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United Parcel Service is working on a proposal that it says can fix a looming insolvency crisis affecting pensions for unionized workers.
The proposal would provide low interest long term federal government loans to troubled pension plans to cover their cash flow shortage for 5 years. Plan participants would see benefit cuts of 20 percent across the board. Plans would be obligated to begin interest-only repayments after 5 years. Loan repayments would be ensured through the creation of a risk reserve pool funded by employers, participants and unions.
Finding a workable solution to the crisis that potentially will affect more than a million plan participants has been elusive. The Multiemployer Pension Reform Act, also known as the Kline-Miller Act, was seen as a grand fix but many believe it hasn’t lived up to its promise. Other proposals already introduced in Congress or making their way toward introduction have been seen either as unworkable or not subject to bipartisan support.
There’s a lot at stake for employers, employees, and the Pension Benefit Guaranty Corporation, which insures the payment of a minimal pension benefit. If the nation’s largest plan, the 400,000-member Central States, Southeast and Southwest Areas Pension Fund, becomes insolvent, participants stand to lose most or all of their earned pensions. The fund is projected to be insolvent by sometime in late 2024. The plan’s insolvency would also likely lead to the PBGC’s own insolvency, with reverberations for other plans and their participants and retirees.
Retiree groups have been meeting with legislators and Trump Administration officials in search of a solution, including a meeting with Treasury Secretary Steven Mnuchin July 11.
UPS has a significant interest in solving the pension crisis. It could be on the hook for up to $4 billion in plan contributions if the Central States plan becomes insolvent. Other employers, such as Kroger Co., in Cincinnati, which are party to bargaining agreements with financially troubled pensions, would be adversely affected if Central States collapses.
Could UPS’s proposal be the cavalry riding to the rescue? Some think so.
The UPS plan will not only work, “but has a lot of bells and whistles that will appeal to conservative members of Congress,” Thomas C. Nyhan, Central States’ executive director and general counsel, told Bloomberg BNA July 11. Nyhan said the UPS proposal is the only one that he’s seen that can both work and have a shot to pass Congress.
“Our actuaries have looked at the proposal and they tell us the plan will work,” Gino Bosetti, secretary-treasurer of the Western Pennsylvania Teamsters and Employers Pension Fund in Pittsburgh, told Bloomberg BNA July 13. He said its the best option among the proposals he has seen.
Not everyone thinks the proposal is a panacea.
Conceptually, the proposal is a “good approach and is clever,” but the assumed interest rates for the plans repaying the loans “presents the risk that the plans will still face insolvency down the road,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, told Bloomberg BNA July 13. To ensure that plans remain solvent long-term, an assumed interest rate of about 4 percent would be reasonable, she said. That rate is far below the initial assumed rate of 6.5 percent used by UPS in its proposal.
Munnell also said she thinks its unfair for proposals, like this one, to have employers and employees take on pension liability for employers that have gone out of business while obligated to pay benefits for so-called “orphaned” retirees. She said taxpayers should be responsible for those obligations, even though she recognized that will be a hard sell in Congress.
UPS’s proposal “can prevent many plans from going insolvent and avoid the demise of the PBGC,” Chris Langan, UPS vice president for finance in Atlanta, told Bloomberg BNA July 13.
The proposal “avoids a taxpayer bailout and involves shared sacrifice among employers, unions, employees, and the government,” he said.
UPS has received input on its proposal from the PBGC and Treasury Department, he added.
As for the proposal’s prospects in Congress, Langan said “we are receiving a high degree of interest as we meet with people on Capitol Hill and among agencies and other stakeholders.”
The company is currently seeking the right lawmaker to introduce a bill incorporating the proposal and hopes to have legislation passed by the end of the year, he said.
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UPS proposal is at http://src.bna.com/qLf.
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