By: Ron Kramer
Don’t look now, but pension reform is back in play. The proposed “Multiemployer Pension Reform Act of 2014” (“MPRA”), 161 pages long (click here), was recently introduced in the House Rules Committee by Representatives George Miller (D-CA) and Rep. John Kline (R-MN), and may be adopted before the end of the lame duck session this week as part of the spending deal to keep the government running. The House Rules Committee claims the bill would permit trustees of severely underfunded plans to adjust vested benefits, enabling deeply troubled plans to survive without a federal bailout while protecting the most vulnerable employees and adjusting the premium structure to improve the health of the PBGC.
Much of the draft legislation is based on recommendations previously issued by the National Coordinating Committee for Multiemployer Plans. The bill is designed to make it easier for multiemployer pension plans to take steps to improve their health without necessarily placing significant additional financial burdens on participating employers or taxpayers. Below are three key highlights of interest for employers:
1. Ability of deeply troubled plans to reduce benefits before insolvency: Key to the MPRA is the ability of critical and declining plans to reduce employee benefits now to avoid insolvency. Currently, vested benefits can only be reduced under certain limited circumstances: e.g., with “critical status” plans or when a plan is insolvent (and then they are reduced to PBGC guarantee minimums). The MPRA provides for an extensive process for “critical and declining” plans — i.e., critical plans which are projected to become insolvent within 14 plan years (19 plan years if the plan has a ratio of inactive participants to active participants that exceeds 2 to 1 or if the unfunded percentage of the plan is less than 80 percent) — to seek approval to “suspend” benefits to no less than 110% of PBGC minimums (subject to certain exceptions to protect the most vulnerable retirees) to the extent needed to avoid insolvency. The process for obtaining approval for reducing benefits is extensive (including the appointment of a retiree representative for larger plans to advocate for the retirees), and includes a mandated vote in favor by the participants. That vote can be overridden, however, in the event the government determines that the plan is “systemically important,” i.e., the present value of projected financial assistance payments by the PBGC would exceed one billion dollars (indexed going forward) if suspensions are not implemented.
The ability to suspend benefits now, while painful for participants, may help many critical and declining funds in the long run to avoid insolvency or outright plan termination. To the extent this will permit a fund to avoid insolvency, fund employers may be less likely to withdraw. This change does not necessarily help employers interested in withdrawing from such plans, however, or employers that may experience a withdrawal for business reasons beyond their control. Benefit suspensions are disregarded in withdrawal liability calculations unless the withdrawal occurs more than ten years after the effective date of a benefit suspension.
2. Changes to mergers and partitions: The MPRA significantly revises existing merger and partition rules. The PBGC will be authorized to promote and facilitate plan mergers and may provide financial assistance (provided it has sufficient funds) in certain situations where one of the plans to be merged is in critical and declining status. The PBGC’s ability to approve partitions to carve out the bad parts of a plan from the good parts also has been expanded. Under the MPRA, in order for a partition to be approved: (i) the plan must be in critical and declining status; (ii) all reasonable measures to avoid insolvency (including the imposition of the maximum allowable benefit suspensions) must have been taken; (iii) a partition would reduce the PBGC’s expected losses, and would be necessary to keep the plan solvent; (iv) the PBGC can do it financially without hurting its ability to meet its other financial obligations; and (v) the PBGC’s costs are paid for exclusively from the fund for basic benefits guaranteed for multiemployer plans. Only the minimum amount of the plan’s liabilities necessary for the plan to remain solvent will be permitted to be partitioned.
These changes also will help save critical and declining funds. Employers seeking to withdraw within ten years after a partition will have their liability calculated with respect to both plans, thus ensuring exiting employers will not monetarily benefit from the partition.
3. Employer relief on withdrawal liability payments: Under current law, an employer’s withdrawal liability payment schedule is directly tied to its highest contribution rate in the past ten years. The MPRA clarifies that surcharges imposed pursuant to the Pension Protection Act do not count towards that rate — an issue reported on earlier (click here) that is currently pending before the Third Circuit Court of Appeals. Moreover, under the MPRA, contribution increases mandated by a rehabilitation or funding improvement plan also will be disregarded in certain circumstances. These changes, at least for employers who withdraw after they take effect, will considerably reduce an employer’s annual withdrawal liability payments — and hence total spend when subject to the 20-year cap on payments.
Other changes include, but are not limited to: giving plans the right to impose rehabilitation and funding improvement plan contribution increases based on the schedule option (preferred or default) previously adopted if the parties have not negotiated the increases within 180 days of the contract termination date; giving plans the ability to elect to be in critical status under certain conditions; expanding the rights of participants and employers to certain plan information; amending certain rules governing certain charity and nonprofit pension plans; adjusting premium payments to the PBGC, etc.
Will it pass both houses of Congress? What will remain in the bill if passed? What surprises lurk within the 161 pages? How much will it help multiemployer plans? Will it make employers reconsider entering or exiting multiemployer plans, especially those that are in endangered or critical plans? Stay tuned.