LANSING – Multiemployer pension plans such as those that cover the building trades unions are in better financial positions compared to the dark, dark economic times of the U.S. economy in 2009. But there has been little momentum toward improvement of funds since 2011.
To get in the best position for the good long-term health of funds, painful structural changes in the law governing how pension plans are funded and administered are going to have to be adopted this year by a dysfunctional Congress, says Randy DeFrehn, speaking on March 5 before delegates to the Michigan Building and Construction Trades Council’s 55th Legislative Conference.
“We’re still digging out of a very deep hole,” said Defrehn, the executive director of the National Coordinating Committee for Multiemployer Plans. “Construction industry hours haven’t picked up” as they have following past economic recessions, “and that primarily explains why plans haven’t picked up as in the past. We have actually been in a depression, not a recession.”
Multi-employer plans basically need four things to get healthier. The first is a no-brainer: more man-hours to feed contributions to pension plans. Second: continued decent performance of stock market investments. Third: changes by Congress to allow plans to make accounting and structural changes to fix the way they do business. And fourth, time: to allow for all the above to work, as well as to allow unions an opportunity to attract new employers to widen the pool of contributors to the pension plans.
The building trades unions are among many in the multi-employer pension community, which also includes groups like the Mine Workers, Teamsters and United Food and Commercial Workers Union. For about 18 months, 42 groups spanning that community, including labor, management and others, met to develop a consensus on a course of action to present to Congress. They completed a plan, “Solutions Not Bailouts,” and brought it before Congress last year, where five hearings have already been held on the matter.
“The bottom line,” DeFrehn told delegates, “is that they (the multi-employer community) developed voluntary tools for your plans to use in certain situations.” The tools, he said, fall under three broad categories: how to preserve what plans already have, how to remediate what’s wrong, and how to innovate to assure a healthier financial future.
The financial health of the plans hasn’t changed much in the last three years. In the worst “red zone” are 28 percent of multi-employer pension plans as of 2013. Being in the red zone means a plan is less than 65 percent funded. “Inevitable insolvency,” DeFrehn said, is the fate of between 6 to 15 percent of all multiemployer plans.
An additional 11 percent of all plans are in the “yellow zone,” meaning they are 65-80 percent funded. And some 61 percent of multi-employer pension plans are considered in the healthy “green zone,” or more than 80 percent funded.
DeFrehn said there are currently only “bad choices” for fixing troubled multi-employer pension plans. This is in good part because federal laws governing pension plans – especially those headed toward insolvency – offer administrators little flexibility for making fixes, like benefit reductions. For example, there is no ability by plan operators, he said, to roll back pensioner increases given back in the more prosperous late 1990s. “There is no early intervention option,” DeFrehn said. “Benefits must be maintained until insolvency.”
And once a pension plan becomes insolvent, the next (false) hope is that the PBGC – the Pension Benefit Guaranty Corp. – will step in and maintain benefit levels. The problem is, the PBGC itself is expected to be insolvent in 10-15 years, and only an act of Congress would restore funding to the PBGC. “I have been told point blank, ‘don’t look for a PBGC bailout, you’re not getting one,’ ” DeFrehn said.
The Solutions Not Bailouts plan would allow green zone plans to stay healthy, for example, by removing disincentives for employers to stay in the system. Employers are understandably reticent about getting linked with a potentially failing pension plan. Solutions would allow yellow zone plans the flexibility to lower current or future plan benefit levels so that they don’t become worse. And for red zone plans,Solutions Not Bailouts would allow pension administrators to implement the difficult changes that need to be made so that plans do not become insolvent. Those changes for red zone plans would likely take the form of lowering benefit levels, and raising the age at which benefits can be earned.
Of course, the crux of all this is the potential for the lowering of benefit levels for individual workers. To reduce “a very complicated and very technical” piece of legislation into terms that show how drastic the options are for Congress, DeFrehn said an average 50-year-old worker today in a red zone multiemployer plan looking at normal retirement age could expect to earn about $28,000 per year under theSolutions Not Bailouts plan. In the wholly unlikely event of a taxpayer bailout of the PBGC, he said that same worker could expect to get as much as $13,000 per year. But if the current law is not changed, that same worker would get about $3,000 a year. “So doing nothing is not an option,” DeFrehn said.
Fortunately, Congress forced itself to act on pension reform by making 2014 the expiration year for existing pension law – so Congress has to do something. One of the more drastic options would be to do away with multiemployer pension plans altogether, and move everyone into a 401K plan. DeFrehn said “we recognized that” as a bad option for workers, and came up with ways to solidify the finances of pension plans “without putting greater liability on employers.” But he also said long-term, the success of the Solutions plan also depends on bringing in new employers.
“We have to think differently to protect economic security for our members,” Defrehn said. “We have a very good chance of getting this passed this year.”