Congress passed the Multiemployer Pension Plan Reform Act of 2014 (MPRA) in an effort to aid the many failing multiemployer pension plans. At the time of its passage, the MPRA was regarded as the most significant legislation in decades. Importantly, the MPRA permits trustees to reduce the pension benefits of plan participants, including benefits for some retirees who are already in pay-status, if the fund is projected to become insolvent within a specified number of years. However, the MPRA requires that proposed benefit cuts be submitted to the Treasury Department for approval.
The first large multiemployer pension plan to submit an application to the Treasury Department for benefit cuts was the Teamsters Central States, Southeast and Southwest Areas Pension Fund (“Central States”). Because of Central States’ financial problems (it was projected to be insolvent by 2026), the union and management trustees agreed to submit a plan calling for benefit cuts to the Department of Treasury pursuant to the MPRA. On May 6, 2016, the Treasury Department denied Central States’ application and cast doubt upon the viability of pension reform under the MPRA.
Treasury officials found that the plan submitted by Central States would not avoid insolvency. Among other things, the Treasury Department found that Central States’ presumed rate of investment return, the entry age of its participants, and its demographic assumptions were too optimistic. Accordingly, the Treasury Department rejected the application submitted by Central States, and Central States is still facing insolvency by 2026 and $35 billion dollars in unfunded liability.
One unfortunate consequence of the Treasury Department’s rejection of Central States’ application appears to be that many other under-funded multiemployer plans may be reluctant to expend the financial and political resources necessary to reach an internal agreement between employer and union trustees that would result in approval of the benefit reductions needed to avoid insolvency in the future.
If one of the most useful tools provided by the MPRA has been stymied because the Treasury Department is unprepared to accept what it views as overly optimistic actuarial assumptions, what is the future of multiemployer pension plan reform? One proposal that was not included in the final version of the MPRA involved the use of so-called hybrid composite plans. While there are different types of hybrid composite plans, the basic concept is the combination of a traditional defined benefit plan with a defined contribution plan. As an example, an employer under a hybrid composite plan could contribute a fixed amount, and the trustees could be required to determine benefit levels based on actuarial calculations that provided assurances that the contributions would cover 120% of the promised defined benefit level. If the investments of the trustees performed better than expected, then the employees would be eligible for greater benefits. In any event, employees would be assured of receiving at least some fixed benefits because of the very conservative assumptions underlying the defined benefit portion of the plan.
The proposals involving hybrid composite plans were originally eliminated from the MPRA because of the perception by some in Congress that many unions, in 2014, would oppose hybrid plans. In light of the Treasury Department’s rejection of Central States’ application, the assumption that many unions will oppose hybrid composite plans may no longer be accurate.
Government reports have estimated that up to 15% of multiemployer plans are at risk of becoming insolvent over the next 20 years and that up to 1.5 million participants are at risk from those insolvencies. In addition, many other plans remain underfunded and employers who cease doing business or sell their businesses to buyers who do not assume their pension obligations face withdrawal liability for their shares of the unfunded portions of the plans. Until such time as Congress enacts hybrid composite plans or other solutions to multiemployer pension plan underfunding, employers who contribute to multiemployer pension plans and those companies considering purchasing businesses that contribute to such plans must continue to carefully scrutinize their potential liability.