Monday, May 9, 2016

Multiemployer Law Fails to Work for the Plan it was Most Likely Developed For

In mid-2014, Congress enacted and the President signed into law the Multiemployer Pension Reform Act (MPRA) sometimes known as the Kline-Miller Act (for its original sponsors). MPRA was unique in modern political circles as it was sponsored by John Kline, a Republican from Minnesota and George Miller, a Democrat from California. It was also unique in that it had support from unions, from companies that employ union workers, from affected government agencies and from industry groups specializing in multiemployer plans.

All that makes it sound like a law that was practically perfect.

Some background for those who don't spend their days in the multiemployer plan world is useful. Generally, multiemployer plans exist in industries where an individual working in that industry may provide services to many different employers. In the Teamsters Unions (primarily truck drivers), for example, drivers may drive on behalf of many different employers. Each employer agrees to contribute an amount to the plan based on the amount of service provided to it by each worker under the agreement. So, for example, in the case of a Teamsters Union, contributions could be set at some number of dollars per thousand miles driven. Retirement benefits are set based on the levels that the trust can support.

Benefits under multiemployer plans are insured (to some extent) by the Pension Benefit Guaranty Corporation (PBGC). One of the reasons for the passage of MPRA was to protect the PBGC. This was to be accomplished by allowing plans that met a set of requirements (more later) to reduce benefits that had already accrued. As many of the industries often covered by multiemployer plans dwindle, the plans themselves are unable to support the levels of benefits that had been promised. There are just not enough dollars coming into the plans.

Based on data published initially by the Center for Retirement Research at Boston College, the single plan that was viewed as potentially most problematic was the Central States, Southeast, and Southwest Areas Pension Plan. With more than 400,000 member, a funded ratio just barely above 50%, and nearly 5 times as many inactives as actives (all as of 2012), the plan was estimated to become insolvent in 12 years. Many plans were projected to become insolvent sooner, but not represented nearly the liability of the Central States Plan.

As MPRA should have, it placed a strict set of conditions (see Code Section 432(e)(9)) on such suspensions. Cutting back retirement benefits had essentially never been permitted in an ERISA plan. Such a cutback needed to be in everyone's best interests.

The process for determining that was generally to be that the Trustees of a Plan would apply to the Treasury Department for such a suspension (the technical term for such a reduction). The application would need to demonstrate that the suspension met all of the conditions referenced above.

In the case of the Central States application, Special Master Ken Feinberg determined that some of those conditions were not met.


  • The suspension must be reasonably estimated to avoid insolvency
    • In making its projections, the Trustees or the outside consultants used by the Trustees assumed a rate of return on plan assets that for every asset class in the plan exceeded the 75th percentile (according to survey data) for that class
    • The entry age for new participants under the plan was assumed to be 32. While data shows that 32 is the average age, that is misleading because a group of new entrants at age 32 would have no new retirees in the next 20 years. On the other hand, a group with average age 32, including some who are much older, would have new retirees representing cash outflow from the plan far sooner than that.
  • The suspension of benefits must be equitably distributed meaning that a particular class of participants is not adversely affected more than other classes
    • The Trustees sought to make use of participants who are or were UPS employees under the plan. UPS had completely withdrawn from the plan and made withdrawal liability payments under the plan. In doing so, UPS had fulfilled its obligations with respect to the plan.
    • But, UPS made those participants whole under a different plan. In its application, the Trustees considered only the portion of UPS benefits attributable to the make-whole agreement. This was judged not to be an equitable distribution.
  • Upon application for suspension of benefits, notices must be distributed to participants explaining the suspension and the reasons for it
    • The notices must be understandable by the typical participant, but in fact contained lots of technical jargon.
    • In the notice's worst blemish, it contains a 98-word sentence with 4 technical terms not defined anywhere in the notice.
For all these reasons, the application was denied.

What does this do?

It leaves the Central States Plan in a position where it is likely within roughly 7 or 8 years of becoming insolvent. This means that the PBGC will become responsible for an extremely large liability for which its multiemployer fund does not have sufficient assets.

Who wins? Nobody.

Who loses? The PBGC, the plan participants, and the multiemployer system.

We might as well say that Americans are the losers.


  1. Do you think this is just a "try again later" response or is it fatal? Some of the actuarial objections raised by Treasury seem to suggest that there is no way Central States could ever qualify if it used the assumptions Treasury was advocating, but I'm not sure if I'm reading that correctly.

  2. Chris, I don't have access to all the math on this one, but it appears that the plan may be in a Catch-22 situation of not being able to satisfy the various requirements AND avoid insolvency. If I had all the supporting actuarial work, I'd have a better idea.

  3. My father is in term vested pay status in this plan and the terms he explained to me what they were going to do were pretty unfair to me. His payments were to be cut in half, literally, while others who were older or on disability status would have seen no cut whatsoever. He is happy to not lose half of his payment now and has resolved that if the fund is insolvent in 7-8 years that is ok, as he will have received the full benefit for those next 7-8 years. What I cannot understand is why did they not insert provisions here to allow for lump sum payouts for term vested participants in pay status. He would most likely have been happy to take such a payment if it would have been offered.

  4. Brett, I'm sorry to hear that your father is a likely victim of the funded position of this plan. Frankly, it is, I believe, the most underfunded non-governmental plan (dollar basis, not percentage) in the US.

    The IRS has (within the last 2 years, I believe) ruled that lump sum windows for participants in pay status are not permissible. In fact, the provision that Central States did apply for is only available under some pretty strict terms.

    Many of the multiemployer plans never foresaw the situation where, much akin to our Social Security system, the ratio of actives to inactives, once far more than 1 to 1, would decline to levels like 1 to 10. Especially in the multiemployer world, specifically because of the way they are funded, such plans inevitably wind up in a death spiral.