Lessons from the Central States Pension Fund ‘Rescue Plan’ Denial

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Employers that contribute to underfunded multiemployer pension plans should think strategically about the potential impact of withdrawing from the plans and the liability they will face for exiting, employee benefits attorneys told SHRM Online.

The U.S. Department of Treasury on May 6 denied a "rescue plan" proposed by the Central States Southeast and Southwest Areas Pension Fund—one of the largest multiemployer pension funds in the country. The fund has over 400,000 participants.

The controversial rescue plan would have reduced about 270,000 participants' benefits beginning in July 2016, which the plan's trustees said was necessary to avoid insolvency. The trustees projected that the plan would otherwise run out of money within a decade and participants would potentially receive nothing at all.

The Treasury, however, rejected the rescue plan, stating that the proposal failed to meet the following criteria:

  • That the proposed benefit suspensions be reasonably estimated to avoid insolvency.
  • That the suspensions be equitably distributed across participants and beneficiaries. 
  • That the notice of proposed benefit suspensions be understandable to the average plan participant.

"One of the biggest things other multiemployer plans want to think about is why the Treasury denied this particular rescue plan," said Douglas Neville, leader of the employee benefits practice group at Greensfelder, Hemker & Gale in St. Louis.

The Treasury said the ​proposal didn't go far enough to prevent potential insolvency and that the assumptions regarding investment returns and plan demographics were overly optimistic, Neville added.

Therefore, other pension plans seeking relief should consider these items carefully in their applications for benefit suspension.

"Everyone is hoping for additional congressional action to help these plans," said Sarah Kregor, an attorney with Franczek Radelet in Chicago.

"There's the real possibility that if Central States goes insolvent, that could cause [the Pension Benefit Guaranty Corp. (PBGC) multiemployer insurance program] to go insolvent, too," Kregor said. "That's a big problem."

Troubled Plans Denied Relief

Through the Multiemployer Pension Reform Act (MPRA) of 2014, financially troubled pension plans have an opportunity to reduce benefits to avoid running out of money. However, a proposed rescue plan must be approved by the Treasury and pension plan participants are given an opportunity to object to the rescue plan.

Plan trustees must show that the proposed benefit reductions are reasonably estimated to avoid insolvency.

In the Central States case, the Treasury found that the proposed rescue plan fell short of the MPRA's requirements.

Kregor said benefit reduction under the MPRA isn't panning out as people thought it might.

In June, the Treasury told the Road Carriers Local 707 Pension Fund, a smaller fund based in Hempstead, N.Y., that its application would be denied. The rescue plan was reliant on the fund also obtaining a partition from the PBGC, but the partition was also denied.

"The failure to obtain a partition order is outcome determinative for the suspension application" because the plan won't avoid insolvency without it, the Treasury reasoned.

"The Treasury Department seems to be holding people to very high standards," Kregor said. "Additional congressional action may be necessary to help these plans."

Withdrawal Liability Rises

"We have seen the trend of employers withdrawing from the Central States fund in the last few years, and that has generally been a good approach," Neville said.

The downside for employers who elect to leave a plan is the withdrawal liability, he cautioned.

A multiemployer plan is collectively bargained between a union and more than one employer, generally in a related industry. Withdrawal liability is the amount an employer must pay when it exits a multiemployer plan to cover its share of unfunded, vested benefits.

"The amount can be substantial," Neville said. Employers with a small number of union employees could still face hundreds of thousands of dollars in withdrawal liability, and larger employers could pay millions.

"Employers will continue to see contingent withdrawal liability go up," Kregor noted. "They won't be able to get out of a plan without paying large sums in withdrawal liability."

Even if an employer can pay the withdrawal liability, it still has the hurdle of bargaining out of the plan. "It's a bleak situation," Kregor remarked.

If an employer does wish to withdraw from the Central States pension plan, now is the time to do it, or at least consider it, Neville said. The fund is likely to become insolvent by 2025, and the longer an employer waits, the more it will have to pay to withdraw.

"This is something to think about for any troubled fund in declining status," he added.

Start Planning Now

"It's a good idea for employers to start engaging in some strategy discussions," Kregor said. Employers should explore whether they are able to exit the plan and if it makes sense to do so.

Kregor and Neville each said it's a good idea for employers to request estimates of withdrawal liability from any underfunded plan.

"It would be a good practice for employers to request estimates annually, so they know what to expect in terms of withdrawal liability should they need to exit the plan," Kregor noted.

This lets employers know what they would owe if they decided to withdraw now, or at least gives them an idea of what they will owe later down the road, Neville said.​
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