United States: Central States Pension Fund Submits Plan For Reducing Benefits

Last Updated: October 14 2015
Article by Robert B. Wynne, James P. McElligott, Jr and Larry R. Goldstein

On Sept. 25, 2015, the Central States, Southeast and Southwest Areas Pension Plan (Central States), submitted to the Department of the Treasury a plan for reducing benefits under the Multiemployer Pension Reform Act of 2014 (MPRA). Central States' "Rescue Plan" appears to be the first application for benefit suspensions under MPRA, and it will serve as an important bellwether for other multiemployer pension plans in critical and declining status that are considering a similar course of action.

MPRA Benefit Suspension Application Process

MPRA seeks to address the looming insolvency of many multiemployer pension plans, as well as the projected insolvency of the Pension Benefit Guaranty Corporation (PBGC) multiemployer plan program. MPRA permits plan trustees to reduce accrued pension benefits under specific criteria and procedures if the plan is in critical and declining status.

This past June, the Internal Revenue Service (IRS) and the PBGC issued temporary, proposed and interim final regulations and a revenue procedure (collectively, the Guidance) under MPRA. See our WorkCite article on the Guidance. The process for approval of suspension applications and a model notice that plan sponsors may use to meet MPRA requirements for notifying participants, employers and unions are provided in the Guidance. Applications must include (i) information demonstrating the plan's eligibility for suspension; (ii) information demonstrating that the plan's proposed suspension satisfies the statutory requirements for a suspension; (iii) a plan sponsor determination relating to reasonable measures taken to avoid insolvency; and (iv) certain other information. Once submitted, applications will become available for public viewing at www.treasury.gov/services/Pages/Plan-Applications.aspx.

Central States Funding Woes

Since 1955, Central States has provided retirement and related benefits for eligible employees of contributing employers that are signatories to collective bargaining agreements with various Teamster local unions. According to Central States, in 1980, there were four active Teamsters for every retiree. Over time, however, those numbers reversed as trucking industry deregulation, declining union membership, two economic recessions and various other factors left Central States severely underfunded. Today, Central States (i) has one active Teamster working for every five retirees; (ii) pays out $3.46 for every $1 taken in, resulting in it paying out $2 billion more than it is taking in each year through employer contributions; and (iii) is projected to run out of money within 10 years.

Central States has tried to improve its financial position by increasing employer contributions, reducing early retirement benefits and lowering its benefit accrual rate of active employees from 2 percent to 1 percent of contributions. In materials it distributed describing its Rescue Plan, Central States acknowledged:

Unfortunately, these efforts have not been sufficient. A realistic rescue plan is needed now. The longer we wait to act, the larger that benefit reductions will have to be. And, if we wait too long, the Central States Pension Fund will run out of money and won't be able to be saved.

The Rescue Plan

A summary of the Rescue Plan can be found at www.CSPensionRescue.com. The Rescue Plan itself, reported to be some 2,000 pages long, has not yet been made available online. Here are some highlights, based upon the summary:

  • Age and Disability Protections.  As required by MPRA, benefits for participants age 80 and older and benefits based on disability would be protected from any reductions. Reductions to benefits for participants age 75 to 80 would be mitigated on a sliding scale determined by months to age 80. Central States estimates that 41 percent of its retirees would receive some or complete protections from benefit suspensions due to their age, and 5,000 retirees would be protected due to MPRA's disability protections.
  • "Orphans." As required by MPRA, the Rescue Plan would make maximum benefit reductions (to 110 percent of the PBGC guaranteed benefit) for participants and beneficiaries whose employers failed to pay their full withdrawal liability. Central States estimates that there are 43,000 such "orphans," each of whom earned 90 percent of his or her service with an employer that failed to pay its full withdrawal liability. An additional 56,000 participants are estimated to have some work history with such employers. This group faces the steepest benefit cuts under the Rescue Plan.
  • UPS Transfer Group. MPRA contains a special ordering rule protecting participants whose employers withdrew from a plan but paid their full withdrawal liability and guaranteed the benefits of participants employed by them. Under the terms of its 2007 withdrawal from Central States, United Parcel Service Inc. (UPS) paid its full withdrawal liability and promised in a separate union agreement to cover any benefits reduced for certain UPS employees. Central States estimates that 48,000 participants would face no net loss of benefits due to this UPS guarantee.
  • Reduction in Future Accruals. The Rescue Plan would further cut future accruals of active employees – from 1 percent to 0.75 percent of contributions.
  • New Re-employment Rules. In recognition that these benefit cuts would force many retirees back to work, the Rescue Plan would remove all re-employment restrictions for participants who retired on or before Oct. 1, 2015 and whose benefits are reduced. Re-employment restrictions would be relaxed for those who retire after that date.

