Central States Pension Fund Rescue Not Panacea for All

Pension & Benefits Daily™ covers all major legislative, regulatory, legal, and industry developments in the area of employee benefits every business day, focusing on actions by Congress,...

By David B. Brandolph

June 10 — Many Central States pension fund retirees said they would be better off financially if the plan’s rescue proposal were rejected—even if the fund eventually went insolvent.

A closer look at the numbers shows they were right.

The Central States, Southeast and Southwest Areas Pension Fund last summer became the first multiemployer fund to file a rescue petition with the Treasury Department requesting approval of participant benefit cuts to avoid insolvency. The fund was authorized to make this request by the Multiemployer Pension Reform Act of 2014, also known as the Kline-Miller Act—a law that has drawn a lot of criticism.

When they learned of the fund's proposal to cut their pensions, some of the fund's retirees said they didn't expect to live long enough to benefit if the fund managed to avoid insolvency 10 years down the road, as projected by the fund. Instead, they said they preferred to get their full benefits now and worry about the fund's collapse later.

Consequently, many banded together to persuade policy makers to prevent the cuts. This effort likely helped spur the entire Democratic Party Senate caucus to urge the Treasury secretary in an April letter to carefully scrutinize the fund's rescue proposal.

The retirees felt vindicated when, on May 6, the Treasury rejected the fund's petition.

There are lessons that could be learned by other multiemployer funds. Central States’ experience shows that plan trustees now considering whether to file a rescue petition—particularly plans with a large number of retirees—should carefully consider the consequences of proposing severe cuts.

In this analysis, Bloomberg BNA examined data supplied by Central States to determine how many retirees were correct when they said they would be better off financially if the fund ditched the rescue plan and paid them their full benefits until the fund became insolvent. Central States collected the data on July 31, 2015, to use in notices sent to retirees.

Examination of the numbers reveals that retirees between the ages of 60 and 79 who were slated to have their benefits slashed by 30 percent or more stood to gain the least under the fund's ill-fated proposal. It would logically follow that members of this group mounted the greatest opposition to the rescue proposal.

More specifically, nearly 42,000 retirees, a little more than 10 percent of the fund's 400,000 participants, were better off financially by getting full payments until the fund's projected insolvency in 10 years than if they had received reduced benefits under the rescue plan until their projected life expectancy.

This finding holds even if, at the time of the fund's insolvency, the financially beleaguered Pension Benefit Guaranty Corporation isn't itself healthy enough to provide the fund with financial assistance under the agency's multiemployer pension plan insurance program.

Multiemployer plans are collectively bargained and serve the employees of several employers.

Rescue Plan Rejected

Supporters of the rescue petition said the cuts were needed to avoid insolvency. They acknowledged that some of the proposed benefit cuts were steep, but warned that retirees would be worse off if the plan went insolvent. Participant benefits were to be cut, on average, by only 23 percent, the fund said in its application to the Treasury Department.

That 23 percent cut was just an average: Many retirees claimed that they were facing cuts of up to or greater than 70 percent. In hearings and other public forums, many retirees said they felt betrayed by fund officials and Congress for permitting reductions to promised benefits they were counting on. They described how such cuts would reduce their income to poverty levels, resulting in the loss of their cars, homes, health and self-respect.

These retirees rejoiced when the Treasury rejected the fund's application. When the fund subsequently announced that it wouldn't resubmit its application, the threat of benefit suspensions presumably ended for participants and retirees.

Central States officials said that, absent a legislative or other solution, the fund will be insolvent in 10 years or less. Once insolvent, the officials said fund participants would be at risk of receiving little or nothing.

Tale of Two Retirees

Despite such dire predictions, many retirees said they were pleased that the threat of benefit cuts had ended.

Two fund members who said they are better off without the rescue plan are 65-year-old Dave Scheidt of Kansas City, Mo., and 64-year-old Bob Amsden of Milwaukee.

Scheidt, who worked for 32 years primarily on the loading docks for Roadway Express in Kansas City, told Bloomberg BNA that the fund presented him with a letter last summer indicating that his monthly benefits under the rescue plan would be reduced from $2,704 to $1,377, a 49 percent drop.

Under actuarial tables for blue collar workers that the fund uses for its participants (Table 1), healthy 65-year-old retirees like Scheidt have a life-expectancy of 16.6 years and would be expected to live until nearly age 82.

Blue Collar Actuarial Table (Male Only)

Scheidt is currently on course to receive $324,480 in benefits if the fund survives another 10 years. If his benefits had been cut by 49 percent under the fund's rescue plan, he would have received only $274,298, or $50,000 less, assuming he lives to his life expectancy.

Amsden spent 33 years as a fund participant driving trucks and working on loading docks for a number of employers. He told Bloomberg BNA that his $3,000 per month pension benefit was to be cut under the rescue plan by 55.4 percent—leaving him with a $1,336 per month payment.

According to the mortality table used by Central States, participants between age 60 and 64, like Amsden, have a life expectancy of 20.3 years.

Applying this life expectancy, Amsden would expect to receive $325,450 in benefits under the rescue plan. By comparison, with the rescue plan now rejected, Amsden anticipates receiving $35,000 more—$360,000 in payments—over the next 10 years.

Limits of MPRA

Under the MPRA, the fund was prohibited from cutting the benefits of three participant groups. The three groups were those receiving disability pensions, those receiving benefits at or below 110 percent of the PBGC's maximum guarantee—$12,870 annually for those with at least 30 years of service—and retirees age 80 and over.

The law also restricted cuts for retirees between age 75 and 79. It did so by reducing cuts on a prorated basis so that the closer a retiree was to age 79, the less their benefits were cut.

Crunching the Numbers

Scheidt and Amsden weren't alone in benefiting from the rescue plan's demise. Table 2A shows that among retirees age 60 to 64, those receiving cuts of more than 50 percent (shown in red) wouldn't be benefiting from the rescue plan if they were to receive reduced benefits until their life expectancy. This group included nearly 1,400 retirees (See table 3B).

Table 2B shows that among retirees age 65 to 69, those receiving benefit cuts of 40 percent or more—slightly more than 14,500 retirees— would have received less in payments under the rescue plan.

Nearly 20,000 retirees between the age of 70 and 74 and more than 6,000 retirees over the age of 75 received cuts of greater than 30 percent. Table 2C shows that all of those retirees are better off without the cuts.

In total, it appears that nearly 42,000 retirees knew what they were talking about when they said they preferred to get their full benefits now even if the fund became insolvent in 10 years.

Rescue Plan Payment Comparison Age 60 to 64 Rescue Plan Payment Comparison Age 65 to 69 Rescue Plan Payment Comparison Age 70 to 74 Rescue Plan Cuts Per Retiree Age Range Percentage of Rescue Plan Cuts by Age Range

To contact the reporter on this story: David B. Brandolph in Washington at dbrandol@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com