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Eleventh-hour congressional action last week ends any imminent risk of the collapse of big, massively underfunded multiemployer pension plans and the federal insurance program that guarantees a portion of participants' benefits, but long-term problems remain.
In a rare act of congressional bipartisanship and to the surprise of many, legislators led by Rep. John Kline, R-Minn., chairman of the House Education and the Workforce Committee, and the panel's ranking minority member, Rep. George Miller, D-Calif., added a sweeping multiemployer pension plan reform package to a broader federal spending bill that President Barack Obama signed into law last week.
The new law “will allow plans to survive and not end up on the doorstep of the PBGC,” said Jack Abraham, a principal with PricewaterhouseCoopers L.L.P. in Chicago, referring to the Pension Benefit Guaranty Corp., the federal agency that guarantees participants' benefits.
“This is a common-sense solution that does not in any way cost the government money,” added Vince Sandusky, CEO of the Sheet Metal and Air Conditioning Contractors National Association in Chantilly, Virginia.
The new law will allow participants' benefits to be cut if a plan is projected to become insolvent during a current plan year or any of the next 14 years, or any of the next 19 years if the plan's ratio of inactive participants to active participants exceeds 2-to-1 or if the plan is less than 80% funded.
Participants would have to be given the right to vote on cuts before the benefit reductions could be implemented. However, even if participants rejected the cuts, the U.S. Treasury Department could override the vote, permitting implementation of a benefits suspension plan, if a plan is “systemically important,” meaning it poses a very large risk to the PBGC.
Certain participants would be protected from benefit cuts, including retirees age 80 and older and those receiving disability benefits under the plan. Retirees between ages 75 and 79 would face smaller benefit cuts than retirees under age 75. And plans could not reduce benefits to less than 110% of the benefit guaranteed by the PBGC. Currently, the maximum annual benefit guaranteed by the PBGC is $13,000 for a participant with 30 years of service.
Effective in 2015, the new law will double the PBGC premium rate for multiemployer plans to $26 per plan participant. The current premium is $12 per plan participant and had been scheduled, prior to passage of the bill, to rise next year to $13 per plan participant.
While inclusion of the multiemployer provisions in the spending package came at the very close of the congressional session, lawmakers have been bombarded for years with warnings from plan executives, trade groups and federal agencies that action was needed to prevent the failure of large underfunded pension plans and, with those failures, the collapse of the PBGC's multiemployer pension plan insurance program.
The PBGC itself warned last month that the looming insolvency of several large multiemployer plans led to a fivefold leap — to $42.43 billion — in just one year in the deficit of the agency's multiemployer insurance program that guarantees benefits to participants in insolvent plans. That $42 billion-plus deficit compares with only $122 million the PBGC collected in 2014 from the nation's 1,400 multiemployer plans, which have about 10.4 million participants.
The PBGC warned that it expects more than 10% of the plans it insures would become insolvent and need money from the agency to pay participants' benefits. Without congressional action, the U.S. Government Accountability Office projected the PBGC's insurance program would go broke in the next 10 to 15 years.
Now, with the new law allowing financially troubled plans to cut benefits, those plans are much less likely to need a PBGC bailout.
“This certainly significantly extends the solvency of the PBGC's insurance program,” Mr. Abraham said.
By allowing plan trustees to cut benefits, the plans' liabilities will be cut. That in turn will reduce the payments, known as withdrawal liability, that employers pay when they leave underfunded plans.
Knowing that withdrawal liability payments will not escalate due to the law giving plan trustees the ability to cut benefits, more employers could be encouraged to remain in the plans, some say.
“What Congress did was to avoid a mass withdrawal of dozens, perhaps hundreds, of employers from the plans. Had that happened, the system would have collapsed,” said Joshua Gotbaum, a former PBGC director and now a guest scholar at the Brookings Institution in Washington.
Still, the financial problems facing a segment of multiemployer pension plans are far from settled.
For example, deregulation of certain industries, such as trucking, has triggered more competition and more failures of companies that contribute to multiemployer plans. At the Central States, Southeast and Southwest Areas Pension Fund, more than 600 firms once in the plan have gone into bankruptcy since 1980, Thomas Nyhan, the plan's executive director, told a congressional panel last year.
In addition, the fear of withdrawal liability has discouraged new employers from joining the plans, said Diane Gleave, senior vice president and regional manager with The Segal Co. in New York.
While the congressional action may reduce the amount of withdrawal liability employers could face if they leave the plans, the threat of it still may be high enough to discourage new employers from joining the plans, Mr. Abraham said.