The Building Tradesman Newspaper

Friday, May 03, 2013

Troubled pension plans now have a potentially painful path forward

By Marty Mulcahy, Editor

Investments in the stock market, which reached an all-time high last month, have been very helpful to sustaining the fiscal health of numerous union pension plans, including those that cover the workers in the U.S. construction industry.

But pension plan investments are no substitute for the other major contributor to the fiscal health of construction industry multi-employer pension plans: income created by hours worked. Industry employment continues to be weak following the Great Recession, and that lack of man-hour contributions has pushed several multi-employer pension funds toward insolvency. 

So what to do about fixing multi-employer pensions? A potentially important report was issued in February titled “Solutions Not Bailouts” that was sponsored by 40 organizations, including many building trades international unions, in conjunction with the National Coordinating Committee for Multi-Employer Plans.

An April 14 article in the Wall Street Journal said, “The proposal, which would undo guarantees put in place by federal law in 1974, is already stirring controversy among pension-rights advocates and rank-and-file union members.” The article added, “Pension experts say a report issued by the group earlier this year will likely serve as the foundation of a bill to replace rules (that expire in 2014) governing pensions.”

The group sponsoring the proposals, which called itself the Retirement Security Review Commission, identified two primary objectives:

  • Any recommendations for change to the existing system must still provide regular and reliable lifetime retirement income to the participants.”
  • In doing so, the proposals must be structured to reduce or eliminate the financial risks to the contributing employers.”

Now, how to make that happen? The most controversial suggestion targets benefit reductions for pensioners who are in plans that are in critical financial shape. They include, the report said,  “a relatively small but significant minority of deeply troubled plans are projected to become insolvent.”

According to the report: “For the limited number of plans that, despite the adoption of all reasonable measures available to the plans’ settlors and fiduciaries, are projected to become insolvent within certain prescribed time frames, the Commission recommends that limited authority be granted to plan trustees to take early corrective actions, including the partial suspension of accrued benefits for active and inactive vested participants, and the partial suspension of benefits in pay status for retirees.  Such suspensions would be limited to the extent necessary to prevent insolvency….”

The other suggestions to bolster faltering plans basically represent changing federal pension law to ease accounting restrictions on how the funds operate, and giving them more time to recover. The condition of specific union pension plans weren’t named in the report.

The recommendations in the plan, said Associated General Contractors of America CEO Stephen E. Sandherr, “acknowledge two distinct realities. First, taxpayers will not be asked to contribute to the preservation of these retirement plans, and second, workers and employers alike must be willing to reconsider the long-term viability of the current defined-benefit plan model in place in this country.”

“Indeed,” Sandherr continued, “the steps outlined in the Commission’s plan have the potential to safeguard many current retirement plans while offering a way to provide retirement security for future construction workers. That is why we will work to support swift legislative approval of the types of measures outlined in this plan and encourage employers and their workers to adopt them.”

It would take an act of Congress to overturn the 1974 Employee Retirement Income Security Act, which prohibits the reduction of retiree pension benefits. John Tesija, a Southfield attorney who advises about a dozen union pension funds in Michigan, said that’s hardly a sure thing. “You’d have to get the entire industry to agree on a plan and you’d have to get it through Congress,” Tesija said. “And Congress hasn’t been able to agree on anything, it’s complete gridlock.”

AFL-CIO Building Trades Department President Sean McGarvey said discussions to improve multi-employer pensions have gone on over the past two years, resulting in this plan. “In short,” he said. “our proposal is based upon crafting solutions, not relying upon bailouts, in order to keep multi-employer plans intact and solvent.

“But, at the end of the day, this proposal will serve as the basis for federal legislation that we will shepherd through the U.S. Congress until we achieve final passage.”

 Tesija said “the last thing” any fund manager wants to do is reduce retiree benefits, and that the best solution is an improved economy.

“More man-hours, and a better economy, are just crucial to improving the position of the funds,” Tesija said, “and some funds have seen their positions improve.” A Feb. 27 survey of U.S. multi-employer funds by the Segal Co. revealed an up-and-down pattern for fund strength. The survey found that multi-employer pension plans in the top “green” zone – which are more than 80 percent funded – rose from 53 percent in 2010 to 63 percent in 2011, but dropped to 60 percent in 2012. That compares to the pre-crash year of 2008, when 80 percent of surveyed plans were in the green zone.

However, the position of funds for Michigan-based unions isn’t nearly as good, Tesija said. With our state being more or less in an economic funk since about 2001, he said the “vast majority” of Michigan funds are in the yellow zone (65-80 percent funded) or the red zone (below 65 percent funded).

Tesija said the single best thing that Congress can do to help multi-employer pension funds is to ease accounting restrictions on how funds operate. He said current rules are far too stringent and force fund managers to make decisions that seek short-term gains at the cost of what’s better for the long-term health of the fund. “There are some rules in place for red zone plans that just don’t make sense,” he said.