In April, the Teamsters Central States Pension Fund (“Central States”) announced its intention to cut the benefits of retired workers under the recently enacted 2014 Multiemployer Pension Reform Act (“MEPRA”). I previously blogged about the MEPRA in December. There I noted that, for those financially stressed pension plans seeking protection, the process for implementing benefit cuts would likely begin in 2015, with the actual cuts themselves not felt until 2016 at the earliest. As if on cue, with its announcement, Central States becomes the first multiemployer pension plan to seek relief under the new law.
The troubled financial status of Central States explains why its Trustees felt dramatic action was needed. According to Central States’ Executive Director Thomas Nyham, Central States has a $2 billion annual funding shortfall and is only 50 percent funded. During an April 14, 2015 “Town Hall” conference call, Nyham disclosed that Central States would be insolvent by 2026 – a mere eleven years from today. Thus, Nyham explained, if the Trustees did not take action, by 2026 all Central States’ retirees’ and participants’ retirement benefits would be worthless. You can read Central States announcement or listen to an audio recording of the Town Hall call here.
The precise scope of the planned benefit reductions have not been announced. The U.S. Treasury Department must still issue the MEPRA implementing regulations (expected this summer). Central States must then proposal a “Rescue Plan” for Treasury Department approval, followed by an approval vote by all plan participants. It should be noted, however, that the Treasury Department may implement a Rescue Plan rejected by the plan participants if the Pension Benefit Guarantee Corporation (PBGC) faced projected liability of more than $1 billion as a result of plan insolvency, a threshold which Nylan disclosed would certainly be met by Central States’ collapse.
While the plight of Central States may represent an extreme, its financial difficulties are not unique. In its 2014 Annual Report, the PBGC reported that its multiemployer pension plan deficit reached a record $42 billion and that its risk of insolvency was 50% by 2022 and 90% by 2025. A significant number of the 1400 multiemployer pension plans in the United States face financial pressures similar to Central States and this writer expects the Central States’ “Rescue Plan” to become one roadmap to address the looming crisis.
The Central States’ “pension cut” approach is not the only option troubled plans have followed in recent years. In August 2012, UPS announced an agreement with the New England Teamsters and Trucking Industry Pension Fund (“NETTI”) to restructure the pension liabilities of its 10,000 UPS employees. In that restructuring, UPS agreed to immediately begin paying its $2.1 billion withdrawal liability (over fifty years) and remain in the fund by contributing to a separate “pool.” Since that restructuring of the NETTI, other employers have followed the UPS lead.
Manufacturers currently contributing to multiemployer pension plans should take special notice of the Central States’ and NETTI’s competing approaches. Among other things, manufacturers approaching bargaining in 2015 or 2016 should consider:
- The funding status of the multiemployer pension plans to which they contribute;
- Given the uncertain funding status of some plans, whether active employees will seek or a manufacturer should offer supplemental pension benefits in some form;
- Whether reducing plan contributions or moving contributions to a designated pool would trigger withdrawal liability;
- To the extent a manufacturer’s multiemployer plan follows the Central States’ approach and seeks to cut retiree benefits, whether retirees will seek the opportunity to return to the workforce in a part-time, temporary or reduced capacity and, if so, whether the manufacturer would be willing to consider such an option given conflicting seniority, bumping, and other contractual obligations.
To the extent that manufacturers face funding short-falls in the multiemployer plans covering their employees or retirees, proactive planning becomes essential. Central States’ decision to cut retiree pension benefits may turn out to be the “canary in the coal mine” – a warning of the coming crisis.