Multiemployer Pension Plan Liabilities:
Issues Facing Plans and Employers in 2008
Multiemployer pension plans, often called “union plans,” are trust funds to which a number of employers contribute set amounts of money, as required by the collective bargaining agreements (CBAs) between the employers and the local unions that represent their employees. When the workers retire, the plan pays pensions in amounts specified in the plan document.
What many employers do not know, however, is that if the fund’s assets are below the amount needed to pay the pensions promised to the workers, the employer may be required to pay additional amounts into the fund. In addition, there are impending requirements in 2008 that may necessitate action by both employers and plan trustees.
The Backdrop: Understanding MPPAA and PPA
Congress addressed the issue of underfunded plans in 1980 when it passed the Multiemployer Pension Plan Amendments Act (MPPAA) and again in 2006 when it passed the Pension Protection Act (PPA). Among other things, the MPPAA created “withdrawal liability,” whereby an employer must pay a sum of money into the plan if it permanently stops contributing at a time when plan assets are insufficient to pay promised benefits. The 1980 law also created liability for “partial withdrawals,” which may be triggered by certain events short of a complete withdrawal from the fund.
To some employers, receiving a demand for withdrawal liability comes as a surprise, because they believed the amounts they had agreed to pay to the plan under their union CBAs represented their total exposure to the plan. While there are defenses to a demand for withdrawal liability, employers must respond quickly or the law will deem their defenses waived. Recent court decisions have explored the extent to which other businesses associated with the employer, particularly those that have been in the same ownership group, must also respond quickly or waive their defenses.
With the 2006 passage of the PPA, Congress created additional liabilities for certain employers that participate in plans with assets that fall below promised benefits. These liabilities are not triggered by the total or partial cessation of contributions that bring about the withdrawal liability discussed above, but rather by notices issued after the plan actuary determines the plan to have certain levels of underfunding. In addition, rather than being calculated as a lump sum, these liabilities, called “surcharges,” are imposed automatically if the actuary certifies that the plan has hit a specified level of underfunding. For example, if the actuary certifies in a certain year that the plan is less than 65% funded, then employers in the plan generally will have to pay a surcharge of 5% of the contribution amounts otherwise required under their CBAs, commencing after they receive notice that the surcharge is in effect.
Longer-term, the PPA requires plans that are less than 80% funded to implement a program, which may include a combination of rate increases and benefit cuts, that will enable the plan to hit certain funding targets within a specified amount of time. These combinations will take the form of “schedules” of contribution rates and corresponding benefit levels, to be presented to the bargaining parties (employers and local unions). Plans may offer multiple schedules—one with a lower level of rates and benefits, and one or more with higher rates and benefits. Once the employer and the union agree on a schedule, the surcharge will be eliminated.
What to Look for in 2008
For plans operating on a calendar year, their actuaries are required by the PPA to submit their certifications of funded status by March 28, 2008. As a result, both plans and employers face a number of looming questions and issues.
Issues for Plan Trustees. If a plan is less than 80% funded, the trustees will have to determine a realistic way to get the plan to the required funding level in the time allowed. For example, should the trustees cut the rate of future accruals so that a worker earns less in promised benefits per year than he or she used to? How high can the trustees raise the rate of required contributions from employers without driving them away from the plan entirely?
Issues for Employers. After receiving the schedules of rates and benefits agreed upon by the trustees, the participating employer may want to consider asking the union to terminate the employer’s obligation to pay into the plan. For example, UPS recently convinced the International Brotherhood of Teamsters to end the company’s obligation to contribute to the Central States Pension Fund.
What can an employer offer the union to induce it to agree to a termination of its obligation to contribute to the plan? In the case of UPS, the company reportedly offered to establish its own pension plan to replace what the workers would have earned if UPS had kept contributing to the Central States plan.
Another important question for the employer is whether it will be able to pay the withdrawal liability that will become due upon withdrawal from the plan. UPS evidently believed it could pay its estimated $6 billion withdrawal liability to the Central States plan, set up a new plan to provide similar benefits going forward, and still come out ahead financially. The numbers will be different for each employer, however. In fact, the employer may want to request an estimate of its withdrawal liability and consult with an actuary or other professional in order to compare the cost of any alternative it may offer the union with the rates and benefits contained in the schedules it receives from the multiemployer plan.
The good news? If the PPA is successful, pensioners stand a better chance of actually receiving the pensions they were promised (without government support), and withdrawal liability exposure for employers could diminish over time.
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