Major changes are coming to multi-employer pension plans as two of the largest Teamsters-covered plans have adopted a new "hybrid" pension model to repair the broken system of the past.
The health of the nation's multi-employer pension plans are in jeopardy because of changing demographics and a worsening ratio of active workers to retirees, a top trucking attorney says.
Herve H. Aitken, who has long represented trucking interests in pension cases, said the systemic underfunding has never been addressed by Washington and is threatening the health of many plans affecting unionized trucking employees. He is an attorney with Ford Harrison in Washington, D.C.
Some 32 years after the Multi-Employer Pension Plan Amendment Act was passed in 1980, multi-employer plans such as Teamsters' Central States plan remain in jeopardy, Aitken says. But major changes are coming.
The Teamsters Central States and New England pension funds are now offering employers a choice of joining a "hybrid" plan, which allows companies to pay down their liability and stay within the Teamster plan. As of the fourth quarter of 2012, some 17 Central States' employers and another 25 in the New England plan had opted for the hybrid model.
More than 10,000 UPS Teamsters in the New England plan were switched recently to the hybrid model last September. It made financial sense to UPS, which got out from under a heavy withdrawal liability and given more than 50 years with which to make those payments.
These changes are necessary because of structural labor changes in the trucking industry. Since deregulation in 1980, the trucking industry has lost more than 500 Teamster-covered carriers. Currently, about 95 percent of the overall trucking industry is non-unionized. In the truckload sector, it is virtually non-union.
For instance, there is only one active worker for every four retirees receiving benefits from the Central States plan, the Teamsters' largest. Those Teamster retirees often retire after 30 years of service with a $3,000 per month benefit—$36,000 a year. That is far above the $13,000 level that is guaranteed by the Pension Benefit Guaranty Corp. (PBGC), the government agency that guarantees troubled pension funds.
That level of benefit would appear to be unsustainable going forward, independent trucking analysts and attorneys such as Aitken say. Others appear to be listening.
A recent Credit Suisse report estimated that underfunding of multi-employer plans at $369 billion. Of that amount, $326 billion is owed by smaller companies outside the S&P 500. Those companies are mostly in the trucking, construction and mining industries.
The Retirement Security Review Commission, a sub-group of the National Coordinating Committee for Multi-Employer Plans (NCCMP), is developing ideas for legislative reform.
One of its rumored reforms is a reduction of pension benefits for future Teamster retirees. It is timely because the multi-employer funding provisions of the Pension Protective Act of 2006 will sunset at the end of 2014. The NCCMP is drafting legislative reforms for that act.
Aitken said there are three factors affecting the health of multi-employer plans:
-there is no more money available from contributing employers (such as YRC Worldwide and ABF Freight System, both financially troubled LTL carriers);
-there will be no bailout money available from the federal government; and
-there is no other alternative except a reduction of benefits to align with available assets to current the systemic underfunding of these plans.
"There is a systemic underfunding problem," Aitken says.
John F. Ring, a labor attorney and partner with Morgan Lewis & Bockius in its labor and employment practice, testified before the House Health, Education and Pension (HELP) Subcommittee last June 20 that the health of these multi-employer plans are at stake.
"There are a number of plans that will not survive without significant changes in the current law," Ring testified. "For these plans, there needs to be major reform and frankly, a fundamental change in the way we approach pension plans."
Currently, multi-employer pension plan trustees have just two tools available to help strengthen those plans.
They can either increase employer contributions or reduce the rate of future benefit accruals.
The first is highly unlikely; the second is next to impossible. Firstly, carriers such as YRC have actually reduced their pension contributions to survive during the Great Recession. Secondly, any effort to reduce future benefits would meet with resistance from the Teamster officials who are pension trustees.
Attorney Ring told the HELP subcommittee in his testimony that trustees should be given "additional tools" to address the fundamental fact that pension revenues in these multiemployer plans "can never meet the obligations of these plans."
Aliya Wong, the U.S. Chamber of Commerce’s executive director of retirement policy, noted that multi-employer plan premiums have increased to $12 per participant by 2013. Those premium levels are indexed for inflation.
The National Coordinating Committee for Multi-Employer Plans is now indicating that accepting reduced benefits is the only alternative to the current law's reduction of pension benefits to a guaranty of a maximum $13,000 annually as the lesser of two bad choices.
"You can imagine the shock of a current retiree getting $3,500 or $4,000 a month dropping down to barely $1,000 a month," Aitken says.
The Teamsters union can be expected oppose any reduction in benefits, but may ultimately have no choice to go along.
As for the 2014 legislative solution, Aitken says any pension relief ought to include elimination of withdrawal liability. That provision prevents remaining active employers from joining multi-employer plans.
In the case of YRC and ABF, also effectively means those companies actually are funding the pensions of thousands of retirees who never actually ever worked for either company.
Removing withdrawal liability would allow new employers to join multi-employer plans without worrying about paying for such retiree benefits, Aitken said. The downside of removing that liability also could remove a limited source of revenue for these multi-employer plans, he added.
Another source of relief may include higher premiums to the PBGC from multi-employer plans in order to pay for insolvent plans. That would require more money from already overstressed contributing employers such as YRC and ABF.
But Aitken said that would solve the underlying problem by funding PBGC from inside the system and would fund those plans at a lower level from that of current solvent plans.
Last year, the New England Teamsters Pension Plan agreed with PBGC to permit contributing employers to withdraw and re-enter the multi-employer plan under what is called a "direct attribution" plan that Aitken says has three benefits:
- current withdrawal liability was significantly reduced;
- an employer is not liable for liability attributable to other employers; and
- the plan agreed to reduced benefit accruals to the employers' contribution level to fully fund the plan for the employer.
Aitken said the PBGC already has approved an application by the Central States Pension Plan, the Teamsters' largest, to establish a same type of plan as the New England plan.
Thomas G. Nyhan, administrator for the Central States plan, testified two years ago before the Senate HELP Committee that his plan is in "unprecedented financial crisis." If no action is taken, Nyhan said his fund could be insolvent in the next 10-15 years.
Nyhan testified that Central States had an operating loss of $2.2 billion in one recent year. It pays out annual benefits of $2.9 billion, but only has annual employer contributions of $675 million.
As of February 2011, Central States had just 54,698 active workers to 214,243 retirees—a ratio of 1 active to 4 retirees vs. the 4 actives to 1 retiree in 1980.
Aitken is recommending trucking companies belonging to such plans to try and join a hybrid attribution plan. That could save employers up to 40 percent of withdrawal liability, Aitken said.
Aitken is president of the Multi-Employer Pension Plan Alliance (MEPPA), which represents companies trying to obtain relief from pension withdrawal liability.