Back in December, the U.S. Treasury Department received an application from the American Federation of Musicians and Employers’ Pension Fund (AFM-EPF) to suspend benefits, based on authorities granted under the Multiemployer Pension Reform Act of 2014 (MPRA).
The plan’s as-yet pending application is among more than 30 filed in the past several years by similar multiemployer plans. So far, the applications have mainly covered workers in transportation and the building trades, but upward of 120 plans in a number of industries are considered “critical and declining.” Under the MPRA, this status means they are expected to run out of money within 20 years. Such plans may suspend benefits if that would prevent outright insolvency, subject to approval by the U.S. Treasury.
In January, the AFM-EPF told PLANADVISER that more than 20,000 musicians could see benefit reductions under its plan. But they said the plan was necessary and that it represents the best possible outcome for members. The vast majority face benefits reductions ranging from 0% to 20%, while fewer than 1,000 younger people could see reductions in the range of 20% to 40%.
In cases like this, the U.S. Treasury must approve or deny the benefit reduction plan after conferring with the U.S. Department of Labor (DOL) and the Pension Benefit Guaranty Corporation (PBGC). Once approved, the suspension proposal goes to the plan’s participants and beneficiaries for a final vote.
No Go for AFM-EPF Reduction Plan
Based on new communications between the Treasury and AFM-EPF, it now appears that the Treasury staff will recommend that the Treasury secretary deny the AFM-EPF’s benefits reduction plan. In a new statement to PLANADVISER, the fund says it has been informed that the Treasury staff disagrees with two of the actuarial assumptions used in its application. On this basis, Treasury staff will apparently recommend that the Secretary of the Treasury deny the application.
“The trustees strongly disagree with Treasury staff’s position on the two assumptions, and the plan’s actuaries stand firmly by all of the assumptions used in the application,” the AFM-EPF writes. Of interest to the broader retirement planning audience is that the actuary in this case is Milliman.
“Even more to the point,” the statement continues, “Treasury staff is recommending denial despite the fact that that the AFM-EPF demonstrated the proposed benefit reduction would prevent the plan from running out of money even if the plan used the assumptions that Treasury staff preferred.”
Disappointed with this development, the AFM-EPF trustees have sent a letter to Treasury Secretary Steven Mnuchin, conveying the reasons for their disagreement with Treasury staff and asking him to overrule the expected recommendation and not deny the application.
“Too much is at stake for this to be the basis of a denial,” the letter states. “Over 50,000 musicians across the country rely upon their pension benefits as an important part of their retirement security. These participants are in dire need of your support. Plan insolvency would cause many of these participants to have their benefits reduced to the amount insured by the Pension Benefit Guaranty Corporation, well below the level of current benefits enjoyed by the vast majority.”
This line helps to explain why members of the musician union pension backed the proposal. Union members’ votes in favor of benefit reductions are cast based on a simple economic analysis: The guaranteed monthly benefit limit that will be paid out by the PBGC—which insures both union and single-employer corporate pensions—is about $36 per month per year of service, or about $13,000 annually with 30 years of service. This amount is far less than the PBGC single-employer guarantee of about $65,000, and it is often also far less than the level of the benefit to be paid after a proposed reduction—as in this case. And, unlike the single-employer guarantee, the multiemployer guarantee is not adjusted for inflation.
Congress Called Upon to Act
As the Treasury weighs this case, a debate continues to simmer in Congress about how to help stressed union pensions. Two influential Republican senators have recently published a white paper outlining a proposed plan to address the multiemployer pension funding crisis. The senators, Finance Committee Chairman Chuck Grassley, R-Iowa, and Senate HELP [Health, Education, Labor and Pensions] Committee Chairman Lamar Alexander, R-Tennessee, say their proposal represents a realistic and balanced approach to the issue. In simple terms, to help the “sickest plans” recover their financial footing, the proposal creates a special partition option for multiemployer plans. The senators say this is not a new concept. Rather, the proposal would expand on the PBGC’s existing authority to enact plan partitions in special circumstances.
According to the senators, partitioning permits employers to maintain a financially healthy multiemployer plan by carving out pension benefit liabilities owed to participants who have been “orphaned” by employers who have exited the plan without paying their full share of those liabilities. They argue that removing orphan liabilities allows the original plan to continue to provide benefits in a self-sustaining manner by funding benefits with contributions from current participating employers. In effect, partitioning creates a “healthy pension” that continues to meet all of its obligations to retirees, the senators say, and a separate “sick pension” that requires attention and assistance from the PBGC.
The Senate Republicans’ proposal differs in important respects from the approach taken by the Butch Lewis Act, which was advanced on a party-line vote by the House Ways and Means Committee last year. This approach, favored by House Democrats, would provide funds for 30-year loans and new financial assistance, in the form of grants, to financially troubled multiemployer pension plans. According to the text of the legislation, the program is designed to “operate primarily over the next 30 years.”
During the committee debate last year, Democrats, led by Chairman Richard Neal of Massachusetts, generally voiced strong support for the act. They suggest that the dire financial situation faced by some multiemployer pension systems is chiefly due to the Great Recession and long-lasting market challenges that have particularly harmed manufacturing and other blue-collar industries. They say economic conditions over the past two decades have forced many employers that offer these pensions to go insolvent themselves, which, in turn, left the multiemployer pension plans with fewer and more financially stressed contributing employers.
House Republicans, on the other hand, led by Ranking Member Kevin Brady of Texas, are quick to cite their worries about ongoing mismanagement and even maleficence on the part of union leaders and pension trustees. They argue a loan program will do nothing to solve the underlying problems that weakened many of the plans to begin with, and they commonly use the term “bailout” to describe the program.