Should the pension of a retired truck driver – or his widow – be cut by one-third or more because the plan is in trouble?
Doing no harm to current retirees is a basic tenet of sound retirement policy, as well as basic fairness. But legislation passed in 2014 opened the door to the possibility of cutting retiree benefits. The Multiemployer Pension Reform Act of 2014 (MPRA) was an attempt to head off a looming implosion of multiemployer pension plans. These are traditional defined benefit plans jointly funded by groups of employers – typically in industries like construction, trucking, mining and food retailing.
MPRA allows troubled multiemployer plans to seek government permission to make deep cuts to the future pensions of workers – and even for current retirees – if they can show that cuts would prolong the life of the plan. In theory, that would stave off plan failures – and a possible meltdown of the broader federally sponsored insurance program that backstops the plans.
Last week, the U.S. Treasury sent a clear message to pension plan sponsors: not so fast. It rejected an application by the financially troubled Teamsters’ Central States Pension Fund to cut benefits, saying that the fund had not met certain MPRA hurdles. Treasury said the plan failed to demonstrate that the cuts were properly estimated to avoid plan insolvency, and that it did not distribute cuts equitably or explain the actions to plan participants in a way they can understand.
This was a major test case for MPRA. Central States, which covers 400,000 participants, claimed that the plan would become insolvent within 10 years without relief on its obligations. An estimated 40 percent of participants seeing reductions would have lost 30 percent or more of their benefit.
Treasury’s decision had pension advocates celebrating. A coalition that includes unions, AARP and the Pension Rights Center (PRC) have been fighting the law since its passage. Some of the outrage was sparked by the way the bill became law: it was attached at the 11th hour to the must-pass 2014 “cromnibus” legislation averting a government shutdown.
A grassroots network of workers and retirees has made their voices heard at demonstrations. And at a series of town hall meetings around the country, Kenneth Feinberg – the well-known mediator who is overseeing MPRA applications for Treasury – got an earful from outraged Teamster retirees and workers.
As he should have. Allowing cuts to current retirees flies in the face of one of the basic tenets of the Employee Retirement Income Security Act of 1974 (ERISA), which prevents cuts for retirees in most cases.
The Central States decision forestalls pension cuts that would have taken effect this summer, but it does not resolve the problem. Plan administrators say it could be insolvent within a decade. The fund suffers from a long decline of employment in the trucking industry, with payouts to retirees exceeding incoming contributions since the mid-1980s. The plan also was hurt by the financial crisis of 2008, which slashed dramatically the funded ratio of assets to promised benefits.
But the Treasury decision does not settle the matter. The plan could still refile its application to make cuts. And more broadly, the decision leaves a huge unanswered question: what should be done to keep multiemployer plans solvent and protect worker retirements?
Congress should fix the problem it created by under-protecting multiemployer pension plans in the first place. My Reuters Money column this week explains that the level of PBGC insurance protection (and premiums) for multiemployer plans has been much lower than for single-employer plans. When Congress created the PBGC as part of ERISA, lawmakers thought less protection was needed for multiemployer plans due to the pooling of risk. But that theory simply has not held up. PBGC estimates that up to 15 percent of the 10 million participants are in multiemployer plans that could become insolvent.
Higher premiums, as requested by the Obama administration, could go a long way toward fixing the problem. Josh Gotbaum, former director of the PBGC, runs the numbers in this blog post.