have plagued it, and attempts to
fix it. Additionally, the report identifies several initiatives to
resolve the crisis. Ultimately, however, the report presents a strong
case for why Congress and the Administration need to act now.
Although many multiemployer plans were fully funded in the 1980s and
1990s, this euphoria came to an end in 2000, when the price of
technology stocks fell drastically. Many multiemployer plans had ridden
the wave of these dot-com companies to historic highs in asset levels,
but when the market crashed and investment returns were disastrous,
plans were hit twice as hard because of their declining contribution
bases. Moreover, the 2008 global recession led funding levels in most
plans to plummet. For those plans that had not sufficiently recovered
from the bursting of the dot-com bubble, 2008 proved catastrophic.
National and global financial events exacerbated the financial troubles
of multiemployer plans that already faced significant demographic and
financial pressures. Shrinking industries and declining union
participation eroded the contribution base of many plans. Between 1983
and 2016, the number of unionized workers dropped by almost half.
Moreover, there has been increased competition facing contributing
employers and their employees. Due to competition and fewer unionized
workers, untenable ratios of inactive-to-active participants were
created. Many plans now see ratios of one active worker for every two,
three, or even five retirees. As expected, industries with high
inactive-to-active retiree ratios experience the lowest average funding
levels. Due to all of these factors, certain plans will enter a ``death
spiral'' where there is no realistic chance of recovery.
There have been several attempts to address the multiemployer pension
funding problem. In 1980, Congress passed the Multiemployer Pension
Plan Amendments Act (MPPAA), which was designed to discourage employers
from leaving financially troubled multiemployer plans by implementing a
withdrawal liability. Although the introduction of withdrawal liability
was supposed to prevent withdrawing employers from shifting pension
obligations to remaining employers, the biggest problem is that many
withdrawing employers do not have the financial means to satisfy their
withdrawal liability.
In 2006, Congress passed the Pension Protection Act (PPA). The purpose
of the PPA is to give plan trustees more flexibility in dealing with
funding while at the same time forcing them to identify and correct
existing and potential funding issues in time to prevent further
funding level deterioration and stabilize the plans' finances. While
PPA did provide additional tools, it was not enough for those
underfunded plans with a declining active population base and severe
negative cash-flow problems.
Recognizing that some plans could not avoid insolvency without drastic
changes in the law, Congress passed the Multiemployer Pension Reform
Act (MPRA) in 2014. MPRA created three new tools to help plans stave
off insolvency: plan mergers, plan partitioning, and benefit
suspensions. Most notably, for the first time under the Employee
Retirement Income Security Act of 1974 (ERISA), Congress allowed plans
that were in severe financial distress to reduce benefits that had
already accrued, including benefits that were in pay status.
In addition, plan trustees have also implemented strategies to solve
plans' funding issues. These strategies include; reductions to future
benefit accruals, increased employer contributions, new funding
policies, and a ``two-pool withdrawal liability method.''
While the legislation has provided benefit to some plans and some of
these strategies have been helpful, the funding issues for the most
underfunded plans remain. If these plans fail, the impact will affect
individuals, businesses, the retirement system, and entire communities.
If the largest underfunded plans become insolvent, they will bankrupt
the PBGC. The subsequent benefit cuts that follow will also have deep
impacts on the communities where participants live. Retirees will see
their standard of living reduced. In addition, the insolvencies could
bankrupt employers, potentially leaving workers without income.
Reduced spending by workers and retirees will be felt by businesses,
and less money will be paid to local government in sales and other
taxes. While tax revenue decreases, the demand for social programs will
increase, because many retirees and workers could lose their homes and/
or have difficulty paying for medical costs. This will cause many to
become reliant on social programs that have to be funded by taxpayers
at a time when tax revenue will decline.
Consequently, new ideas and proposals are being discussed. Some are
purely legislative proposals, whereas others deal with new pension plan
designs. Solutions will not be easy, but they are necessary to address
the looming crisis that will affect us all.
OVERVIEW OF CURRENT MULTIEMPLOYER
PENSION PLAN FUNDING PROBLEM
Since the beginning of the last decade, many multiemployer defined
benefit pension plans have seen their funding level erode to the point
that their ability to pay pension benefits into the future is severely
threatened. While the majority of multiemployer plans are sufficiently
funded, several distressed plans are facing insolvency within the next
5 to 15 years. Some of the most underfunded plans cover hundreds of
thousands of participants. If they fail, the economic impact will be
disastrous for the U.S. economy as a whole and for certain industries.
In addition to the direct impact to contributing employer companies,
many secondary businesses will fail and retirees living on a fixed
income will see their benefits significantly reduced, resulting in
additional stresses on already strapped social service programs and
reduced revenues to state and local governments.
There are several reasons for this pending funding crisis. There have
been shifts in U.S. regulatory and trade policies over the years, which
have resulted in increased competition for businesses in certain
industries. The number of employees covered by collective bargaining
agreements (CBA) in these industries has declined precipitously. This
has resulted in a change in demographics, where many plans have two or
more retired participants receiving pension benefits for every one
active participant on whose behalf the plan is receiving contributions.
The increased ratio of retirees to active employees has led to negative
cash flow; many plans are paying significantly more in pension benefits
than they are receiving in employer contributions. This negative cash
flow can only be made up through investment returns. However, not only
can market returns not be predicted, but taking an overly aggressive
approach in investing pension plan assets in the hope that outsized
investment gains will be realized is risky and raises other potential
legal concerns.
Severe market downturns at the beginning of this century and in 2008
exacerbated the problem for many plans because they compounded the
effect of the already existing negative cash flow. Many plans have seen
their contribution base further eroded by contributing employers that
left the plan due to bankruptcy with little or no remaining assets to
pay their share of the plan's unfunded liability. The employees of
these employers are referred to as ``orphans,'' and the cost for
funding their benefits was placed on those employers who remained
behind.
Historically, there were only three ways for multiemployer pension
plans to improve their funding: (1) reduce future benefit accruals,
thus saving costs; (2) increase employer contributions; and (3) obtain
investment returns above the rate assumed by the plan actuary.
While many plans have reduced future benefit accruals, the savings
yielded from doing so have generally not been sufficient to materially
improve funding. This is because the liabilities that jeopardize
pension plans mostly relate to past service (i.e., benefits that have
already accrued and in many cases are already being paid to retirees).
Until recently, there has been a blanket prohibition against reducing
benefits already accrued, so plans reduced future accruals. Plans have
also consistently increased employer contributions. However, plans in
some industries have increased employer contribution rates to the point
that employers cannot be competitive or are on the brink of bankruptcy.
Investment returns cannot be predicted, and historically have not
provided the type of returns that would be needed to cure most plans'
underfunding.
Despite changes in the law designed to provide multiemployer plans with
greater flexibility in dealing with funding problems, there is nothing
that exists under current law that will save the multiemployer system's
most underfunded plans. The risk is not theoretical; some projections
show the Pension Benefit Guaranty Corporation (PBGC), the government
entity designed to be a backstop for multiemployer pension plans that
need financial assistance, will itself become insolvent by 2025. It has
become increasingly clear that additional legislative solutions are
necessary if the largest and most underfunded plans are to be saved. If
these plans become insolvent, the negative repercussions will be felt
throughout the U.S. economy.
Current Statistics
As of 2014, there were a total of 1,403 multiemployer defined benefit
plans, covering 10.1 million participants.\1\ Approximately 4 million
were active participants, while a little over 6 million were retired
participants. It is estimated that more than 1 million defined benefit
plan participants are in plans that have serious funding issues.\2\ The
gap between plans with severe funding issues (known as ``critical-
status plans'') and those that are not in critical status continues to
widen.\3\
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\1\ ``Multiemployer Defined Benefit (DB) Pension Plans: A Primer
and Analysis of Policy,'' Congressional Research Service Report
prepared for members and committees of Congress, John J. Topoleski,
November 3, 2016.
\2\ Alicia H. Munnell and Jean-Pierre Aubry, ``The Financial Status
of Private Sector Multiemployer Pension Plans,'' Center for Retirement
Research at Boston College, September 2014, Number 14-14, 3, http://
crr.bc.edu/briefs/the-financial-status-of-private-sector-multiemployer-
pension-plans/.
\3\ Kevin Campe, Rex Barker, Bob Behar, Tim Connor, Nina Lantz, and
Ladd Preppernau, Milliman Multiemployer Pension Funding Study,
Milliman, Fall 2017, http://www.
milliman.com/uploadedFiles/insight/Periodicals/multiemployer-pfs/
multiemployer-pension-funding-fall-2017.pdf.
According to an August 2017 analysis conducted by the actuarial firm
Cheiron, 114 multiemployer defined benefit plans (out of approximately
1,400 nationally), covering 1.3 million workers, are underfunded by
$36.4 billion. Participants covered by plans in the coal, trucking,
manufacturing, service, retail, and food industries are, and will
continue to be, at the center of the funding crisis. Unless a solution
is found, most of these plans will go insolvent during the next 5 to 20
years.\4\
---------------------------------------------------------------------------
\4\ ``Cheiron Study Finds 114 Multiemployer Pension Plans Projected
to Fail Within 20 Years, More Than a Million Participants Could Lose
Benefits,'' August 27, 2017, https://cheiron.us/articles/
Cheiron%20Analysis%20Critical%20and%20Declining%20Plans.pdf.
In 2016, 167 multiemployer plans filed notices with the Department of
Labor (DOL) advising that they were in ``critical status'' (critical-
status plans are sometimes referred to as being in the ``red
zone'').\5\ As of 2012, the funding ratio for plans in critical status
was 37.1% based on the market value of assets and 62.5% based on the
actuarial value of assets. The aggregate underfunding on a market value
basis was $166 billion, and on an actuarial basis $65 billion.\6\ The
difference between market value and actuarial value is explained in the
``Funding Rules'' section of this paper.
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\5\ ``Critical, Critical and Declining, Endangered and WRERA Status
Notices,'' Department of Labor, Public Disclosure, https://www.dol.gov/
agencies/ebsa/about-ebsa/our-activities/public-disclosure/critical-
status-notices.
\6\ Alicia H. Munnell and Jean-Pierre Aubry, ``The Financial Status
of Private Sector Multiemployer Pension Plans,'' Center for Retirement
Research at Boston College, September 2014, Number 14-14, 3, http://
crr.bc.edu/briefs/the-financial-status-of-private-sector-multiemployer-
pension-plans/.
In 2016, an additional 83 multiemployer plans filed notices with the
DOL advising they were in critical and declining status. Critical and
declining status plans are plans in critical status, but, which, have
been certified as facing impending insolvency. These plans generally
have the highest ratios of inactive-to-active participants and the most
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severe negative cash flow.
As assets decline and money continues to flow out of these plans,
investment income is insufficient to offset the negative cash flow.
Since the market crash of 2008, plans that find themselves in critical
and declining status have not only failed to improve their funded
percentage, but have seen their funded percentage continue to decline
to the point that their only hope of survival is to reduce benefits to
retirees who are already receiving benefits (referred to as benefits in
``pay status'').
For some plans, even reductions in benefits to retirees are not enough
to stave off insolvency. Plans such as Central States, Southeast and
Southwest Areas Pension Fund (Central States) and the United Mine
Workers of America 1974 Pension Plan (UMWA Plan) are nearing the point
of no return. Sometimes referred to as the ``death spiral,'' these
plans' negative cash flow is so severe that they will have to shift
their assets away from investments that can provide long-term growth to
investments that preserve cash to pay benefits.
When this happens, insolvency is no longer a matter of ``if'' but of
``when,'' and by most accounts, ``when'' is before the end of the next
decade. Therefore, without a viable resolution, in less than 10 years
there will be significant benefit cuts for current retirees, active
participants without retirement benefits, and employers bankrupted
because of pension obligations.
The PBGC ``Backstop'' Is in Danger
The funding crisis for multiemployer plans is exacerbated because the
Pension Benefit Guaranty Corporation's multiemployer program is itself
in crisis. The PBGC is a federal agency created by Employee Retirement
Income Security Act of 1974 (ERISA) to protect the benefits of
participants in private-sector defined benefit plans. PBGC insures both
single-employer and multiemployer defined benefit plans, but under two
separate programs.
The PBGC's multiemployer program is funded from premiums paid by
multiemployer pension plans and interest income on U.S. Department of
the Treasury (Treasury) debt. There is no taxpayer funding.\7\
---------------------------------------------------------------------------
\7\ John J. Topoleski, ``Multiemployer Defined Benefit (DB) Pension
Plans: A Primer and Analysis of Policy,'' July 24, 2015, Congressional
Research Service, 1, http://digitalcommons.ilr.
cornell.edu/key--workplace/1436/.
ERISA Section 4002 reads, in part, ``The U.S. is not liable for any
obligation or liability incurred by the corporation [PBGC].'' Unlike
public-sector plans that are completely financed by American taxpayers,
multiemployer plans have always paid their own way, with U.S.
businesses bearing the bulk of the cost.\8\
---------------------------------------------------------------------------
\8\ As noted in John J. Topoleski's November 3, 2016, paper, some
in Congress have expressed reluctance to even consider providing
financial assistance to the PBGC. See U.S. Congress, House Committee on
Education and the Workforce, Subcommittee on Health, Employment, Labor,
and Pensions, ``Examining the Challenges Facing the PBGC and Defined
Benefit Pension Plans,'' 112th Cong. 2nd sess., February 2, 2012, 112-
50 (Washington: GPO, 2012) and U.S. Congress, House Committee on
Education and the Workforce, Subcommittee on Health, Employment, Labor,
and Pensions, ``Strengthening the Multiemployer Pension System: What
Reforms Should Policymakers Consider?'', 113th Cong. 1st sess., June
12, 2013.
The crisis in the PBGC multiemployer program has been recent and swift.
Until 2003, the PBGC multiemployer program operated with a surplus. As
of 2017, the multiemployer program has a $65 billion deficit.\9\ This
drastic increase in liabilities is directly due to the insolvency and
projected insolvency of plans in industries that have been adversely
affected by regulatory and trade policies. PBGC noted that in 2017
there were 19 plans newly classified as probable claims against the
insurance program as they either terminated or are expected to run out
of money within the next decade. The liabilities represent the present
value of $141 million in financial assistance to 72 insolvent
multiemployer plans, up from the previous year's payments of $113
million to 65 plans.\10\
---------------------------------------------------------------------------
\9\ Annual Report 2017, Pension Benefit Guaranty Corporation,
November 16, 2017, https://www.pbgc.gov/sites/default/files/pbgc-
annual-report-2017.pdf.
\10\ Id.
In addition, employers have seen a steady increase in premiums. In the
10 years starting in plan year 2007, premiums have increased $20 per
participant and are now set at $28 per participant for plan year 2018.
Despite these increases, the PBGC maximum benefit payout has remained
---------------------------------------------------------------------------
relatively low and is currently $1,251 per year.
As contributing employers to these plans failed, funding levels
plummeted. Remaining employers see their long-term viability threatened
by ever-increasing pension liability brought on by employers that went
bankrupt, liquidated, or otherwise went out of business. When employers
stop contributing to a pension fund, all remaining employers are
required to pick up the slack and assume proportionate liability for
the payments owed to the exited employer's ``orphan'' employees. As
employers leave the pool of contributors, each remaining employer's
percentage of the growing funding deficit gets larger. This is known as
the ``last man standing'' rule and was established to protect plan
participants from the consequences of employer withdrawals. The ``last
man standing'' rule has rendered multiemployer plans unstable as nobody
wants to be the last man standing. This provides incentive for even
healthy employers to leave, and puts the PBGC in the role of the
ultimate ``last man.'' \11\
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\11\ Carl Horowitz, ``New Report Shows Severe Shortfalls in
Multiemployer Union Pensions,'' National Legal and Policy Center, July
3, 2013, http://nlpc.org/2013/07/03/new-reports-show-severe-shortfalls-
multiemployer-union-pensions/.
Given the deficit between total assets and the present value of
liabilities, PBGC projects that there is a greater than 50% chance that
the multiemployer plan program will run out of money by 2025, and a
greater than 90% chance that it will run out of money by the end of
2035.\12\ Absent a dramatic increase in premiums that multiemployer
plans pay (which would further undermine many plans' funding levels and
is thus likely not feasible), or a change in how the PBGC is funded,
pension plans facing impending insolvency (or even those that are
already insolvent and receiving PBGC financial assistance) cannot rely
on assistance from PBGC beyond the next 10 years.
