On May 6, 2016, the Treasury Secretary informed the Central States, Southeast and Southwest Areas Pension Fund (Central States) and members of Congress that Central States’ application for benefit suspensions had been denied for failing to satisfy the requirements set out in the Kline-Miller Multiemployer Pension Reform Act of 2014 (MPRA). Central States is one of ten multiemployer pension plans which applied for benefit suspensions under MPRA. Of these plans, Central States is the largest and likely the most important.
Treasury’s denial of Central States’ application raised the prospect that no plan would be approved for benefit suspensions under MPRA. Indeed, as of December 2016, Treasury had not approved a single application, and it had also denied a total of four by this time.1 However, on December 16, 2016, Treasury informed the Iron Workers Local 17 Pension Fund (Iron Workers 17) that its application to suspend benefits was approved.2
The funding woes of Central States and Iron Workers 17 are emblematic of a broader decline of the pension system. During the last several decades, many defined benefit pension plans have terminated, either due to insolvency or due to their employer-sponsors’ desire to manage costs and to reduce liabilities both on and off the balance sheet. Some have been converted or merged into various forms of defined contribution retirement arrangements, such as 401(k) plans, which do not guarantee retirement income for life and shift longevity and investment risks to the worker.3
Macroeconomic influences have certainly contributed to the decline of the private industry pension system. Contraction in various industries reduced the number of employers sponsoring or contributing to pension plans and reduced their number of participating employees. The stock market crash of 2000 - 2002 and the Great Recession of 2008 caused further erosion of pension fund assets and destabilized funding targets.
While the number of employer-sponsored defined benefit pension plans has substantially declined, a large number public sector pension plans are still active, as are many pension plans in industries characterized by mobile work patterns in which “multiemployer plans” have provided industry-based, rather than company-specific, employee benefit plans.4
The comprehensive legislative reform of the Employee Retirement Income Security of 1974, as amended (“ERISA”) applies to both single-employer and multiemployer plans, while public sector plans are exempt from ERISA. Some of ERISA’s provisions apply uniformly to both single-employer and multiemployer plans, but ERISA contains many provisions that apply only to multiemployer plans. This is due primarily to the structural differences between the two types of plans.
A multiemployer plan is one that covers workers of two or more unrelated companies in accordance with a collective bargaining agreement. The Labor-Management Relations Act of 1947 (LMRA), often referred to as the Taft-Hartley Act, requires multiemployer plans to be governed by a board of trustees composed of an equal number of employer and union representatives.
Historically, the funding rules for multiemployer and single-employer plans had similar structures, but over time they have diverged, particularly since the enactment of various post-ERISA reforms, such as the Multiemployer Pension Plan Amendment Act of 1980 (MPPAA) and the Pension Protection Act of 2006 (PPA).
1. MPPAA (1980)
The enactment of MPPAA on September 26, 1980, amended ERISA and the Internal Revenue Code (IRC) to improve retirement income security under private multiemployer pension plans by strengthening the funding requirements for such plans. Congress found that withdrawals of contributing employers had frequently resulted in increased funding obligations for employers continuing to contribute, which adversely impacted plans, participants and beneficiaries, and labor-management relations. Congress noted a greater incidence of employer withdrawals in declining industries; accelerating employer withdrawals sent many pension plans in these industries into a death spiral.5
Accordingly, one of the most significant changes of MPPAA was the establishment of withdrawal liability, which imposes financial liability on employers who drop out of plans. In addition to withdrawal liability, examples of key reforms introduced by MPPAA include: providing uniform definition of “multiemployer plan” under ERISA and the IRC; establishing funding and benefit adjustment rules for troubled plans; and implementing broad modification of the termination insurance system by steering multiemployer pension plans to an insolvency-based benefit protection program that emphasizes plan continuation (putting multiemployer plans on significantly different footing than financially troubled single-employer plans, which have distress termination procedures at their disposal).
2. PPA (2006)
The PPA was enacted in 2006 and introduced many significant changes to funding rules for both single and multiemployer plans. Perhaps PPA’s most substantial reform for multiemployer plan funding is the annual plan status certifications based on standardized funding and liquidity measures for determining the financial health of plans. These standardized measures are used to identify multiemployer plans in severe financial distress, known as critical status (red-zone) plans; those plans experiencing financial difficulty, known as endangered status (yellow-zone) plans or seriously endangered status (orange-zone) plans; and those plans in relatively sound financial condition, known as non-distressed (green-zone) plans.
