Central States' Strategy:Litigate Less, Recoup More?

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By Carmen Castro-Pagan

June 6 — The Central States pension fund recently fell short in its attempt to cut the benefits it provides retirees, but the country's largest multiemployer fund has had some success in another area: collecting debts from employers that exit the fund.

In the five years leading up to its request to the Treasury Department to cut benefits, the Central States, Southeast and Southwest Areas Pension Fund moved away from its once litigation-driven tactics and has used alternate ways to recover liability payments. According to an independent data search conducted by Bloomberg BNA and numbers provided by Central States, the fund has been filing fewer lawsuits in the past five years while at the same time it has been consistently collecting more withdrawal liability payments.

Once described by the U.S. Court of Appeals for the Seventh Circuit as a “uniquely aggressive seeker of withdrawal payments,” the fund filed 52 lawsuits in 2011 seeking withdrawal liability payments. By 2015, this dropped 35 percent, to 34.

Withdrawal liability actions filed

Despite the decline in lawsuits, Central States has seen the actual dollar amount of withdrawal liability collected increase from $171 million in 2011 to $548 million in 2015, Thomas C. Nyhan, executive director and general counsel of the Central States fund, told Bloomberg BNA.

“I'm not surprised that the number of cases has dropped,” Mark Trapp, a member of Epstein Becker Green in Chicago who represents employers in withdrawal liability cases, told Bloomberg BNA. The economy may be one factor that has led to this decline in lawsuits, as more employers are making the decision to withdraw voluntarily, Trapp said.

Withdrawal liability cash received

Withdrawal liability is the fee an employer must pay to exit a multiemployer defined benefit pension plan to help cover a fund's future liabilities. This exit fee can be quite onerous for some businesses and it can amount to millions of dollars. In 2007, United Parcel Services left the Central States pension fund and was assessed a withdrawal liability of $6.1 billion.

Decline in Lawsuits

The decline in lawsuits filed in the past five years, Nyhan said, was caused by a drop in the number of new withdrawal liability assessments, better economic conditions, fewer employers participating in the fund and the adoption of an alternative way to assess withdrawal liability.

There were 151 assessments approved by the fund's trustees in 2011, and 86 in 2015, a 43 percent decline, Nyhan said. The financial crisis of 2008-2009 caused a number of employers to go out of business, so it makes sense that the fund was making more assessments in 2011 as compared with 2015, when the economy was better, Trapp said.

Withdrawal liability assessments approved

Nyhan said another factor contributing to the drop in assessments is simply that the number of employers in the fund fell from 2,057 in 2010 to 1,458 in 2015.

It also seems that the fund has become more “receptive to settlement in the last five years knowing that a lump sum payment now” will avoid waiting for installment payments in the future with the uncertain collection and insolvency risks, Thomas Vasiljevich, shareholder of Ogletree Deakins Nash Smoak & Stewart PC, told Bloomberg BNA. Vasiljevich has litigated against Central States on behalf of employers.

‘Hybrid' Method

Another significant factor that has contributed to Central States litigating less and collecting more is that in October 2011, the Pension Benefit Guaranty Corporation granted Central States' application for approval of a new alternative method of determining withdrawal liability—the “hybrid” method.

Under this method, employers that pay their existing withdrawal liability and that satisfy certain other conditions are allowed to continue to contribute to the fund with “virtual assurance” that their continued participation won't cause them to incur any additional liability, Nyhan said ( 167 PBD, 8/29/12 ).

Since 2011, when Central States introduced the hybrid method, 83 employers have qualified for it and paid approximately $272 million in satisfaction of their existing or historical withdrawal liability, Nyhan said.

According to Nyhan, these employers would have fully withdrawn from the fund if the hybrid method hadn't been available to them.

Employers are attracted to the method because it offers a means to continue to participate in the fund, while eliminating or reducing the risk of future withdrawal liability, including the risk that the employers' exposure to liability will increase over time with any increases in the amount of unfunded vested benefits owed by the fund, Nyhan said.

This hybrid method can be enticing for employers. "Employers are concerned about the potential for increased liability in the future so they are more receptive to paying what they owe now," Vasiljevich said. For employers that need to be unionized in their trucking operations, the hybrid method is one alternative to address that need, Vasiljevich said.

Voluntary Withdrawals

But while the hybrid method can be beneficial for some employers, other employers would rather pay the withdrawal liability and exit the plan altogether, Trapp explained.

Observers seem to agree that more employers are voluntarily withdrawing from the fund. In the case of Central States, employers are doing so because they are conscious of its economic situation, Trapp said.

According to Vasiljevich, “some employers are worried about a mass withdrawal liability occurring in the future and getting assessed additional redetermination and reallocation liability.”

These voluntary withdrawals, including the employers' participation in the hybrid method, seem to explain why the actual amount of money collected has increased.

In 2015, the $548 million the fund collected was more than double the $255 million the previous year, Nyhan said. To explain this sudden spike, Nyhan explained that in 2015, the fund received two particularly large lump sum settlement agreement payments that totaled $230 million. One of these settlements involved the move of an employer to the hybrid withdrawal liability method.

Effective Change of Strategy

Trapp and Vasiljevich agree that other factors must also be considered to determine why fewer lawsuits have been filed by the fund, including the number of arbitration proceedings conducted by the fund, the amount of liability assessed against employers and the refusal of new employers to participate in the fund.

Despite its dire economic situation, Central States has shown a degree of success by changing its legal strategy. The numbers show that the fund has become more efficient in recovering withdrawal liability by engaging in alternate ways to deal with employers than by litigating these cases in court.

To contact the reporter on this story: Carmen Castro-Pagan in Washington at ccastro-pagan@bna.com

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