Earlier this year, an announcement by the PBGC that attracted little notice will have a large and negative impact on employers who contribute to multiemployer plans. The announcement stated that the PBGC multiemployer insurance system is expected to run out of money in approximately 10 years, even before any new obligations are added. This announcement is just further confirmation of what many contributing employers have already realized: the system is unsustainable and cannot - and will not - survive. The announcement also represents a time frame, beginning now, that signals the beginning of the end for the PBGC insurance system, which will have dramatic consequences for any employer still contributing to a multiemployer plan.
To understand why the demise of the multiemployer plan system is inevitable, an understanding of the history of multiemployer plans is necessary. Before 1980, a contributing employer's sole liability was the negotiated rate of contribution to the plan. In 1980, the Multi-Employer Pension Amendments Act (MEPAA) imposed a withdrawal liability on employers who withdrew from any multiemployer plan. While helpful in shoring up the finances of many plans, withdrawal liability was not enough to save the system. The liability imposed on withdrawing employers was, and still is, too easily avoided because many withdrawing employers withdraw because of bankruptcy, insolvency, or they avoided payment through loopholes in the statute. In addition, poor assessment and collection practices by many multiemployer plans in the past allowed many withdrawing employers (and affiliated businesses who are also liable for withdrawal liability) to avoid payment of their share of withdrawal liability. Because of this dynamic, PBGC, the government insurer of pension plans (similar to the manner in which FDIC insures banks) has been called upon to bail out insolvent multiemployer plans with increasing frequency. The Pension Protection Act (PPA) was enacted in 2006 to try and deal with some of the problems not addressed by MEPPA. PPA imposed additional contribution requirements on contributing employers who contribute to plans in endangered and critical status (euphemistically referred to as "yellow zone" and "red zone plans"). These measures have undoubtedly helped, as the number of plans in the "green zone" (i.e. with assets to cover more than 80% of their liabilities) has increased to 60%, up from 35% in 2009 at the height of the recession. Arguably, this improvement is largely attributable to stock market gains, and is not a true indication of the long-term health of the system.
However, by requiring additional contributions from contributing, as opposed to withdrawing employers, PPA focused employers on the increasing cost of remaining in a troubled plan, in a way MEPPA never did. As a result, those employers began to carefully weigh the cost of continued participation versus the cost of withdrawal liability, with the knowledge that most of their fellow contributing employers are performing the same analysis.
Many knowledgeable observers believe that, like MEPPA, PPA is a stopgap solution at best because the root cause of problem is the shrinking number of employees and employers who contribute to many multiemployer funds, particularly in declining industries. This places the increasing strain on the plans themselves as well as the PBGC insurance system. If fact, many employees who participate in financially troubled plans, now realize that that a large percentage of their employer's contribution is used to pay for benefits due to participants that have already retired. When this fact becomes more widely understood by multiemployer plan participants, more and more of them will support employer efforts to substitute another type of pension arrangement. The difficulties faced by PBGC insurance system will undoubtedly exacerbate this problem.
In the author's view, there is an increasingly narrow set of possible scenarios in light of the large (and snowballing) problem faced by the system. Undoubtedly, Congress will step in and help save the PBGC insurance system. This is not a final solution, however, and any Congressional fix will undoubtedly require employers to pay even more in an effort to minimize the need for an infusion of taxpayer funds. Even before the PBGC announcement, many employers have realized the failing state of the system and began to monitor the status of their plans more carefully, as simple logic suggests that the last few remaining employers in a troubled multiemployer plan will be saddled with very high rehabilitation plan contributions and withdrawal liabilities. However, many employers do not realize that they could be left in that very position quickly. With the collapse of the PBGC multiemployer insurance system a real possibility, many employers could decide to leave the system at once and the tide could turn very quickly.
The bottom line is that the PBGC Insurance system will almost certainly not survive in its current form, despite congressional intervention. Given this reality, despite the cost of withdrawal liability, many employers should be seriously considering negotiating a withdrawal from their multiemployer plans now, as more of their fellow contributors are undoubtedly doing the same thing. The risk of involvement with a rapidly deteriorating fund should be a concern to all multiemployer plan contributors even those who contribute adequately funded plans. The additional pressure imposed upon the insurance system by the PBGC announcement should be a wake up call for a tipping point may come very quickly if employers begin leaving the system in large numbers.
Originally published by For Your Benefit
