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 Buried in the $1.1 trillion "Cromnibus" legislation signed this week
by President Barack Obama was a provision that aims to head off a
looming implosion of multiemployer pension plans - traditional
defined benefit plans jointly funded by groups of employers. The
pension reforms affect only retirees in struggling multiemployer
pension plans, but any retiree living on a defined benefit pension
could rightly wonder: Am I next?
“Even people who aren’t impacted directly by this would have to ask
themselves: If they’re doing that, what’s to stop them from doing it
to me?” says Jeff Snyder, vice president of Cammack Retirement
Group, a consulting and investment advisory firm that works with
retirement plans.
The answer: plenty. Private sector pensions are governed by the
Employee Retirement Income Security Act (ERISA), which prevents cuts
for retirees in most cases. The new legislation doesn’t affect
private sector workers in single-employer plans. Workers and
retirees in public sector pension plans also are not affected by the
law.
Here are answers to some of the key questions workers and retirees
should be asking in the legislation’s wake.
Q: Cutting benefits for people who already are retired seems unfair.
Why was this done?
A: Proponents argue it was better to preserve some pension benefit
for workers in the most troubled plans rather than letting plans
collapse. The multiemployer plans are backstopped by the Pension
Benefit Guaranty Corp (PBGC), the federally sponsored agency that
insures private sector pensions. The multiemployer fund was on track
to run out of money within 10 years - a date that could be hastened
if healthy companies withdraw from their plans. If the multiemployer
backup system had been allowed to collapse, pensioners would have
been left with no benefit.
Opponents, including AARP and the Pension Rights Center, argued that
cutting benefits for current retirees was draconian and established
a bad precedent.
Q: Who will be affected by the new law? If I have a traditional
pension, should I worry?
A: Only pensioners in multiemployer plans are at risk, and even
there, the risk is limited to retirees in “red zone” plans - those
that are severely underfunded. Of the 10 million participants in
multiemployer plans, perhaps 1 million will see some cuts. The new
law also prohibits any cuts for beneficiaries over age 80, or who
receive a disability pension.
Q: What will be the size of the cuts?
A: That is up to plan trustees. However, the maximum cuts permitted
under the law are dramatic. Many retirees in these troubled plans
were well-paid union workers who receive substantial pension
benefits. For a retiree with 25 years of service and a $25,000
annual benefit, the maximum annual cut permitted under the law is
$13,200, according to a cutback calculator at the Pension Rights
Center’s website (http://bit.ly/1vZuiPE).
The cuts must be approved by a majority of all the active and
retired workers in a plan (not just a majority of those who vote).
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Q: How do I determine if I’m at risk?
A: Plan sponsors are required to send out an annual funding notice
indicating the funding status of your program. Plans in the red zone
must send workers a “critical status alert.” If you’re in doubt,
Snyder suggests, “just call your retirement plan administrator,”
Snyder says. “Simply ask, if you have cause for concern. Is your
plan underfunded?”
The U.S. Department of Labor’s website maintains a list of plans on
the critical list
Q: How quickly would the cuts be made?
A: If a plan’s trustees decide to make cuts, a notice would be sent
to workers. Snyder says implementation would take at least six
months, and might require “a year or more.”
Q: Am I safe if I am in a single employer pension plan?
A: When the PBGC takes over a private sector single employer plan,
about 85 percent of beneficiaries receive the full amount of their
promised benefit. The maximum benefit paid by PBGC this year is
$59,320.
Q: Does this law make it more likely that we’ll see efforts to cut
other retiree benefits?
A: That will depend on the political climate in Washington, and in
statehouses across the country. In a previous column I argued that
the midterm elections results boost the odds of attacks on public
sector pensions, Social Security and Medicare
(http://reut.rs/1yYqvnP).
Sadly, the Cromnibus deal should serve as a warning that full
pension benefits aren’t a sure thing anymore. So having a Plan B
makes sense. “If you have a defined benefit pension, great,” Snyder
says. “But you should still be putting money away to make sure you
have something to rely on in the future.”
(Follow us @ReutersMoney or at
http://www.reuters.com/finance/personal-finance. Editing by Douglas
Royalty)
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