Tea Leaves Offer Clues to Coming Pension Rescue Petitions

Employee Benefits News examines legal developments that impact the employee benefits and executive compensation employers provide, including federal and state legislation, rules from federal...

By David B. Brandolph

Oct. 6 — Want a glimpse into which multiemployer pension plans are likely to next file Treasury Department benefit suspension applications? Then consider the plan’s size, its ratio of active to total participants and the number of years until the plan’s insolvency, a Bloomberg BNA analysis finds.

Nearly 70 multiemployer plans have filed with the Labor Department as having funding or liquidity problems, or both. Multiemployer plans are typically collectively bargained and involve more than one contributing employer.

Many of these plans, and the retirement benefits they provide, are heading inevitably toward insolvency. Hundreds of thousands of plan participants are at risk of losing all or most of their hard-earned promised benefits.

In addition, the federal agency tasked with providing a backstop minimum amount of benefits for participants of insolvent plans is itself facing a financial crisis.

To remedy the impending fiasco, a controversial law was enacted in December 2014 that permitted multiemployer plans, for the first time since the Employee Retirement Income Security Act was enacted in 1974, to reduce plan participants’ accrued benefits.

The Multiemployer Pension Reform Act of 2014, also known as the Kline-Miller Act, required plans seeking to cut benefits to petition the Treasury Department for such approval. To do so, plans were required to show that such cuts would prevent the plan’s insolvency.

However, plans attempting to navigate the MPRA to rescue themselves from insolvency have found rough seas. Consequently, a number of plans may decide that the voyage isn’t worth taking.

In September 2015, the mammoth Central States, Southeast and Southwest Areas Pension Fund became the first plan to file a rescue plan application with the Treasury. The conventional wisdom was that many other plans were considering doing the same, but decided to wait to see how Central States’ petition fared at Treasury.

They got their answer in May 2016, when the Treasury Department rejected Central States’ petition. Many believe that the rejection was due, at least in part, to significant opposition and lobbying from the plan’s retirees, who refused to accept the argument that they would be better off by accepting in many cases severe benefit cuts.

Instead of a flood of plans filing petitions, there has only been a trickle of five plans that are known to have filed an application to the Treasury since it rejected Central States’ proposal.

To find out what type of plans may yet decide to file their own rescue petitions, Bloomberg BNA examined the characteristics of the five plans that filed after May, in addition to the numbers applicable to the only two plans that have thus far had their petitions rejected. In doing so, a number of common plan traits emerged.

Size Matters

First, using data from the Pension Rights Center on multiemployer plans that have filed with the Labor Department as plans in critical and declining status under the MPRA, the size of the plans that have filed petitions was examined. Three of the plans that filed petitions after May were small plans, having less than 5,000 participants. Two others were considered to be medium-size plans, having between 5,000 and 40,000 participants. No large plans—those with more than 40,000 participants—filed a petition after Central States’ petition was rejected.

Plans in Critical and Declining Status

Smaller plans are more likely to file petitions because there are fewer people needed to reach a consensus, Michael P. Kreps, a principal at Groom Law Group in Washington, told Bloomberg BNA Oct. 5.

“At the end of the day, it’s the trustees’ decision whether to use the tools in MPRA. But the process of reaching a decision typically involves a discussion with all the stakeholders,” he said. Such stakeholders include the trustees as well as the plan sponsors and unions involved, Kreps said.

Being a very large plan may even be a disadvantage for plans considering a petition filing. For example, the Central States fund has over 400,000 participants. As noted above, the plan’s filing with Treasury unleashed an intense lobbying effort by thousands of retirees. Other very large plans could also be susceptible to similar lobbying efforts from disgruntled retirees.

Ratio of Actives to Participants

Next, the ratio of active participants to total participants was considered. Four of the five plans filing after May have ratios of under 33 percent. One plan, the New York State Teamsters Conference Pension and Retirement Fund, has a ratio of 42 percent.

Kreps, who previously was senior pensions and employment counsel for the Senate Health, Education, Labor and Pensions Committee, said that a plan’s contribution base is a key factor in determining whether a plan will consider filing a petition.

With a healthy contribution base, he said a plan can often get the added contributions from plan sponsors it needs to avoid being forced to seek a rescue petition. This would be true, even if a plan has a low funding ratio, he said.

However, Kreps said it was also the case that the lower the ratio of active employees to total participants, the more likely a plan would be to file a petition. “The more retirees there are, the more challenging it is for the remaining employers to deal with under funding,” as the plan has more people to support, he said.

Having a ratio that is too low could mean that a plan is susceptible to having its petition rejected for being too financially troubled to avoid insolvency. The Central States plan had an active to total participant ratio of about 16 percent, while the Road Carriers Local 707 Pension Fund, which also had its petition rejected, had a ratio of about 18 percent.

Years to Insolvency

None of the plans that have filed petitions after May are expected to be insolvent for at least five years, with three of the plans expected to be remain solvent for eight or more years. In comparison, the rejected Road Carriers fund was expected to be insolvent less than two years after its filing date.

Plan’s Filing After Central States Rejection

Joshua Shapiro, senior actuarial adviser at Groom Law Group, told Bloomberg BNA Oct. 4 that plans that will be insolvent in a few years may not have sufficient time to make enough cuts to avoid insolvency. The more years until insolvency, the more likely that a MPRA benefit suspension could avoid the plan’s insolvency, he said.

In addition, Shapiro said that some plans may be too far underfunded to use the MPRA’s rescue plan mechanism. Such plans are already providing benefits that are so low that any further cuts would be prohibited under the law.

He explained that benefits can’t be cut below 110 percent of the minimum Pension Benefit Guaranty Corporation guaranteed payment. The PBGC, which faces insolvency issues of its own, collects premium payments from plan sponsors and, in return, provides a backstop for retirees when their plans become insolvent and can’t pay benefits.

Kreps added that some industries were more likely to have plans that will consider filing a petition. That’s because the industry may have fewer financially healthy plan sponsors in which to tap for additional contributions, he added.

Three of the five plans that filed since May are in the construction industry, while one is in the trucking industry, the same as the Central States plan.

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

Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.

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