On September 25, the Central States Pension Fund (one of the largest multiemployer/union pension funds in the country) submitted to the U.S. Department of Treasury a proposed “rescue plan,” which would allow the fund to reduce participant benefits in order to stave off the fund’s potential insolvency. As discussed in our prior alert, the Multiemployer Pension Reform Act of 2014 (MPRA) permits deeply troubled multiemployer pension plans to voluntarily reduce benefits in order to avoid insolvency. To implement a benefit reduction, a multiemployer fund must first submit its proposed rescue plan to the U.S. Department of Treasury for approval.
Rescue Plan Provisions
Central States has made available a summary of its proposed rescue plan. The following key provisions would apply if the rescue plan is implemented:
Benefit Reductions. Benefits will generally be reduced based on each participant’s age, years of service, employer contributions, and disability status.
Future Accruals. Benefit reductions will apply to benefits earned up to the date the rescue plan is implemented. Active participants will be able to earn future pension credits, but they will earn 0.75% of contributions instead of the 1% they are currently earning.
Re-employment Guidelines. Central States will remove re-employment restrictions for participants whose benefits are reduced if they retired on or before October 1, 2015 and will relax restrictions for participants who retire after October 1, 2015. These rule changes are meant to allow these participants to return to work while continuing to receive a pension.
Early Retirement Phase Out. The age that participants can retire without early retirement reductions will increase from age 62 to age 65 between 2021 and 2025.
Terminated Participants. Terminated participants (those who are not retired but do not work for a contributing employer) will be subject to higher benefit reductions than retirees and active participants, unless they have 20 or more years of service credit.
"Orphan” Participants. As required by MPRA, participants and their beneficiaries whose employers withdrew from the plan but failed to pay their full withdrawal liability assessment (so-called “orphan” participants) will have their benefits reduced to 110% of the amount that the Pension Benefit Guaranty Corporation (PBGC) guarantees in the event of plan insolvency.
Age and Disability Protections. MPRA does not permit benefit reductions for participants who are age 80 or older and partially protects the benefits of participants between ages 75 and 80. As a result, Central States will not reduce the benefits of participants over age 80. Benefit reductions for participants in the 75-80 age range will be limited to 50% of what the reduction would have been absent the age protections, calculated using a sliding scale. Participants receiving a disability benefit from the fund are protected from reductions, which is also a requirement of MPRA.
In 2007, United Parcel Service Inc. (UPS) withdrew from the Central States Pension Fund and paid its withdrawal liability in a negotiated lump sum totaling $6.1 billion. In a subsequent collective bargaining agreement, UPS agreed to make up for any benefit reductions that were later applied to Central States participants who were active or terminated UPS employees as of December 29, 2007. For this group of UPS participants, there will effectively be no net loss in benefits because UPS will be covering any reductions. The UPS group makes up approximately 12% of the total fund participants.
The U.S. Department of Treasury has up to 225 days to review the proposed rescue plan. If the agency approves the plan, participants will have the opportunity to vote on the plan. Even if participants vote down the Central States rescue plan, however, the U.S. Department of Treasury can override the votes and order the plan to be implemented. If approved, the rescue plan will be implemented in July of 2016.
Although controversial to many, Central States’ rescue plan appears to be the only viable option currently available to avoid the fund’s insolvency or larger pension reductions in the future. The insolvency of the Central States fund would effectively bankrupt the PBGC’s multiemployer plan insurance program, which would, in turn, result in the fund’s own participants receiving no benefits at some point. It would also have an enormous ripple effect on other (solvent) multiemployer funds that are covered by the PBGC, as well as participants and beneficiaries of insolvent multiemployer funds who rely on the PBGC for their pension payments. In sum, the rescue plan appears to be the best available option for the Central States fund, the PBGC, and the many other multiemployer pension funds and participants who rely on the PBGC’s coverage.