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New multi-employer pension law to allow benefit cuts for the first time while raising PBGC premiums

RFP
The president signed a last-minute government funding bill on Dec. 16 that will allow “critical and declining” multi-employer pension plans to cut vested and accrued retiree benefits for the first time.

The provision was one of a handful of changes to multi-employer pension rules that Congress tucked into the last-minute agreement to fund the government for 2015. The most significant rule change will allow distressed plans to cut benefits, but the legislation also increases the premiums all multi-employer pension plans pay to the Pension Benefit Guaranty Corporation (PBGC). In addition, it makes permanent certain pension funding rules enacted as part of the Pension Protection Act (PPA).

Benefit cuts
The legislation is intended to allow distressed multi-employer pension plans to cut benefits to stave off insolvency and provide higher benefits than would be provided by the PBGC if the plan failed. The cuts are called “suspensions of benefits” under the legislation, but there are no requirements to reinstate benefits if a plan’s financial position improves. Pensions are generally guaranteed by the PBGC, but if a plan fails, the PBGC typically provides only a fraction of participant benefits. The level of PBGC guarantee for multi-employer plans is lower than the level for single employer plans. Nonetheless, the legislative changes were very controversial, and several lawmakers criticized the legislation for not doing enough to protect participants and retirees.

‘Critical and declining’ plans

The process for cutting benefits applies only if a pension plan is deemed to have reached the newly created status of “critical and declining.”

Critical and declining status is defined as:

  • Projected to be insolvent within 15 years
  • Projected to be insolvent within 20 years, plus one of the following: ratio of inactive to active participants exceeds 2 to 1, and plan is less than 80% funded

Plans in critical and declining status will be able to apply to the Department of the Treasury to voluntarily cut benefits. Benefit cuts must:
  • Continue to provide benefits of at least 110% of the PBGC guarantee
  • Exempt beneficiaries 80 and older at the time of the cut and phase out the cuts for beneficiaries 75 and older
  • Exempt disability pensions

Outside of these requirements, trustees generally have broad authority on how to allocate proposed cuts, with the legislation directing them to use factors such as age, years of retirement and benefit history to apply cuts equitably. However, the legislation prescribes an ordering rule for plans in which an employer has withdrawn, assumed liabilities equal to benefit reductions, and paid the full withdrawal fee. In these plans, the cuts must first affect participants from employers who withdrew without paying the fee. Participants from employers who withdrew and paid the fee must be affected last. Plans with 10,000 or more participants must also appoint an advocate to represent the interests of retirees.

Treasury must act on applications for benefit cuts within 225 days, or the application is deemed approved. If approved, plans with 10,000 or more participants can vote on the proposed cuts. But to actually reject the proposal, a majority of all participants, not just those who actually vote, must vote against it. Even if it is rejected, Treasury, the Department of Labor and the PBGC can still accept the proposed benefit cuts (or modify and accept them) if insolvency would result in $1 billion or more in PBGC liabilities.

PBGC authority
The legislation also gives the PBGC new authority to promote and facilitate the merger or partition of plans. Mergers must be in the interests of the participants and beneficiaries of at least one of the plans, and cannot reasonably be expected to be adverse to the participants and beneficiaries of the other.

Partitioning of plans is available only to plans in critical and declining status, and the sponsor must have taken all reasonable steps to avoid insolvency, including the benefit cuts allowed under the legislation. The PBGC can approve the partition only if it will reduce PBGC’s long-term loss and the partition is needed for the plan to remain solvent. The PBGC must also certify that its ability to meet its other financial obligations will not be impaired, and its cost arising from the partition will be paid exclusively from the fund for basic multi-employer benefit guarantees.

Premium adjustments
The bill doubles the current $13 per participant PBGC premium on multi-employer plans to $26 in 2015. In addition, the PBGC must report whether the increased premiums will be sufficient to meet its guarantees for both the 10- and 20-year periods beginning in 2015, and if not, propose revised premiums.

PPA funding rules
The legislation makes permanent the ability of multi-employer pension plans to take an additional five years to amortize funding shortfalls. It also amends and makes permanent certain rules for addressing funding shortfalls, and it allows plans projected to be in critical status within five years to preemptively elect to be in critical status. In addition, it eliminates the penalty facing employers who increase contributions to underfunded plans.

Next steps
The legislation could have a profound impact on many of the more than 1,400 existing multi-employer pension plans. All multi-employer pension plans will face higher PBGC premiums. And given that the PBGC estimates that multi-employer pensions face a combined funding shortfall of $42 billion, many plans may be eligible to apply for benefit cuts. Plan administrators should carefully examine the legislation to determine its affect.

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