STUMP » Articles » MEPs on the Rocks: Furniture Workers Pension Allowed to Cut Retiree Benefits » 22 July 2017, 09:16

Where Stu & MP spout off about everything.

MEPs on the Rocks: Furniture Workers Pension Allowed to Cut Retiree Benefits  

by

22 July 2017, 09:16

As in, they are being allowed to cut the benefits of current retirees (as well as future ones). The participants are going to have to vote to approve, next, if I remember correctly.

John Bury gives details:

On August 17, 2016 trustees of the United Furniture Workers Pension Fund A out of Nashville, TN became the eighth multiemployer (union) plan to file for benefit cuts under MPRA in an attempt to avoid insolvency. That application was withdrawn on February 21, 2017 and resubmitted on March 15, 2017. Yesterday they got their letter.

Approved.

From their latest 5500 form here is the plan’s relevant data:
Plan Name: United Furniture Workers Pension Fund A
EIN/PN: 13-5511877/001
Total participants @ 2/29/16: 9,896 including:
Retirees: 5,509
Separated but entitled to benefits: 3,311
Still working: 1,076

Asset Value (Market) 3/1/15: 70,887,468 Value of liabilities using RPA rate (3.44%) 3/1/15: $290,549,936 including:
Retirees: $151,631,639
Separated but entitled to benefits: $89,993,573
Still working: $48,924,724

Funded ratio: 24.40%
Unfunded Liabilities as of 3/1/15: $219,662,468

Asset Value (Market) as of 2/29/16: $55,798,192
Contributions: $3,864,739
Payouts: $13,603,642
Expenses: $1,758,131

Bury has made a good record of all the applications and actions on MEPs applying to cut benefits for current retirees. You can find them under his multiemployer pensions tag.

The official records are here.

Here’s how things stand:
2 have been approved
5 Denied
5 in Review
5 Withdrawn (the Furniture workers one had been withdrawn Feb 21, 2017.. and re-applied March 15, 2017; others also re-submitted after withdrawal)

I will go through a comparison of those approved vs. those denied at the end of this post.

COMMENTARY AND THE LINK WITH PUBLIC PENSIONS

Another blow for heartland workers: Slashed pensions

February was a bad month for Larry Burruel and thousands of other retired Ohio iron workers. His monthly take-home pension was cut by more than half from $3,700 to $1,600.

Things have been rough in the Rust Belt, but this was a particularly powerful punch in the pocketbook for Burruel, who started in the trade at 19 and worked 36 years before opting for early retirement to make way for younger workers. Unfortunately, this sagging industry doesn’t have enough younger workers to pay for retirees like Burruel, whose pension plan is in what the U.S. Treasury Department calls “critical and declining status.”

Burruel and the 4,000 members of his Cleveland Iron Workers Local 17 pension plan are the canaries in the coal mine as far as pension cutbacks go. At least 50 Midwestern pension plans — mostly the kind jointly administered by trustees for a labor union and a group of employers — are in this decrepit condition. Several plan sponsors have already applied to the Treasury Department to cut back retirees’ allotments.

This cross-section of America includes more than a million former truck drivers, office and factory employees, bricklayers and construction workers who are threatened with cutbacks that could last the rest of their lives.

The Cleveland iron workers was the first to actually be approved for this triage under a 2014 law known as the Multiemployer Pension Fund Reform Act (MPFRA). Many pension advocates call it unfair.

“It was run through Congress in the dead of night, and President Obama — who was supposed to be for the working class — signed it,” complained Burruel. The MPFRA is overseen by attorney Kenneth Feinberg, known for dividing up huge settlements in cases such as the 9/11 terrorist attack and the BP (BP) oil spill in the Gulf.
…..
Pensioners like Burruel and Overstreet said they were used to receiving that monthly letter saying their pension plan was “critical.” But then came the more ominous letter reporting the plan was “critical and declining.” That was the tip-off. And the final letter said the plan sponsor had applied for retiree cuts.

For the iron workers, that meant battling to save what they could — not only against attorney Feinberg, but against part of their own membership — the disabled and those over the age of 80.

Burruel believes his nearly 60 percent monthly payment cut is unfair and that it should be 20 percent across the board. But, inevitably, certain groups are favored over others, one reason the former union leadership was voted out, he said.
…..
“They encouraged me to retire early,” said Burruel. “Now I’d like to get at least a part-time job, but my knee and hip replacements make that impossible.”

Unfortunately, this is only a glimpse into the future awaiting at least a million pensioners in the Rust Belt and elsewhere. The New York State Conference of Teamsters applied for cutbacks then withdrew its application, but it plans to reapply, said pension rights advocate Leavelle. In the meantime, several states’ public pension funds are running dry, including Illinois, New Jersey and Connecticut.

“This is going to hit everyone,” predicted Overstreet, “public employees, too.”

Now, there are differences between the plight of the MEPs and public pensions.

