Posted on 01/10/2018 at 12:00 AM by Russell Samson
Earlier last month I read an article entitled, “Retired Teamsters Facing Dramatic Pension Cuts See Hope in New Federal Legislation.” It
reinforced in my mind a topic that has been percolating for years, but which apparently is under the radar of most Americans.
For many years, employers with obligations to collectively bargain with the Teamsters have been “strongly encouraged” to agree to – and pay into – a defined benefit retirement plan set up back in the days of Jimmy Hoffa, the Central States, Southeast and Southwest Area Pension Fund. (It is also known as the “Central States Pension Fund.”) That Fund had buckets of cash, so, perhaps not unsurprisingly, it became the banker of choice for some less than reputable borrowers. Objectively, some of the loans to less than reputable borrowers were not fully repaid with the contractually promised interest. A lack of projected “investment income” was not the only problem that the Central States Pension Fund faced. The benefits sold by the Teamsters to its members through the Fund may have been inflated, actuarial assumptions on turnover (and thus the amount of money paid for personnel for whom no benefit would ever need to be provided in the future) proved incorrect, actuarial projections on earnings were too rosy, and people didn’t die off – so the “for life” promised benefits were being paid out over a longer period of time. And union membership is declining. Like the Iowa Public Employees Retirement System (“IPERS”) in my home state, Central States Pension did not actuarially have the assets to pay the obligations it had incurred as a defined benefit plan.
According to the Central States Pension Fund itself, “recently,” for every $3.46 that the Central States pays out in pension benefits, only $1 is collected from employers. (That statement shows an inherent flaw in general “thinking” – any defined benefit fund is NOT supposed to have current inflow matching current outflow. Rather, it is supposed to have been investing the money as it presently came in to fund the future benefits. So the money going out should be matched against the FUND – money paid in plus earnings. If any fund – say, Social Security – is paying out current benefits based on current payments in, logic suggests that at some point the bubble bursts.)
On Labor Day 1974, President Ford signed the Employee Retirement Income Security Act. That legislation was prompted in no small part by the demise of Studebaker-Packard Corp., and of its negotiated-with-the-UAW pension plan for hourly employees in 1964. At that time, Studebaker’s plan reportedly had only had enough assets to pay about 15 cents for every dollar in pension benefits the some 4,500 participants had “earned.” Part of the ERISA reforms for defined benefit retirement plans required employers to set aside actuarially sufficient assets to pay the actuarially computed promised benefits, to file periodic reports with the government which included actuarial examinations on whether the plan would be able to meet its promises, and to set up the Pension Benefit Guarantee Corporation to in effect insure that benefits would be paid. To provide funds for the PBGC “guarantee,” defined benefit plans were required to pay premiums to PBGC. There are two types of defined benefit plans covered by the PBGC – single-employer plans and multiemployer plans (simplistically, a plan created through an agreement between two or more employers and a union). For “single employer” plans there are both per participant flat-rate premiums and variable rate premiums – an amount per $1,000 of unfunded vested benefits (UVBs), with a cap on the premium which is a function of the number of participants. Multiemployer plans have only a per participant flat rate premium, and that is set at what I regard as a significantly lower level that for single employers. (For example, the 2018 flat rate premium for single employers is $74.00 per participant, for multiemployer plans the per participant flat rate is $28.00. Again for 2018, for single employers the variable rate premium is $38.00 per $1,000 of unfunded vested benefits, with a per participant cap of $523.00. In 2007, the single employer per participant flat rate was $31.00; it was $8.00 for multiemployer plans.)
While one may speculate on the why of the disparity – lobbying power of organized labor? – the fact is that multiemployer plans were required to pay in “premiums” at a lower level than single employers. Which works well until one (or more) of the multiemployer plans is on the brink of failure. Hindsight suggests that a decision to permit union plans to not have the same level of insurance premium accountability (why set a flat rate that is lower than that for a single employer, and does not take into account the disparity between funding and promised benefits?) was will advised.
