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The U.S. Treasury's decision last Friday to reject a plan by the Teamsters' Central States Pension Fund to slash benefits for hundreds of thousands of plan members could lead to more severe cuts down the road and send shockwaves throughout the pension system.
According to some pension experts, the benefit cuts proposed by the Central States, Southeast and Southwest Areas Pension Fund, which would have reduced benefits by up to 70% for some participants, are the least severe of several other options that include even greater benefit cuts or insolvency.
“For those people who are cheering and celebrating, they are not looking beyond the end of their nose to anticipate what kind of cuts (could occur) and the devastating financial impact they are going to have on both the people in the Central States plan and others,” said Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans in Washington.
“This rejection returns everyone to square one,” said Mark Trapp, a member of Epstein, Becker & Green P.C. in Chicago. Central States is “one year closer to the cliff they are going over and nothing has changed.”
In what is widely deemed a victory for multiemployer pension plan participants, the Treasury Department last week denied an application by the Central States Pension Fund to cut benefits for about 270,000 of the plan's 400,000 participants. The proposed cuts would have gone into effect in July.
Those benefit cuts, if approved by the Treasury, would have been allowed under the under the Kline-Miller Multiemployer Pension Reform Act of 2014, which is meant to help protect multiemployer pension plans headed toward insolvency. Before that law was passed, such benefit cuts would have been illegal.
In a letter sent Friday to the Central States, Kenneth Feinberg, special master for the Treasury's implementation of MPRA, said the Central States' plan failed because it used an investment return assumption that was too optimistic and failed to show that the proposed cuts would indeed prevent the plan from becoming insolvent in the future.
Additionally, the plan's proposed cuts were not “equitably distributed” among the retiree population, and the notice provided to plan participants about the cuts was too “technical” and “overly complex,” Mr. Feinberg explained Friday during a conference call with media outlets.
Several groups including the International Brotherhood of Teamsters, AARP Inc., and the Pension Rights Center applauded the Treasury's decision.
But Thomas Nyhan, Central States Pension Fund executive director and general counsel, said the pension plan trustees are “disappointed.” “Absent a rescue plan like the one we proposed, only government funding, either directly or through the PBGC, will prevent our participants from losing their benefits entirely,” Mr. Nyhan said Monday during a conference call with the media.
The Central States board of trustees has not yet decided if it will submit another plan to the Treasury, as meeting MPRA's requirements may not be “feasible,” Mr. Nyhan said.
Under the law, pension benefits cannot be reduced to below 110% of the Pension Benefit Guaranty Corp.'s minimums. The pension benefits also must be reduced enough to ensure the plan remains solvent, but cannot be reduced to more than what is necessary for that to happen.
Mr. Nyhan said the Central States' trustees must determine if the larger benefit cuts required by the Treasury will also remain above that 110% PBGC threshold.
“Any new benefit plan would result in substantially higher benefit reductions for our members. The questions that we need to answer for ourselves are whether substantially increased benefit reductions are reasonable, and whether or not we actually have the time left to file and implement a plan under the provisions of MPRA.”
Until then, the plan will continue to pay benefits to participants at the current level until it reaches insolvency, Mr. DeFrehn said. That's projected to happen within 10 years.
The Central States pension plan had $35 billion in liabilities and $17.8 billion in assets at the end of 2014.
If the pension plan goes insolvent, benefits must be reduced to the PBGC levels, which are much lower than the benefit cuts Central States had proposed, he said. For a person with 30 years of service, benefits would be reduced to a maximum of $12,870 annually. If the Central States Pension Fund goes insolvent, it could jeopardize the PBGC, which itself is projected to run out of money within the next decade, it said in March.
Mr. Nyhan said he will continue to urge Congress to take action.
Mr. DeFrehn, however, said he “wouldn't bank on” a government bailout.
“We are hoping that … they are still able to come up with a plan that is acceptable and that meets the expectations of the law and the Treasury's regulations and preserve the benefits of the maximum number of people,” Mr. DeFrehn said.
(Reuters) — Teamsters unions representing 16,000 workers of Costco Wholesale Corp. on Tuesday recommended their members approve a new contract offer from the retailer that they said would secure larger pension contributions throughout an employee's career.