The reduction and even suspension of pension benefits isn’tsomething anyone wants. However, a growing number of financially troubled multiemployer benefitplan managers may find it to be an inescapableeventuality.

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The Teamsters Union's troubled Central States Pension Fund is agood example of how bad things could turn out. Projections showthat it will be insolvent by 2026, unless it takes the drastic stepof cutting back benefits.

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“Their leader testified before Congress that this is a time whenarithmetic becomes reality,” said Randy DeFrehn, executive directorof the National Coordinating Committee for Multiemployer Plans inWashington, D.C. “The fund’s actuaries ran the numbers both ways.If reform legislation is enacted, they can pay $72 million inbenefits over the next 50 years. Without it, they can pay only $28million. That’s a big difference.”

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DeFrehn’s committee has been promoting a string of “reforms” formultiemployer plans since it was formed in 1974, the same year theEmployment Retirement Income Security Act becamelaw.

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Some of its recommendations have gained traction, others not somuch, especially, predictably, the idea of suspension of benefits,which would require amending ERISA.

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Also read: Can this government bailout be avoided?

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DeFrehn and other pension reform advocates fear that if Congressfails to intervene before the end of this year, employers willstampede out of the plans, leaving the Treasury on the hook forbillions of dollars.

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At the moment, more than 10 million American workers andretirees are covered by 1,510 multiemployer plans, according to thePension Rights Center in Washington, D.C.

These are retirement plans negotiated by a union with a group ofemployers, typically in the same industry. Collective bargainingcontracts dictate how much these employers must contribute tothe plans for their employees. The plans are run by trusteesselected by the union and the employers. The trustees typicallydetermine the amounts that the plans will pay in lifetime monthlybenefits.

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Between 5 percent and 10 percent of theseplans now face insolvency, the NCCMP estimates. Their problems arerooted in a number of factors that include industry shakeouts, theeconomy, overly optimistic income projections and conflictinggovernmentpolicies.

According to the Pension Benefit Guaranty Corp., 1.5 million peopleare in plans that will most likely fail.

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Hoping to address the issues faced by thesedeeply troubled plans, as well as MEPs in general, DeFrehn and hisorganization a few years ago set out to find common ground amongmanagement, labor and Congress. And to a large degree, it did.

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“Our objective was to allow benefits to be paid on a regular,monthly basis while not driving employers out of business,” hesaid. “At our first meeting, I said, `By the time we’re done, someof you won’t still be here.’ That didn’t happen. We all agreed wehad to find a solution, and I am proud to have been a part of thatnon-confrontational approach.”

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That said, the organization’s 2013 report, “SolutionsNot Bailouts,” offers several provisions in its 35 pages thatcan best be described as tough love – not that it had much choice –and which face an uncertain future.

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As the report was being produced, “commission members discussedthe clear message from Congress that no bailout would beforthcoming to protect the private multiemployer pension systemoverall,” DeFrehn recalled. “The only practical alternative is toreduce the liabilities of the plan. Current rules that place theentire burden for liability reduction on the active employeepopulations are insufficient for the most troubled plans torecover."

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Also read: ThePBGC’s perfect storm

In other words, MEP retirees are going to have to feel the pain,too, hence the proposal to suspend benefits under certaincircumstances – an always-controversial, if not explosive,idea.

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“Suspending accrued benefits is a change to the social contractbetween the plan and participants,” the report acknowledged. "Itmust not be used arbitrarily, and its use must be restricted toplans that face inevitable insolvency. And only in situations wherethe long-term benefit to participants as a group after interventionis advantaged.”

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According to the NCCMP proposal, plans that take this routewould have to meet a number of criteria:

  • They would be projected to become insolvent within 20 years andhave a ratio of inactive to active participants that exceeds 2-1;or they would be expected to become insolvent within 15 years.

  • After application of the suspension, the plan would be expectedto avoid insolvency.

  • Plan sponsors and trustees would have exercised due diligence todetermine that suspension is necessary.

Photo: Randy DeFrehn.

