Monday, December 8, 2014

Multiemployer Pension Plan Crisis ... Or Not

Late last week, the New York Times published an article by Floyd Norris, its chief financial correspondent and an economist, on the crisis in multiemployer pension plans. I decided to write about it for a few reasons: 1) it's an interesting topic to me, 2) my strong impression is that the crisis is is not quite as the picture painted in the article, and 3) to go with the article, I think it's important to give some background and education.

I preface by saying that I do not generally work in the area of multiemployer plans, but then neither does Mr. Norris nor most of the people cited in his article.

Multiemployer (ME) pension plans are defined benefit (DB) plans. They meet the general tenet of DB plans in that they promise a benefit to plan participants at retirement rather than simply a pool of money segregated for that participant. But, there are lots of differences between ME plans and what most of us would think of as traditional (single employer) DB plans. Here are some of them.

  • ME plans are collectively bargained.
  • As the name suggests, these plans are generally maintained by more than one employer, usually in the same or related industries. The rationale is that a worker can be used by multiple businesses while all the time accruing a single pension.
  • What is negotiated at the most basic level is the level of contributions that each employer will make. For example, a negotiated contribution might be 20 cents per hour worked or 25 cents per 1,000 miles driven.
  • ME plans are managed, so to speak, by their trustees, joint committees having equal representation from labor unions and from management.
The article notes that the Pension Benefit Guaranty Corporation (PBGC), the governmental agency that insures pension benefits, believes that it will run out of money in its ME fund in the very foreseeable future. This could be the case (I have no reason to doubt the PBGC's forecasts) as two of the largest plans (those of the United Mine Workers and Central States Teamsters) are nearing the point where they will have insufficient assets to pay benefits to retirees.

What the article does not point out, however, is that the large majority of ME plans are really pretty well funded. Generally, ME plans have been managed responsibly and as a result, most of those plans do not face similar dangers.

When the Employee Retirement Income Security Act (ERISA) was signed into law in 1974, ME plans were not even covered by the PBGC. It wasn't until 1980 when the Multiemployer Pension Plan Amendments Act (MEPPAA) became law that such a fund was established for ME plans. And, even then, it was thought (I don't know any of the logic which may have been very good at the time for these thoughts) that the likelihood of ME plans needing PBGC coverage was small. So, as PBGC premiums for single-employer plans continued to increase, premiums for ME plans stayed low.

From my viewpoint, the reason for this might have been that it is up to the plan trustees to assure that the level of benefits provided to ME plan participants not be such that plan assets would be insufficient to pay such benefits. However, I have heard it said by people working in the ME arena, that in some of the larger, less funded plans that the strategy used amounted to a death spiral which is now approaching that death.

What happened?

As we know, plan assets have some years where their underlying investments perform well and some where they don't. So, when assets did perform well, and this is oversimplified a bit, the plans appeared to be better funded than they had been and therefore able to support higher levels of benefits for plan participants. In some plans, the trustees granted such increases. But, we all know that not all years provide excellent investment returns. When the plans were suddenly less well funded, benefit levels did not decrease. Further, and the United Mine Workers represent a good case study for this, when the ratio of active workers to retired participants decreases (similar to the US Social Security system), sources of assets may no longer be sufficient to support benefits. [This is a great reason to fully fund benefits for an individual participant on a reasonable actuarial basis by the time that participant leaves employment, but that's for another rant.]

What Mr. Norris does not point out in his article is that most ME plans are not in danger of needing PBGC protection. And, for the two plans in question, one might posit that they dug their own graves, so to speak. That is, they offered levels of benefits that the plans were not able to sustain over the long haul. Some ME actuaries have told me that the trustees who engage them for valuation services and for consulting advice have not necessarily followed that advice. 

The losers in this story are likely the people who have done nothing wrong. Plan participants, as a group, tend to do their jobs and assume that that their pensions will be paid. It is not the fault of a coal miner in the UMW plan that the industry fell on hard times. And, that long haul trucker in the Central States plan probably has no idea how his pension plan works, but he does expect that when he retires that he will get the benefits that he has been guaranteed. 

A joint business and labor group developed a plan designed to rescue the ME system without bailouts and without saving the PBGC. It was controversial in that it violated one of the most sacred tenets of ERISA -- thou shalt not reduce benefits that have already been earned. However, for any plans that go under, benefits in excess of the PBGC maximum guaranteed benefit may be reduced. And, if the PBGC runs out of money, even benefits less than that limit will likely be reduced. 

The situation is more complex than I describe. ME rules are quite complicated. But, I reiterate that the crisis appears to be limited to a relatively small percentage of plans, and according to the joint business and labor group could be solved by reducing benefits only in those plans that promised benefits that it could never have expected to support for the long term. Anything like that, however, would require Congress to pass a bill and the President to sign it.

Oh well ...

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