---------------------------------------------------------------------------
\12\ PBGC FY 2016 Annual Report, 61.
The pressure the projected plan insolvencies will place on the PBGC
will be catastrophic, absent congressional action. In 2014, the Center
for Retirement Research in Boston College delivered an ominous
---------------------------------------------------------------------------
assessment of the situation:
The actuarial model projects that it is more likely than not
that the program [PBGC] will be insolvent by 2022, with a 90-
percent chance of insolvency by 2025. Once the fund is
exhausted, the PBGC would have to rely on annual premium
receipts and would be forced to pay only a fraction of its
paltry guaranteed benefit. One estimate is that a retiree who
once received a monthly benefit of $2,000 and whose benefit was
reduced to $1,251 under the PBGC guarantee would see the
monthly benefit decline to $125. The exhaustion of the
multiemployer insurance fund could also undermine confidence in
the entire system.\13\
---------------------------------------------------------------------------
\13\ Alicia H. Munnell and Jean-Pierre Aubry, ``Can PBGC Save
Multiemployer Plans?,'' Center for Retirement Research at Boston
College, September 2014, Number 14-16, 5, http://crr.bc.edu/
uncategorized/can-pbgc-save-multiemployer-plans/.
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MULTIEMPLOYER DEFINED BENEFIT PENSION PLAN BASICS
Private-sector multiemployer defined benefit pension plans are plans
jointly sponsored by a labor union(s) and a group of employers. Such
plans usually cover employees working in a common industry such as, for
example, coal, construction, food, maritime, textile, trucking, etc.
Many multiemployer plans cover employees working at a particular craft
within an industry, such as electricians, bricklayers, and truck
drivers. While most plans are ``local plans'' and cover employees
working in a specific geographical area, there are also ``national
plans,'' which cover employees working in crafts or trades throughout
the U.S. Many of the industries in which multiemployer plans prevail
have high worker mobility and/or seasonal employment.
Due to the migratory nature of the work, employees frequently work for
more than one employer during their careers. Oftentimes, employees
would not work long enough for one employer to vest in a benefit under
that specific employer's pension plan; however, multiemployer plans
allow employees to move from employer to employer and still earn
service credit under the multiemployer plan, provided the employers for
which the employee works participate in the multiemployer plan.
Multiemployer plans are established via collective bargaining between a
union and two or more employers. Ordinarily, the union and the
employers will enter into a collective bargaining agreement which is
negotiated between local, regional, or national unions and individual
employers or an association of employers bargaining as a group. The
collective bargaining agreement establishes the employer's obligation
to contribute to the plan, identifies the bargaining unit to which the
collective bargaining agreement applies, and sets the rate and basis on
which employers pay contributions to the plan. The contribution rate is
usually a specific sum per hour or unit of time worked by or paid to
the employee.
Negotiations over pension contribution rates are not done in a vacuum.
The union and employers also must negotiate contribution rates to other
multiemployer benefit plans (health and welfare, vacation, defined
contribution pension, etc.) as well as wages. The combination of wages
and benefit plan contributions is commonly referred to as the ``wage
and benefit package'' or the ``total package.'' Thus while pension plan
funding is a factor that bargaining parties must take into account
during negotiations, they also must be cognizant of ever-increasing
medical inflation and its impact on medical costs as well as employees'
desire to receive increases in their hourly wage. As many employers
operate on thin profit margins, addressing these competing factors can
be complex. Compounding the complexity is that, once negotiated, the
pension contribution rate is often subject to review and approval by
the plan's trustees.
STATUTES GOVERNING MULTIEMPLOYER PENSION PLANS
Labor Management Relations Act
The Labor Management Relations Act (LMRA), commonly known as the Taft-
Hartley Act, requires employers to pay contributions into a trust fund
that must be jointly administered by an equal number of union and
employer representatives. The obligation to contribute must be set
forth in a written document (usually a collective bargaining
agreement), and the contributions must be used for the sole purpose of
providing benefits to employees.\14\
---------------------------------------------------------------------------
\14\ LMRA Section 302 (c)(5).
---------------------------------------------------------------------------
Employee Retirement Income Security Act
The union and employer representatives who manage the pension plan and
administer the trust are called trustees. As trustees of the monies
deposited into the trust, the trustees are fiduciaries to the
participants (both active employees and retirees) covered by the
pension plan. The fiduciary duties to which the trustees must adhere
are established under the Employee Retirement Income Security Act of
1974 \15\ and are enforced by the U.S. Department of Labor's Employee
Benefits Security Administration. ERISA requires the trustees to act
with the ``care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent man acting in like capacity and familiar
with such matters would use in the conduct of an enterprise of a like
character and with a like aim.'' \16\ This is known as the ``prudent
expert'' rule and is the standard to which all fiduciary decisions are
held.
---------------------------------------------------------------------------
\15\ ERISA Section 1001, et seq.
\16\ ERISA Section 404(a)(1)(B).
---------------------------------------------------------------------------
Internal Revenue Code
While a plan's trustees generally have the discretion to determine the
amount of benefits a plan will provide, there are other plan features
that must comply with the requirements of the Internal Revenue Code of
1986 (Code).\17\ One such requirement is that, in general, a plan
cannot be amended to reduce accrued benefits, optional forms of
payment, early retirement benefits, and retirement-type subsidies.\18\
This is known as the anti-cutback rule, which until recently was the
lynchpin of the federal pension system. Amendments are generally
allowed to reduce future benefit accruals, as well as optional forms of
payment, early retirement benefits, and retirement-type subsidies that
accrue after the date of the amendment.\19\
---------------------------------------------------------------------------
\17\ Some Code requirements are also found in ERISA.
\18\ Code Section 411(d)(6) and ERISA Section 204(g).
\19\ ``Present Law, Data, and Selected Proposals Relating to
Multiemployer Defined Benefit Plans,'' The Joint Committee on Taxation,
February 26, 2016, https://www.jct.gov/
publications.html?func=startdown&id=4872.
The anti-cutback rule, which has been a backbone of federal pension law
since ERISA's inception in 1976, has been considerably weakened by
passage of the Pension Protection Act of 2006 (PPA) and the
Multiemployer Pension Reform Act of 2014 (MPRA). The weakening of the
anti-cutback rule has been in direct response to the pending funding
crisis of certain multiemployer plans and has been helpful to many
plans trying to avoid insolvency. However, MPRA has not been entirely
successful, as there are many severely underfunded plans that are going
to need additional help from Congress to survive.
Funding Rules
ERISA's and the Code's minimum funding rules require multiemployer
plans to maintain a funding standard account. The funding standard
account gets debited for charges related to benefit accruals,
investment losses, and other negative plan experience. Credits are
given for employer contributions, investment gains, and other positive
plan experience. The minimum required contribution to a multiemployer
plan is the amount needed, if any, to balance the accumulated credits
and accumulated debits to the funding standard account. If the debits
exceed the credits, there is a negative balance, and contributing
employers must pay the amount necessary to balance the account. The
liability is allocated to all of the plan's contributing employers.
If participating employers do not make the contribution necessary to
balance the funding standard account, the plan has a minimum funding
deficiency and contributing employers can be assessed excise taxes on
top of having to make up the deficiency. On the other hand, if the plan
was overfunded, it would have to increase benefits in order to prevent
paying an excise tax on the overfunding.
The calculations related to determining the amount in a multiemployer
plan's funding standard account are performed by an actuary. The plan
must use a specific funding method to determine the elements included
in its funding standard account for a given year. Such elements include
the plan's normal cost and the supplemental cost. Normal cost is the
cost of future benefits allocated to the year under the plan's funding
method. Supplemental cost is generally the costs attributable to past
service liability or to investment returns that were less than those
assumed by the actuary. The supplemental costs are amortized over a
specified period of years by debiting the funding standard account over
that period. If experience is good, there can also be actuarial gains
that result in credits being made to the funding standard account.\20\
When calculating debits and credits to the funding standard account,
the plan actuary must use reasonable actuarial assumptions.
---------------------------------------------------------------------------
\20\ Id.
Actuaries calculate plan funding using both actuarial values and market
values. Actuarial values are computed by the plan's actuary to predict
how much money a plan needs to set aside to pay future retirees.
Actuaries cannot use market values for this prediction, because market
values fluctuate from day to day as the stock market rises and falls.
An actuary predicts the long-term performance of the plan's investments
by using mathematics to smooth out year-to-year market variations. This
means that when investment performance is bad for a given year, the
actuary will not recognize the entire loss in the year it occurs, but
rather will ``smooth'' the loss by recognizing a portion each year for
---------------------------------------------------------------------------
a period of years. Investment gains are treated similarly.
The actuary uses this smoothing method to create an actuarial value of
the plan's assets, which is the likely value of the investments based
on typical long-term investment results. Market value is the actual
value of the plan's assets on any given day without regard to any
smoothing and provides a more realistic view of a plan's financial
condition.
As of 2012, the funding ratio for plans in critical status was 62.5%
based on the actuarial value of plan assets. Under normal
circumstances, such a ratio would not be disastrous; if the plan's
investment earnings matched or exceeded its actuarial assumed rate of
return and if the trustees made changes to benefits, a plan in critical
status could be expected to right itself. The actuarial assumed rate of
return is the rate the actuary assumes the plan's investment will earn
annually, and generally ranges from 7% to 8%. Unfortunately, many plans
have seen their contribution bases erode to the point where their cash
flow is so negative they cannot earn their way out of critical status.
As of June 30, 2017, the aggregate funding percentage of plans in
critical status fell to 60%, whereas the funded percentage of non-
critical status plans was almost 90%.\21\
---------------------------------------------------------------------------
\21\ Kevin Campe, Rex Barker, Bob Behar, Tim Connor, Nina Lantz,
and Ladd Preppernau, ``Milliman Multiemployer Pension Funding Study,''
Milliman, Fall 2017, http://www.
milliman.com/uploadedFiles/insight/Periodicals/multiemployer-pfs/
multiemployer-pension-funding-fall-2017.pdf.
---------------------------------------------------------------------------
THE CURRENT FUNDING CRISIS IS BEING DRIVEN BY A SMALL PERCENTAGE OF
PLANS WITH COMMON CHARACTERISTICS
Multiemployer defined benefit pension plans are not a monolith. The
most recent surveys illustrate that, as of today, many plans are
structurally stable and well managed. In fact, a Milliman study
recently reported that ``in the first 6 months of 2017, the aggregate
funding percentage for all multiemployer pensions climbed from 77% to
81%, reducing the system's shortfall by $21 billion--an improvement
driven largely by favorable investment returns.'' \22\ According to the
study, the estimated investment returns have outpaced actuarial
assumptions, reflecting the strong performance of the U.S. stock
market.
---------------------------------------------------------------------------
\22\ Id.
During the 1980s and 1990s, many plans were fully funded.\23\ This was
primarily due to a soaring stock market. While most multiemployer
plans' actuaries assume that annual investment returns will be in the
7% to 8% range, investment returns were well above those percentages
for many plans in the 1990s. The surging stock market seemed like a
blessing at the time. However, the outsized investment returns masked a
significant problem.
---------------------------------------------------------------------------
\23\ Alicia H. Munnell and Jean-Pierre Aubry, ``Private Sector
Multiemployer Pension Plans--A Primer,'' Center for Retirement Research
at Boston College, August 2014, No. 14-13, http://crr.bc.edu/briefs/
private-sector-multiemployer-pension-plans-a-primer/.
While pension assets increased at historical rates, union membership
nationally was in a steady decline. Private-sector union membership in
1983 was 12 million. By 2015, that number had fallen to 7.6
million.\24\ Thus, while pension plans assets were increasing thanks to
the stock market, many plans' contribution bases were declining. With
fewer contributions coming in, plans relied more heavily on investment
returns to keep assets growing.
---------------------------------------------------------------------------
\24\ Megan Dunn and James Walker, ``Union Membership in the United
States,'' Bureau of Labor Statistics, September 2016, https://
www.bls.gov/spotlight/2016/union-membership-in-the-united-states/
home.htm.
Today, almost half of all union members are between 45 and 64 years
old.\25\ As these workers age into retirement, there are not enough
younger union workers to replace them. This exacerbates negative cash
flow and essentially requires some plans to earn annual investment
returns that are likely unrealistic based on the investment markets'
cyclical nature. Moreover, as mentioned above, funds were not able to
``bank'' these extra returns because they would be subject to an excise
tax.
---------------------------------------------------------------------------
\25\ Id.
The euphoria of the 1990s came to an end in 2000, when the price of
technology stocks fell drastically. Many multiemployer plans had ridden
the wave of these dot-com companies to historic highs in asset levels,
but when the market crashed and investment returns were disastrous,
plans were hit twice as hard because of their declining contribution
bases. By the mid-2000s, most plans had recovered, but several plans
remained in dire straits. While very few industries were immune from
funding issues, certain plans in industries that had seen a significant
decline in active participants, such as trucking, or in industries with
cyclical work, like construction, did not recover. In 2008, a global
recession rocked the investment markets, causing funding levels in most
plans to plummet. For those plans that had not sufficiently recovered
from the dot-com bubble burst a few years earlier, 2008 was
---------------------------------------------------------------------------
catastrophic.
Although the investment markets have had favorable returns in recent
years, many plans' funding levels have continued to deteriorate. Since
passage of MPRA in December 2014, 15 multiemployer defined benefit
plans have filed applications with the Treasury Department to reduce
benefits to avoid insolvency. As of December 2017, Treasury has
approved only 4 of the 15 applications. These 15 applicants currently
account for only 1.35% of multiemployer defined benefits plans, but
cover roughly 5% of all multiemployer defined benefits plan
participants. These plans represent a segment of multiemployer pension
plans that are failing and that, although in the minority, could cause
the entire multiemployer pension system to crumble if additional
legislative action is not taken.
What does a plan facing impending solvency look like? By looking
broadly at the plans and industries they are in we can identify many of
the conditions and events that lead a plan down the path to critical
and declining status, and eventual insolvency.
Shrinking Industries and Declining Union Roles
The Bureau of Labor Statistics (BLS) reports that in 1983, there were
approximately 12 million American workers covered by a collective
bargaining agreement, which represented 16.8% of the American
workforce. By 2016, the number had fallen to about 7.6 million, or 6.4%
of the workforce.\26\
---------------------------------------------------------------------------
\26\ Id.
From 2000 to 2015, union membership in the transportation sector,
alone, declined by 6.7 percentage points. Union membership rates in
construction, manufacturing, and wholesale and retail trade also
declined over that period.\27\
---------------------------------------------------------------------------
\27\ Id.
Unionized workers on average are older than nonunion workers. In 2015,
nearly half of union members were between 45 and 64 years old, but only
about one-third of nonunion members belonged in this age group. Workers
aged 45 to 64 were heavily represented in the manufacturing and
transportation industries, which also had relatively high unionization
rates. Furthermore, the lowest union membership rate is among workers
aged 16 to 24 (4.4%), which makes the systemic replacement of older
union members with younger members impracticable.\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
Competition and Economic Factors Impacting Contributing Employers
Increased competition facing contributing employers and their employees
is another factor leading to declining pension plan funding levels.
There has been an onslaught of new competition in the last half century
caused in part by changes in U.S. regulatory and trade policy. These
policy changes have contributed to the hollowing out of entire
industries and their associated retirement plans.
For example, the United Furniture Workers Pension Fund A (Furniture
Workers Fund) was crippled by an influx of imported goods. In 1999, the
furniture and related products industry had 537,000 workers. By 2010,
the industry had only 251,000 workers.\29\ Some of this attrition was
caused by the 2008 financial crisis, but not all of it. Between 1981
and 2009, a period that coincides with significant increases in
importation by foreign manufacturers, 35 contributing employers to the
Furniture Workers Fund filed for bankruptcy protection and withdrew
from the plan.
---------------------------------------------------------------------------
\29\ United Furniture Workers Pension Fund A--Second Application
for Approval of Suspension of Benefits (File 1), 12.
In the trucking industry, the competition was domestic in origin, but
similarly dramatic. In 1980, Congress deregulated the trucking
industry, allowing companies to compete in a free and open market.
While the deregulation of the trucking industry has been beneficial for
economy and the American consumer, deregulation has significantly
---------------------------------------------------------------------------
impacted trucking companies that participate in multiemployer plans.
