October 17, 2007: Rumors are flying about the Pension Protection Act, the pension legislation that starts to take effect on Jan. 1.
Does the UPS contract have to be settled by Jan. 1 to head off benefit cuts and win pension improvements? Is a new round of pension cuts on the way? The answer is NO.
TDU consulted with actuaries, attorneys and fund managers to cut through the rumors and provide members with the facts.
January 1: A Kickoff, Not a Deadline
Some provisions of the Pension Protection Act go into effect on Jan. 1. This date is the kickoff of a long-term timeline for strengthening funds over 10 to 15 years.
It is not a deadline by which the UPS contract needs to be ratified for UPS Teamsters to avoid pension cuts or win pension improvements. It also is not a date on which Teamster pension funds will change their benefits.
What Happens on January 1?
On Jan. 1, 2008, the funding portions of the Pension Protection Act go into effect.
As a result, Teamster pension funds will have to certify their funding levels (Green Zone, Yellow Zone or Red Zone) and inform participants and the government of their status. This process does not occur immediately on Jan. 1, but can take up to 90 days.
On April 1, 2008, fund actuaries have to certify the status of the plan. If a plan is under-funded, then it must notify participants, the union, the company, and the government by May 1, 2008—120 days after Jan. 1.
Yellow Zone and Red Zone
If a pension plan is under-funded, it will be certified by the fund actuary as in the “Yellow Zone” or the “Red Zone.”
The Yellow Zone means the fund is less than 80 percent funded.
The Red Zone means that the fund is seriously under-funded and also has a short-term credit balance deficiency (a technical calculation that indicates a more short-term problem than the funding level). Being under 65 percent funded will not automatically place a pension plan in the Red Zone.
Few, if any, Teamster plans will fall in the Red Zone. But some major Teamster funds, including the Central States Fund and the New England Fund, are expected to be in the Yellow Zone.
December 31, 2008: Deadline for Plans
If a plan is in the Yellow Zone or Red Zone, the plan’s actuary will then come up with at least two options to get the funding level up toward 80 percent over the next ten or 15 years.
These options include increasing employer contributions, and/or decreasing future pension accruals.
For any plan under 80 percent funded, the trustees will adopt a Funding Improvement Plan, based on the options prepared by their actuaries, to present to the union and the company. If the trustees deadlock (company vs. union trustees), the matter goes to expedited arbitration.
By Dec. 1, 2008 a pension plan must announce their improvement plan, unless there is an impasse.
That plan must go into effect by December 2009, two years from now.
The Central States Fund has already adopted its plan. They require contracts signed this year to have pension contributions go up at least eight percent a year. And they cut back benefits, by eliminating unreduced 25- and 30-and-out pension accruals.
Under the law, Teamster pension funds must adjust their funding plans based on any new pension money that is negotiated in contract bargaining. A new contract does not have to be ratified by Jan. 1.
When major contracts are settled, fund actuaries and trustees will adjust their Funding Improvement Plans based on the new money projected in the contract.
The Bottom Line
The goal of the Pension Protection Act is to get multi-employer plans to move their funding levels up to 80 percent over the next ten to fifteen years.
It is a long-term process. No plan needs to be adopted until Dec. 1, 2008, over a year from now, and none needs to be put into effect until a year after that.
Any contract improvements that are won—at any time—will be taken into account. The UPS contract does not need to be settled by Jan. 1 for us to prevent cuts or win pension improvements.