Treasury: Iron Workers' Troubled Multiemployer Pension May Reduce Payouts

Benefit reductions are first to be approved under Kline-Miller act

December 21, 2016
Treasury: Iron Workers Troubled Multiemployer Pension May Reduce Payouts
updated on Jan. 30, 2017

The U.S. Treasury Department, for the first time, approved an application from a troubled multiemployer pension plan to reduce vested benefits paid to retirees. Other deeply underfunded union plans could follow the same path.

The application, which was approved by the Treasury on Dec. 16, was submitted in November by the board of trustees of the Iron Workers Local 17 Pension Fund in Cleveland. The pension fund had $91.9 million in assets and $223.2 million in liabilities as of April 30, 2014, according to its most recent Form 5500 filing. Of its 2,064 participants, 640 are active employees.

The benefit cuts are authorized under 2014's Kline-Miller Multiemployer Pension Reform Act (MPRA), which allows trustees of deeply underfunded multiemployer plans to lower the amount of monthly payouts that beneficiaries receive, provided the reductions are approved by the Treasury and if doing so would restore the plan to solvency.

The Washington, D.C.-based Pension Rights Center, which advocates on behalf of pension beneficiaries, had opposed the application in comments submitted to the Treasury in October, stating that the trustees had failed to show that they had taken all reasonable steps to avoid insolvency, among other allegations.

Update: The lower payouts by the Iron Workers Local 17 pension were approved in a vote by plan participants and beneficiaries, as required by the Kline-Miller MPRA. The outcome hinged on whether current and future beneficiaries were convinced, as the trustees maintained, that accepting the proposed reductions is a better deal than they would receive if the plan becomes insolvent and is taken over by the PBGC.

The vote took place on Jan. 20, 2017. Of the 936 votes cast, 616 were in favor of the benefit suspension while 320 voted against it. More than half of the fund's 1,938 participants did not vote, according to the Pension Rights Center.

Going forward, the plan sponsor must make an annual determination that all reasonable measures to avoid insolvency have been and continue to be taken and that the plan is projected to become insolvent unless the suspension continues. If the plan fails to satisfy the annual plan sponsor determination requirement for a plan year, the suspension of benefits will cease to be in effect beginning as of the first day of the next plan year.

Multiemployer pensions are funded by multiple employers and negotiated through a collective bargaining agreement with one or more labor unions, which co-manage the plans. More than a million Americans have their retirement savings in multiemployer pensions that are severely distressed and headed for default in the near future, according to the House Committee on Education and the Workforce.

If these plans become insolvent, it falls to the federal Pension Benefit Guaranty Corp. (PBGC) to provide benefits to beneficiaries, albeit at monthly payouts considerably lower than what the plans have promised. However, the PBGC's multiemployer program itself has insufficient funding to cover the potential insolvencies of so many at-risk plans.

Troubled Multiemployer Plans

"Over the past 15 years, assets backing pension promises have not come close to keeping up with the growth in pension liabilities," said Brian C. Donohue, a partner with October Three Consulting, a plan advisory firm in Chicago. Underfunding is particularly acute for multiemployer plans, he explained, because "for these plans, there is only one source of plan funding: out of the wages of current active participants. Unlike corporate or public sector pensions, there is no third party—employer or taxpayer—standing behind the promise and making up any shortfalls."

With regard to the ironworkers' plan, "in retrospect, current retirees simply did not contribute enough toward their own retirement benefits when they were working, and now the burden falls entirely on current active members," Donohue said.

Based on Form 5500 information for the ironworkers' pension, he calculated that the contribution per active employee toward the plan was $12,800 in 2009 and grew to $20,000 in 2014. "These costs are 4 to 5 times as much as it would cost current members to buy annuities from an insurer to cover the cost of benefits earned in the current year," Donohue noted. But "despite the oversized contributions from current active members, the plan is in dire financial shape."

[SHRM members-only toolkit: Designing and Administering Defined Benefit Retirement Plans]

Previous Application Denied

An earlier, high-profile attempt to invoke the Kline-Miller MPRA was denied by the Treasury Department when, in May, it rejected an application to trim benefits for the Teamsters' Central States, Southeast & Southwest Areas Pension Plan, citing flaws in the application and claiming that the proposed reductions would not make the $17.8 billion plan, with $35 billion in unfunded liabilities, solvent.

Critics charged that the denial was unwarranted and was politically motivated, putting off a worsening problem in hopes of a future government bailout. At the time, former Rep. George Miller, D-Calif., who sponsored the 2014 legislation with Rep. John Kline, R-Minn., told Politico that the Treasury's decision "was a calculated response to sort of stop the discussion in this political year. ... I just don't understand how you can arrive at another conclusion."

Currently awaiting Treasury action, the Automotive Industries Pension Plan, in Alameda, Calif., applied in October to cut future payouts as part of a proposed rescue plan. The fund assets as of Jan. 1 were $1.19 billion with liabilities of $1.96 billion. Once an application to reduce benefits under the Kline-Miller act is submitted, the Treasury Department has 30 days to post the application on its website and 225 days to respond.

"The success of the Iron Workers plan in implementing the voluntary reductions is an indication that plans now understand the standards they must meet in order to get Department of Treasury approval of their voluntary reductions," noted John Wirtshafter, a tax and benefits attorney with McDonald Hopkins in Cleveland. "Hopefully, with dozens and dozens of other multiemployer pension plans in critical and declining status, more plan trustees will see that voluntarily implementing a reduction in pension benefits to avoid insolvency may be more advantageous to their participants than facing the more-significant benefit cuts that would be imposed by the PBGC."

Further Reforms Sought

Kline, who chairs the House Committee on Education and the Workforce, in September unveiled for discussion draft legislation to further modernize the multiemployer pension system. Kline's proposal would replace financially troubled multiemployer plans with so-called composite plans that combine features of defined benefit and defined contribution plans. They would, for instance, provide a lifetime income stream in retirement like a traditional pension, but participants could see the amount of their payouts reduced if the plan isn't adequately funded.

Organized labor is divided on this latest reform plan. Sean McGarvey, president of North America's Building Trades Unions, said in a news statement that the legislation "addresses some of the critical issues remaining that need to be solved so we can move forward and finish reforming the multiemployer pension system." But the Teamsters and other unions co-signed a letter to House members opposing the measure.

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