Researchers at the Center of Retirement Research at Boston College
summarized the effects, noting ``of the 50 largest employers that
participated in the Central States Fund in 1980, only four remain in
business today. More than 600 trucking companies have gone bankrupt and
thousands have gone out of business without filing for bankruptcy. As a
result, roughly 50 cents of every benefit dollar goes to pay benefits
to `orphaned' participants, those left behind when employers exit.''
\30\ Even though an employer leaves, the fund--meaning the remaining
employers--is still responsible for paying the benefits due to all
participants in the plan. The orphan participants constitute a
significant share of total multiemployer participants and are much
likelier to participate in severely underfunded plans.
---------------------------------------------------------------------------
\30\ Alicia H. Munnell, Jean-Pierre Aubry, Wenliang Hou, and
Anthony Webb, ``Multiemployer Plans--A Proposal to Spread the Pain,''
Center for Retirement Research at Boston College, October 2014, 8,
http://crr.bc.edu/wp-content/uploads/2014/10/IB_14-17.pdf.
---------------------------------------------------------------------------
Plan Demographics--The Inactive-to-Active Participant Ratio
As competition and demographic shifts reduced the participant
populations in plans, untenable ratios of inactive-to-active
participants were created. New York State Teamsters Conference Pension
and Retirement Fund (New York State Fund) provides a vivid
illustration.
In 1990, the New York State Fund had 23,883 active participants and
10,150 retired participants, for a ratio of more than two active
participants for every one retired participant. By 2000, the ratio was
reduced to almost one to one, as the number of active participants
declined to 16,827, and the number of retired participants increased to
14,198. As of January 1, 2016, there were 11,576 active participants,
compared to 15,936 retired participants, reversing the ratio of active
to retired participants in a single career span.\31\
---------------------------------------------------------------------------
\31\ New York State Teamsters Conference Pension and Retirement
Fund Treasury Application, 24.
According to a survey of multiemployer plans, 87% of beneficiaries in
critical and declining plans were inactive (either already retired or
entitled to a benefit at some time in the future but are no longer
working), compared with 63% in non-critical and declining plans.\32\
---------------------------------------------------------------------------
\32\ ``Summer 2017 Survey of Plans' Zone Status,'' Segal
Consulting, Summer 2017, 4.
The survey also found some correlation between average plan funding
levels by industry and inactive-to-active retiree ratios. Plans from
the manufacturing sector had the lowest average funding levels at 79%
and the highest inactive-to-active ratio at 5.8 retirees per active
employee. Transportation sector plans fared a little better with
funding levels averaging 81% but with a much more manageable inactive
to retiree ratio of 2.9:1. Compared to those plans, construction sector
plans are 89% funded on average and have an average ratio of 1.6:1.\33\
As ratios worsen, and the rate of negative cash flow grows, employer
contribution rate increases have little overall effect on plan funding.
Instead plans must rely more heavily on investment returns.
---------------------------------------------------------------------------
\33\ Id., 6.
---------------------------------------------------------------------------
Financial Pressure
Plans with negative cash flow can survive only if the investment return
outpaces the benefit payments. During the 1980s and 1990s many
multiemployer pension plans rode the bull market gains, thereby masking
ominous trends in the growing retiree population. When the tech bubble
burst in 2000, many plans, which had been relying on investment returns
to cover negative cash flows, had to pay benefits directly from plan
assets. As they did so, plan funding levels dropped, and plans had a
lower asset base with which to invest. Since the negative cash flow
problems for many plans did not improve, they were forced to seek
higher investment returns to bridge the gap between the amount of money
coming into the plan and the amount going out.
As a plan's assets dwindle, however, trustees are forced to shift
investments out of equities and into more conservative investment
vehicles to preserve cash to pay benefits for as long as possible. Such
investments generally provide for little growth, so there is no
opportunity for the asset base to grow. If the trustees were to
continue to leave assets invested in equities, a sharp downturn in
equity markets could cause a plan to go insolvent much sooner than
anticipated and to provide trustees with little time for corrective
action or to request the PBGC's assistance. In such circumstances,
trustees are at risk of a fiduciary breach claim for imprudently
investing the assets of the plan. Accordingly, trustees will almost
always err on the side of making assets last longer to avoid potential
legal liability. This approach generally leads a plan to enter the
death spiral where there is no realistic chance of recovery.
The 2008 financial crisis was a disaster for multiemployer plans. Just
prior to 2008, 80% of plans had funding levels in excess of 80%
(referred to as the ``green zone''), whereas only 9% of plans were in
critical status, or the ``red zone.'' By 2009, in the wake of the
market collapse, the percentage of green zone plans plummeted to 38%,
while the percentage of plans in the red zone increased to 30%. Over
time, as the investment markets rebounded, many plans were able to claw
their way back into the green zone. While some plans are just now
returning to their pre-2008 funding levels, virtually all funding
improvements have come exclusively from positive investment
performance. This suggests that nothing has changed demographically,
and that these plans will remain vulnerable to investment market
conditions, which are unpredictable.
ATTEMPTS TO FIX THE MULTIEMPLOYER
PENSION PLAN FUNDING PROBLEM
Given the negative cash flow and diminishing contribution bases of
plans that are facing impending insolvency and the PBGC's precarious
financial condition, finding a solution to the funding woes of many
plans will not be easy. Congress and trustees of pension plans have
attempted to address multiemployer funding issues in the past,
especially within the last several years. These attempts have helped
some plans, but additional measures will be needed to save some of the
most underfunded plans.
Multiemployer Pension Plan Amendment Act
In 1980, Congress passed the Multiemployer Pension Plan Amendments Act
(MPPAA).\34\ MPPAA amended ERISA and was designed to discourage
employers from exiting financially troubled multiemployer plans.
Congress recognized that when a contributing employer stopped
contributing to an underfunded multiemployer plan, the unfunded
liability related to the departing employer was absorbed by the plan's
remaining contributing employers. Although in 1980 most multiemployer
pension plans were not facing funding issues as severe as those today,
withdrawing employers increased pension costs for employers that
remained, and in many cases threatened their financial viability.
Withdrawing employers also caused multiemployer plans' contribution
bases to erode.
---------------------------------------------------------------------------
\34\ See ERISA Sections 4201-4225.
Prior to MPPAA, an employer that withdrew from a multiemployer plan did
not have to pay anything to the plan unless the plan was terminated
within 5 years of the employer's withdrawal. Even then, the employer's
liability was limited to no more than 30% of the employer's net worth.
Under MPPAA, an employer that totally or partially withdraws from a
multiemployer pension plan must pay ``withdrawal liability.'' \35\ An
employer's withdrawal liability is the amount of the employer's
proportionate share of the plan's unfunded vested benefits or
liabilities, or UVBs (i.e., the withdrawing employer's proportionate
share of the deficit between the amount of the plan's vested benefits
and the plan's assets).
---------------------------------------------------------------------------
\35\ Not only is the contributing employer to the plan responsible
for paying withdrawal liability, but also MPPAA provides that all
trades or businesses under common control (as defined in Section 414 of
the Code) are jointly and severally liable for a withdrawing employer's
withdrawal liability. See ERISA Section 4001(b)(1).
When an employer withdraws from an underfunded multiemployer plan,
MPPAA requires the plan's trustees to (1) determine the amount of
withdrawal liability, (2) notify the employer of the amount of that
liability, and (3) collect that liability. Generally, in order to
determine an employer's withdrawal liability, a portion of the plan's
UVBs is first allocated to the employer, generally in proportion to the
employer's share of plan contributions for a previous period. The
amount of UVBs allocable to the employer is then subject to various
---------------------------------------------------------------------------
reductions and adjustments.
ERISA sets forth the amount of annual withdrawal liability payments the
employer must make directly to the plan. Generally speaking, ERISA
calls for annual payments to continue until the employer pays the
liability in full, but caps the annual payments at 20 years. Thus, it
is possible for an employer that does pay withdrawal liability for 20
years to still not pay off all of its unfunded liability. When this
happens, other employers must make up the difference.
An employer's annual withdrawal liability payment amount is generally
structured to approximate the employer's annual contributions to the
plan. The amount is equal to the employer's highest recent average
number of contribution base units, or CBUs (essentially, the amount of
contribution paid to the plan) multiplied by the employer's highest
contribution rate in the past 10 years. An employer can prepay its
liability or attempt to negotiate the amount with the plan. There are
additional withdrawal liability rules applicable to certain industries,
exemptions for certain sales of assets, employer and plan disputes, and
plan terminations following mass employer withdrawals.
Although the introduction of withdrawal liability was supposed to
prevent withdrawing employers from shifting pension obligations to the
remaining employers, MPPAA has not always worked as intended. The
biggest problem is that many withdrawing employers do not have the
financial means to satisfy their withdrawal liability. Employers often
withdraw when they are going out of business or when they file for
bankruptcy. When this happens, it is difficult, if not impossible, for
the plan to collect the employer's withdrawal liability. As a result,
some plan participants with vested benefits may have worked for an
employer that no longer participates in the plan. The liability for
these ``orphaned'' participants has devastating effects on plan funding
and is a major contributor to the funding issues that many plans face
today.
Pension Protection Act of 2006
In 2006, Congress passed the Pension Protection Act. The PPA amended
ERISA and the Code to make certain changes to multiemployer funding
rules. These changes were designed to give plan trustees more
flexibility in dealing with funding while at the same time forcing them
to identify and correct existing and potential funding issues in time
to prevent further funding level deterioration and stabilize the plans'
finances.\36\ The PPA requires a multiemployer plan's actuary to
provide an annual certification to the Internal Revenue Service of the
plan's funded status. The certification specifies that the plan falls
into one of three categories: endangered status, critical status, or
neither.
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\36\ Segal Consulting, Segal Bulletin, August 2006.
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Endangered-Status Plans
A plan is generally in endangered status, also known as the ``yellow
zone,'' if the plan's funded percentage is less than 80%, or the plan
has an accumulated funding deficiency for the plan year or is projected
to have an accumulated funding deficiency in any of the six succeeding
plan years. A plan's funded percentage for purposes of the PPA
certification is determined by dividing the value of plan assets by the
accrued liability of the plan. The trustees of a plan in endangered
status are required to adopt a funding improvement plan.
A funding improvement plan consists of a list of options, or range of
options, for the trustees to propose to the union and the employers
(the bargaining parties). The funding improvement plan is formulated to
provide, based on anticipated experience and reasonable actuarial
assumptions, for the plan to attain ``applicable benchmarks'' by the
end of the funding improvement period. The range of options generally
is a combination of contribution rate increases or reductions in future
benefit accruals that would allow the plan to obtain a statutorily
specified increase in the funded percentage and not have an accumulated
funded percentage by the end of the funding improvement period, which
is generally 10 years.
Many plans certified as endangered in the early years of the PPA were
able to fix their funding problems and now are in neither endangered
nor critical status (known as the ``green zone''). Other plans were not
so fortunate, and their status deteriorated from endangered to
critical. It should be noted that the PPA did not allow plans in
endangered status to make any changes to benefits that were not already
allowed under pre-PPA rules. In other words, trustees of endangered
plans are not allowed to violate the anti-cutback rule of ERISA and the
Code, and can only reduce future accruals and eliminate other protected
benefits on a prospective basis. This led some trustees to take the
counterintuitive action of allowing their plans to fall into critical
status, because there was more statutory flexibility under the critical
status rules to address funding problems.
Critical-Status Plans
A plan is in critical status if the plan:
(1) is less than 65% funded and will either have a minimum funding
deficiency in 5 years or be insolvent in 7 years; or
(2) will have a funding deficiency in 4 years; or
(3) will be insolvent within 5 years; or
(4) the liability for inactive participants is greater than the
liability for active participants, and contributions are less than the
plan's normal cost, and there is an expected funding deficiency in 5
years.
Trustees of plans in critical status are required to adopt a
rehabilitation plan. Unlike endangered plans, critical-status plans
whose trustees adopt and follow a rehabilitation plan generally do not
have to meet the minimum funding rules of ERISA and the Code.
A rehabilitation plan is a plan that consists of a range of options for
the trustees to propose to the bargaining parties, formulated to
provide (based on anticipated experience and reasonable actuarial
assumptions) for the plan to cease to be in critical status by the end
of the rehabilitation period, which is generally 10 years. Options
include reductions in plan expenditures, reductions in future benefit
accruals, increases in contributions, or any combination of such
actions. The rehabilitation plan must be updated annually, and the plan
must show that it is making scheduled progress toward emerging from
critical status.
If the trustees determine that, based on reasonable actuarial
assumptions, the plan cannot reasonably be expected to emerge from
critical status by the end of the rehabilitation period, the plan must
include reasonable measures to emerge from critical status at a later
time or to forestall possible insolvency. If a multiemployer plan fails
to make scheduled progress under the rehabilitation plan for three
consecutive plan years or fails to meet the requirements applicable to
plans in critical status by the end of the rehabilitation period, for
excise tax purposes the plan is treated as having a funding deficiency
equal either to the amount of the contributions necessary to leave
critical status or make scheduled progress or to the plan's actual
funding deficiency, if any. Plans may apply for a funding waiver if the
case failure is due to reasonable cause and not willful neglect.
The PPA allows trustees of critical-status plans to make changes to
benefits that endangered-plan trustees cannot. They are allowed to
reduce or eliminate benefits that were previously protected by the
anti-cutback rule. Critical-status plans can be amended to reduce or
eliminate certain adjustable benefits, including post-retirement
benefits, subsidized optional forms of payment, disability benefits not
yet in pay status, early retirement benefits or retirement subsidies
and benefit increases adopted less than 60 months before the plan
entered critical status. In addition, critical-status plans that
provide for payment of benefits in the form of a lump sum are required
to cease paying lump-sum benefits on the date they enter critical
status.
The ability to eliminate or reduce previously protected benefits was
heretofore unprecedented, and many plans in critical status have taken
advantage of these new rules and are projected to emerge from critical
status or to forestall possible insolvency because of them. However,
for those underfunded plans with a declining active population base and
severe negative cash-flow problems, the savings generated by
eliminating these adjustable benefits were not great enough to improve
the plans' funded percentages.
Compounding the problem is that after cutting benefits to the maximum
extent possible, there was little else that could be done to reduce
costs. That left employer contribution rate increases as the only
viable option to improve funding. Over the years, however, many plans
have found that annual increases in employer contribution rates are not
so viable because employers cannot absorb the costs. Out-of-
control pension costs threaten employers' very survival.
Multiemployer Pension Reform Act of 2014
Although the investment markets have had favorable returns in recent
years, many plans' funding levels continue to deteriorate. Under the
PPA, a prohibition against reducing accrued benefits on a retroactive
basis remained. Recognizing that some plans could not avoid insolvency
without drastic changes in the law, Congress passed the Multiemployer
Pension Reform Act in 2014.\37\ MPRA changed the multiemployer defined
benefit plan landscape.
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\37\ The Multiemployer Pension Reform Act of 2014, Pub. L. No. 113-
235, Division O (2014).
The law created three new tools to help plans stave off insolvency.
Most notably, for the first time under ERISA, Congress allowed plans
that were in severe financial distress to reduce benefits that had
already accrued, including benefits that were in pay status (these
reductions are referred to as ``benefit suspensions'' under MPRA). This
was a landmark change and a radical departure from what was previously
allowed. MPRA also revised ERISA's existing merger and partition rules.
Critical and Declining Status
MPRA created a new funding status called ``critical and declining'' for
those plans that were the most deeply troubled. A ``critical and
declining'' plan is one that meets one of the statutory requirements
for critical status and is actuarially projected to become insolvent
within 14 years (or within 19 years if more than two-thirds of its
participants are inactive or retired). A plan that is in ``critical and
declining'' status can file an application with Treasury to reduce or
suspend benefits that have already accrued and that are in pay status
(i.e., are already being paid to retirees and beneficiaries). MPRA
provides for the following three mechanisms to help critical and
declining plans avoid insolvency:
PBGC-Facilitated Plan Mergers
Mergers can improve a financially troubled plan's funding issues. By
transferring its assets to a more financially stable plan, the weaker
plan can lessen or eliminate the effect of negative cash flow while
gaining a larger asset base with which to invest. Generally, however, a
trustee's decision to merge is subject to the fiduciary duty provisions
of ERISA.\38\ These fiduciary duties are applied to the trustees of
both plans involved in a contemplated merger. The trustees of both
plans have to determine that a merger would be in the best interest of
their respective participants. Both plans' trustees have to examine the
financial condition of their respective plans before and after the
merger, as well as the viability of the surviving plan post-merger.
