October 8, 2015
On Sept. 25, 2015, the Central States, Southeast and Southwest Areas Pension Plan (Central States), submitted to the Department of the Treasury a plan for reducing benefits under the Multiemployer Pension Reform Act of 2014 (MPRA). Central States’ “Rescue Plan” appears to be the first application for benefit suspensions under MPRA, and it will serve as an important bellwether for other multiemployer pension plans in critical and declining status that are considering a similar course of action.
MPRA Benefit Suspension Application Process
MPRA seeks to address the looming insolvency of many multiemployer pension plans, as well as the projected insolvency of the Pension Benefit Guaranty Corporation (PBGC) multiemployer plan program. MPRA permits plan trustees to reduce accrued pension benefits under specific criteria and procedures if the plan is in critical and declining status.
This past June, the Internal Revenue Service (IRS) and the PBGC issued temporary, proposed and interim final regulations and a revenue procedure (collectively, the Guidance) under MPRA. See our WorkCite article on the Guidance. The process for approval of suspension applications and a model notice that plan sponsors may use to meet MPRA requirements for notifying participants, employers and unions are provided in the Guidance. Applications must include (i) information demonstrating the plan’s eligibility for suspension; (ii) information demonstrating that the plan’s proposed suspension satisfies the statutory requirements for a suspension; (iii) a plan sponsor determination relating to reasonable measures taken to avoid insolvency; and (iv) certain other information. Once submitted, applications will become available for public viewing at www.treasury.gov/services/Pages/Plan-Applications.aspx.
Central States Funding Woes
Since 1955, Central States has provided retirement and related benefits for eligible employees of contributing employers that are signatories to collective bargaining agreements with various Teamster local unions. According to Central States, in 1980, there were four active Teamsters for every retiree. Over time, however, those numbers reversed as trucking industry deregulation, declining union membership, two economic recessions and various other factors left Central States severely underfunded. Today, Central States (i) has one active Teamster working for every five retirees; (ii) pays out $3.46 for every $1 taken in, resulting in it paying out $2 billion more than it is taking in each year through employer contributions; and (iii) is projected to run out of money within 10 years.
Central States has tried to improve its financial position by increasing employer contributions, reducing early retirement benefits and lowering its benefit accrual rate of active employees from 2 percent to 1 percent of contributions. In materials it distributed describing its Rescue Plan, Central States acknowledged:
Unfortunately, these efforts have not been sufficient. A realistic rescue plan is needed now. The longer we wait to act, the larger that benefit reductions will have to be. And, if we wait too long, the Central States Pension Fund will run out of money and won’t be able to be saved.
The Rescue Plan
A summary of the Rescue Plan can be found at www.CSPensionRescue.com. The Rescue Plan itself, reported to be some 2,000 pages long, has not yet been made available online. Here are some highlights, based upon the summary:
Report of the Retiree Representative
Under MPRA, a pension plan with 10,000 or more participants that seeks to suspend benefits must select a participant in pay status as a “retiree representative” to advocate for retired and deferred vested participants. Central States appointed Susan Mauren as the retiree representative and in her statement posted online, she explains the need for the Rescue Plan:
Central States cannot continue to pay out significantly more money than it is taking in. Without intervention, the Fund will run out of money and be unable to pay any benefits.
MPRA is not the legislation any of us wanted. I agree with those of you who have contacted me to say that a full congressional bailout of our pension systems is what retirees deserve. However, Central States introduced this type of legislation in 2010 – to a more worker-friendly Congress – without any success. Current legislation sponsored by Senator Bernie Sanders has not yet earned the bipartisan support it needs to become law. And we cannot rely on the federal government insurance program, Pension Benefit Guaranty Corporation, to pay benefits if Central States runs out of money. According to recent reports it has published, the PBGC is likely to become insolvent before Central States.
What’s Next
Here is what to expect going forward:
Political Developments
The fallout from Central States’ application is in full force. This is not surprising, as the MPRA is the first instance in which Congress has permitted an exception to the provisions in ERISA and the Internal Revenue Code prohibiting the cut-back of accrued benefits under qualified retirement plans. A posting yesterday from the Pension Rights Center indicates as follows:
In the last few days we at the Pension Rights Center have been inundated with calls from retirees who are receiving letters from their pension plan informing them that their pension is slated to be cut by as much as 70 percent. All of the retirees we have heard from so far are participants in the Central States Pension Fund — and they are scared and upset at the thought that their benefits could be cut by so much. This is the first time many of them are learning that their pensions could be cut at all.
Many of the people we’ve spoken to have told us that they fear they will lose their homes, they worry that they won’t be able to pay for medicine, and they worry that they won’t be able to support their families — all because of these proposed pension benefit cuts. They say they will now have to resort to government assistance to pay their bills — a cruel irony when you consider that these people worked all their lives for a pension they assumed would take care of them in retirement.
Several bills have been introduced in Congress to change MPRA:
We will continue to provide WorkCite updates on developments in this important issue.
For further information, please contact any of the authors of this article, Robert B. Wynne, James P. McElligott Jr. and Larry R. Goldstein, or any other member of the McGuireWoods employee benefits team.