The Building Tradesman Newspaper

Friday, March 31, 2017

No end in sight: pension funds under continuous strain to fix finances

By Marty Mulcahy, Editor

LANSING - You do the math.

The 40 or so construction industry multiemployer union pension funds in Michigan have net assets of about $7 billion. 

Every year, more than $800 million in multiemployer pension benefits are paid, plus about $60 million is paid in service provider expenses. And every year, there are less than $500 million in contributions that come from hours worked in the construction industry.  With the exception of a few pension plans, the state's unionized construction industry has a chronic, fixed financial chasm between income and out-go that will be difficult to turn around.

"Most of the funds have a negative cash flow. By negative cash flow, not taking investment returns into account, I'm just talking about contributions in - benefit payments and expenses out," said attorney Derek Watkins of Sachs Waldman PC. He specializes in the representation of jointly trusteed (Taft-Hartley) multiemployer benefit funds in the Michigan construction industry. "You're really relying on investment returns to make sure you have a positive situation with your funds." 

The problem is, Watkins said, "you just don't have enough guys and gals out there working construction to solve the problem."
Speaking on March 7 to  the Michigan Building and Construction Trades Council's 58th Legislative Conference delegates - many of whom sit on pension trustee boards - Watkins said Michigan's multiemployer plans are in a greater hole than in the rest of the country largely because our so-called one-state Depression started years before the nation's Great Recession in 2009.

He said pension trustees are "facing headwinds today not because of any decisions they made," but mainly because federal pension law that existed in the 1990s required fund managers to disburse excess funds instead of allowing them to save for a rainy day.

As a whole, multiemployer pension funds around the country are in rough financial shape. Nationwide there are 1,380 multiemployer pension plans with more than $480 billion in assets. More than half of all the multiemployer plans are in the construction industry, and most plans currently have negative cash flows. 

Notices for "critical and declining status" were filed by 51 plans in 2015, and another 74 in 2016.

One financial barometer of the industry is the Pension Benefit Guaranty Corp., which backstops failing pension plans. Absent any financial reforms, the PBGC will likely be insolvent by 2024-25. And "backstops" is a relative term: for pension plan participants whose funds fail, the PBGC currently only funds a maximum benefit of about $12,000 per year. 

"Until recently with the Pension Protection Act (of 2006), you have had a lot of things working against you," Watkins said. "First, plans couldn't have established a rainy day fund. So back in the 1990s, when the markets were just going gangbusters, the funds couldn't set that money aside, couldn't be more than 100 percent funded and still have the contributions to your funds be tax deductible. So that limit didn't let you as trustees of these funds put money aside to protect you when the 2000s came. And since 2000 we've had really turbulent investment markets. We might have had a few good years but there have been a number of bad years, too."

The federal government and the industry rates the financial health of pension plans on a simple scale. "Green Zone" (healthy plans) have a funded percentage 80 percent or above; "Yellow Zone" plans (endangered) have a funded percentage is between 65 and 80 percent, and "Red Zone" plans (critical) have a funded percentage below 65 percent.

Congress, in a rare display of bipartisanship, in 2014 adopted a law that allows changes in how pension plans address their financial difficulties, called the Multi Employer Pension Reform Act. The primary effect of the act allows failing funds to cut benefits for self-preservation.

"They can do what's called suspension of benefits, which is just a nice way of saying taking benefits away from participants," Watkins said. "What it does is allow you to make cuts to maintain the solvency of the plan. But in order to do that there's a really tough application process you have to go through (with the U.S. Treasury Department). But once you go through that you can actually reach back to that period, back in the 90s, when you had to make benefit improvements in order to maintain the tax deductibility of those contributions You can reach back into that period  when maybe your benefits were not sustainable on a going-forward basis, and take those benefits back."

But getting such a benefit-cutting plan approved by the plan's participants, much less the Treasury Department, is no simple feat. 

Watkins said there are a number of multiemployer pension plans in the nation that are in critical financial condition, but only 11 plans have made the application with the Treasury Department to suspend benefits. And of those 11 only one plan has been approved to make the cuts, Iron Workers Local 17 in Cleveland.  "And some believe that it might be the only one that ever gets approved," Watkins said. "Because it was approved just to show the world that this isn't an insurmountable task, that yes indeed the Department of Treasury will approve one. Others believe that there are more approvals coming, but there was a delay in granting any approvals until the last election was over."

The applications by multiemployer plans to the Treasury Department to cut benefits have been a case of attempting to thread a fine needle with thick thread in order to get approved. It's up to actuaries of failing plans submitting paperwork to the Treasury Department to try to thread that needle. 

There are debatable assumptions about mortality rates for members and spouses. There are assumed, but unknowable future investment returns, as well as assumed workload hours decades ahead. The law allows plan participants to cut benefits for inactive participants, but not actively working participants, creating potential inequities there and elsewhere. Other assumed factors are future withdrawal liability costs for employers who want to leave the system. 

Watkins said there are few good options for financially critical plans. The 2014 law allows plans to move themselves into the Red Zone in order to make a tactical decision to impose benefit cuts before things get worse. He said long-term there's little chance that the cuts will put critical funds in a better financial condition. "For a critical and declining plan that goes through this process," he said, "it's not like 10 years from now it will be Green, what it probably means that 10 or even 50 years from now, we're still Red Zone, but at least we still have money."