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\38\ Merging a plan is arguably a settlor function that would not
be subject to ERISA's fiduciary rules. The DOL has offered the opinion
that certain actions taken by trustees of multiemployer plans that
would ordinarily be settlor functions will be treated as fiduciary
functions if the plan's trust agreement provides that the trustees act
as fiduciaries when engaging in what otherwise would be settlor
functions. If the governing plan documents are silent, activities
generally considered settlor functions in a non-multiemployer setting
will be considered as settlor functions with respect to the
multiemployer plan. DOL Field Assistance Bulletin 2002-2.
Because generally one of the plans in the proposed merger is in worse
financial condition than the other, finding a good merger partner was
and is sometimes difficult. For example, the trustees of a financially
sound plan will likely not want to merge with a plan that is projected
to become insolvent because of the affect the poorly funded plan would
have on the funded level of the financially sound plan. Traditionally,
a merger between a stronger plan and a weaker plan--but not one facing
insolvency--would have the benefit of a larger asset base in which to
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obtain investment gains.
Under MPRA, the PBGC can facilitate mergers between two or more plans,
including providing financial assistance. By providing financial
assistance, the PBGC can alleviate the healthier plan's financial/
fiduciary concerns, which might make the healthier plans more willing
to merge. Upon a plan's request, the PBGC may facilitate a merger if
PBGC determines the merger is in the interests of the participants and
beneficiaries of at least one of the plans, and the merger is not
reasonably expected to be adverse to the overall interests of the
participants and beneficiaries of any of the plans. The PBGC may
provide assistance to a plan such as training, technical assistance,
mediation, communication with stakeholders, and support with related
requests to other governmental agencies. MPRA allows trustees of plans
in ``critical and declining'' status to apply for both a facilitated
merger and a benefit suspension.
The PBGC may also provide financial assistance to facilitate a merger
if one or more of the plans in the merger is in ``critical and
declining status''; the PBGC reasonably expects that financial
assistance will reduce it's expected long-term loss with respect to the
plans involved and, the PBGC reasonably expects that the financial
assistance is necessary for the merged plan to become or remain
solvent; the PBGC certifies its ability to meet existing financial
obligations will not be impaired by providing the financial assistance;
and the assistance is paid from the PBGC's fund for basic benefits
guaranteed for multiemployer plans.
PBGC Plan Partitions
MPRA also expanded ERISA's partition rules, which previously allowed
only the PBGC to partition plans that suffered significant contribution
losses as a result of employer bankruptcies. In a partition, PBGC gives
approval to divide a severely underfunded plan into two plans.
Generally, the liability for orphaned participants is transferred to a
new plan, which is technically insolvent from inception. The PBGC pays
the orphan benefits up to the PBGC guaranteed amount. The original plan
remains as is, and the goal is to restore its financial health.
A plan in critical and declining status may submit coordinated
applications to the PBGC for a partition and to Treasury for a benefit
suspension.
The PBGC may order a partition if the following conditions are
satisfied:
(1) the plan is in critical and declining status;
(2) the PBGC determines that the plan has taken all reasonable
measures to avoid insolvency, including the maximum benefit suspensions
as discussed above;
(3) the PBGC reasonably expects that the partition will reduce its
expected long-term loss with respect to the plan and partition is
necessary for the plan to remain solvent;
(4) the PBGC certifies to Congress that its ability to meet existing
financial assistance obligations to other plans will not be impaired by
such partition; and
(5) the cost arising from such partition is paid exclusively from the
PBGC's fund for basic benefits guaranteed for multiemployer plans.
Suspension of Benefits
MPRA allows trustees of plans in critical and declining status to apply
to Treasury to suspend (temporarily or permanently) participants'
accrued pension benefits, including those already in pay status. MPRA
defines ``suspension of benefits'' as the ``the temporary or permanent
reduction of any current or future payment obligation of the plan to
any participant or beneficiary under the plan, whether or not in pay
status at the time of the suspension of benefits.''
A plan may suspend benefits only if the plan's actuary certifies that
the plan is projected to avoid insolvency if the benefit suspensions
are implemented.
Benefit suspensions are subject to the following limitations:
(1) a participant or beneficiary's monthly benefit cannot be reduced
below 110% of the PBGC-guaranteed amount;
(2) participants and beneficiaries aged 75 and older at the date of
suspension have limitations on the suspension;
(3) participants and beneficiaries aged 80 and older at the date of
suspension are exempt from suspensions;
(4) disability pensions are exempt from suspensions; and
(5) benefit suspensions must be reasonably implemented to avoid plan
insolvency.
MPRA also includes a list of factors the plan may consider to ensure
the benefit suspensions are equitably distributed among the
participants and beneficiaries, including age, number of years to
retirement, and the participants' benefit history.
MPRA requires plans with 10,000 or more participants to select a
retiree representative to act as an advocate for the interests of the
retirees and inactive participants during the suspension application
process. The plan must pay for all reasonable legal, actuarial, and
other costs the representative incurs.
Benefit Suspension Application Rules
In order to suspend benefits, the trustees must submit a detailed
application to Treasury and demonstrate that the plan meets the
statutory requirements. Once Treasury accepts the application for
review, it has 225 days to render a decision or the application is
automatically deemed approved. Treasury will generally request
additional information and pose questions to the plan's attorneys and
actuaries regarding the application.
If Treasury rejects a plan's application, the plan may challenge the
denial in court. If Treasury approves a plan's application, the
suspension is subject to a participant and beneficiary vote within 30
days of the approval. If a majority of all participants and
beneficiaries (not simply a majority of those who vote) do not actively
vote to reject the suspensions, the suspensions are approved.
Suspensions may not take effect until after the vote, and Treasury
issues final authorization. If the participants and beneficiaries vote
to reject the suspensions, Treasury, in consultation with the DOL and
PBGC, must determine whether the plan is ``systemically important.'' A
plan is ``systemically important'' if the plan's insolvency will result
in $1 billion or more in projected PBGC liabilities. If a plan is
deemed systemically important and suspensions were not approved by the
participants, Treasury has the discretion either to accept the terms of
the proposal or to modify the benefit suspensions in some other manner
projected to avoid plan insolvency.
Since the passage of MPRA, 15 multiemployer defined benefit plans have
filed applications with the Treasury Department to reduce benefits to
avoid insolvency. As of December 2017, Treasury has approved only 4 of
the 15 applications. These 15 applicants currently account for only
1.35% of multiemployer defined benefits plans, but cover roughly 5% of
all multiemployer defined benefits plan participants. These plans
represent a segment of failing multiemployer pension plans that,
although in the minority, could cause the entire multiemployer pension
system to crumble if additional legislative action is not taken.
Details on these applications are provided in ``MPRA Suspension
Applications to Date'' in this paper.
Individual Plan Initiatives
Over the past 15 years, trustees of financially troubled plans have
employed numerous strategies to solve plans' funding issues. While some
of these strategies have been helpful, most of these plans' funding
issues remain.
Reductions to Future Benefit Accruals and Increased Employer
Contributions
The PPA requires trustees to take an active and forward-looking
approach in managing their plans. Plans in critical and endangered
status have to take corrective action. As part of that corrective
action, plans can continue to reduce future benefit accruals and
increase contributions. Critical-status plans can also reduce and
eliminate adjustable benefits for those participants that have not
retired.
Prior to the PPA, trustees had limited options to combat underfunding
issues. Most plans had to solve funding problems by: (1) reducing the
future benefit accruals of the active participants; and/or (2)
requiring employers to increase their contributions.\39\ While these
strategies were sometimes successful, for employers in industries like
coal, trucking, manufacturing, and bakery, continued contribution
increases became unsustainable.
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\39\ In general terms, a participant's accrued benefit represents
the benefit that the participant has earned or ``accrued'' under the
plan as of a given time. For example, if a participant terminated
covered employment before reaching normal retirement age under a plan's
rules, the benefit to which the participant is entitled to receive on
reaching normal retirement age is the accrued benefit. The plan usually
specifies the accrual method used to determine a participant's accrued
benefit.
Many trustees now recognize that they can no longer feasibly cut
benefits for active employees and raise employer contributions.
Employers and bargaining unit groups have left plans at alarming rates
over the last decade as contribution rates have steadily increased and
plans have repeatedly reduced benefits for active participants.
Additional contribution increases are not sustainable in many
industries, and threaten the employers' competitiveness, and in some
cases, their existence. Losing employers would further erode the stream
of contribution revenue on which a plan relies and exacerbate the
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negative cash flow problem for severely underfunded plans.
For example, in 1980 the Central States Pension Fund had approximately
12,000 employers; by July 2015 the number was down to 1,800.\40\
Between 2010 and 2014, Central States experienced approximately 260
involuntary employer withdrawals as a result of employer bankruptcies.
During this same period, the New York State Fund also had a significant
number of employers leave, negatively affecting its funding level.\41\
In December 2013, the New England Teamsters and Trucking Industry
Pension Fund (New England Teamsters Fund) reported that in order to
avoid filing bankruptcy, one of its 10 largest employers negotiated an
agreement with the International Brotherhood of Teamsters to
temporarily cease pension contributions, with a subsequent resumption
at a significantly reduced level. Another large employer emerged from
bankruptcy and notified the Fund that it was unable to pay its current
contributions.\42\
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\40\ Central States, Southeast and Southwest Areas Pension Fund's
MPRA Suspension of Benefits Application, dated September 25, 2015,
Section 19.8.4.
\41\ New York State Teamsters Conference Pension and Retirement
Fund's MPRA suspension of benefits application, dated May 15, 2017,
Section 5.
\42\ New England Teamsters and Trucking Industry Pension Fund 2013
Review of the Rehabilitation Plan.
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Funding Policies
Some trustees have adopted policies with strict rules on the acceptance
of employer contributions to ensure that the bargaining parties, i.e.,
the union and the employer, do not negotiate a CBA containing pension
provisions that would adversely affect plan funding. These trustees
have drafted policies or included rules in the plans' governing
documents explicitly reserving sole discretion to reject a particular
CBA if it is not in compliance with the policy or if it is deemed
economically bad for the plan. While some plans have had such policies
for many years, others are now just implementing them.
For example, the Board of Trustees of the Western Conference of
Teamsters Pension Trust Fund does not allow CBAs that permit or require
pension contributions for non-bargaining unit members or CBAs that
limit the employees on whose behalf contributions are to be made.
The Trustees of the Central States Pension Fund have taken a similar
but more aggressive position. They reserved discretion in the Fund's
trust agreement to reject any CBA it determines to be unlawful or would
``threaten to cause economic harm to, and/or impairment of the
actuarial soundness of, the Fund, and/or that continued participation
by the Employer is not in the best interest of the Fund.'' \43\
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\43\ ``Trust Agreement of the Central States, Southeast and
Southwest Areas Pension Fund as Amended through April 1, 2016,'' 9,
https://mycentralstatespension.org/-/media/Pension/PDFs/Legal/
pension_fund_trust_agreement_as_amended_april_2016.pdf?la=en&hash=1A7964
61
E51C6BB84ED3111B62C59A326D881686.
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Two-Pool Withdrawal Liability Method
Some trustees have requested approval from the PBGC to adopt an
alternative method to calculate withdrawal liability called the ``two-
pool withdrawal liability method'' (the two-pool method). Under the
two-pool method, the plan maintains two withdrawal liability pools for
contributing employers: one new pool for new employers and current
employers that elect to pay off their existing withdrawal liability and
transition over; and a second old pool for existing employers who, for
a variety of reasons, decide not to trigger a withdrawal and remain in
the plan.
Usually, an employer that is not contributing or does not owe
withdrawal liability to the plan can qualify to be in the new pool. If
a new employer enters the plan, it would automatically enter the new
pool. When an already contributing employer moves from the old pool to
the new pool, it generally agrees to withdraw from the existing
withdrawal liability pool, to adhere to a withdrawal liability payment
schedule, and to reenter the plan through the new pool for
contributions made and benefits earned after that date.
Over the past few years, PBGC has received a number of requests from
plans looking to implement the two-pool method.\44\ The Central States
Pension Fund, the New England Teamsters Fund, the New York State Fund,
and the Bakery and Confectionery Union and Industry International
Pension Fund have received PBGC approval to use the two-pool method. In
order to encourage employer participation in the new pool, the trustees
offer favorable settlement terms to satisfy withdrawal liability, but
the extent of the relief is related to the employer's sustained
commitment and continued contributions to the Fund.
---------------------------------------------------------------------------
\44\ ``Retirement Matters, Request for Information: Two Pool
Withdrawal Liability,'' PBGC Blog, January 4, 2017, https://
www.pbgc.gov/about-pbgc/who-we-are/retirement-matters/request-
information-two-pool-withdrawal-liability.
The Western Pennsylvania Teamsters and Employers Pension Fund has
implemented the two-pool method but is still waiting for the PBGC's
official approval. See Plan Document of the Western Pennsylvania
Teamsters and Employers Pension Fund.
The two-pool method has the potential to provide significant benefits
to some plans. Trustees that have implemented the two-pool method
believe it helps retain contributing employers that might otherwise
withdraw.\45\ A plan's long-term funding is affected by the strength of
its base of contributing employers. Often times, a plan's more
financially stable employers become frustrated as other employers
withdraw from the plan. These withdrawals transfer costs and liability
to the remaining employers over time in the form of higher
contributions and increased reallocated withdrawal liability. This
trend encourages healthy employers to withdraw before additional
financial responsibility shifts to them, which ultimately places
financial stress on the plan. The two-pool method offers an opportunity
for healthy employers to remain in a plan while insulating them from
the less financially stable employers.\46\
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\45\ ``Response to Request for Information on Alternative Two-Pool
Withdrawal Liability Methods,'' American Academy of Actuaries, February
21, 2017; see also PBGC Letter to the Bakery Confectionery Union and
Industry International Pension Fund, January 19, 2017.
\46\ ``Response to Request for Information on Alternative Two-Pool
Withdrawal Liability Methods,'' American Academy of Actuaries, February
21, 2017.
Despite its potential benefits, to date the two-pool method has not
attracted new employers. It is a relatively new concept, however, and
may be helpful in conjunction with other strategies, such as mergers
and partitions.
DEVELOPMENTS UNDER THE MULTIEMPLOYER
PENSION REFORM ACT OF 2014
Since its passage almost 3 years ago, MPRA has been criticized in part
because of the manner in which it was enacted but more substantively
because of the law's allowance for reductions to accrued benefits,
including benefits already in pay status. Additionally, critics claim
that implementation of MPRA failed to provide relief to the one plan
that arguably was the primary focus of Congressional concern: the
Central States Fund. Supporters assert, however, that absent benefit
reductions, there are some plans that cannot avoid insolvency and thus
will result in benefit reductions for most participants far greater
than proposed under the rescue plan, since participants' benefits will
be reduced to the PBGC guarantees. That the PBGC itself is projected to
become insolvent only complicates things.
MPRA Suspension Applications to Date
As of December 2017, 15 plans covering a variety of industries,
including transportation, furniture, machinery, and bricklaying, have
applied to Treasury to suspend benefits, while four of those same plans
submitted coordinating partition applications to the PBGC.\47\
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\47\ Applications for Benefit Suspension, U.S. Department of the
Treasury, October 26, 2017, https://www.treasury.gov/services/Pages/
Plan-Applications.aspx.
See also Partition Requests, Pension Benefit Guaranty Corporation,
October 26, 2017, https://www.pbgc.gov/prac/pg/mpra/multiemployer-
plans-and-partition.
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Treasury has denied the following MPRA applications:
Automotive Industries Pension Plan;
Central States, Southeast and Southwest Areas Pension Fund
(Central States);
Iron Workers Local Union 16 Pension Fund;
Road Carriers Local 707 Pension Fund (Local 707 Pension Fund);
and
Teamsters Local 469 Pension Plan.
The following plans withdrew their applications prior to Treasury's
issuance of a ruling:
Alaska Ironworkers Pension Plan;
Bricklayers and Allied Craftsmen Local No. 7 Pension Plan;
Bricklayers and Allied Craftsmen Local No. 5 Pension Plan
(Bricklayers Local 5 Pension Plan);
Local 805 Pension and Retirement Plan (Local 805 Pension Fund);
and
Southwest Ohio Regional Council of Carpenters Pension Plan.