Under these rules, a plan in critical status (e.g., a plan that is determined by its actuary to be less than 65% funded) must adopt a rehabilitation plan. A rehabilitation plan is comprised of a “range of options” determined by the plan and its advisors to enable the plan to emerge from critical status by the end of a certain period known as the “rehabilitation period” (e.g., ten years following the first day of the plan year following the second anniversary of the date of the adoption of the rehabilitation plan). The typical “range of options” implemented under a rehabilitation plan is some combination of: a reduction in future benefit accruals; an increase in contributions from employers; and elimination of certain “adjustable benefits” provided under the plan.
A fundamental tenet of ERISA is the protection of participants’ promised benefits through the establishment of minimum vesting standards and the prohibition of plan amendments that reduce or eliminate accrued benefits, early retirement benefits, retirement-type subsidies, and certain optional forms of benefits under qualified retirement plans. Accordingly, PPA draws a clear exception to ERISA’s “anti-cutback” rule in its provisions permitting the elimination of adjustable benefits under a rehabilitation plan. It defines adjustable benefits as “benefits, rights, and features under the plan, including post-retirement death benefits, 60-month guarantees, disability benefits not yet in pay status, and similar benefits . . . any early retirement benefit or retirement-type subsidy . . . and any benefit payment option.”
PPA also requires that a plan in endangered status (e.g., a plan that is determined by its actuary to be less than 80% funded, known as a yellow-zone plan) adopt a funding improvement plan. A funding improvement plan, like a rehabilitation plan, involves a range of options to be proposed to the bargaining parties determined by the plan and its advisors to enable the plan to emerge from endangered status (or seriously endangered status) by the end of a funding improvement period. The range of options includes reductions in future benefit accruals, increases in contributions, and the elimination of adjustable benefits.
While PPA’s funding provisions aim to preserve the continuity and survival of troubled plans, reductions in future benefit accruals and the reduction and/or elimination of adjustable benefits are adverse to participants and beneficiaries. Furthermore, contribution rate increases are adverse to participating employers and can strain collective bargaining negotiations. Specifically, PPA’s contribution mandates under rehabilitation and funding improvement plans can compel employers to seek reductions from other areas of workers’ economic package, such as wages and health insurance. These problems are predictably exacerbated in times of economic recession and market downturns.
3. MPRA (2014)
Key to the funding projections inherent in PPA’s rehabilitation and funding improvement plans are assumptions based on anticipated rates of investment returns, but, as the financial crisis of 2008 unfolded, the sudden and overwhelming decline in investment markets capsized multiemployer plan’s funding ratios and projections. The percentage of green-zone plans (e.g., plans with assets sufficient to fund 80% or more its benefit liabilities) decreased from 76% at the beginning of 2008 to 20% at the beginning of 2009.6
The heightened contribution obligations imposed by PPA strained employers in industries with thin profit margins.7 Coupled with the broad and deleterious effect of the financial crisis, many of these employers were propelled into liquidation and bankruptcy, requiring remaining employers to shoulder increasingly larger shares of shortfall amounts, in turn resulting in additional liquidations and bankruptcies.8 This trend endangered the survival of many plans. Having already exhausted their ability to increase contributions and remain competitive, the bargaining parties and plan trustees involved with these plans faced even greater challenges with more limited options at their disposal.9 Many commentators noted that the magnitude of the financial crisis exposed the inability of PPA to respond to dramatic market fluctuations.
Consequently, key stakeholders and policy experts collaborated to address the fundamental structural ailments of the multiemployer pension system.10 Various policy concepts developed into formal proposals as the 2014 sunset of PPA approached and eventually culminated with the enactment of MPRA.
MPRA amended ERISA Section 305 and IRC Section 432 to add a new status for especially troubled plans known as “critical and declining status.” Pursuant to MPRA’s amendments, the sponsor of a plan in critical and declining status is permitted to reduce pension benefits payable to plan participants and beneficiaries. These reductions are referred to as “suspension of benefits.” Certain conditions and limitations apply. For example, a plan may not reduce benefits below one hundred and ten percent (110%) of the monthly benefit that is guaranteed by the PBGC, and benefit reductions must be equitably distributed across the participant and beneficiary populations. Additionally, the plan sponsor must provide notice of the proposed suspension of benefits to affected participants and beneficiaries, all employers that have an obligation to contribute to the plan, and each labor union representing plan participants employed by such employers.
MPRA also requires that the plan sponsor of a plan in critical and declining status seeking to suspend benefits to submit an application to the Secretary of the Treasury (Secretary). The Secretary, in consultation with the PBGC and the DOL, will approve an application upon a finding that the plan is eligible for the suspensions and has satisfied the criteria set forth under MPRA. Treasury’s decision to approve an application is then subject to a participant vote.
