The U.S. Department of Treasury recently designated Kenneth Feinberg to head an effort to review distressed multiemployer pension plans that are facing funding shortfalls. This effort is part of the Kline-Miller Multiemployer Pension Reform Act of 2014, enacted late last year, which may legally reduce member benefits under new pension reform.
According to the Treasury’s announcement, Mr. Feinberg has been named a Special Master to oversee the Kline-Miller act. In this capacity, his role is to:
- Provide impartial review of the applications;
- Determine whether applications meet the requirements set by Congress; and
- Ensure that the affected stakeholders have a single point of contact dedicated to this process.
Difficult Decisions Ahead
The appointment of Mr. Feinberg may signal tough times ahead for multiemployer pension plans. The fact that the Treasury formalized a role to oversee pension reform processes means that the Department expects to receive applications for reductions in multiemployer plans.
In a prior ERISA Benefits article published in January, it was reported the new legislation could affect almost 10 million members of multiemployer pension plans. These particular pension plans – traditionally created through collective bargaining agreements between a labor union and two or more employers – have been hurt in recent years. Contributing factors include a shrinking pool of unionized workers, significant economic fluctuations that affect investment performance, and interest rate challenges encountered by all pension plans. Industries such as construction, trucking, mining and other small businesses hold a stake in these plans.
A June 18 story in the New York Times, titled “Kenneth Feinberg to Oversee Cuts in Multiemployer Pension Plans,” reported that before cuts are effective, certain regulations must first be met:
- Trustees must prove that by cutting retirees’ pensions, the plan would remain solvent for at least 30 years;
- Trustees must show that even though they have already taken other measures, such as getting bigger contributions from workers and/or companies, plans are still headed toward insolvency; and
- Workers and retirees must be notified of the proposed cuts and have a chance to vote on them.
According to the article, Mr. Feinberg said that if proposed changes are unacceptable, he will send them back to plan trustees for additional work. He also admitted that he could override any vote against plan cuts if there is no other alternative, and if the plan is considered “systematically important”-meaning that taking it over would cost the Pension Benefit Guaranty Corp. (PBGC) more than $1 billion. Some plan participants, however, are protected from a reduction in benefits, including retirees 80 years of age and older and participants receiving disability benefits.
The PBGC believes that about 10 percent of all multiemployer pension participants are in distressed plans, but said that many of them are taking other measures to postpone insolvency or improve their financial outlook.
The Math Doesn’t Work
Although there are not any pending applications to be reviewed under the new program, there are signs that the Teamsters Central States, Southeast & Southwest Areas Pension Plan, Rosemont, Ill., is considering the development of a rescue plan, according to a special website the multiemployer plan created to provide details and updates.
The plan, which has more than 400,000 workers, could devastate the PBGC’s insurance program if it failed. That means payments to other plans’ retirees who are currently relying on government intervention would stop. If Central States takes no action, the plan will completely run out of money in 11 years.
According to a recent Pensions & Investments article, the pension fund had assets of $17.8 billion as of Dec. 31, down from the $18.7 billion a year earlier.
“However, even record investment returns in the short term will not be nearly enough to resolve the fund’s imbalance,” the rescue website explained. “For every $3.46 that the fund pays out in pension benefits, only $1 is collected from contributing employers, which results in an annual $2 billion shortfall. That math simply doesn’t work.”
The pension fund has been in “critical and declining status” since 2008, a PBGC designation given to multiemployer plans that are less than 65% funded.
This summer, Central States is expected to disclose details of its rescue plan that may involve cuts in benefits to both active employees and retirees. “Our goal is to stabilize the Central States pension fund so that we can continue to pay benefits to our participants now and for years to come,” the website said.
Any rescue plan would not become effective until next year.
Emblematic Choice for a Complicated Problem
Mr. Feinberg, a skilled attorney who is one of the nation’s leading experts in mediation and alternative dispute resolution, is viewed by many in the industry as a reasonable choice for what he admits is a “very, very challenging assignment.”
He has had several prior federal appointments including Special Master for TARP Executive Compensation following the financial crisis, Administrator of the Gulf Coast Claims Facility following the Deepwater Horizon oil spill, and Special Master of the Federal September 11th Victim Compensation Fund. He also administered victim compensation and memorial funds following the Boston Marathon bombings and the Virginia Tech shootings. He will be taking on this new role pro bono.
More information about the proposed regulations and the temporary regulations are available online. The related revenue procedure, detailing the application requirements, is also available online. The public comment period ends August 18, 2015.