The following application is under review:
Western States Office and Professional Employees Pension Fund.
Treasury has approved the following applications:
Iron Workers Local 17 Pension Fund;
United Furniture Workers Pension Fund A (Furniture Workers
Fund);
New York State Teamsters Conference Pension and Retirement Fund
(New York State Fund); and
International Association of Machinists Motor City Pension Fund
(Motor City Fund).
MPRA Application Denials
Central States Pension Fund
Treasury denied Central States Pension Fund's suspension application in
May 2016. The Central States Pension Fund's application was the first
application submitted under MPRA. Central States, the largest
multiemployer pension plan in the country with close to 400,000 total
participants, roughly half of whom currently receive annual benefits
totaling close to $3 billion,\48\ has been reeling from investment
losses stemming from the 2008 financial crisis. When Central States
submitted its MPRA application, it had $16.8 billion in assets against
$35 billion in liabilities. In 2015, the Fund was certified to be in
critical and declining status, at 47.7% funded and projected to go
insolvent by 2026.
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\48\ Central States, Southeast and Southwest Areas Pension Fund's
MPRA suspension of benefits application, September 25, 2015, Section
5.1.9, https://www.treasury.gov/services/AppsExtended/
(Checklist%205)%20Critical%20and%20Declining%20Status%20Certification.pd
f.
Decades ago, the Fund had four active workers for every retiree or
inactive member. But, like many other Teamster plans, that ratio
reversed to approximately five retirees for every one active worker, as
a decline in membership due to the deregulation of the trucking
industry and two economic catastrophes in the 2000s resulted in far
fewer active workers paying into the plan than receiving benefits. The
Fund's retirees currently earn $1,128 per month on average, although
that total includes workers with tenures of all different lengths. The
---------------------------------------------------------------------------
longest-tenured workers receive about $2,400 a month.
Treasury rejected the Central States Pension Fund's application because
it failed to satisfy several MPRA technical requirements.\49\
---------------------------------------------------------------------------
\49\ Kenneth R. Feinberg, U.S. Department of the Treasury's MPRA
suspension application denial letter to the Board of Trustees of the
Central States, Southeast and Southwest Areas Pension Plan, May 6,
2016, https://www.treasury.gov/services/Responses2/Central%20States%20
Notification%20Letter.pdf.
According to Treasury, the Fund did not meet the following statutory
---------------------------------------------------------------------------
requirements:
(1) to use reasonable investment return assumptions;
(2) to use a reasonable entry age assumption;
(3) to equitably distribute the suspensions; or
(4) to draft its suspension notices to be understandable by the
average plan participant.
Many commentators were shocked that Treasury denied the Central States
application, because it is one of the largest and most financially
troubled plans in the multiemployer system. Many believe MPRA was
passed specifically to save Central States, on the grounds that if the
plan went insolvent it would effectively bankrupt the PBGC's
multiemployer plan insurance program. On the same day that Treasury
rejected Central States' application, Treasury Secretary Jacob J. Lew
sent a letter to Congress wherein he advised that the larger funding
issues facing Central States and other multiemployer plans remain
unsolved, especially as the PBGC is simultaneously heading toward
insolvency. Secretary Lew's letter explained that Treasury's rejection
of the application may have provided participants with some short-term
relief but pointed out that even larger cuts may be required in the
future for the Fund to meet MPRA's requirements.\50\
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\50\ Jacob J. Lew, Secretary of the U.S. Department of the
Treasury, Letter to Congress, May 6, 2016, https://www.treasury.gov/
services/Documents/MPRA%20SecLew%20Letter%20to%20
Congress%20050616.pdf.
Central States' executive director, Thomas Nyhan, said the decision was
disappointing because the trustees believed ``the rescue plan provided
the only realistic solution to avoiding insolvency.'' Nyhan said the
Fund's retirees would have been better off with the cuts than they
would be if the plan became insolvent. Given PBGC's looming insolvency,
Nyhan noted that without the PBGC safety net, the Fund's participants
could see their pension benefits reduced to ``virtually nothing.'' \51\
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\51\ Thomas Nyhan, Executive Director and General Counsel of the
Central States, Southeast and Southwest Area Pension Plan Letter to
Participants, May 20, 2016, https://mycentralstatespension.org/-/media/
Pension/PDFs/cspf-letter-to-participants-05-20-16.pdf?la=
en&hash=5A9F9CCFF4AD8A48781D30CDD684B02092531264.
As of this writing, the Fund has posted the following sobering message
---------------------------------------------------------------------------
on its website:
Although the decision to request approval of a pension rescue
plan was very difficult for the Fund's Trustees, we are
disappointed in Treasury's decision and strongly disagree with
the reasons expressed by Treasury for denying our rescue plan
application. Central States' proposed rescue plan was a
proposal of last resort, and clearly not an option that the
Trustees preferred. It was, however, based on a realistic
assessment that benefit reductions under a rescue plan were the
only available, practical way to avoid the hardship and
countless personal tragedies that will result if the Pension
Fund runs out of money.
Since the Central States Pension Fund submitted its application, its
funding percentage has decreased to approximately 42.1%, with an
estimated insolvency date of 2025. Its liabilities have increased to
approximately $39 billion, and its assets have decreased to $16.1
billion.\52\
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\52\ 2017 Notice of Critical and Declining Status of the Central
States, Southeast and Southwest Area Pension Plan, https://www.dol.gov/
sites/default/files/ebsa/about-ebsa/our-activities/public-disclosure/
status-notices/declining/2017/central-states-southeast-and-southwest-
areas-pension-plan.pdf.
Central States, Southeast and Southwest Area Pension Plan 2016
Annual Form 5500, Schedule MB, October 6, 2017.
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Road Carriers Local 707 Pension Fund
Treasury and the PBGC denied the Road Carriers Local 707 Pension Fund's
coordinated partition and suspension applications in June 2016.\53\ The
Fund, a Teamster plan based in Hempstead, New York, is currently
insolvent and receives financial support from the PBGC in the amount of
$1.7 million per month to pay benefits.\54\
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\53\ Kenneth R. Feinberg, U.S. Department of the Treasury's MPRA
suspension application denial letter to the Board of Trustees of the
Road Carriers Local 707 Pension Fund, June 24, 2016, https://
www.treasury.gov/services/Responses2/
Local%20707%20Notification%20Letter.pdf.
See also PBGC Letter to the Board of Trustees of the Road Carriers
Local 707 Pension Fund, June 2016, https://www.pbgc.gov/documents/PBGC-
Letter-June-2016.pdf.
\54\ Notice of Insolvency Benefit Level of the Road Carriers Local
707 Pension Fund, dated December 2016, https://www.pbgc.gov/news/other/
res/road-carriers-local-707-faqs, (October 29, 2017).
At the time the Fund submitted its applications in February and March
2016, it was less than 5% funded and had only $24.5 million in assets,
a 2:1 retiree-to-active participant ratio, and only nine remaining
contributing employers.\55\
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\55\ Road Carriers Local 707 Pension Fund Coordinated Application
for Approval of Suspension of Benefits under MPRA, Exhibits 2-3, March
15, 2016, https://www.treasury.gov/services/KlineMillerApplications/
Redacted%20Files%20Local%20707%20application_001.pdf.
The trustees had already reduced benefit levels for those in pay status
and filed the Fund's notice of insolvency with the PBGC, informing the
Corporation that it would become insolvent and require financial
support beginning in February 2017. Like many other Teamster plans,
this Fund has never been able to recover from a combination of trucking
deregulation, little to no growth in the trucking industry, an
increasing retiree population, bankrupt employers failing to pay their
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withdrawal liability, and the two financial crises in the 2000s.
In its denial of the partition request, PBGC concluded that the Fund
failed to demonstrate that it would remain solvent following a
partition, and that its application was based on unreasonably
optimistic assumptions related to active participants and future
contribution levels, including those of the Fund's dominant employer,
YRC Worldwide.\56\ Treasury also denied the Fund's suspension
application, mainly because the projection of solvency in the
application was based on the implementation of a partition, which the
PBGC denied.\57\
---------------------------------------------------------------------------
\56\ PBGC Letter to Board of Trustees of the Road Carriers Local
707 Pension Fund, June 10, 2016, https://www.pbgc.gov/documents/PBGC-
Letter-June-2016.pdf.
\57\ Kenneth R. Feinberg, U.S. Department of the Treasury's MPRA
suspension application denial letter to the Board of Trustees of the
Road Carriers Local 707 Pension Fund, June 24, 2016, https://
www.treasury.gov/services/Responses2/
Local%20707%20Notification%20Letter.pdf.
---------------------------------------------------------------------------
Other MPRA Application Denials and Withdrawals
The applications of the Automotive Industries Pension Plan, the
Ironworkers Local Union 16 Pension Fund, and the Teamsters Local 469
Pension Plan were all rejected, because they did not meet MPRA's
technical requirements. According to Treasury's denial letters, these
plans' applications were denied because the proposed suspensions were
not reasonably estimated to avoid insolvency, the actuarial assumptions
and methods (i.e., assumptions about mortality rates, hours of service,
and spousal survivor benefits) were unreasonable, and/or assumptions
about the return on investment were unreasonable.\58\
---------------------------------------------------------------------------
\58\ See U.S. Department of the Treasury Letter to Board of
Trustees of the Automotive Industries Pension Plan, May 9, 2017; U.S.
Department of the Treasury Letter to Board of Trustees of the
Ironworkers Local 16 Pension Fund, November 3, 2016; U.S. Department of
the Treasury Letter to Board of Trustees of the Teamsters Local 469
Pension Fund.
On the other hand, a few plans, such as the Alaska Ironworkers Pension
Plan and the Bricklayers and Allied Craftsmen Local No. 5 and No. 7
Pension Plans, made the strategic decision to withdraw their
applications from Treasury consideration before the Department could
issue its decision.\59\ These plans likely withdrew their applications
based on discussions with Treasury. To date, three of the four plans
that received Treasury's approval withdrew their initial applications
and resubmitted revised applications after consultation with
Treasury.\60\ The recent approvals may give these plans hope that
Treasury will approve a refiled application.
---------------------------------------------------------------------------
\59\ See Applications for Benefit Suspensions, U.S. Department of
the Treasury, October 31, 2017, https://www.treasury.gov/services/
Pages/Plan-Applications.aspx.
\60\ Id.
---------------------------------------------------------------------------
MPRA Application Approvals
Treasury has now approved four plans' applications to suspend benefits
under MPRA. Three of these approvals have occurred under President
Donald Trump's administration and may indicate a changing trend in the
review and approval process at Treasury.
Iron Workers Local 17 Pension Fund
On December 16, 2016, Treasury issued its first MPRA suspension
application approval to the Iron Workers Local 17 Pension Fund based in
Cleveland, Ohio.\61\ At the time the Fund submitted its application, it
was 44.3% funded with approximately $84 million in assets and $263
million in liabilities and was projected to become insolvent in
2024.\62\ This Fund was one of the smaller plans to submit an
application, with a little fewer than 2,000 participants and a 1:2
active-to-retired-worker population ratio.
---------------------------------------------------------------------------
\61\ Letter to the Board of Trustees of the Ironworkers Local 17
Pension Fund, U.S. Department of the Treasury, December 16, 2016.
\62\ Iron Workers Local 17 Pension Fund's Application to Suspend
Benefits, July 29, 2016.
The Fund's proposed suspensions generally involved reducing accrued
benefits and eliminating early retirement subsidies and extra benefit
credits indefinitely. Benefits were generally estimated to be reduced
between 20% and 60%. Under the proposed suspensions, 52%, or 1,029 of
the plan's 1,995 participants, will not have their retirement benefits
cut. More than 30% of participants will see benefits cut by at least
20%. Specifically, 30 participants will see extreme cuts between 50%
and 60%; 115 participants will see cuts between 40% and 50%; 191 will
see cuts between 30% and 40%; and 265 will see cuts between 20% and
30%. Another 168 participants will see benefits cut by 10% or less. The
suspension will reduce the average monthly benefit for all participants
by 20%, from $1,401 to $1,120. With these proposed suspensions, the
Fund's actuaries estimated that the Fund will remain solvent through
April 2055.
United Furniture Workers Pension Fund A
In July 2017, the Furniture Workers Pension Fund A, based in Nashville,
Tennessee, became the second plan to receive Treasury's approval to
suspend benefits.\63\ The Fund has approximately 10,000 participants
and also received approval for a partition from the PBGC effective in
September 2017.\64\ At the time the Fund submitted its suspension plan,
it had assets of approximately $55 million and almost $200 million in
liabilities, was approximately 30.6% funded, and was projected to
become insolvent by 2021.\65\ As with other plans facing insolvency,
the plan's funding had slowly deteriorated over the years due to its
inability to recover from the market downturns in 2000 and 2008 and to
competitive pressures caused by increased furniture imports from
overseas, the loss of some of its larger contributing employers, the
further decline of its active participant base, and its inability to
attract new contributing employers in the industry.
---------------------------------------------------------------------------
\63\ Letter to Board of Trustees of the United Furniture Workers
Pension Fund A, U.S. Department of the Treasury, August 31, 2017,
https://www.treasury.gov/services/Responses2/
UFW_Final_Approval_Letter.pdf.
\64\ Letter to Board of Trustees of the United Furniture Workers
Pension Fund A, U.S. Department of the Treasury, August 31, 2017,
https://www.treasury.gov/services/Responses2/
UFW_Final_Approval_Letter.pdf.
See also PBGC FAQs on the United Furniture Workers Pension Fund,
https://www.pbgc.gov/about/faq/ufw-partition-faqs.
\65\ United Furniture Workers Pension Fund A's Second Application
to Suspend Benefits Under MPRA, Exhibit 3, U.S. Department of the
Treasury, March 15, 2017, https://www.treasury.gov/services/
KlineMillerApplications/
United%20Furniture%20Workers%20Pension%20Fund%20A%
20-
%20Second%20Application%20for%20Approval%20of%20Suspension%20of%20Benefi
ts%20-%
20File%202a%20of%203_Redacted.pdf.
In the Fund's application, its trustees estimated that 2,800
participants would receive on average a reduction of 12.7%, and 7,100
participants would receive no reductions because they were protected
under MPRA (i.e., they were over age 80, disabled, etc.).\66\ The
reductions were estimated to range from 0% to 62%.\67\
---------------------------------------------------------------------------
\66\ Letter from the United Furniture Workers Pension Fund A to
Participants, March 15, 2017.
\67\ Id.
In the Fund's partition application, the trustees proposed to partition
to the successor plan 100% of the liability associated with the
terminated vested participants and 56% of the liability associated with
those in paid status (retirees, beneficiaries, and disabled
participants).\68\ The PBGC generally would become responsible for
paying the partitioned liabilities in the successor plan. The trustees
estimated that this would be the minimum amount of liability necessary
to transfer to the PBGC to relieve some of the financial burden and to
remain solvent for the 30-year period required under MPRA.
---------------------------------------------------------------------------
\68\ United Furniture Workers Pension Fund A's Second Application
to Suspend Benefits Under MPRA, U.S. Department of the Treasury, March
15, 2017, https://www.treasury.gov/services/KlineMillerApplications/
United%20Furniture%20Workers%20Pension%20Fund%20A%20-%20Se
cond%20Application%20for%20Approval%20of%20Suspension%20of%20Benefits%20
-%20File%20
1%20of%203_Redacted.pdf.
---------------------------------------------------------------------------
New York State Teamsters Conference Pension and Retirement Fund
The New York State Teamsters Conference Pension and Retirement Fund was
the third and largest plan to receive Treasury approval.\69\ Like the
other two successful plans before it, this plan withdrew its original
application and submitted a new one.
---------------------------------------------------------------------------
\69\ Letter to Board of Trustees of the New York State Teamsters
Conference Pension and Retirement Fund, U.S. Department of the
Treasury, September 13, 2017, https://www.
treasury.gov/services/Documents/NYST%20final%20approval%20letter.pdf.
Over the past 35 years, this Fund faced a significant deterioration in
its contribution base. In 1990, the Fund had 37,953 total participants,
with an active population of approximately 23,883 workers and a retiree
and terminated vested population of 14,070.\70\ The Fund had almost 500
contributing employers and received $60 million in annual
contributions, while paying about $46.9 million in annual benefits.