On September 25, 2015, Central States submitted an application to the Secretary requesting approval to suspend benefits under MPRA.11 On May 6, 2016, the Secretary notified Central States that its application had been denied because its proposed suspension of benefits failed to take it off the path to insolvency.12 In its notice of denial, the Secretary cited three specific failures under MPRA.
First, the Secretary held that Central States’ application used unreasonable investment return and entry age assumptions.13 It used a 7.5% annual investment rate of return assumption because, among other reasons, of its common use for pension plan annual funding valuation purposes.14 However, the Secretary determined that a 7.5% investment return assumption was not reasonable because it: (1) did not take into account Central States’ negative cash flows (and related factors); (2) did not adequately take into account the relevant current economic data (i.e., the appropriate investment forecast data); and (3) had a significantly optimistic bias.15
A lower investment return assumption would have resulted in greater benefit reductions to participants and beneficiaries. Presumably, therefore, the Secretary would have been more likely to approve an application proposing a more severe suspension of benefits.
As with the investment return assumption, the Secretary held that the assumed age of future new entrants into Central States was not sufficiently refined. The entry age assumption is important for projecting future cash flows. Central States’ application used an entry age assumption of 32 years old, a single assumed age reflective of the average age at entry for the entire current active workforce covered under Central States. The Secretary made several arguments suggesting that if the entry age assumption had been sufficiently refined, then it would have been less optimistic (i.e., an older entry age assumption would have resulted).16 An older participant population is a headwind for funding improvement. This is because, among other factors, older participants retire sooner and thus draw on benefits sooner.
Second, the Secretary held that Central States’ application failed to equitably distribute its proposed benefit suspensions across its participant and beneficiary population. The Secretary objected to the application’s different treatment of two groups of participants with benefits attributable to service with United Parcel Service, Inc. (UPS). Apparently, Central States’ different treatment of the two groups was due to its attempt to comply with a special rule applicable to employers that have: (1) completely withdrawn from the plan; (2) paid the full amount of its withdrawal liability; and (3) pursuant to a collective bargaining agreement, assumed liability for providing benefits to participants and beneficiaries of the plan under a separate, single-employer plan sponsored by the employer, in an amount equal to any amount of benefits for such participants and beneficiaries reduced as a result of the financial status of the plan (i.e., a make-whole agreement). UPS met this description.
Central States’ application referred to benefits attributable to service covered under the make-whole agreement as “Tier 3” benefits, which would have been subject to a 40% cap on the percentage reduction of a participant’s pre-suspension benefit. The application referred to benefits attributable to service not covered under the make-whole agreement as “Tier 2” benefits, which would have been subject to a 50% cap on the percentage reduction of a participant’s pre-suspension benefit.
Although the different treatment of the two groups of UPS participants was not per se in violation MPRA’s special rule for withdrawn employers with make-whole agreements, the Secretary held that the different treatment failed to constitute an equitable distribution of the suspension of benefits. Specifically, the Secretary noted that the Tier 3 participants are more protected from benefit cuts because of they are covered under a make-whole agreement, while Tier 2 participants are less protected because they are not covered under the make-whole agreement.17 Central States’ proposed 50% cap for Tier 2 participants would have subjected such participants to larger benefit suspensions than Tier 3 participants under the proposed 40% cap. Therefore, the Secretary concluded that “applying a factor in a manner that justifies larger cuts for participants who are otherwise less protected less protected (and therefore stand to receive smaller benefits)” is unreasonable and fails MPRA’s equitable distribution requirement. Presumably, Central States could have avoided the Secretary’s objection either by treating all UPS participants equally or by proposing a reduction cap for Tier 2 participants more protective than the cap for Tier 3 participants.
Third, the Secretary held that Central States’ notices of its proposed benefit suspensions failed to be written in a manner so as to be understood by the average participant. Specifically, the Secretary concluded that: (1) the notices extensively used technical language without adequate explanation; (2) critical terms used in the notices are defined only by cross reference to other documents; and (3) the cross-referenced definitions are not understandable to the average participant.
