The crisis of multiemployer pension plans: Where do we go from here?

It is no secret that many multiemployer pension plans are struggling – paying out substantially more in benefits to retirees than the income they are receiving.  Without legislative action, many are expected to go bankrupt in the next 5 to 15 years, leaving current retirees and active employees without the retirement income they expected.  To understand where we go from here, let’s first explore the history of multiemployer plans, then look at potential avenues for reform.

How did we get here?

The Employee Retirement Income Security Act of 1974 created new fiduciary standards for trustees of multiemployer benefit plans and regulated the vesting and funding of benefits.  ERISA also guaranteed certain participant benefits not funded by plan assets upon the termination of a plan.

Furthermore, under ERISA, employers that contributed to multiemployer funds had only limited liability for unfunded benefits.  If a fund could not recover assets from employers, the Pension Benefit Guarantee Corporation would step in and finance the payments from annual premiums paid by plans.

Only four years later, it became obvious that those steps would not be sufficient to maintain a viable pension system.  Accordingly, in 1980, Congress passed the Multiemployer Pension Protection Amendments Act.  The MPPAA limited the circumstances under which the PBGC would step in and pay guaranteed benefits and raised the premium rate to generate revenues.  Additionally, the MPPAA instituted the possibility of withdrawal liability if (assuming certain circumstances were met), an employer ceased making or substantially reduced its contributions to a multiemployer benefit plan.

Building on the protections enacted in the MPPAA, President Bush signed the Pension Protection Act of 2006 (PPA).  This law established higher PBGC premiums for employers that made contributions to certain plans.

The PPA also created three funding zones based upon the funding ratio of plan assets to liabilities.  Each plan’s actuary must certify which zone a plan falls into at the beginning of each year – the green zone, the yellow zone, or the red zone.  Funds in the yellow and red zones must adopt plans that will increase the plans’ funding within 10 years.  Plans in the red zone face additional consequences at the behest of trustees, who may impose other contribution obligations upon employers under certain circumstances.

In a continuing effort to shore up the multiemployer pension system, in December of 2014, President Obama signed the Multiemployer Pension Reform Act (MPRA).  Among a litany of other changes, the MPRA extended some provisions of the PPA that were set to expire, and added a new “critical and declining” funding zone.  If a fund is in the “critical and declining” funding zone, plan sponsors may file an application with the Secretary of the Treasury seeking a temporary or permanent reprieve from benefits payments in order to keep the plan solvent.  As of January 2020, 15 applications have been approved; six are under review; five have been denied; and 15 have been withdrawn.

Multiple funds are running out of money

Currently, there are approximately 125 funds in “critical and declining” status that are projected to be insolvent within 20 years.  These funds, altogether, cover approximately 1.3 million participants – or about 13% of all participants in multiemployer funds.  The possibility that Central States, New England Teamsters, and other large funds may fail are particularly worrisome not only because of the number of covered participants, but also because of the robust nature of the expected benefits.

In the event that funds fail, a participant’s benefits will be cut to the guarantee levels set by the PBGC, which is significantly lower than the benefits the participants in these three funds would otherwise receive if their respective plans were fully funded.

Compounding problems further, the PBGC is likewise projected to become insolvent in 2025.  As a result, without further legislative intervention, participants can expect an even sharper cut to benefits in the future.

In light of these issues, unions, employers, and Congress generally agree: Something needs to be done.  But, a consensus on how to fix this problem has remained elusive.

Where do we go from here?

In February 2018, Congress created a bipartisan Joint Select Committee on Solvency of Multiemployer Pension Plans.  Although the Committee was directed to propose remedial legislation by November 30, 2018, it failed to come to an agreement by the deadline.  Nonetheless, an outline of the Committee’s hopeful proposal was leaked to the press.  Key features of the proposed solution included the following:

• Repealing benefit cuts authorized by the MPRA;
• Increasing PBGC minimum guarantees to $70 per month per year of service, and at least $3,000 per year;
• Securing additional federal funding to allow the PBGC to engage in additional partitioning of struggling plans;
• Increasing PBGC funding via a new variable rate premium for plan sponsors, new exit premiums for employers, and new retiree premiums for participants in struggling plans;
• Modifying funding rules to cap the discount rate for measuring liabilities at the long-term corporate bond rate plus 2%;
• Imposing additional requirements on plans for self-evaluating financial status, including “stress testing” to analyze whether a plan can remain financially viable through economically uncertain times; and
• Adding new funding zones for “very healthy” plans, which minimizes the restrictions imposed on the plan.

Additionally, the outline included major overhauls to withdrawal liability including the elimination of mass withdrawal liability, and proposing new calculations for withdrawal liability with a focus on a specific duration of annual payments corresponding to the plan’s funding percentage.