---------------------------------------------------------------------------
\70\ New York State Teamsters Conference Pension and Retirement
Fund Second Application to Suspend Benefits, U.S. Department of the
Treasury, May 15, 2017, https://www.
treasury.gov/services/KlineMillerApplications/
01a%20NYSTPF%20MPRA%20App%20C%
20Exhibits%2001%20to%2016_Redacted.pdf.
At the time the Fund submitted its revised application to Treasury in
May 2017, it had almost the same number of participants (34,459);
however, it now had two retirees for every active worker, and only 184
contributing employers. The Fund was receiving $118.7 million in annual
contributions but paying approximately $280.1 million in annual retiree
benefits. While almost fully funded in 2000, as of January 1, 2017, the
plan was 37.8% funded, with $1.28 billion in assets and $3.39 billion
---------------------------------------------------------------------------
in liabilities.
In its application, the trustees proposed a 19% reduction for all
active participants and a 29% benefit reduction for all inactive
participants. It was estimated that nearly 28% of participants would
not see any cuts due to MPRA's protections.
International Association of Machinists Motor City Pension Fund
On November 6, 2017, the Troy, Michigan-based International Association
of Machinists Motor City Pension Fund (Motor City Fund) became the
fourth plan to receive Treasury's approval to suspend benefits.\71\
This Fund became the first one to receive Treasury's approval without
undergoing a resubmission process.
---------------------------------------------------------------------------
\71\ Letter to the Board of Trustees of the International
Association of Machinists Motor City Pension Plan, U.S. Department of
the Treasury, November 6, 2017, https://www.treasury.gov/services/
Pages/Benefit-Suspensions.aspx.
Over the last 15-plus years, the Motor City Fund's finances have been
affected by the same factors plaguing other plans seeking MPRA relief--
loss of contributing employers, a decrease in active participants, and
an inability to recover from the economic catastrophes of the
2000s.\72\ In 2006, the Fund was 74% funded with a market value of
assets of approximately $84 million and about $111 million in
liabilities.
---------------------------------------------------------------------------
\72\ Board of Trustees of the International Association of
Machinists Motor City Pension Plan Application to Suspend Benefits,
U.S. Department of the Treasury, March 29, 2017, https://
www.treasury.gov/services/Pages/International-Association-of-
Machinists-Motor-City-Pension-Fund.aspx.
Since then, the Fund's demographics and asset base have declined. The
Fund has experienced numerous employer withdrawals over the years. The
Fund had 20 contributing employers in 2012, 16 in 2015, and 11 in 2016,
and is currently down to five. As of June 30, 2016, the Fund was about
58% funded with only $51 million in assets and about $101 million in
liabilities. It pays out $8.69 million in benefits to its retirees
annually, while receiving only $1.6 million in employer contributions.
Unbelievably, it has almost eight inactive participants receiving
benefits per every one active worker. Without the benefit suspensions,
---------------------------------------------------------------------------
the Fund is projected to be insolvent by the end of the 2026 plan year.
Under the Fund's suspension plan, monthly benefits payable to
participants in pay status as of January 1, 2018, would be reduced to
110% of the PBGC-guaranteed amount, which is the maximum reduction
allowed under MPRA. The reduction applies to benefits earned up to
January 1, 2018. Accruals after January 1, 2018, will return to 0.5% of
credited contributions. As of December 2017, the Fund was in the
process of submitting its proposal to its 1,134 members for voting.
IS MPRA WORKING?
MPRA has been neither an unmitigated disaster nor a panacea for
multiemployer pension plans. Many commentators and, without a doubt,
most plan participants are unhappy with MPRA because it allows plan
trustees to violate the most basic tenet of ERISA: that once a benefit
is earned, it cannot be taken away. There is little doubt, however,
that prior to MPRA there was nothing some plans could do to avoid
insolvency given the anti-cutback rule and the unsustainability of
employer contribution increases. For plans that have recently reduced
benefits, there is now hope that they will provide benefits for at
least the next 30 years and perhaps in perpetuity. For other plans like
Central States and the UMWA Pension Plan to survive, additional
legislative action will need to be taken.
Yes
MPRA now allows plans to reduce accrued benefits, which are by far the
highest expense most plans have. It is virtually impossible for a plan
with severe funding issues to reduce costs sufficiently when reductions
are limited to future accruals. While there is a cost to providing
future service credit, it is the past liabilities, many of which are
unfunded but still owed, that normally sink a pension plan. With
limited cost-cutting measures available pre-MPRA, plan trustees looked
to employers to pay more and more every year. Now that well has run dry
and the ability to cut accrued benefits is the last tool available for
some plans to avoid insolvency.
The MPRA application process also appears to be getting more
streamlined. The first several MPRA applications were denied because
Treasury was not comfortable with the actuarial and investment
assumptions that plans were making in proposing their benefit
suspensions. Treasury has since issued new regulations governing
suspension applications and has demonstrated a willingness to engage
plan advisors during Treasury's review process. This allows for the
exchange of information and the tweaking of certain assumptions that
make it easier for the plan to demonstrate that suspensions will avoid
insolvency for at least 30 years, which is what is required for
Treasury to approve an application.
Treasury has now approved four MPRA applications, with the Motor City
Pension Fund being the first plan to obtain an approval on its initial
application. This could possibly bode well for future applications.
No
Although Treasury seems to have implemented a process that may
ultimately result in more suspension application approvals, the process
is still lengthy and expensive. This is partly attributable to
Treasury's use of its own actuarial and investment assumptions when
reviewing and evaluating a plan's suspension application. By
substituting its own assumptions for those of the plans' actuaries,
Treasury adds a layer of complexity that slows the process and makes it
more expensive.
MPRA's statutory text does not require (or authorize) Treasury to make
such a detailed review of suspension applications. The statute
authorizes Treasury to review applications to determine if the plan is
eligible for the suspension and has satisfied the requirements of MPRA.
In fact, the statute specifically says that when evaluating an
application, Treasury must accept the trustees' determinations unless
the plan's determinations are clearly erroneous.
While MPRA allows plans to make drastic reductions in costs by reducing
accrued benefits, nothing in MPRA helps to infuse new money into the
plans. Ultimately, some of the larger and most underfunded plans will
need a new income stream in addition to benefit cuts to avoid
insolvency. A combination of new money and benefit reductions could
stop the bleeding from negative cash flow and allow a plan to earn its
way out of critical and declining status. There is nothing in MPRA that
helps on the income side of the equation.
Benefit cuts alone do not appear to be sufficient to address the
payment of the orphan liability some plans have. MPRA has been unable
to save two of the largest and most underfunded plans: Central States
and the UMWA Plan. Central States' application was denied, and the UMWA
Plan's benefit levels do not seem to make it a candidate for benefit
suspensions under MPRA because it is already paying out benefits in
many cases that are below the minimum amount allowed under MPRA. PBGC's
projected insolvency is in part based on the liabilities it sees coming
from these two plans. Although other legislative proposals have been
made to provide relief to the UMWA Plan, nothing has been passed to
date.
MPRA has been helpful to some plans and may prove helpful to others.
But MPRA will not save Central States, the UMWA Pension Plan, and the
other most severely underfunded plans because it provides no additional
funding mechanism, which these plans will require. For these plans, and
the more than 1 million participants in them, additional legislation is
needed in short order.
WHAT HAPPENS IF NOTHING HAPPENS?
Central States, the UMWA Plan, and other plans approaching insolvency
are not in a position to impose additional benefit cuts or employer
contribution increases. These plans generally have no realistic
expectation that any new employers will enter the plan. As assets
dwindle, the trustees' fiduciary duty limits their ability to diversify
the plan's investments.\73\ Now begins the death spiral, the inexorable
slow march that will see the assets depleted while benefits are still
due and owing.
---------------------------------------------------------------------------
\73\ As mentioned earlier, as a plan's assets dwindle, trustees are
obligated by their fiduciary duties to shift a plan's investments out
of equities and into more conservative investment vehicles to preserve
cash to pay benefits for as long as possible. Such investments
generally provide for little growth, so there is no opportunity for the
asset base to grow. If the trustees continued to leave assets invested
in equities, a sharp downtown in equity markets could cause a plan to
go insolvent much sooner than otherwise anticipated.
If insolvency occurs, participants will receive significant cuts in
payments, because PBGC insurance covers only a fraction of the promised
pension benefit payment. For example, a Local 707 Pension Fund
participant with 30 years of service once received approximately
$48,000 a year from the plan. Since the plan's insolvency, that
participant receives only $12,870 per year from the PBGC, which is the
maximum guaranteed amount. This reduction obviously puts participants
---------------------------------------------------------------------------
in a difficult position.
Many cannot return to work because of age and health issues, not to
mention potential skill and certification gaps. As a result, they will
have to find other ways to make up for the reduction, including
liquidating their assets, relying on family members, and looking to the
government, and by extension the taxpayer, through the use of Medicare,
Medicaid, Social Security, Supplemental Nutrition Assistance Program
benefits, and other social safety net programs.
The failure of the largest and most underfunded plans will ultimately
bankrupt the PBGC. In its FY 2016 Projections report, the PBGC stated
that the multiemployer insurance program is likely to run out of money
by the end of 2025. The PBGC Multiemployer Program's 2016 deficit of
$59 billion increased to $65.1 billion in 2017 and is expected to
explode to $80 billion by 2026.\74\ Once the multiemployer program is
bankrupt, participant payments will be cut even further and may even
cease. As such, the scenario described above will become even direr.
---------------------------------------------------------------------------
\74\ ``PBGC Projections: Multiemployer Program Likely Insolvent by
the End of 2025; Single-Employer Program Likely to Eliminate Deficit by
2022,'' Press Release, Pension Benefit Guaranty Corporation, August 3,
2017, https://www.pbgc.gov/news/press/releases/pr17-04.
A failure of this magnitude in the multiemployer system will damage the
entire economy--not just employers in the multiemployer plan system.
Insolvencies and the subsequent benefit cuts that follow also have deep
impacts on the communities where participants live. Retirees will see
their standard of living reduced. At a minimum, they will have less
income to spend in local economies. The reduced spending will be felt
by businesses, especially in small communities. Less money spent by
retirees also means less paid to local government in sales and other
taxes. When tax revenue decreases, the demand for social programs will
increase, because many retirees will likely lose their homes and/or
have difficulty paying for medical expenses. This will cause many to
become reliant on social programs that have to be funded by taxpayers
at a time when tax revenue will be declining. Simply put, pension plan
insolvencies and a PBGC collapse will have a cumulative negative effect
on entire communities. Individuals, government, and businesses will all
suffer unless a solution is found.
POTENTIAL SOLUTIONS
Several proposals have been designed to address the multiemployer
pension plan funding problem. Some are purely legislative proposals,
whereas others deal with new pension plan designs. The most widely
considered of the proposals are discussed below.
PBGC Takeover of Critical and Declining Status Plans
The prospect of the PBGC taking over all plans that are classified as
critical and declining has some appeal. After all, the PBGC was
established in 1974 to provide insurance to private pension plans,
including multiemployer plans. If the PBGC's mission is to provide
assistance to financially troubled multiemployer plans, the plans in
the worse shape should look to PBGC to not only help pay benefits if
necessary, but to operate the plan as well.
Proponents of a complete PBGC takeover of critical and declining plans
cite these primary reasons for their position--PBGC-operated plans will
save money by reducing administrative expenses; or the threat of a PBGC
takeover will provide an incentive for trustees to ensure adequate
funding, because their jobs will be at risk otherwise.\75\
---------------------------------------------------------------------------
\75\ Rachel Grezler, ``Congress Needs to Address the PBGC's
Multiemployer Program Deficit Now,'' The Heritage Foundation Issue
Brief, September 13, 2016, 2.
When a single-employer defined benefit pension plan goes insolvent, the
PBGC takes over the operation of the plan. When a multiemployer plan
goes insolvent, the PBGC offers financial assistance in the form of a
loan. Not only are these loans almost never repaid, but the plan
continues to operate under the pre-insolvency structure. This means
that there remains a board of trustees comprised of an equal number of
union and employer representatives who are charged with administering
the plan in accordance with the fiduciary requirements of ERISA and the
tax- qualification requirements of the Code. The trustees hire
actuaries, attorneys, accountants, investment consultants, and
investment managers to help comply with the various legal requirements.
These professional advisors cost money, and therefore even an insolvent
plan receiving financial assistance from PBGC has continuing
---------------------------------------------------------------------------
administrative costs.
A PBGC takeover of critical and declining multiemployer plans would
likely reduce administrative costs. The costs would not be eliminated,
because the PBGC would still need the same actuarial, legal,
accounting, and investment advisory services that the plan's trustees
use. Nevertheless, many of the advisors would either already be on
staff at PBGC, or the services could be provided in a less costly
manner due to economies of scale.
However, the PBGC is not currently funded well enough itself to offer
any meaningful long-term financial relief to multiemployer plans under
its current structure of offering only loans. If the PBGC were to take
over the administration of critical and declining plans, PBGC's costs
would increase, even if only slightly. More important, plans that are
in critical and declining status are not in that condition because of
their administrative expenses; rather, they are in critical and
declining status primarily because of massive negative cash flow issues
brought on by having to pay millions more in benefits to retirees than
they receive in contributions for active employees. While a PBGC
takeover would most assuredly reduce administrative expenses, a
reduction in administrative expenses alone, without shoring up the
PBGC's financial condition, would not provide a long-term solution.
Another reason frequently cited by those advocating for PBGC takeovers
is that the threat of a takeover will incentivize plan officials to
more closely monitor a plan's funding level. This line of thinking
assumes that once a plan becomes critical and declining, the PBGC
takeover of the plan will cost people their jobs, and therefore, for
self-preservation purposes, plan officials will do everything possible
to prevent a plan from becoming critical and declining. While it is
true that a plan's professional advisors and in-house administration
(if any) would not be needed after a PBGC takeover, professional
advisors and administrative staff do not have the authority to make
decisions for the plan that affect funding.
Those decisions are made by the plan's trustees, who generally are not
full-time plan employees. Being a trustee of a multiemployer plan is
often one of the duties of a union official or employer-appointed
trustee, but it is not a job in and of itself. Therefore, it is
doubtful that very many plan trustees will lose their jobs if the PBGC
were to take over a plan; the professional advisors whose jobs would be
at risk are already incentivized to help keep a plan out of critical
and declining status, because if their advice is shoddy, the trustees
will terminate them. Finally, the PBGC ``takeover as incentive/threat''
position assumes that critical and declining plans are in that
condition because plan officials were not diligent or were asleep at
the wheel. This is rarely the case, as changing demographics and stock
market returns have been more influenced by government policy and
market forces than by trustees' decisions.
PBGC Funding
There are limited tools available to improve the PBGC's funded status.
Historically, the PBGC multiemployer program has been funded solely
through annual premiums that multiemployer plans are required to pay,
and not by individual tax payers. Broadening the PBGC's funding
mechanisms to include taxpayer dollars from the general treasury is
appealing to some but anathema to others.\76\ Some pundits believe that
the federal government has been complicit in the downfall of some
multiemployer plans by imposing strict funding rules and deregulating
certain industries.\77\ These pundits believe that the government
should help fund the PBGC to make up for prior policies that have put
the plans at risk. Others believe that American taxpayers, the majority
of whom do not participate in multiemployer pension plans, should not
be asked to sacrifice for others when they have their own retirements
to fund.\78\
---------------------------------------------------------------------------
\76\ Id., 2.
\77\ Mary Sanchez, ``The Federal Government's Little Known Pension
Heist,'' Baltimore Sun, February 17, 2015.
\78\ Rachel Grezler, ``Congress Needs to Address the PBGC's
Multiemployer Program Deficit Now,'' The Heritage Foundation Issue
Brief, September 13, 2016.
Another way to improve PBGC funding is to increase the annual premiums
that multiemployer plans pay. This has already been done in recent
years, but increases have not been large enough to solve the PBGC's
funding deficit. In 2014, multiemployer plans paid an annual flat rate
premium of $12 per participant. In 2018, multiemployer premiums will be
$28 per participant. Despite more than doubling the premium, the PBGC
still projects that there is a 90% chance it will be insolvent by 2035.