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The NCCMP proposal also includes protectionsfor pensioners:

  • No participant’s benefit could be reduced to below 110 percentof the Pension Benefit Guaranty Corp. guaranteed amounts.

  • Suspension must achieve, but not exceed, the level necessary toavoid insolvency.

  • Any future benefit improvement must be accompanied by equitablerestoration of suspensions.

Congressional approval would be required for these changes to beimplemented, and although some of the stakeholders have beenpromoting action since “Benefits Not Solutions” was released,DeFrehn understands that Congress moves on its on schedule.

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“We realize that that final law is not goingto be identical to what we proposed,” he said. “But we areencouraged that Rep. John Kline (R-Mich. and chairman of the HouseEducation and the Workforce Committee) has been using ourrecommendations as a framework.”

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Kline, however, is ending his term as chairman after thisCongress.

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Pushing back

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Adoption, however, is, again, far from certain and severalinfluential organizations have pushed back. The Pension RightsCenter states its objections bluntly:

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“Proponents of the ‘Solutions Not Bailouts’ approach claim thatthese immediate cuts are preferable to the PBGC's very lowguarantees, but these plans are unlikely to run out of money for decades. In the meantime,other steps could be taken to save the plans that would notjeopardize retirees’ retirement security. Allowing immediatebenefit cuts would be devastating to elderly pensioners who may nolonger be alive in 15 or 20 years. It would also be unprecedentedand would undermine a fundamental protection of the federal privatepension law.”

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The AARP also is opposed.

Also read: Employer groups oppose pension fees in budgetdeal

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DeFrehn, however, thinks that neither organization “reallyunderstands how critical the finances (of the most distressed MEPs)are.”

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“They don’t understand that both labor and management were inthe room and that for solvent plans, we would provide what is overand above the current law. Some people are so hung up on what’s inthe past that they can’t see that the future may in jeopardy.”

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Although unions had a seat at the table when the NCCMP drew up“Solutions,” two key organizations oppose the proposed solutions:The Teamsters and the International Association of Machinists andAerospace Workers.

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“James Hoffa said they can’t support it at this time,” DeFrehnsaid. “We had more Teamsters in the room than any other union whenwe worked on it for the first time. They made their decisionseveral weeks later.”

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The other union’s lack of support, DeFrehn said, “has been ourbiggest disappointment, because they traditionally had been strongsupporters."

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“(But) they had several strikes against Boeing in Washingtonstate, which had proposed doing away with defined benefits. Theystarted to shop other states for a tax deal and then went back tothe union to reconsider define contribution plans. The nationalunion has followed the local in its stance.”

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Photo: Rep. John Kline.

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Clock is ticking

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Although DeFrehn is not sure if or how the recent midtermelection results will affect NCCMP efforts, he hopes that allstakeholders will understand that neither time nor demographics areon their side.

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“Younger union members are carrying the burden,” he said. “Irecently talked to one young worker whose contribution was morethan $18 an hour, and union members make a contribution for everyhour worked. Their attitude is, ‘I am glad to take care of the guyswho were here before me, but what about me? What am I going to liveon?’

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“If anything, the urgency of getting this passed has increasedsince the report was written.”

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DeFrehn believes that the process he and the NCCMP have gonethrough offers lessons even for retirement professionals who don’twork with multiemployer plans.

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“Make sure people who have spent a lifetime in a career candepend on security moving forward,” he said. “Focus on what is bestfor the workers, and keep all of the stakeholders involved. Many ofour old plan models are getting old and don’t work, so let’s fixthe problems.”

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At a Bloomberg Government event earlier this year, Kline said,“If we do nothing, benefits will be cut. … It’s only a question ofwhen and by whom. … The choice NCCMP offers is between an axe inthe hand of a first-year med student or a scalpel in the hand of atrusted surgeon.”

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A spokesman for Kline told Politico that the Education and theWorkforce Committee hopes to resolve the question by year’s end.Others, including Dallas Salisbury, president and CEO of theEmployee Benefits Research Institute, are less hopeful, suggestingthe next Congress, not the lame-duck one, is more likely to tacklethe NCCMP’s suggested reform.

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