For one, there’s a guaranty fund backing the MEPs, though the guarantees are very low.

I mentioned that I expected failing MEPs to be a theme for 2017, though it’s taken a back seat to many hotter political topics, such as Obamacare.

I don’t think there will be bailouts, as I said last year.

OPTIONS

The American Academy of Actuaries recently had a Capitol Hill briefing on the MEP problem. They also published an issue brief on the matter.

Here are some key points:

While different circumstances apply to each plan, many plans in critical and declining status share several attributes:

Pension assets are invested in diversified portfolios. Plans have invested in diversified portfolios to try to achieve investment returns that can support higher benefit levels and lower contribution requirements than would be possible if the assets earned risk-free rates of return. These investment strategies, however, are not guaranteed, and plans need additional contributions or reduced benefits if the anticipated investment returns are not achieved.

Past surpluses led to benefit increases that were not sustainable. Funding pension plans using diversified portfolios will strengthen a plan’s funding status when investment returns are robust. These investment gains may be needed to offset losses when returns are weak. However, following the large asset gains in the late 1990s, many plans became significantly overfunded, and responded by increasing benefit levels or taking contribution holidays. Both the dynamics of the collective bargaining process and regulatory policies that were not conducive to maintaining overfunded plans contributed to this trend. These benefit increases ultimately became unaffordable for many plans when their assets declined dramatically in the subsequent decade.

Mature plans have fewer resources to recover from investment losses as the assets grow relative to the contribution base supporting the plan. In young plans, contributions are the primary source of asset growth and investment returns are comparatively small, while the opposite is true in mature plans. As the plan relies more heavily on investment returns, it becomes more difficult to make up for investment losses through additional contributions.

Fewer workers are employed in the industries sponsoring multiemployer plans. Some unionized industries have seen significant transformations over time. In some industries the workforce has shifted to more non-union employees as a result of restructurings or regulatory changes, while others have seen declines in the number of employees needed due to global competition, automation, or broad declines in the industry. A decline in the active workforce results in a diminished economic base for collectively bargained employer contributions.

Employers have exited multiemployer pension plans, either through bankruptcy or withdrawal, leaving unfunded obligations for the remaining employers in the plans. These obligations, often referred to as “orphan liabilities,” add to the maturity of the plan and subject the remaining employers to additional risks related to the funding of the orphan liabilities.

To cut in right now: all but the last item are common between MEPs and public pensions. To be sure, certain aspects of MEPs in terms of the cratering of the active employee base are more rapid than that seen in public pensions.

However, this is why it’s so often stated that closing a public pension plan makes the legacy plan so much more expensive. It doesn’t, really, but the point is that they can’t hide the cost among contributions from new entrants.

Some of the solutions presented for the legacy MEPs:

Addressing Legacy Pensions

If the accrual of future benefits in these critical and declining plans ceased today, the pension benefits attributable to past service would still present an enormous problem. This legacy problem has an impact on existing and future retirees, as well as the PBGC.

The PBGC Guarantee

Plans eligible for PBGC financial support are subject to the PBGC guaranteed benefit levels, which are generally relatively low (e.g., maximum payout for a full-career participant is approximately $13,000 per year) and are often much lower than the underlying obligation payable from a troubled multiemployer plan. Many participants will experience a significant benefit reduction even if PBGC is fully able to provide the guaranteed benefits, but the PBGC multiemployer insurance program is itself in dire financial condition, and is likely to exhaust its asset reserves in approximately eight years. To deliver the existing PBGC guarantees, it will take some combination of additional revenue or reduced claims from insolvent plans. Some of the measures discussed to improve PBGC finances—all of which would require enabling legislation—are summarized below.

Increase PBGC premiums. Premiums have already increased significantly and are scheduled to continue to increase. A potential concern with this approach is that insurance premiums are generally intended to pay for ongoing risks and not past losses. To the extent that higher premiums are viewed as paying for legacy liabilities and not future risks, they may drive healthy employers and employee organizations out of the system, making the increase self-defeating. Higher multiemployer plan premiums represent higher plan expenses, which would adversely impact the funded status of plans over time. While there is concern about any increase in premiums, the current and historical amounts may be perceived as relatively low.3 The multiemployer premium for 2017 is $28 per participant, which represents an average of approximately $0.05 per hour out of employees’ wage packages.4

Charge the specific industry. In some industries where restructuring has resulted in a considerable number bankruptcies among employers supporting the pension plan while new employers in the industry did not join the plan, it may be advisable to construct a specific industry tax or premium. This additional charge could be earmarked to pay for the orphaned liabilities left by the bankrupt employers. Another area of potential focus for a targeted charge is on industries for which the claims on the PBGC insurance fund are disproportionately large. However, in both cases, there may not be enough employers remaining in the industry, or the industry may not be healthy enough, to pay the amount needed. Charging the entire industry also means that employers that never participated in the plan would be paying a portion of the liability for the bankrupt employers that did participate in the plan.

