Pensions broken: Can they be fixed with cuts?

Bankrate.com

It's no secret that pension plans around the country are in trouble. The old-fashioned defined benefit plans in both the public and private sectors face funding shortages, and some radical solutions have been proposed to fix them.

The trouble extends to so-called multiemployer pension plans that provide benefits -- or promise them -- to more than 10 million union members, including those of the Teamsters, the United Food and Commercial Workers International Union, and the National Electrical Contractors Association. Some are running alarmingly short on money, prompting a coalition of union officials and industry executives to put aside their differences and hammer out what they hope is a potential solution that involves compromises from all involved, including existing retirees.

The National Coordinating Committee for Multiemployer Plans, a coalition of unions and companies that employ union workers, has released its report, "Solutions Not Bailouts," which recommends taking these and other drastic steps.

  • Raise retirement ages in line with those of Social Security.
  • Allow trustees of the most troubled pension plans to suspend some benefits and even cut benefits that current pensioners already receive.
  • Create new types of plans, such as variable annuity plans in which the benefit would rise or fall depending on investment performance but provide a minimum "floor" using conservative return assumptions. This would reduce employers' liability.

Some of these solutions run afoul of pension regulation put in place nearly 40 years ago that rendered pension plan promises sacrosanct.

What are multiemployer pension plans?

Multiemployer pension plans are different from other pensions offered by private companies in a variety of ways. These plans help union workers maintain retirement security throughout their working lives even though they may move from one job to another within their trade. Multiemployer pension plans are generally maintained by several employers within a particular industry as well as a labor union.

However, in recent years, some of these plans got into serious trouble due to a combination of deteriorating economic and market forces as well as government policies.

Earlier this year, the Pension Benefit Guaranty Corporation, or PBGC, which guarantees private pensions, reported that while it expects some multiemployer plans to recover as the economy improves, others may never be stable again.

The PBGC said it paid $95 million to participants of insolvent multiemployer plans in 2012. It projects this cost will rise to $500 million by 2022 -- accounting for just those plans that have already reported liabilities.

In March, the Government Accountability Office, or GAO, also released a report on the problems facing multiemployer pension plans. Author Charles Jeszeck, director of education, workforce and income security issues, summed up his conclusions this way: "A good chunk of the multiemployer system is healthy and should be able to provide benefits into the future. But there are some very large plans and a number of smaller plans where no reasonable combination of employer contributions and employee cutbacks will ever make them solvent."

He adds that if the PBGC is forced to step up and cover these shortfalls that it, too, will run out of money in the next 10 or 15 years.

The pension plans sponsored by the Teamsters union are among the least financially stable. Jeszeck says that without some shoring up, the situation will only get worse. "If the Teamsters came in (to the PBGC), it would whack the system," he adds.

Galen Munroe, spokesman for the Teamsters union, said in an email: "We are going to decline comment for your story."

PBGC won't rescue these plans

The amount the PBGC is already stretching to cover is just a fraction of what union retirees have been promised. Multiemployer pensions can provide very generous benefits, with some journeymen employees anticipating more than $60,000 a year. But the PBGC has never promised to match pensions that high. Unlike its insurance of single-employer plans, the PBGC doesn't take over multiemployer plans and assume responsibility for paying all the benefits up to a certain cap. Instead, the agency pays administrative costs and a minimum amount to retirees.

The PBGC doesn't offer an acceptable solution for hardworking union workers, nor does it provide sufficient relief for union employers faced with uncertain obligations, says Marco Giamberardino, executive director for government affairs for the National Electrical Contractors Association.

Josh Gotbaum, director of the PBGC, says the program was designed decades ago with "low guarantees and low premiums, and it worked fine for 30 years. But the world has changed and the program hasn't."

He adds that the PBGC ought to revisit how these pension plans are insured at PBGC. "The issue is, what do you do for the minority of plans that are in trouble that doesn't mess up the majority plans that are not in trouble? The thing we don't want to do is taint a good system of retirement by tarring everyone with the same brush. Any change needs to be made carefully, thoughtfully and gradually."

Giamberardino says his union's national plan, as well as its 112 local plans, are mostly in good shape, but it does have a few in what is referred to as the yellow zone -- troubled -- as well as in the red zone -- deeply troubled. If those plans can't be turned around, workers can expect to receive no more than $13,000 annually from the PBGC -- assuming the PBGC remains solvent enough to pay that.

"No one wants to get to that point," Giamberardino says. "The heads of many of our member companies were apprentices and journeymen once, and they continue to be card-carrying union members. They understand what it means to be an employee and how important those pensions are."

Legislative, regulatory solutions

It is critical for unions and employers to craft a solution this year because many of the provisions of the Pension Protection Act of 2006, which offer tools for unions and employers to bail out troubled plans, expire at the end of 2014, says Joseph P. Paranac Jr., labor attorney at LeClairRyan in Newark, N.J.

Paranac works with union employers to help them manage their pension obligations. He says the available remedies in the Pension Protection Act for fixing troubled plans seemed severe when the law was passed in 2006, but since the economic meltdown in 2008, they don't look so harsh. Paranac thinks Congress ought to take pressure off multiemployer plans by extending the Pension Protection Act right away. "Nobody wants the act to expire and go into oblivion," he says.

Some union employers are angry and think any proposal that will cost them money is the wrong one. The National Coordinating Committee for Multiemployer Plans, which released the "Solutions Not Bailouts" report, calls for educating members of regulatory agencies and Congress to adopt their recommendations.

But some image problems are hard to overcome. As one Teamster member, who asked to remain anonymous, says, "The rumors have been running rampant for years that because of bad management, there will be no money in the pension fund for the retirees."

Giamberardino shrugs at union members with that kind of attitude: "Do you keep letting the roof leak, or do you fix it?" he asks.



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