House Education and Labor Chairman Bobby Scott (D-VA) recently introduced legislation that seeks to rescue multiemployer pension plans (MEPs) facing insolvency. Entitled the Emergency Pension Plan Relief Act (EPPRA), the bill would fund this rescue directly from the U.S. Treasury. As drafted, however, the legislation does not propose any reform to the multiemployer pension system, and would expose contributing employers to increased liability over the next 15 years.
MEPs are pension plans created by agreement between two or more employers, typically within the same industry, and a union. An MEP is administered by a board of trustees, which includes employer and union representatives. Many MEPs are in financial distress.
EPPRA seeks to rescue MEPs by directing the Pension Benefit Guarantee Corporation (PBGC) to "partition" dying MEPs. In a partition, the PBGC (which, as a federally chartered corporation, is essentially an arm of the government) takes over the responsibility for the payment of enough of the retiree benefits so that the partitioned MEP can avoid financial destruction without cutting into the earned benefits of participants and beneficiaries. In theory, EPPRA's partition program would expand the PBGC's existing authority to partition plans, increase the number of eligible plans, and simplify the application process. Meanwhile, the MEP trustees would continue to administer a now smaller plan that would not include the burden of benefits for those retirees transferred to government responsibility.
EPPRA would also increase the PBGC payment to retirees who have participated in MEPs that already became insolvent, or will become insolvent in the future. Currently, these retirees receive a maximum yearly payment of $12,870. Consequently, under the current system, retirees who, for example, might have received $35,000 per year from their plan, experience dramatic pension reductions when/if their plan fails. Under EPPRA, this yearly government guarantee would be increased to $24,300.
Finally, EPPRA would "disregard" a PBGC partition for purposes of calculating an employer's withdrawal liability to the plan for 15 years following the date of the partition. It is this last provision that has the potential to increase dramatically employer liability at the same time that MEPs receive a financial lifeline.
Withdrawal liability, often labeled an "exit tax," was conceived by Congress under President Carter in 1980 as a remedy to salvage underfunded MEPs. Even in 1980, many MEPs did not have enough money to cover vested benefits of their participants and retirees. In an attempt to solve this lack of funding, Congress amended ERISA to require any participating employer that exited an MEP to pay its pro rata share of the MEP's unfunded vested benefits. The theory behind withdrawal liability was that employers would remain in the plans rather than face the exit tax. Therefore, the MEPs would receive sufficient employer contributions to return to health.
Four decades of experience has proved Congress dramatically incorrect. MEPs have continued to deteriorate and are collectively underfunded by hundreds of billions of dollars. Meanwhile, withdrawal liability has become an enterprise-destroying liability for employers that contribute to them. It is increasingly common for employers to face potential exposure of $500,000 per full-time-equivalent employee on whose behalf the employer contributes to the MEP. So, a small unionized garage with only four union-represented employees could face a $2,000,000 tax upon leaving an MEP to replace it with a 401k. This high fee is, of course, significantly higher than the vested benefits of the company's own employees. It is driven, in large part, by the unfunded vested benefits attributed to other employers that did not (or could not) pay their own withdrawal liability; increased life expectancy; trustee misbehavior (in some instances); and misguided investment policies compounded over decades. The high level of unfunded vested benefits may also have been driven by unrealistic benefit (pension) promises that defy actuarial science. But, regardless of the reasons for an MEP's exceedingly high level of unfunded vested benefits, the contingent withdrawal liability leaves employers with few palatable options.
EPPRA would be, at best, a temporary fix. It makes no effort to confront the factors causing MEP deterioration. There are no reforms or controls placed upon trustee behavior. Rather, it is only a direct and unrestricted transfer of taxpayer funds to the retirees who are suffering, or might at some time in the future suffer, financial hardship. Although certain retirees would receive relief in the form of an increased benefit guarantee, because of the 15-year "disregard" provision, employers would receive no relief from the MEP's salvation. Instead, employers would continue to shoulder the withdrawal liability as if no government assistance had been provided. Moreover, because the MEPs that would receive relief are, by definition, the very ones that are cascading toward insolvency, their "disregarded" underfunding would increase each year. Employers thus could face greater and greater exposure over the next 15 years at the very same time that the plans are receiving government assistance.
If EPPRA, or legislation conceptually similar, is enacted, it is difficult to predict the employment implications. Past predictions as to employer, union, and plan behavior have proven unreliable. What is predictable, however, is that employer financial exposure to currently failing MEPs would not be reduced for the foreseeable future.
In a narrowly divided Congress, the fate of EPPRA is unclear. Nevertheless, EPPRA's swift introduction shows that multiemployer pension relief remains a priority of congressional Democrats. WPI will keep you apprised of relevant developments.
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