Another component of ERISA with regard to multiemployer plans like Central States is the ability to assess a “withdrawal liability” on employers which get out of multi-employer plans. Companies which are getting out of a multiemployer plan because they are going out of business most frequently have no assets to pay the withdrawal assessment. That is especially true for multiemployer plans which have very large – dare I say “huge”? – disparities between funds and vested benefits. Logic might suggest that at some point remaining employers which are successful (and thus not about to go bankrupt) cannot afford to withdraw from Central States because the withdrawal liability would be so large. That said, in the fall of 2017, it was announced that supermarket chain owner The Kroger Co. had signed a new collective bargaining agreement with the Teamsters that allows the company to withdraw from the Central States Pension Fund. Kroger and IBT reportedly established the “International Brotherhood of Teamster Consolidated Plan.” Current, active employees of Kroger will be moved to the new plan, which reportedly will require contributions based on how well the plan is funded rather than a flat, negotiated rate based on hours work. The estimated withdrawal liability for Kroger leaving Central States is $698 million, which “Kroger will pay in annual installments of $60 million over the next 20 years.
The new scheme may or may not work out for Kroger and Kroger’s current employees. That doesn’t change the fact that Central States Pension Fund is still projected to be insolvent, creating problems for both current retirees as well as for current individuals whose employers are paying in the Central States Pension Fund because their collective bargaining agreement requires it. An alternative to Central States Pension Plan’s insolvency problem would be to increase the amounts employers are required to pay into the Central States fund. But where is that money going to come from – wages going down, or the costs going up? I don’t know that I would be too thrilled about having my current take home pay reduced so payments to Central States Pension Fund might be increased – especially given the caution that I will never see the retirement money that is promised.
As has been predicted for some time, some Central States Pension Fund benefits are being slashed. And the retirees are upset.
The response of the Teamsters and the Teamster retirees is the Butch Lewis Act; it was introduced in mid-November 2017 by Sen. Sherrod Brown, (D-Ohio). The proposed law would create, in the Treasury Department, the Pension Rehabilitation Administration. Troubled pension plans – and that would include not only the Central States Pension Plan but also apparently the United Mine Workers Pension Plan and some 200 other plans around the country -- would be able to borrow money from the Administration at low interest rates such that the plan could continue to make the “promised” payments to retirees.
According to Senator Brown’s office, the money for the loans and the cost to run the pension office would come from selling Treasury bonds to financial institutions such as banks. The PRA take the money from the bonds and provide 30-year loans at low interest rates to financially troubled union pension plans. The pension plans are expected to repay the loans as their financial health improves. That begs the question – a question that appears to me to be similar to the question that should have been asked back in the “housing boom” days: IF UNION FUNDED PLANS ARE PAYING OUT $3.46 FOR EVERY DOLLAR THAT IS TAKEN IN, WHERE IS THE MONEY GOING TO COME FROM TO REPAY THE GOVERNMENT LOANS?
I was troubled by the observation of one union official as to why the Butch Lewis Act should be passed. “He said the U.S. government failed in its obligation to make sure the Central States Pension Plan remained solvent.” Like every multiemployer pension plan subject to Section 302(c)(5)(B) of the Taft-Hartley Act -- 29 U.S. Code § 186(c)(5)(B) -- Central States is jointly administered by an equal number of employee and employer representatives. “The government” had an “obligation to make sure the Central States Pension Plan remained solvent”? Maybe – but who, and what should have been done? Perhaps Congress was wrong in setting premiums for all multiemployer pension plans at a lower level than what was charged single employer plans. Perhaps Congress should have required that multiemployer pension plans participate in the variable rate premiums which focus on unfunded vested benefits. What kind of premiums might have been required given the significant disparity between “funds” and “promised benefits” in the Central States Pension Fund, or the United Mineworkers Fund? Or should the trustees have modified benefits for future plans, and increased contributions for employers?
“It’s not my fault.” ERISA, with its mandated reporting, provides the information.
It is the uncertainty of the future combined with problems in the present that no doubt prompts most employers with any sense to run from defined benefit plans.
The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed.
- Russ Samson