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President Barack Obama on Tuesday signed into law legislation that will allow trustees of financially distressed multiemployer pension plans to cut participants' benefits to prevent the plans from becoming insolvent.
The multiemployer pension provisions are part of a huge $1.1 trillion spending bill — H.R. 83 — that received congressional approval last week.
Under the new law, benefits can 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, if a plan is “systemically important” — meaning that it poses a very large risk to the Pension Benefit Guaranty Corp., the federal agency that guarantees participant benefits — the U.S. Treasury Department could override the vote, permitting implementation of a benefits suspension plan.
Certain participants will be shielded from benefit cuts, including retirees age 80 and older and those receiving disability benefits under the plan. Retirees between ages 75 and 79 will face smaller benefit cuts than retirees under age 75.
In addition, benefits cannot be reduced to less than 110% of the benefit guaranteed by the PBGC. Currently, the maximum annual benefit guaranteed by the PBGC to participants in multiemployer plans is $13,000 for a participant with 30 years of service.
Effective next year, the legislation also doubles the premiums multiemployer pension plans pay the PBGC to $26 per participant. The current premium is $12 per plan participant, and had been scheduled to rise to $13 per participant prior to the new law.
Congressional consideration and inclusion of the multiemployer provisions in the spending legislation came after numerous warnings that lawmakers needed to act to prevent the collapse of the PBGC insurance program that guarantees benefits to participants in failed multiemployer plans.
The most recent warning came last month when the PBGC said the looming insolvency of several large multiemployer plans led to a huge rise in the deficit in the agency's insurance program covering the plans. The deficit leaped more than fivefold, rising to $42.4 billion in fiscal 2014 from $8.3 billion the prior year.
That tab of more than $40 billion is about 400 times what the PBGC collects in insurance premiums from the nation's more than 1,400 multiemployer plans, which have about 10.4 million participants, the overwhelming majority of whom are retirees and other former employees.
The PBGC itself said it expects 173 plans to become insolvent and need money from the agency to pay participants' benefits.
The U.S. Government Accountability Office earlier warned that without congressional action, the PBGC's insurance program would run out of money in the next 10 to 15 years.
One plan, the Central States, Southeast and Southwest Areas Pension Fund in Chicago, has more than $17 billion in unfunded benefits and has reached a point where legislative action is needed to avoid insolvency, its executive director, Thomas Nyhan, told a congressional panel last year.
In his last day as director of the Pension Benefit Guaranty Corp., Joshua Gotbaum warned of dire consequences unless Congress acts to shore up financially ailing multiemployer pension plans.