Moreover, on a recurring 3-year basis, plans would be tasked with providing employers with withdrawal liability estimates, in the hopes that these estimates would incentivize current employers to stay in the plan.

Other proposed legislative fixes have mirrored parts of this plan, but have likewise failed to become law:

GROW Act. For example, the Giving Retirement Options to Workers (“GROW”) Act, a bipartisan bill, was proposed in the House in 2018, but was never voted on. The GROW Act sought to amend ERISA and the Internal Revenue Code to permit “composite” multiemployer pension plans, which include key features of defined benefit and defined contribution plans, with the former subject to a higher funding threshold.  The GROW Act also proposed to eliminate withdrawal liability for composite plans, and capped benefit increases depending on a plan’s funding status.

Butch Lewis Act. Another piece of legislation, the Butch Lewis Act, called for the creation of a new entity within the Treasury – the Pension Rehabilitation Administration (PRA).  The PRA would provide 30-year loans to certain funds falling into any one of three categories:

1. funds in critical and declining status;
2. funds that are below a funded percentage of 40% and the ratio of active to inactive participants is less than 2 to 5;
3. or funds that became insolvent after December 16, 2014 and have not terminated.

Those loans would be for 30 years and carry low interest rates of about 3 percent. Ideally, funds would use the loans to pay benefits and to make long-term and certain low-risk investments.  The legislation would also require Congress to provide funds to the PBGC to be used for financial assistance to plans than can’t borrow enough to meet their retiree obligations.  Additionally, employers withdrawing during the 30-year loan term would have their withdrawal liability calculated as if a mass withdrawal had occurred.

Grassley-Alexander proposal. Additionally, Senator Chuck Grassley and Senator Lamar Alexander published a white paper in November 2019, which outlines their proposed response to the multiemployer plan funding crisis.  Key features of the Republican Senators’ proposal include an expansion of the PBGC’s partition authority, and an increase in PBGC premiums and guarantees.

Further, the plan calls for “Stakeholder” co-payments to be made by employers, unions, and retirees predicated on a plan’s funding status.  Citing a historic lack of “meaningful regulation” regarding actuarial assumptions – particularly the discount rate when estimating future obligations – the proposal seeks to enforce a cap on discount rates when measuring liabilities.

The proposal includes a reform of the zone-status rules, requiring plans to institute “stress testing” akin to the Joint Select Committee approach, and to estimate a plan’s financial health farther into the future.

Lastly, the proposal eliminates mass withdrawal liability, and requires that withdrawal liability be measured using the same methods and measures utilized by the plan to measure its assets and liabilities for funding and reporting purposes.  The goal of these adjustments is to create a “simpler and more transparent” process for calculating withdrawal liability.

HEROES Act. Meanwhile, the HEROES Act, passed by the House of Representatives in response to COVID-19, contained some multiemployer relief provisions.  Although the Senate has not acted on the bill and it has not become law, the HEROES Act provides a window into Congress’ thinking.

The HEROES Act proposed a special “partition program” for plans in “critical and declining” as well as merely “critical” status, including those that fall into those classifications now, and at any time up through 2024.

“Partitioning” means that the PBGC takes over the liabilities for enough of the participants of a plan so that the plan, taking into account the liabilities for the remainder of the participants, becomes financially healthy.

Ordinarily, under the Multiemployer Pension Reform Act of 2014, the partition would be paired with benefit cuts. But, the proposed act promised that there will be no benefit cuts for any participants. In addition, benefit cuts that had already been implemented for plans using MPRA to avoid insolvency would be restored for plans applying for a “special partition” (including retroactive payments) and no new benefit cuts would be permitted in any case.

Additionally, although current law restricts benefits covered when PBGC takes over insolvent plans to a fairly low maximum amount, Section 40106 of the proposed bill nearly doubled that limit.

One thing all parties agree on

Regardless of what legislation is ultimately passed, all parties agree that at some point in the imminent future, Congress is likely to continue to try to push some kind of legislative relief through to prevent the collapse of the multiemployer pension system.  Meanwhile, employers, unions, and participants eagerly await Washington’s answer to the impending funding crisis.

Sarah Bryan Fask is a Shareholder in the Philadelphia office at Littler where she maintains a nationwide practice focusing on Employee Retirement Income Security Act (ERISA) litigation. Sarah regularly counsels and represents employers with issues involving the interplay between collective bargaining, multiemployer pension plan obligations and withdrawal liability.

 Michael R. Romeo is an associate in the Philadelphia office at Littler where he focuses on class action, discrimination, and benefit plan litigation. Michael also has experience in appellate litigation in both state and federal courts.