LAW MAKES UPS' PROPOSED PLAN WITHDRAWAL COSTLYPosted On: Aug. 17, 1997 12:00 AM CST
WASHINGTON-The whopping $700 million that United Parcel Service of America Inc. says it would pay to exit underfunded multiemployer pension plans covering its Teamster-represented employees is the direct result of a 1980 federal law.
That law-the Multiemployer Pension Plan Amendments Act-was enacted by a Congress worried that a failure of dozens of multiemployer plans and the saddling of the federal Pension Benefit Guaranty Corp. with tens of billions of dollars in unfunded benefits lay just around the corner.
At the time, federal officials said such a scenario could unfold as a "last man out" psychology gripped employers in the plans. That kind of mindset could have developed because of the old rules that governed multiemployer plans.
Under those old rules, an employer's obligation when leaving a multiemployer plan was limited-based on the collective bargaining agreement covering it and other employers-to a contribution of a certain amount of dollars and cents per employee. Unlike today, there was no added financial penalty for withdrawing from an underfunded plan.
That limited liability, critics of the old system said, encouraged employer negotiators to seek the lowest contribution rates possible. At the same time, union representatives were fighting for increased benefits.
Such a system worked, though, as long as existing employers remained in the plans and new employers continued to join the plans.
But federal officials in the late 1970s feared that the old liability system eventually would lead many multiemployer plans to fail. That could have occurred, for example, if an entire industry suffered an economic decline and there were no new employers to join the plans and replace those going out of business.
With fewer contributors, the remaining companies would have had to increase their contributions substantially to pay for promised benefits. However, as costs escalated, a kind of mob psychology to flee the plans could have developed.
If a multiemployer plan did collapse because of a mass withdrawal of employers, the PBGC ultimately would have been stuck with the tab for covering participants.
The MEPPA was supposed to prevent such scenarios from developing, and to a large extent, it has. That law imposed withdrawal liability on employers leaving underfunded plans, which requires employers that leave underfunded plans to pay a share of the plans' unfunded obligations.
The underlying premise of withdrawal liability is that if employers know they can be hit with a huge bill when they leave an underfunded plan, they will take a more active role in improving the plan's financial condition by boosting contributions and holding down costly benefit improvements.
Withdrawal liability "has made employer trustees very careful about improving benefit increases," said Bill Ecklund, president of Minneapolis law firm Felhaber, Larson, Fenlon & Vogt and chairman of the attorneys committee of the International Foundation of Employee Benefit Plans.
The premise of withdrawal liability has by and large become reality-albeit with some significant exceptions. Plan funding has vastly improved. A 1996 survey by The Segal Co. found that multiemployer plans between 1990 and 1995 on average were between 95% and 97% funded.
In addition, underfunded plans over time have become less so. In 1996, assets in underfunded plans covered 82% of promised benefits, according to a PBGC estimate, a huge improvement from 1980, when the plans covered just 58% of vested benefits.
Still, while multiemployer plan funding has improved, thanks to increased employer contributions and a booming stock market that has boosted the value of assets, a growing retiree population and employer reluctance to enter plans that have big unfunded liabilities could spell future problems for some plans.