Even more disturbing is that the PBGC estimates that if premiums were
increased to $120 per participant, its deficit in 2022 would still
increase by $15 billion.\79\
---------------------------------------------------------------------------
\79\ Alicia H. Munnell and Jean-Pierre Aubry, ``Can PBGC Save
Multiemployer Plans?'', Center for Retirement Research at Boston
College, September 2014, Number 14-16, 5, http://crr.bc.edu/
uncategorized/can-pbgc-save-multiemployer-plans/.
According to the Congressional Budget Office, PBGC premiums would have
to be increased to $232 per participant to achieve a 90% probability of
covering its deficit by 2036.\80\ Based on the fair-value estimated
deficit of $101 billion, a $232 premium increase would cover only 36%
of the PBGC's deficit.\81\ Furthermore, raising premiums eightfold
would require increasing employer contributions. As many plans are in
critical and declining status because employers could not afford the
contribution increases required under their rehabilitation plans, it
seems unlikely that employers would be able to pay the increases
necessary to increase PBGC premiums to a level that would cure the
PBGC's deficit.
---------------------------------------------------------------------------
\80\ Rachel Grezler, ``Congress Needs to Address the PBGC's
Multiemployer Program Deficit Now,'' The Heritage Foundation Issue
Brief, September 13, 2016, 2.
\81\ Alicia H. Munnell and Jean-Pierre Aubry, ``Can PBGC Save
Multiemployer Plans?,'' Center for Retirement Research at Boston
College, September 2014, Number 14-16, 5, http://crr.bc.edu/
uncategorized/can-pbgc-save-multiemployer-plans/.
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Partitioning of Orphans
Orphan participants constitute a significant portion of total
multiemployer participants. Approximately 1.6 million of the 10.7
million multiemployer plan participants are orphans.\82\ To relieve
severely underfunded plans of the burden of unfunded orphan liability,
many practitioners suggest that the liability be transferred to the
PBGC via a partition. Once a partition is approved, and the original
plan transfers liabilities to the PBGC, the PBGC becomes responsible
for paying benefits to the partitioned participants at the PBGC
guaranteed level.
---------------------------------------------------------------------------
\82\ Alicia H. Munnell, Jean-Pierre Aubry, and Caroline V.
Crawford, ``Multiemployer Pension Plans: Current Status and Future
Trends,'' Center for Retirement Research at Boston College, November
2017, 170.
Since MPRA's enactment, only the Furniture Workers Fund has
---------------------------------------------------------------------------
successfully applied for a partition.
While partitions can help reduce a plan's underfunding, they are far
from a panacea because they rely on the PBGC to pay the partitioned
participants' benefits. PBGC is simply not funded well enough to pay
all orphaned liabilities for all critical and declining plans. The PBGC
funding issue is actually exacerbated in a partition, because PBGC
starts paying the partitioned benefits immediately, unlike when the
plan as a whole goes insolvent. Absent additional funding, this move
would likely accelerate PBGC's projected insolvency.\83\ Assuming the
funding issue could be resolved, the value of partitioning would be to
help plans to focus on maximizing contributions to pay for current
costs.
---------------------------------------------------------------------------
\83\ Alicia H. Munnell and Jean-Pierre Aubry, ``Can PBGC Save
Multiemployer Plans?'', 5.
---------------------------------------------------------------------------
Plan Mergers
As discussed previously, MPRA provides the PBGC with the authority to
facilitate mergers. Some commentators believe that, with PBGC-assisted
mergers or partitions, many plans will be able to recover using
contributions from the remaining active employers and employees, which
might help preserve plans covering some 800,000 people.\84\ However, it
does not appear that many plans have sought PBGC assistance in
effectuating mergers under MPRA. This could be because trustees of
critical and declining plans have been focused on determining whether a
benefit suspension and/or partition application would solve their
plans' solvency issues rather than on investigating potential mergers.
---------------------------------------------------------------------------
\84\ ``What Can Congress Do to Help People in Multiemployer Pension
Plans?'': testimony by Hon. Joshua Gotbaum before the Senate Committee
on Finance, March 1, 2016, https://www.finance.senate.gov/imo/media/
doc/03012016%20Gotbaum%20SFC%20Gotbaum%20Multi
employer%20Pensions%20Testimony.pdf.
The MPRA application process is labor intensive, time consuming, and
expensive and requires only the involvement of one board of trustees.
It would thus be difficult and time consuming to explore potential
mergers or perform a merger study and to prepare a MPRA application at
the same time. It is possible that those plans that have had their MPRA
applications rejected, or who have withdrawn their applications, may
investigate whether a PBGC-facilitated merger with another plan is
feasible. However, any solution that requires PBGC funding is not
necessarily going to permanently resolve a plan's funding issues
because of PBGC's own precarious financial condition. To make plan
mergers a viable tool for critical and declining plans, more guidance
is needed from Treasury/PBGC and/or Congress.
Benefit Modifications
While the PPA has allowed many plans to make benefit modifications to
future accruals and other adjustable benefits, and MPRA now authorizes
reductions to benefits in pay status, some are calling for even more
flexibility to allow financially troubled plans to make benefit
modifications. It is possible that for some deeply troubled plans that
are nearing the death spiral, benefit reductions that go beyond those
allowed by MPRA may be necessary.
The more time that elapses without a workable solution, the bigger the
cuts will have to be. These plans' plights are exacerbated by PBGC's
underfunded status. It is estimated that if the PBGC becomes insolvent,
ongoing premiums that multiemployer plans pay would cover only about
10% of the benefits for which Central State is responsible. This would
require participants to take a 90% reduction in their benefits.\85\
---------------------------------------------------------------------------
\85\ Id.
In an article for the Heritage Foundation, Rachel Grezler proposed
several ideas to improve multiemployer plan funding. First, she
suggested creating special rules for critical and declining plans that
``have no hope of becoming solvent.'' Under the proposal, critical and
declining plans would not be allowed to continue adding new
liabilities. Instead, they would be required to freeze new benefits and
reduce existing benefits, including to those in pay status, similar to
MPRA.\86\ The paper also advocates for rules making it easier for plans
to reduce benefits prior to becoming insolvent as doing so would
prevent older workers in underfunded plans from continuing to receive
full benefits, while younger worker accrue very little. The authors
suggest that plans looking to make MPRA reductions be able to do so
without demonstrating that the reductions will result in the plan's
long-term solvency.\87\ Another concept is to allow the PBGC, on its
initiative, to reduce benefits within a plan prior to the plan going
insolvent, or to reduce the PBGC guaranty after insolvency. The
Heritage Foundation recognizes however, that reductions in the PBGC
guaranty alone would not be enough to prevent PBGC insolvency, and that
other changes are necessary.
---------------------------------------------------------------------------
\86\ Rachel Grezler, ``Congress Needs to Address the PBGC's
Multiemployer Program Deficit Now,'' The Heritage Foundation, September
13, 2016, 3.
\87\ Id.
---------------------------------------------------------------------------
Variable Defined Benefit Plans
While technically a defined benefit plan, a variable defined benefit
plan has characteristics of both defined benefit and defined
contribution plans. Interestingly, the variable defined benefit plan
has been used by multiemployer defined benefit plans with severe
funding issues (like the Sheet Metal Workers' National Pension Fund) to
allocate part of the investment risk to employees, as well as by
multiemployer 401(k) plans (like the UNITE HERE Local 26 Pension Plan)
to shift some investment risk to employers.
Variable defined benefit plans can be designed to be 100% funded.\88\
They are similar to traditional defined benefit plans in that the
contributing employers bear the financial obligation and the plan's
assets are invested in a pooled account. They are unlike defined
benefit plans in that they spread investment risk among contributing
employers and participants and rely on less risky investment
assumptions.\89\ The benefit the plan pays is ``variable,'' because the
amount varies depending on actual investment performance.
---------------------------------------------------------------------------
\88\ David B. Brandolph, ``Hotel Industry Trust That Left 401(k)
for Pension Gets IRS OK,'' August 2017, Bloomberg BNA, https://
www.bna.com/hotel-industry-trust-n73014462612/.
\89\ Gene Kalwarski, ``The Variable Defined Benefit Plan,''
Cheiron, accessed December 13, 2017, https://www.cheiron.us/
cheironHome/doc/Retirement_USAv1.pdf.
Basically, the variable defined benefit plan pays the greater of a
floor defined benefit and a variable benefit. After taking into account
contribution levels, the plan actuary will determine the floor benefit
based on plan demographics and a conservative interest assumption (for
example 4% to 5%). The floor benefit would also be converted into
investment units in the plan's collective assets, which would be
professionally managed. These investment units fluctuate in value
annually, increasing in value if the plan's investment return exceeded
the conservative interest assumption (plus a reserve factor) and
decline in value if the plan's investment return falls below the
---------------------------------------------------------------------------
assumption.
At retirement, the employee would receive the greater of the sum of his
or her floor benefits or the sum of his or her investment units.\90\
The floor benefit is thus designed to be the minimum that a participant
might receive at retirement, but the variable component allows the
benefit to increase (within certain specified limits) when investment
returns are higher. Extraordinarily high investment returns above those
specified in the plan are placed into reserve to protect against the
inevitable negative investment return years.
---------------------------------------------------------------------------
\90\ Gene Kalwarski, ``Re-Envisioning Retirement Security: Variable
Defined Benefit Plan,'' Retirement USA, October 21, 2009, http://
www.retirement-usa.org/re-envisioning-retirement-security-variable-
defined-benefit-plan.
Proponents of the variable defined benefit plan laud the design's
ability to pay an adequate benefit in the form of a life annuity, while
at the same time allocating the investment risk among contributing
employers and participants. The conservative investment assumption is
lower than the traditional 7% to 8% that most defined benefit plans
assume, which provides a higher probability that the promised floor
benefit will never have to be adjusted because the lower return is more
likely to be achieved.\91\
---------------------------------------------------------------------------
\91\ David B. Brandolph, ``Hotel Industry Trust That Left 401(k)
for Pension Gets IRS OK,'' August 2017, Bloomberg BNA, https://
www.bna.com/hotel-industry-trust-n73014462612/.
Variable defined benefit plans are of recent vintage in the
multiemployer arena. While there appear to be benefits to all
stakeholders, these plans might be more helpful for younger workers and
could possibly become the defined benefit plan of the future. The
variable defined benefit plan does not do anything to solve the funding
issues of plans that face insolvency today and that jeopardize the
retirement security of those near or in retirement.
Composite Plans
Another plan design that has gained traction among multiemployer plan
stakeholders and practitioners is the composite plan. The concept of
the composite plan was first introduced in 2013 by the National
Coordinating Committee for Multiemployer Plans (NCCMP).\92\ Draft
legislation language was released by the House Education and Workforce
Committee in September 2016, but to date no legislation has been
enacted.
---------------------------------------------------------------------------
\92\ See NCCMP 2013 Retirement Security Review Commission Report,
``Solutions Not Bailouts.''
Like variable defined benefit plans, composite plans are designed to
allocate investment risk to both employers and participants. A
composite plan is neither a defined benefit nor a defined contribution
plan, but has characteristics of each. Like multiemployer defined
benefit plans, the trustees would determine the rate at which benefits
accrue and benefits would be paid in the form of an annuity. However,
unlike defined benefit plans, the ultimate benefit paid would be
variable and depend on the market value of assets.\93\ Benefit amounts
would be adjusted on an annual basis to mitigate the frequency and
impact of market fluctuations, projected for a 15-year period.\94\
Composite plans would not have any withdrawal liability and would not
be subject to PBGC guarantees. The employers' contribution obligation
would be limited to the rates negotiated with the union.\95\
---------------------------------------------------------------------------
\93\ The United States House of Representatives Committee on
Education and the Workforce Subcommittee on Health, Employment, Labor,
and Pensions, ``Examining Reforms to Modernize the Multiemployer
Pension System,'' testimony of Randy G. DeFrehn, April 29, 2015.
\94\ Id.
\95\ Id.
Those advocating for composite plans note that composite plans no
longer place the risk of ensuring performance of the investment markets
solely on employers, while at the same time providing a mechanism for
union workers to receive retirement income for life.\96\ The composite
plan design also has its critics. International Brotherhood of
Teamsters President James Hoffa believes the composite plans would not
be adequately funded under the proposed legislation and the net result
would be two underfunded plans.\97\ The Pension Rights Center describes
the proposed legislation as a bill that would allow ``relatively
healthy multiemployer plans with secure adequate benefit structure to
transition to two inferior plans.'' \98\
---------------------------------------------------------------------------
\96\ ``Examining Reforms to Modernize the Multiemployer Pension
System,'' testimony of Randy G. DeFrehn, April 29, 2015.
\97\ ``Teamsters Strongly Oppose New House `Composite' Pension
Legislation,'' Teamsters, September 22, 2016, https://teamster.org/
news/2016/09/teamsters-strongly-oppose-new-house-composite-pension-
legislation.
\98\ ``Composite Bill Legislative Summary,'' Pension Rights Center,
November 10, 2016, http://www.pensionrights.org/issues/legislation/
composite-bill-legislative-summary.
---------------------------------------------------------------------------
Loan Program Proposals
In recent months, stakeholders representing both union and management
have put forth potential legislative solutions they believe could solve
even the most severely underfunded plans' funding problems. Recognizing
the uphill political battle procuring a pure tax payer bailout of
multiemployer plans would entail, these proposals involve providing
loans to pension plans that would be paid back to the U.S. government
over time.
Butch Lewis Act
In November 2017, Senator Sherrod Brown (D-OH) and Representative
Richard Neal (D-MA) introduced the Butch Lewis Act (S. 2147 and H.R.
4444, respectively), which would allow struggling multiemployer pension
plans to borrow money from Treasury to remain solvent.
The bill would create a new office within Treasury, known as the
Pension Rehabilitation Administration (PRA). The PRA would allow
financially troubled plans to borrow money for up to 30 years at low
interest rates. The PRA would raise money for the loan program through
the sale of Treasury-issued bonds to financial institutions. The 30-
year period is supposed to give the borrowing plans ample time to repay
the loan, while simultaneously incentivizing it to make smart long-term
investments. The legislation would also prohibit the plans from making
certain ``risky'' investments during the loan period. Every 3 years,
the plans will have to report back to the PRA and demonstrate they are
rehabilitating themselves and avoiding insolvency. The PBGC would also
share some responsibility in financing the loan program by providing a
plan the funds it requires beyond the loan program to pay benefits.\99\
---------------------------------------------------------------------------
\99\ ``Brown Announces Plan to Protect Ohio Pensions, Keep Promises
to Ohio Workers,'' Press Release, Sherrod Brown, Senator for Ohio,
November 12, 2017, https://www.brown.senate.gov/newsroom/press/release/
brown-announces-plan-to-protect-ohio-pensions-keep-promises-to-ohio-
workers.
---------------------------------------------------------------------------
Curing Troubled Multiemployer Pension Plans: Proposal
A stakeholder group made up of employers and unions has been proactive
in formulating its own legislative proposal, and has been actively
marketing the proposal to multiemployer plans, the NCCMP, and members
of Congress. The proposal is titled ``Curing Troubled Multiemployer
Pension Plans'' and the theme is that saving multiemployer plans will
require shared sacrifices. Under this proposal, multiemployer plans
will be saved from impending insolvency through a combination of
federal loans, benefit reductions, and surcharges to plan participants.
Under the proposal, any plan that is in critical and declining status
would be eligible for a federal loan. The plan would submit an
application to the Department of Treasury, together with an actuarial
certification that the plan is critical and declining and that the loan
proceeds would be sufficient to cure the plan's funding issues and that
the plan could repay the loan. The loan proceeds would cover the plan's
negative cash flow (i.e., the difference between the amount the plan
pays in benefits each month, plus administrative expenses and the
amount the plan receives in employer contributions).
A plan would be able to take up to three loans. The total amount of the
loan would be calculated by the plan's actuary, and would be sufficient
to pay five times the projected contribution income and earnings minus
benefit payments and administrative expenses. The proposal refers to
this amount as the ``shortfall.'' The interest rate on the loan would
be 1% and would be paid over 30 years, with interest-only payments
during the first 5 years (or 10 years if two loans are necessary, and
15 years if three are needed).
The proposal also requires plans to reduce all benefit payments by 20%
within 60 days after the loan application is approved. These benefit
reductions would apply to all participants and there would be no
protected classes. The reductions would apply even if they resulted in
a participant receiving less than the PBGC guarantee. The 20% reduction
would also apply to those participants who are not yet receiving
benefits. Proponents of the proposal assert that because the loan will
cover the shortfall, and the shortfall is calculated using the
unreduced benefit amounts, plans will have an opportunity to improve
its funded status through investment performance.
