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Publication

July 7, 2016Client Alert

The Future of the Central States Pension Fund

One of the United States’ largest multiemployer pension funds is the Central States Southeast and Southwest Areas Pension Fund (Central States). Multiemployer pension funds are retirement plans funded by multiple employers through the collective bargaining agreement covering their respective workers. Central States provides pension benefits for the members of the International Brotherhood of Teamsters, where approximately 200,000 participants and beneficiaries currently receive benefits and perhaps as many as 200,000 more could later become entitled to benefits. During the 1960s, Central States grew substantially and reached its height with the trucking industry boom. Since then, deregulation of the trucking industry and declining union membership have caused a significant decline in Central States’ membership, leaving fewer employers with unionized workers to fund the plan and many more individuals in retirement status receiving monthly benefits. This means that Central States has a lot of red ink, referred to as “unfunded vested benefits.”

A law passed in 1980 (the Multiemployer Pension Plan Amendments Act) provides that when an employer’s obligation to contribute to a multiemployer pension plan permanently ceases the employer must pay the fund its “share” of the current unfunded vested benefits, which is known as the employer’s “withdrawal liability.” The obligation to contribute can cease for a number of reasons, for example, when an employer sells its assets or closes its doors or when it leaves the pension fund through collective bargaining or if the bargaining unit employees decertify the union.  In each of these circumstances, the employer must pay the pension fund its withdrawal liability. However, over the years, many companies have failed to meet this obligation as they departed Central States, forcing Central States to provide benefits for the “orphaned” retirees without adequate funding. Such unpaid withdrawal liability, major recessions, investment losses, no new employers commencing participation, and retirees living longer have caused  unfunded vested benefits for Central States to exceed $23 billion.

In December 2014, Congress enacted and the President signed the Multiemployer Pension Reform Act (MPRA). MPRA allows underfunded multiemployer pension funds in “critical and declining status,” like Central States, to propose plans to temporarily or permanently reduce pension benefits to stave off insolvency and ensure the ability to pay future benefits. Thus, pension checks in retiree mailboxes could be significantly reduced. The process is complicated, and it includes the Treasury Department reviewing and approving the pension fund’s application. The application must satisfy certain requirements as outlined in the statute and regulations.

In September 2015, Central States filed an application with the Treasury Department proposing a rescue plan designed to stabilize Central State’s financial status and protect Central States from imminent insolvency. The proposed plan intended to reduce benefit payouts for approximately 270,000 current and future retirees. In its application, Central States followed the proposed regulations that had been issued by the Treasury Department.

On April 26, 2016, the Treasury Department issued final regulations regarding the showing multiemployer plans must make to have benefit cuts approved and on May 6, 2016, the Treasury Department rejected Central States’ application stating that it failed to meet three statutory requirements, as explained by the final regulations. First, the Treasury Department criticized the actuarial assumptions Central States used, finding the assumptions “significantly optimistic” and not reasonable estimates to avoid insolvency. The Treasury Department also condemned the proposed benefit reductions, stating that Central States did not equitably distribute proposed cuts. Certain UPS beneficiaries not covered by a make-whole provision received worse treatment under the rescue plan, which the Treasury Department disliked, even though the law allows such treatment. Finally, the Treasury Department found that the average plan participant could not easily understand the notices Central States provided, although participants reported that they understood the notices they received.

On May 20, 2016, Central States issued a statement indicating that the Fund’s Trustees had met with the Fund’s actuaries and legal advisers and it was concluded that due to the passage of time, Central States could no longer develop and implement a new plan that would comply with the Treasury Department’s final regulations. Therefore, there would be no new rescue plan.  In this statement, Central States pointed out that the Treasury Department’s concerns could have been communicated and addressed much earlier in the process (but were not) and that the Treasury Department issued its final regulations only a few days before it rejected Central States’ rescue plan. Central States indicated in its statement that it will now not be able to avoid insolvency, which it projected could occur within 10 years.

The Pension Benefit Guaranty Corporation (PBGC) is an independent agency of the federal government that collects insurance premiums from single employer and multiemployer pension plans and attempts to pay benefits up to a guaranteed amount if a pension plan is unable to do so. Multiemployer pension benefits are currently guaranteed by the PBGC up to $12,870 per year in 2016. Unfortunately, previous pension insolvencies have stressed the PBGC, and it is clear that when Central States becomes insolvent it will lead to the PBGC’s insolvency.  Therefore, in its May 20, 2016 statement, Central States indicated that the Treasury Department’s rejection of its rescue plan “means our participants may see their pension benefits ultimately reduced to virtually nothing when the Fund runs out of money.”

Those members of Congress that voted for the MPRA in late 2014 thought they had found a solution to permit Central States and other multiemployer plans in “critical and declining” status to survive, but this is not to be. Central States points out that many members of Congress called for the Treasury Department to reject the rescue plan, and now it will be necessary for the same members of Congress to come up with real solutions, which the Fund asserts will require a cash infusion. Clearly, the amount of such an infusion can only come from taxpayers, i.e., a bailout.

Those employers participating in the Central States Pension Fund should pay attention to these circumstances and consult with legal counsel with respect to understanding exposure to liability and managing related risks.

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