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 Should the pension of a retired truck driver - or his widow - be cut
by one-third or more because the plan is in trouble?
Doing no harm to current retirees is a basic tenet of sound
retirement policy, as well as basic fairness. But U.S. legislation
passed in 2014 opened the door to the possibility of cutting retiree
benefits. The Multiemployer Pension Reform Act of 2014 (MPRA) was an
attempt to head off a looming implosion of multiemployer pension
plans. These are traditional defined benefit plans jointly funded by
groups of employers - typically in industries like construction,
trucking, mining and food retailing.
MPRA allows troubled multiemployer plans to seek government
permission to make deep cuts to the future pensions of workers - and
even for current retirees - if they can show that cuts would prolong
the life of the plan. In theory, that would stave off plan failures
- and a possible meltdown of the broader federally sponsored
insurance program that backstops the plans.
Last week, the U.S. Treasury sent a clear message to pension plan
sponsors: not so fast. It rejected an application by the financially
troubled Teamsters’ Central States Pension Fund to cut benefits,
saying that the fund had not met certain MPRA hurdles. Treasury said
the plan failed to demonstrate that the cuts were properly estimated
to avoid plan insolvency, and that it did not distribute cuts
equitably or explain the actions to plan participants in a way they
can understand.
This was a major test case for MPRA. Central States, which covers
400,000 participants, claimed that the plan would become insolvent
within 10 years without relief on its obligations. An estimated 40
percent of participants seeing reductions would have lost 30 percent
or more of their benefit. The sharpest cuts would have been borne by
so-called orphans - retirees from companies that have exited the
plan. Older and disabled retirees would have been exempted.
CELEBRATION
Treasury’s decision had pension advocates celebrating. A coalition
that includes unions, AARP and the Pension Rights Center (PRC) have
been fighting the law since its passage. A grassroots network of
workers and retirees has made their voices heard at demonstrations.
And at a series of town hall meetings around the country, Kenneth
Feinberg - the well-known mediator who is overseeing MPRA
applications for Treasury - got an earful from outraged Teamster
retirees and workers.
As he should have. Allowing cuts to current retirees flies in the
face of one of the basic tenets of the Employee Retirement Income
Security Act of 1974 (ERISA), which prevents cuts for retirees in
most cases. “The most harsh way to deal with a problem like this is
to take retirees and substantially cut their benefits,” said David
Certner, legislative policy director at AARP.
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The Central States decision forestalls pension cuts that would have
taken effect this summer, but it does not resolve the problem. Plan
administrators say it could be insolvent within a decade. The fund
suffers from a long decline of employment in the trucking industry,
with payouts to retirees exceeding incoming contributions since the
mid-1980s. The plan also was hurt by the financial crisis of 2008,
which slashed dramatically the funded ratio of assets to promised
benefits.
But the Treasury decision does not settle the matter. The plan could
still refile its application to make cuts. And more broadly, the
decision leaves a huge unanswered question: what should be done to
keep multiemployer plans solvent and protect worker retirements?
FUNDING A SOLUTION
A clear solution is to strengthen the insurance backstop for
multiemployer plans. Private sector pensions are insured by the
Pension Benefit Guaranty Corp (PBGC), a federally sponsored agency
funded through premiums paid by plan sponsors.
Historically, the level of PBGC insurance protection (and premiums)
for multiemployer plans has been much lower than for single-employer
plans. When Congress created the PBGC as part of ERISA, lawmakers
thought less protection was needed for multiemployer plans due to
the pooling of risk. But that theory simply has not held up. PBGC
estimates that up to 15 percent of the 10 million participants are
in multiemployer plans that could become insolvent.
Under MPRA, the PBGC must propose funding by June 1 to Congress that
would permit it to preserve multiemployer plans. The Obama
administration’s 2017 budget proposes to solve the problem by
raising $15 billion in higher premiums for multiemployer plans, and
by giving PBGC the power to set rates without congressional
approval.
The multiemployer plan mess is a huge blemish on ERISA legacy, and
Congress should take action. Says Karen Friedman, executive vice
president and policy director of the PRC: “The legislators who
passed ERISA would be rolling in their graves if they saw what is
happening now.”
(Editing by Matthew Lewis)
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