Report of the Retiree Representative

Under MPRA, a pension plan with 10,000 or more participants that seeks to suspend benefits must select a participant in pay status as a "retiree representative" to advocate for retired and deferred vested participants. Central States appointed Susan Mauren as the retiree representative and in her statement posted online, she explains the need for the Rescue Plan:

Central States cannot continue to pay out significantly more money than it is taking in. Without intervention, the Fund will run out of money and be unable to pay any benefits.

MPRA is not the legislation any of us wanted. I agree with those of you who have contacted me to say that a full congressional bailout of our pension systems is what retirees deserve. However, Central States introduced this type of legislation in 2010 – to a more worker-friendly Congress – without any success. Current legislation sponsored by Senator Bernie Sanders has not yet earned the bipartisan support it needs to become law. And we cannot rely on the federal government insurance program, Pension Benefit Guaranty Corporation, to pay benefits if Central States runs out of money. According to recent reports it has published, the PBGC is likely to become insolvent before Central States.

What's Next

Here is what to expect going forward:

  • Within 30 days of receiving an application to suspend benefits, Treasury will publish the Rescue Plan and request comments from contributing employers, unions, participants and other parties. These comments will help form the "statement in opposition" for the voting ballots that will be provided to participants and beneficiaries during the IRS-administered vote on the Rescue Plan.
  • Treasury must approve or deny Central States' application within 225 days of the submission. If no action is taken, the application is deemed approved. If the application is rejected, Treasury will provide a notice explaining why.
  • Within 30 days of an application's approval, the IRS must administer a vote for participants and beneficiaries to approve or reject the proposed benefit suspensions. See our earlier WorkCite article discussing recently-issued proposed and temporary regulations under MPRA related to the administration of this voting requirement.
  • If a majority of participants and beneficiaries vote to reject the suspension, the plan sponsor may again apply for benefit suspensions. However, if Treasury considers a plan systemically important, Treasury may overrule an adverse vote and implement the plan, perhaps with modifications. A plan is deemed systemically important under MPRA if PBGC assistance is projected to exceed $1 billion if benefits are not suspended. Central States meets those criteria and is therefore systematically important.
  • Benefit suspensions may not become effective until nine months after the date an application is submitted. Accordingly, based on the filing date for the Rescue Plan, if it is approved, it would be implemented on or around July 1, 2016.

Political Developments

The fallout from Central States' application is in full force. This is not surprising, as the MPRA is the first instance in which Congress has permitted an exception to the provisions in ERISA and the Internal Revenue Code prohibiting the cut-back of accrued benefits under qualified retirement plans. A posting yesterday from the Pension Rights Center indicates as follows:

In the last few days we at the Pension Rights Center have been inundated with calls from retirees who are receiving letters from their pension plan informing them that their pension is slated to be cut by as much as 70 percent. All of the retirees we have heard from so far are participants in the Central States Pension Fund — and they are scared and upset at the thought that their benefits could be cut by so much. This is the first time many of them are learning that their pensions could be cut at all.

Many of the people we've spoken to have told us that they fear they will lose their homes, they worry that they won't be able to pay for medicine, and they worry that they won't be able to support their families — all because of these proposed pension benefit cuts. They say they will now have to resort to government assistance to pay their bills — a cruel irony when you consider that these people worked all their lives for a pension they assumed would take care of them in retirement.

Several bills have been introduced in Congress to change MPRA:

  • Companion bills introduced earlier this year by Sen. Bernie Sanders and Rep. Marcy Kaptur would repeal MPRA's benefit-suspension provisions.
  • A bill introduced yesterday by Sen. Rob Portman would make the participant vote binding in all situations, thus making a majority vote necessary for any pension cuts to occur. There would be no exception for systemically important plans. The Portman bill would also require that only ballots that are returned be counted. Currently under the MPRA, except for systemically important plans, a benefit suspension would go into effect unless a majority of all participants and beneficiaries voted to reject the suspension. Thus, for example, if there were 1,000 persons eligible to vote on a benefit suspension and 300 of them voted in favor and 400 voted against, the suspension would proceed because 501 persons did not vote against. Under the Portman bill, only the ballots of the 700 persons who voted would be counted, and the suspension would not go into effect because the 400 persons voting to disapprove constituted a majority.

We will continue to provide WorkCite updates on developments in this important issue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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