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May 9 — The Treasury Department's decision to reject the Central States pension fund's rescue petition was based on faulty conclusions and was avoidable, a fund official said.
In a conference call with reporters May 9, Thomas C. Nyhan, executive director and general counsel of the Central States, Southeast and Southwest Areas Pension Fund, challenged the department's conclusions that the multiemployer pension plan's proposal wasn't based on “reasonable investment assumptions” and that its notices to participants weren't “understandable to the average plan participant.”
In addition, Nyhan took issue with the department's finding that the proposed benefit cuts weren't equitably distributed with regard to United Parcel Service-related benefits. Had Treasury raised its objections to the distribution before its denial decision, the fund would have adjusted the rescue plan to accommodate Treasury’s interpretation of the UPS-related benefit requirements, he said.
The decision to reject the rescue plan's application stops the fund from cutting the accrued benefits for many of its retirees. Retirees had said they faced cuts as high as 70 percent under the Central States proposal.
However, the fund said the decision leaves it back where it started before it filed the petition last fall—heading inexorably toward insolvency in 10 years or less. If the fund becomes insolvent, it said participants could be left with virtually nothing (89 PBD, 5/9/16).
Central States also called on Congress to act now to shore up the fund.
Lawmakers passed the Multiemployer Pension Reform Act in late 2014 to allow multiemployer funds facing insolvency to propose benefit cuts. The law, also known as the Kline-Miller Act, lays out standards such proposals must meet, such as that they be based on reasonable investment assumptions, that benefit cuts be distributed equitably and that notices to plan participants be easy to understand.
Treasury's conclusion that the fund's notices to its 400,000 participants weren't “plain and clear” was in “direct contrast to what our participants told us,” Nyhan said. The fund surveyed its participants and found that 73 percent of those responding said the information in the notices was “clear and easy to understand,” he said.
Nyhan said if “Treasury had told us that they considered the notice to be unsatisfactory, we would have gladly mailed out a revised notice. It clearly didn’t take Treasury 224 days to come to that conclusion.”
Nyhan said the fund also took issue with Treasury's conclusion that the fund's use of a 7.5 percent interest rate assumption was unreasonable and overly optimistic. This conclusion led to the department's finding that the fund hadn't shown that its application was likely to lead to the plan's solvency within 10 years.
It is important to note, Nyhan said, that if the fund had used a lower investment rate of return, which is what Treasury said it should have done, the result would have been “much deeper cuts to benefits than were contained in the rescue plan.”
In addition, “actuarial assumptions inherently involve a substantial element of professional judgment, Nyhan said. “Future investment returns are subject to an enormous degree of uncertainty, which makes the determination of what is `reasonable' a judgment that varies widely across respected professionals,” he said.
Nyhan said a “majority of multiemployer plans” use 7.5 percent return assumptions for “long-term funding and that Central States’ actual return over 35 years” exceeds 10 percent.
The fund also disagreed with Treasury's finding that the petition “didn’t adequately explain why certain groups of participants are subject to different benefit reduction formulas than other groups of participants,” Nyhan said.
Treasury Special Master Kenneth Feinberg cited one example of this in his decision rejecting the application. He said the proposed suspension was inequitably distributed because the benefits of some UPS participants would be reduced more than the benefits of other UPS participants.
Nyhan said that the fund disagreed with Treasury's interpretation and it was “important to note that this issue has a very limited impact on a small number of UPS participants who were excluded from its make-whole agreement” with the International Brotherhood of Teamsters. Under that make-whole pact, UPS agreed when it withdrew from the Central States fund in 2007 to make up any benefits for participants and beneficiaries if their pensions were ever reduced as a result of the financial status of the plan (32 PBD, 2/18/16).
As to what the fund will do next, Nyhan said it was reviewing its options, including the feasibility of resubmitting its petition.
Norman Stein, professor of law at Drexel University in Philadelphia, told Bloomberg BNA May 9 that the fund could challenge Treasury's ruling in court by arguing that the department's finding that the application didn't meet the MPRA's statutory criteria was unreasonable.
He said that such a challenge wasn't likely to prevail, however. Use of a 7.5 percent interest rate assumption would be the most difficult aspect for the fund to defend, he said, given that Congress wanted reasonable assurances in a fund's application that the applicant would avoid insolvency. Such a high interest rate in today's environment is difficult to view as reasonable, particularly in cases such as this one in which the fund has been bleeding assets and its outflow exceeds its contributions, Stein said.
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A copy of the Treasury Department's letter to the Central States fund is at http://src.bna.com/eLv.
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