Pension-Reduction Doors Have Been Opened
Since the passage of the Employee Retirement Income Security Act of 1974 (ERISA), protection of accrued pension benefits has been considered sacrosanct. No longer. In a first-of-its-kind decision, on December 16, 2016, the U.S. Department of the Treasury approved a petition from Iron Workers Local 17 Pension Fund (located in Northeast Ohio) to cut benefits by an average of 20 percent, subject to a vote by the participants and beneficiaries.
In the vote that closed on January 20, 2017, pitting current workers against retirees, the cuts were overwhelmingly approved. The results were, in part, due to the voting rules: eligible voters who failed to cast a ballot were counted as having voted to approve the cuts. From the 1,938 eligible voters, only 936 votes were cast.
The decision by the Treasury Department and the subsequent result are likely to have a significant impact on employers, employees, and retirees alike.
How did we get here?
Multiemployer plans are collectively bargained and involve more than one employer. The little-known Multiemployer Pension Reform Act of 2014 (also known as the Kline-Miller Act), a truly revolutionary law, provides a process for multiemployer pension plans to permanently reduce pension benefits, even to certain retirees, if the plan is projected to become insolvent.
For myriad reasons, countless multiemployer plans are underfunded. Some are in “critical and declining status,” meaning that they are projected to be insolvent within 15 years. A key purpose of the Kline-Miller Act is to help protect the Pension Benefit Guaranty Corporation (PBGC), a quasi-governmental agency that becomes responsible for payment of pension benefits from failed multiemployer and single-employer pension plans. In recent years, PBGC’s multiemployer plan insurance program deficit has ballooned to $58.8 billion and is projected to be insolvent by 2025. (Of note, in fiscal year 2016, the deficit in PBGC’s insurance program for single-employer plans decreased by $3.5 billion to $20.6 billion.)
How the process works
Not all underfunded multiemployer plans are suitable candidates for cuts in pension benefits, and the Act itself is very complex. Retirees age 80 and above and retirees receiving benefits based on disability are exempt from benefit reductions. Retirees between ages 75 and 80 qualify for lower benefit reductions. Benefits cannot be reduced to less than 110 percent of the amount that PBGC guarantees. Participants and beneficiaries also are entitled to notice of an application, including an individualized estimate of the effect of the proposed benefit reduction, and are given an opportunity to make comments on the application.
The Treasury Department may take up to 225 days to approve or deny an application and, if approved, 30 days to administer a vote on the proposed benefit reductions. For large multiemployer plans where the cost to PBGC could exceed $1 billion if the reductions in benefits are not implemented, Treasury may ignore the vote of participants and beneficiaries.
What does this mean?
The door for the reduction of pension benefits has been opened and the Treasury Department's approval of the Iron Workers Local 17 Pension Fund petition provides a roadmap for how to structure the petition. We expect that applicants now will have much greater success in obtaining approval by the Treasury Department. The first four applications to reduce benefits were rejected by the Treasury Department; however, four additional applications are still pending, and it is expected that many more will be filed.
For employers who participate in multiemployer plans, withdrawal liability issues are extremely important, particularly in the context of a corporate transaction. To reduce potential withdrawal liability exposure, participating employers may now band together to pressure multiemployer pension funds to look into the feasibility of submitting petitions to the Treasury Department to reduce benefits. Political ramifications, however, remain unknown. It remains to be seen whether reduction of accrued pension benefits in multiemployer plans will now move to troubled single-employer pension plans or governmental plans.