LANSING - A dysfunctional Congress that deservedly got the lowest performance marks in history last year did do a few things at the very end – it passed a union-approved change to a law governing multiemployer pension plans.
The adoption by Congress of the Multiemployer Pension Reform Act in late 2014 has raised all manner of questions about the future of building trades union pension plans. Southfield-based fund attorney John Tesija offered up what could be considered a good-news summary of the new law at the recent Michigan Building Trades Council’s 56th Legislative Conference:
"Everybody thinks that this law is going to cause pension plans to automatically cut benefits, but the answer, honestly, is 'no,'" said Tesija. "The gist of the new law is not about you." It’s more about saving the PBGC – the federal agency that protects pensions.
Tesija, a fund attorney for about a dozen multiemployer pension plans in Michigan, pointed out that many of the delegates at the conference also sit as trustees on local union pension and other benefit funds. He said the reforms adopted by Congress are "limited to a number of very large, seriously under-funded pension plans with many restrictions on their use, and I don't see any pension plans in Michigan that currently meet this criteria."
Basically, the new law used a position paper adopted by labor unions and contractors as a guide. Titled Solutions Not Bailouts, the paper offered Congress a way around putting more money into the PBGC, the taxpayer-backed agency which is supposed to backstop failing pension plans. The PBGC is in no position to fully fund benefits for failing plans: last year, it had $818 billion in benefit liabilities vs. $397 billion in assets.
Tesija, one of the legal experts on multiemployer pension plans in the state, gave a 20-minute presentation to Michigan Building Trades delegates, while his law partner Michael Novara covered health care issues. Following are some highlights from Tesija:
*He said the new law is an extension of the 2006 Pension Protection Act (PPA), which sets out markers to gauge the financial health of pension plans, and actions for plan trustees to take to keep plans healthy. PPA grades pension plans by zones -- Green Zone (funded 80 percent or more), Yellow Zone (65-80 percent funded) or Red Zone (below 65 percent funded). The level of regulation depends on which zone your pension plan lands in.
Tesija said the 2006 law made "kings" out of fund actuaries, who were given wide powers over pension policy and operations to keep funds in compliance. Unfortunately, he said the PPA also "shortened the horizon" for fund trustees: instead of taking the long view on investments and man-hour swings, funds have been forced to reexamine and readjust their operations constantly, to stay on their funding track.
*The new pension law did two things:
First it doubled PBGC premiums, from $13 to $26 per participant.
Secondly, the law struck fear in the hearts of existing pensioners: Congress allowed plans to cut benefits for retirees under age 80, but only if a plan qualifies for such action, which few will do. That is because the new law sets high barriers to any effort to cut benefits.
*"Benefit cuts are hardly a certainty, even with Red Zone plans," Tesija said. "If you're in the Red Zone, and you're trending downward, only then can you even consider these options.”What does it mean to be trending downward? The current rule is that your pension plan is going to go insolvent in 14 years.
"What is insolvency? Insolvency in the pension world is defined as running out of assets to pay benefits. There's no building trades pension plan out there in Michigan that's completely set to run out of assets, at least not now. You're also going to do things long before you get to insolvency. There are trigger points that kick in long before you get to that point. So that's why I say, I just don't see any Michigan based pension plans that meet this criteria."
*"Let's assume for the sake of argument that you have a red plan that is trending down, that you are in a death spiral," Tesija said. "So what happens? This is where it gets really complicated. If you are a trustee of a plan, and I see a lot of them in the room, you have to have your actuary say hey, you need to cut benefits under this new law. Then you as trustees have to agree with that action. Remember, you have union and management trustees, all of them with equal voting power. Then you have to submit that decision to cut benefits to your participants for a vote, actives and retirees. And it's not clear if they vote together or they vote separately. They have to OK the benefit cuts.
"But we're not done yet. You then have to submit that result, to not one, but three government agencies. The IRS, the DOL, and our friend, the PBGC. They have to OK this action, and only then can you implement the benefit cuts. Those agencies even get a veto over a no vote!
"If you're a really big plan, over 10,000 members, your retirees get a seat on your plan's board of trustees. So they get a say in the process. So you can see that the process for implementing benefit cuts is really, really complicated. Hardly anybody meets it."
*Tesija said he thinks the federal law was really aimed at fixing "a few big national plans that are in deep, deep trouble." And of course, saving the PBGC was the other goal.
*"To summarize," Tesija told Michigan Building Trades delegates, "this new pension law extended the 2006 PPA law, so you're stuck with it now. You're going to have to work with your actuary to comply with this new law. On the one hand this forces us to run these pension plans a little tighter, but it's bad on the other hand. We now have all sorts of new compliance, actuarial issues, and additional legal procedures. This law was apparently the best they could do under the circumstances."