Since the passage of the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”) the financial well-being of employers contributing to multi-employer defined benefit pension plans has been tied to the funding of those plans, many of which have been underfunded for decades. The downward spiral has been exacerbated by several unalterable factors: an increase in retirees, a decrease in active participants whose contributions support the retirees and an increase in life expectancy.
Recent events have highlighted the worsening of the crisis. On October 1, 2015, the Central States Southeast and Southwest Area Pension Fund, one of the largest multi-employer pension funds in the country, filed an application with the Treasury Department requesting permission to reduce core benefits for participants in accordance with the Multiemployer Pension Reform Act of 2014 (“MPRA”) and sent an explanation to its participants. If the application is approved, it will potentially impact pensions of 400,000 participants.
MPRA represented a recognition by Congress that existing legislation was insufficient to adequately protect the solvency of multi-employer plans and the pension benefits of millions of participants. Specifically, the Pension Benefit Guaranty Corporation (“PBGC”) — the statutory “back stop” in ERISA — lacks sufficient assets to meet its mandate to provide pensions to participants of failing plans.
Although long a Congressional concern, the financial health of individual funds was an unknown area until 2006. The issue was demystified by the Pension Protection Act of 2006 (“PPA’06”), which sought transparency by requiring plans to reveal their funding status on an annual basis through the distribution of actuarial certifications and required the adoption of procedures for “funding rehabilitation.” Under the “rehabilitation plans,” contribution amounts ceased to be an issue of negotiation. Rather, contribution amounts became mandated by the pension fund.
Soon after PPA’06’s effective date of January 1, 2008, the stock market tanked. Despite the subsequent rebound in the stock market, the over-all fiscal health of many multi-employer plans failed to improve.
The Central States application should serve as a warning. All employers contributing to multi-employer pension plans must remain alert concerning the status of those funds and should not agree to proposed terms in negotiations without considering the impact upon the company’s financial well-being.
Employers should become pro-active and perform an annual “benefits due diligence.” It should be two-fold: (1) a review of the annual Form 5500 and (2) an annual request to the pension fund for an estimate of the withdrawal liability the employer would incur if it withdrew on the last day of the plan year preceding the date of request. The pension fund’s response must also contain an explanation of the methodology used in determining withdrawal liability. The fund is required to provide this information under Section 101(l) of ERISA.
We will keep you posted on developing issues involving multi-employer defined benefit pension funds.