Two weeks after Treasury’s decision, Central States’ executive director, Thomas Nyhan, reported that Central States strongly disagreed with the reasons expressed by Treasury for denying its application.18 Mr. Nyhan noted that Central States would not seek to develop a new plan for benefit suspensions; consequently, Central States will remain in critical and declining status, and it is projected to become insolvent in less than ten years.19 The Treasury Secretary’s letter to Congress emphasized that Treasury’s denial in no way resolves the serious threat to participants’ pension benefits. Some members of Congress had been vocal in calling for Treasury to reject Central States’ application, presumably to protect current retirees from benefit cuts. In the wake of the denial of its application, Central States has called upon those and other policymakers to deliver solutions to protect the retirement security of all of its participants and beneficiaries.20
Again, some commentators perceived Treasury’s denial of Central States’ application as a signal that it would not approve any application for benefit suspensions under MPRA. However, on December 16, 2016, Treasury notified Iron Workers 17 that its application submitted on July 29, 2016 to suspend benefits had been approved.21
Treasury’s determination was not the final step in implementing the benefit suspensions because MPRA stipulates that no suspension of benefits may take effect before a vote of the affected participants. Treasury, in consultation with the DOL and the PBGC, is required to administer the vote, and the plan sponsor must furnish ballots conforming to the statute’s content and manner requirements.
Ballots and explanatory materials were mailed to Iron Workers 17’s participants on December 30, 2016; voting closed three weeks later on January 20, 2017.22 Ultimately, a majority of the voting participants approved the benefit cuts. Out of 1,938 eligible voters, 616 voted in favor of approval, and 320 - or 16% of all eligible voters - voted to reject the benefit cuts.23 The vote for approval was certified by Treasury in accordance with the regulations, and the benefit cuts went into effect on February 1, 2017.24
While traditional defined benefit pension plans have declined significantly over the last several decades, many multiemployer plans covering unionized labor still remain. Millions of American workers depend on these plans for their retirement security. In addition, these plans are important institutional investors, supplying billions of dollars of investment capital. Due to reforms under MPPAA, multiemployer pension plans cannot terminate and/or convert to alternative forms of retirement vehicles in the same manner that single-employer plans are able to do so under ERISA’s distress termination procedures.
Reforms enacted under legislation like PPA and MPRA aim to keep certain multiemployer pension plans afloat, even at the expense of reducing promised benefits for participants and retirees. The benefit suspension provisions under MPRA constitute perhaps the most dramatic funding reform implemented since the passage of ERISA. However, these provisions have been sparsely utilized to date, as only Iron Workers 17 has submitted a successful application, and only time will tell if its benefit suspensions will lead to reemergence from critical and declining status. To be sure, the projections that underlie any remedial funding plan are highly sensitive to changes in year-to-year experiences. It will be interesting to see what reforms if any may lay ahead.
1 Teamsters Local 469 Pension Fund, Dep’t of Treas., Special Master Kenneth R. Feinberg letter denying application under Kline-Miller Act (November 10, 2016); Road Carriers Local 707 Pension Fund, Feinberg letter denying application (June 24, 2016); Ironworkers Local 16 Pension Fund, Feinberg letter denying application (November 3, 2016).
2 Iron Workers Local 17 Pension Fund, Dep’t of Treas., Special Master Kenneth R. Feinberg letter approving application under Kline-Miller Act (December 16, 2016).
3 See Randy G. Defrehn and Joshua Shapiro, Solutions Not Bailouts: A Comprehensive Plan From Business and Labor to Safeguard Multiemployer Retirement Security, Protect Taxpayers and Spur Economic Growth, Retirement Security Review Commission of the National Coordinating Committee of Multiemployer Plans, 9 (2013).
4 See id.
5 See id.
6See id. at 13.
7Id. at 10.
10Id. at 14.
11 Central States, Southeast and Southwest Areas Pension Fund, Dep’t of Treas., Special Master Kenneth R. Feinberg letter denying application under Kline-Miller Act, 1 (May 6, 2016).
12 See id.
13 See id. at 2.
14 See id. at 3.
15 Id. at 4.
16 See id. at 7.
17 See id. at 9.
18 See Statement: Central States Pension Fund Determines New Rescue Plan Not Possible, Calls for Legislation to Protect Pension Benefits, May 19, 2016, available at: https://d3n8a8pro7vhmx.cloudfront.net/teamstersforademocraticunion/pages/9125/attachments/original/1463693393/CSPF&under;release&under;5-19.pdf?1463693393.
19 See id.
20 See id.
21 Supra note 3, Defrehn and Shapiro at 13.
22 Dep’t of Treasury, FAQ on the Iron Workers Local 17 Pension Fund Vote, available at: https://www.treasury.gov/services/Documents/FAQs%20on%20voting%20procedures%20-%20IW17%20(FINAL).pdf.
23 See Dep’t of Treasury Vote Certification Letter, January 27, 2017, available at: https://www.treasury.gov/services/Responses2/Iron-Workers-Local-17-Final-Approval-Letter.pdf.