After the initial 5-year loan period, the plan's actuary will determine
whether the plan is still in critical and declining status. If the plan
is still critical and declining, the shortfall is recalculated (again
without including benefit reductions) and a new loan amount is
calculated and paid in monthly installments. If the plan is no longer
in critical and declining status, repayment of the loan principal
begins. Benefit reductions would remain in place until the plan is
neither in critical or endangered as defined in the PPA.
The Curing Troubled Multiemployer Pension Plans proposal estimates that
approximately $30 billion in loans might be necessary to save
underfunded multiemployer plans. In order to reduce the risk of default
on the loans (the plans will be paying interest only for 5 to 15
years), a multiemployer plan risk reserve pool (MRRP) would be
established. The MRRP would be funded by imposing monthly surcharges on
participants and employers, and by increasing PBGC premiums that
multiemployer plans pay. PBGC would administer the MRRP and would
invest the money in a trust separate from PBGC's other assets.
Draft Federal Credit Proposal
The NCCMP has put forth its own proposal. The NCCMP was instrumental in
designing and lobbying for the passage of MPRA and firmly believes that
Central States' funding issues would have been resolved if Treasury had
approved Central States MPRA application.\100\
---------------------------------------------------------------------------
\100\ Michael D. Scott, ``Multiemployer Pension Facts and the Draft
Emergency Multiemployer Pension Loan Proposal,'' September 20, 2017, 8.
The NCCMP proposal is similar to the shared sacrifices proposal. The
NCCMP's Draft Credit Proposal (DCP) also contemplates federally
subsidized 30-year loans at a 1% interest rate. According to NCCMP, it
has modeled its program using data from five plans and that each plan
demonstrated that it would maintain solvency and be able to repay the
loan. The DCP provides for three alternatives to be presented to
---------------------------------------------------------------------------
Congress.
Alternative 1 would require no benefit reductions and the federal
government would pay all credit subsidy costs. The credit subsidy cost
is the estimated long-term cost to the government of a direct loan or
loan guarantee, calculated on a net present value basis and excluding
administrative costs. The NCCMP concedes that there is no precedent for
any federal credit program that did not require the recipients to
restructure their obligations and governance.\101\ It is thus hard to
imagine that Alternative 1 would be adopted given the current political
climate.
---------------------------------------------------------------------------
\101\ Id., 11.
Alternative 2 requires the same 20% across the board reduction in
benefits that the shared sacrifices proposal calls for. Unlike the 20%
UPS reductions, which would be used to provide plans with the ability
to earn their way back to solvency, the reductions under the DCP would
be paid to the government to reduce the cost of the government subsidy.
The government would pay any remaining subsidy costs. The NCCMP is on
record that it will not support any tax or other payment on the
multiemployer plan system to pay for or credit-enhance the loan program
because the structure is consistent with the Federal Credit Reform
Act.\102\
---------------------------------------------------------------------------
\102\ Id.
Alternative 3 also requires a 20% across-the-board benefit reduction,
and then requires any additional amounts needed to achieve a zero
credit subsidy to the government.\103\
---------------------------------------------------------------------------
\103\ Id.
The NCCMP recognizes that for plans like Central States and the UMWA
Plan, time is of the essence in passing a solution. Each day that goes
by brings both plans closer to the death spiral from which there would
likely be no return. The NCCMP believes that its proposal maximizes the
probability of success and would be palatable to the government, which
makes implementation more likely.
CONCLUSION
Although most multiemployer pension plans are not in endangered or
critical status, a significant crisis is looming in the multiemployer
system. Most plans have survived last decade's two financial crises and
absorbed the impact of a dwindling ratio of active participants to
retirees. These plans survived primarily due to a combination of
benefit reductions and contribution increases allowed by the Pension
Protection Act of 2006, as well as an improving economy. Some plans
might be able to survive if they make significant Multiemployer Pension
Reform Act of 2014 reductions to benefits in pay status. Those appear
to be the fortunate plans.
Unfortunately, some plans are nearing the death spiral, where even
maximum reductions under the Multiemployer Pension Reform Act of 2014
will not be sufficient to stave off insolvency. At the same time, the
gap between those critical and declining plans and healthier funds
continues to widen, while the Pension Benefit Guaranty Corporation's
insolvency is quickly approaching. If these plans fail, the negative
effects will be felt by the participants and their families, local
economies, and U.S. taxpayers as a whole.
______
ILLOWA Committee to Protect Pensions
Illinois/Iowa Quad Cities
1815 37th Street Place,
Moline, IL 61265
(309-797-9578)
Judith Weeks--Chairperson
Ruth M. Puck--Recording Secretary
Diane Roth--Treasurer
_______________________________________________________________________
May 12, 2018
Joint Select Committee on Solvency of Multiemployer Pension Plans
219 Dirksen Senate Office Building
Washington, DC 20510
Dear Committee Members:
Please support the Butch Lewis Act (S. 2147 and H.R. 4444). We believe
it will relieve the taxpayer of the burden of funding the Pension
Benefit Guarantee Corporation (PBGC) and of taxpayers supporting over
10 million retirees in their declining years.
This letter pertains to the plight of nursing homes across America that
will be harmed if multiemployer pension funds are allowed to become
insolvent. Many retirees are in those nursing homes because they have a
pension that they (or their spouse) earned while working. Most of them
may not even be aware of the possibility of losing the pension check
that pays for their care. They need you to speak for them and make sure
that those nursing homes receive those pension checks so seniors won't
be moved onto Medicaid and state or county homes at taxpayer expense.
This is also about the future of retirees who aren't currently in
nursing homes. One day, many of us may need nursing home care and we
want to make sure that we have pension checks to pay for that
possibility. We don't want to be dependent upon the state or federal
government to care for us in our declining years.
The loss of those pensions could devastate the economy as well. Please
refer to the newly released Economic Impact Study for the entire
multiemployer pension system. The data on the Economic Impact Study is
from the National Institute on Retirement Security (NIRS) which used
DOL Form 5000 data.
Many of these retirees are veterans who are currently paying for
Medicare and a secondary health insurance because they can afford to
with their pensions. If they lose those pensions, they will end up
getting services at the Veterans Administration, again at taxpayer
expense. And many of those who lose pensions will quality for
subsidized housing and even food stamps, again at taxpayer expense.
Our committee, ILLOWA Committee to Protect Pensions, is mostly Teamster
retirees and spouses from Central States but we represent over 10
million retirees in multiemployer pension plans. We are a part of a
group of over 60 committees across America that is working with
congress to solve this funding problem.
Thank you for your work with the Joint Select Committee on Solvency of
the Multiemployer Pension Plans. We need your support in our efforts to
stay in our homes, provide for ourselves, meet our obligations, and
feel secure in our futures. Again, please support S. 2147 or H.R. 4444.
Sincerely,
Members of ILLOWA Committee to Protect Pensions
Ruth M. Puck (Contact Person)
______
Letter Submitted by Henry B. Jefferson III
May 20, 2018
U.S. Senate
Committee on Finance
219 Dirksen Senate Office Bldg.
Washington, DC 20510-6200
RE: Central States Pension Fund
Dear Senate Committee,
My name is Henry B. Jefferson III. I was employed by The Kroger Company
for 36 years. I am now 78 years old and have had multiple sclerosis for
23 years. A cut in my pension plan would put a hardship on my wife and
me. The pension plan was part of my wages and it is not my fault that
the money was mismanaged. Thank you for your assistance in this matter.
Sincerely,
Henry B. Jefferson III
______
Letter Submitted by Bill R. Reed
May 3, 2018
U.S. Senate
U.S. House of Representatives
Joint Select Committee on Solvency of Multiemployer Pension Plans
219 Dirksen Senate Office Building
Washington, DC 20510
Honorable Committee Members:
I am writing you to ask for your support in saving the Central States
Pension Fund from insolvency.
I worked for 47 years as a truck driver in St. Louis and was a member
of Teamsters Local 600. When it was time for my pension my wife and I
decided to take the option of spousal survival and set aside a portion
of my pension for her if she survives me.
Now I understand that unless the pension plan receives funding from the
government, it will be insolvent in 2025 and there will be no more
pension payout from Central States for either the retiree or the
surviving spouse. The impact upon my wife and me will be severe.
Without the pension income we will have to sell our house because we
will no longer be able to set aside money for real estate taxes and
home owners insurance. We have worked hard to improve our house and
surroundings and will not be able to enjoy living in the house as we
get older.
Please add your voice to help those of us who are retired after working
hard for so many years and genuinely need our pension to lead our
lives. This is our number one priority and we hope that the members of
the Committee will support us.
Thank you for listening and for fighting for all our hard-earned
pensions.
Sincerely,
Bill R. Reed
______
Letter Submitted by Thomas J. Spott
April 18, 2018
U.S. Congress
Joint Select Committee on Solvency of Multiemployer Pension Plans
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Comments for:
Mr. Thomas A. Barthold
Chief of Staff
Joint Committee on Taxation
Washington, DC
And
Mr. Ted Goldman, MAAA, FSA, EA
Senior Pension Fellow
American Academy of Actuaries
Washington, DC
Regarding the April 18, 2018 hearing of the Joint Select Committee on
Solvency of Multiemployer Pension Plans on ``The History and Structure
of the Multiemployer Pension System''
Wages are paid now--called ``salary'' and paid later called
``pension.'' If your employer funds a ``noncontributory'' ``defined
benefit plan'' then your employer computes when you are going to retire
and how long you are going to live. With that information they put away
some money that is expected to grow over that time period and get paid
to the retiree. NO MEDICARE OR SOCIAL SECURITY TAXES ARE PAID ON IT.
Upon retirement that retiree gets a check. They pay income taxes on it
but NO OTHER TAXES LIKE MEDICARE or SOCIAL SECURITY. They get the same
Medicare coverage as everyone else and all they paid for it was the tax
taken from their salary. Their Social Security check is a tad smaller
than it would be if the pension funding were part of the computation.
If an employer has a ``contributory'' or commonly called ``401(k)''
plan, the rules are different. From the ``salary'' of their employee,
the employer withholds MEDICARE and SOCIAL SECURITY TAX first. Then
from what is left over, the employee can contribute to the 401(k). When
this money is paid out to them in retirement they pay income taxes on
it the same as the defined benefit plan retiree. They get the same
Medicare coverage as the defined benefit retiree. But they paid more
for it as a function of total ``salary.''
We are told Medicare is going broke. We are told that Social Security
is going broke.
It wouldn't be if EVERYONE paid their fair share on the same rules.
Literally trillions of dollars are put into defined benefit plans by
employers and ALL of it escapes Social Security and Medicare Taxes.
Please stop this unfair lunacy. What you can do is start by taxing the
retirees that are currently getting defined benefit payments--MEDICARE
and SOCIAL SECURITY (tax the employer, too). And going forward have the
employers pay tax on their contributions.
The IRS Publication 15 says defined benefit plan contributions are not
subject to Medicare or Social Security Tax. Also you can call any
pension specialist if you want a citation.
Let me know if you have any questions.
Yours truly
Thomas J. Spott
______
UAW
1757 N Street, NW
Washington, DC 20036
Telephone: (202) 828-8500
April 25, 2018
U.S. Congress
Joint Select Committee on Solvency of Multiemployer Pension Plans
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Statement of Josh Nassar, UAW Legislative Director
On behalf of the more than 1 million active and retired members of the
International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America, UAW, I am writing to encourage the Joint
Select Committee on Solvency of Multiemployer Pension Plans to include
the provisions of the Butch Lewis Act (S. 2147/H.R. 4444) and to avoid
making benefit cuts.
Butch Lewis rightfully honors our nation's commitment to millions of
retirees, including thousands of UAW members and retirees, to help them
receive their earned and promised benefits in the multi-employer
pension system. It does so by enabling the Treasury to provide bond-
backed loans for plans that are in critical and declining status.
Thousands of UAW members in multi-employer plans are at risk of not
receiving benefits through no fault of their own if Congress continues
to fail to act to address our retirement security crisis.
Nearly two-thirds of retirees rely on Social Security for half or more
of their retirement income, as nearly one third of workers have no
savings at all. No senior citizen should have to choose between paying
household expenses and affording their medicine. Sadly, millions upon
millions are faced with these choices every day. Congress's response is
long overdue, and this commission has an important opportunity to begin
the process by ensuring that people in multiemployer pension plans
continue to receive the benefits they have earned. We stand ready to
work with you to ensure all Americans can live with dignity and
economic security in their golden years.
Thank you for considering our views.
______
Letter Submitted by James Waggoner
April 19, 2018
U.S. Congress
Joint Select Committee on Solvency of Multiemployer Pension Plans
Dirksen Senate Office Bldg.
Washington, DC 20510-6200
Members of this committee,
My name is James Waggoner, and I live in Lebanon, TN. I am a retiree
from The Kroger Company, where I was employed for 31 years. I have been
retired since January 2001, and I am 74 years old, married, and have 8
grandchildren. My wife is also retired. We are, by no means, wealthy. I
would guess our earnings status could be put at lower middle class. To
lose a portion of our pension would be a huge setback in our finances.
I can only think of electronics as the only thing that has gone down in
price since I have been retired. Grocery stores increased their costs
because (it was reported) the price of oil increased the costs of
transportation. However, when the cost of oil went down, the price of
groceries stayed the same or even went higher in some instances. The
automobile that I drive is 11 years old, and my wife's is 14 years old.
We will be needing an automobile in the not too distant future but the
price of a new car has gone completely out of question for our budget.
We can only afford a used car, and even a late model is very
questionable. This doesn't take into account that I still have a long-
term mortgage.
It was my understanding that one of our (employee) benefits was our
pension program and it was for life. This pension was a negotiated
benefit for which we gave up other benefits such as hourly wages,
vacation, holidays, etc. We paid a price back then in order to get this
pension when we retired. We were only offered a 401(k) for
approximately the last 3 years (1999) of my employment. Kroger
furnished financial counselors for its employees when they offered this
benefit, and I was counseled that the 401(k) would not be beneficial
assuming the short time I would be employed. With my retirement, I felt
that I could have used most all my wages for family needs, instead of a
savings plan. In hindsight, I would have saved as much money as I
could.
To add insult to injury, so to speak, we (retirees) were very limited
to what employment we could do after retirement. Basically, I could not
have any employment in the ``craft'' that I worked. Being employed for
31 years in a warehouse, I had no other experience that I could draw
upon for supplemental income. It seemed insane that I could not use the
only experience I had to get other jobs. I was told by the pension
representative that I could not even take a warehouse supervisor's
position because it was ``in the craft.''
I have referenced a portion of our ``Pension Plan'' \1\ for your
convenience to read. You can plainly see that the only ``permissible
employment'' was primarily government jobs or be over 65 years of age.
An office job was an option but I had no experience in that field.
After working in a warehouse for 30 years, I was not physically able to
do any work that I had experience in.
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\1\ Summary Plan Description Benefit Classes 15 and Higher, see p.
19-21, https://mycentralstatespension.org/-/media/Pension/PDFs/
pl_pen_spd_15plus.pdf.
As you can see, if our pension is cut, I can't make up that difference
by finding other employment. Who wants to hire a 74 year-old man with
diabetes, hypertension, COPD and peripheral neuropathy with only
warehouse experience? Being 74 years old, mine and my wife's health is
only going to get worse. That means higher medical/prescription bills.
My wife has already experienced the ``donut hole'' in her medicines.
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So, retirement is very nice but it is not exactly a financial windfall.
I ask that you, the Committee members, see the tragic situation we are
in through no fault of our own. The pension crisis will affect millions
more going forward. Personally, I think, the Brown act is a solution
that would put Multiemployer Pensions on sound footing that would work
for all its members. We worked very hard for what little we earned. We
had no part in the failure of this retirement plan and I don't feel
that we should have to pay a price to make it solvent.
The Federal Government appointed someone to be a ``watchdog''' of the
pension plan, to make sure the investments were handled correctly. The
pension investors, from what I am informed, were careless at best with
our pensions. Supposedly they made investment decisions based on the
highest commissions instead of the safest returns. Why was this allowed
to happen?
In closing, I am hoping the members of this committee make this
decision based solely on what is best for several millions of people.
Please don't turn this into a partisan issue.
Respectfully,
James Waggoner