Multiemployer Pension Funding Reform: Helpful, But Systemic Problems Persist

Alerts / May 28, 2010

In March 2010, U.S. Senator Bob Casey (D-Pa) introduced legislation to address funding and pension benefit problems being experienced by multiemployer pension plans. His bill, S. 3157, the Create Jobs & Save Benefits Act of 2010 (the “Casey Bill”), was announced at YRC Transportation in Carlisle, PA. The Casey Bill is designed to address the unique pressures facing multiemployer pension plans, their participants and participating employers.

Multiemployer defined benefit pension plans are pension plans governed by the Employee Retirement Income Security Act of 1974 (“ERISA”). As a general rule, such plans are jointly administered by a board of trustees comprised of both union and employer trustees. Multiemployer pension plans usually are found in trades and industries where the employee population is represented by unions and is inherently mobile amongst the participating employers (such as trucking and shipping, building and construction, food and commercial workers and entertainment). The general principle at work is that each employer must make regular contributions to the plan to fund the pension benefits of those employees who perform services for that employer. As a result, an employee who moves amongst several employers in the same industry will accrue an aggregate pension benefit which will reflect all of the work performed by that employee in that industry (rather than having to start over at each employer, which would be the case in a single employer pension plan). Importantly, however, the liability to fund all of the pensions being accrued by all of the employees covered by the plan is borne collectively. As such, any funding shortfalls a multiemployer plan experiences become a collective problem.

The Problem

As a corollary to its contribution obligation, when an employer ceases to participate in a multiemployer plan, that employer must pay its share of any unfunded vested benefits the multiemployer plan then has based upon contributions the employer made for its employees; the employer's share of that funding shortfall is determined at the time the employer withdraws (the employer’s “withdrawal liability”). By participating in a multiemployer pension plan, an employer thus accepts a risk of loss based on its share of the plan's unfunded pension obligations. For example, negative investment performance inevitably will require each remaining participating employer to contribute more, or face the prospect of a more significant withdrawal liability if and when it chooses (or has to) walk away. For employers participating in multiemployer plans in 2008, the preceding statement might well be revised to reflect that employers accepted the “certainty of loss.”

Three events, all taking place within the past 30 months (January 2008 to present), have turned multiemployer plans into an almost endangered species. First, in 2008, the U.S. economy took a significant downturn, culminating with significant stock market losses. As a result, many multiemployer plans suffered staggering losses in assets, a problem exacerbated by the interest rate cuts that followed. (It should also be noted that, by their nature, many multiemployer plans were heavily invested in equities in 2008, which magnified the losses they suffered as a result of the economic meltdown.) Second, the fallout from the 2008 economic crisis resulted in a spate of bankruptcy filings by participating employers that were forced to close their doors, causing multiemployer plan contribution bases to shrink in 2008 and 2009, while depriving them of the chance to use withdrawal liability from those (then, uncollectible) employers to stabilize the plans' finances. Other employers saw the writing on the wall and, where possible, withdrew before things got worse.

The third and final event was unrelated to the 2008 economic crisis, but the timing could not have been worse. In 2009, many of the augmented funding requirements of the Pension Protection Act of 2006 (“PPA”) went into effect. PPA was enacted to require both single-employer and multiemployer pension plans that were not adequately funded to undertake certain steps to improve funding. Plans found to be less than 80% funded (“endangered status”) were required to undertake a long-term funding improvement plan strategy to attain fiscal viability, while plans found to be less than 65% funded (“critical status”) were forced to implement a rehabilitation plan containing heightened employer contributions and surcharges. For multiemployer plans with significant funding problems, PPA thus began to require multiemployer plan trustees to increase employer contributions on their own, independent of any collective bargaining arrangements, in order to carry out their funding improvement or rehabilitation plan. The magnitude of these additional obligations already have proven to be substantial. The Firm has seen more than one rehabilitation plan, proposed by trustees in accordance with PPA to help plans found to be in “critical status,” which proposes to increase employer contributions to between four and eight times their prior level.

These events—the confluence of the 2008 economic crisis, the resultant erosion in the employer contribution base and the untimely application of the PPA rules—have now brought some multiemployer plans (and their participating employers) to the brink of financial collapse. In some cases, employers and unions have taken the extraordinary step of negotiating a “mass withdrawal” from financially distressed multiemployer plans rather than face the prospect of having to make the heightened employer contributions that would otherwise be forced upon them under PPA. In a mass withdrawal, the multiemployer plan terminates, and if (as is typical) there is a funding shortfall, the employers participating at the end are required to pay their withdrawal liability. In addition, though, the multiemployer plan trustees have the authority to “reallocate” any remaining shortfall the plan has (after accounting for the withdrawal liability that has been assessed) not only among the employers remaining at the end, but also among any employers that left within three years prior to the date of the mass withdrawal. This procedure, known as a “claw back,” can have the effect of pulling an employer that left years earlier back into the multiemployer plan's financial problems and forcing it to help shoulder part of the plan's funding shortfall.

The Proposed Solutions

The Casey Bill proposes to address the difficulties facing multiemployer pension plans, their participants and participating employers following the 2008 economic crisis with a number of remedial measures:

  • Mergers and Alliances: The Casey Bill would facilitate mergers and alliances of multiemployer pension plans so that multiple plans might pool resources and reduce administrative expenses.
  • Partition: Assuming the satisfaction of certain requirements, the Casey Bill would allow a plan to transfer benefit obligations for participants whose employers withdrew without paying withdrawal liability (sometimes referred to as “orphans”) to a separate account along with assets sufficient to fund five years of benefit payments. This separate account would be overseen by, and ultimately transferred to, the Pension Benefit Guaranty Corporation (“PBGC”).
  • Study: The Casey Bill would require the U.S. Department of Labor and the U.S. Department of Treasury to prepare a report regarding the impact of the partition program upon underfunded plans and participating employers in order to determine whether or not the legislation succeeds in its objectives.

It should also be noted that H.R. 4213, the American Jobs and Closing Tax Loopholes Act (also referred to as the “Tax Extenders Bill”), as currently proposed contains several provisions relating to multiemployer pension funding issues, including extension of amortization periods for losses incurred during and since the 2008 economic meltdown, extension of recovery periods for required funding-improvement and rehabilitation plans and additional options for trustees imposing default contribution schedules under such plans.

The Problems With The Proposed Solutions

The Casey Bill has now been pending in the Senate for more than two months. When and whether the Casey Bill might receive serious consideration in Congress remains to be seen. Meanwhile, although passage in the near future of the Tax Extenders Bill appears much more likely, its remedial measures are less expansive than those contained in the Casey Bill (particularly as pertaining to orphaned participants and PBGC intervention) and are more likely to lessen the forthcoming bad news somewhat rather than eliminate it. Meanwhile, although the U.S. economy and equity markets have improved, multiemployer funds and participating employers again face the same situation as in 2009—that is, funds that did not meet the PPA-mandated funding thresholds at the end of 2009 will be announcing rehabilitation plans and other funding-improvement mechanisms in the coming months in order to comply with PPA. The cycle of heightened contribution obligations, withdrawal liability assessments and potential mass withdrawals begins anew and may not end absent a legislative fix—and perhaps one far more expansive than that proposed by the Casey Bill or the Tax Extenders Bill.

For more information regarding multiemployer pension funding and withdrawal liability issues (including the potential impact of the Casey Bill and the Tax Extenders Bill) or to see how we can help you navigate the complexities of this difficult and shifting area of the law, please contact John McGowan (jmcgowan@bakerlaw.com or 216.861.7475).


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