Charge existing retirees. A modest payment collected from all existing retirees receiving multiemployer plan pensions could generate a significant amount of premium revenue, because the multiemployer system has matured and now has more retired participants than active participants. This premium, however, could face significant opposition, as retirees have never been directly charged for insurance on their pensions before, and many retirees live on fixed incomes with limited options to deal with unexpected reductions to their benefits.

Reduce the guarantee. Congress could reduce the guaranteed benefit level to align with the amount of premium resources available. But because the guarantee is already low, the resulting pension payouts may do little to help pensioners achieve financial security. Unlike reducing guarantee amounts for savings deposit insurance, where account holders could shift their assets, multiemployer pension plan participants could not take actions to secure their benefits if the pension insurance limit is reduced.

Provide financial support backed by the government. A financial commitment could be made from the general revenues of the federal government, a specific tax, or other taxpayer-supported funding sources. Under this approach, the solution is spread across a broader tax base, involving many taxpayers with little or no direct relationship with the struggling pension plans.

Combine PBGC’s multiemployer program with the single-employer program. The single-employer program is currently in a stronger financial position than the multiemployer program. However, this approach would generate potential inequities, as it adds new risks to single-employer plan sponsors and participants. In addition, there are fundamental differences in how the single and multiemployer programs operate, and combining funding could put stress on the single-employer system and further erode support for defined benefit plans.

Allow the PBGC to intervene early in troubled multiemployer plans. Under current law, PBGC does not generally provide any financial assistance, or reduce benefits to guaranteed levels, until a multiemployer plan is unable to pay full benefits. The PBGC multiemployer plan program could be aligned with the single-employer program, where PBGC has the authority to intervene long before plans actually fail. By identifying these plans before complete insolvency and reducing benefits to guaranteed levels sooner, PBGC’s limited resources could be conserved. The cost would be that participants in troubled multiemployer plans would experience benefit reductions earlier than occurs under the current multiemployer insurance program.

If this is not clear: every single option mentioned above will be unpopular in some way.

Proposed new solutions:

New potential solutions are clearly needed. What follows are some general approaches for discussion:

Separate the legacy commitments for the “orphan liabilities” relating to bankrupt and withdrawn employers from current employers that may now be shouldering the obligation these employers left in the plan. Segregating these obligations and finding a dedicated funding source helps compartmentalize the solutions to the legacy plan shortfall. There is also an inherent sense of fairness with this approach, and funding could come from a combination of the alternatives identified above for additional PBGC revenue.

Provide low-interest loans to troubled plans or employers. This approach borrows money at a low interest rate and invests the proceeds in plan assets. Loans could be made available either directly from the government or from financial institutions. If from a financial institution, the loan would likely require government support to encourage the private institution to offer the loan. These loans would provide a longer timeframe over which employers could spread the cost of funding the liabilities. Additionally, if actual investment returns exceed the borrowing rate, this approach could create the income needed to pay some or all of the promised benefits. However, if actual investment returns do not exceed the borrowing rate, the existing risks to employers, participants, and the PBGC may remain in force. In addition, the plan may be unable to repay the loan, creating a default risk to the provider or guarantor of the loans. The loans could be guaranteed by a governmental agency (e.g., Treasury or PBGC) that currently holds a portion of the risk. Alternatively, participants could absorb part or all of the risk by transforming their fixed monthly benefits to monthly benefits that vary based on actual investment returns. This strategy of converting to variable legacy benefits could also be deployed with many of the other solutions under consideration.

Increase minimum funding requirements for legacy obligations. Employers participating in poorly funded plans could be required to significantly accelerate the funding of these commitments. Employers, however, entered into collective bargaining agreements that call for specific contributions to these plans with an understanding of the existing specific limits and exposures. Charging them significantly higher costs for past benefits could cause some employers and covered employee groups to exit plans or push more employers into bankruptcy.

Strengthen rules to protect legacy liabilities with respect to withdrawal liability payments and bankruptcy laws. If employers can continue to withdraw and shift liability to the remaining employers, or become bankrupt and escape any withdrawal liability payments, troubled plans—as well as some plans that don’t appear to be troubled—could become even worse. However, giving plans a stronger claim on company assets would mean that other creditors have reduced claims, which could place further stress on the companies that contribute to the plans.

Take actions to promote the health of the general economy and, in particular, the affected industries. Economic growth in the industries that sponsor multiemployer plans could facilitate the funding of pension plans. A strong market could increase investment returns on pension assets.

I believe Trump is focusing on that last item, but I doubt he would be able to do much about some of these legacy industries. If the companies are already gone, it doesn’t really call them back into existence. If something new comes in, by definition it doesn’t have old liabilities following it.

The last one isn’t all that controversial, other than to remark on the likelihood of it occurring… or that it would be enough to pull these pensions out of the holes they’re in.

At the very end of the piece are some recommendations for making sustainable pension plans, which is really only helpful for new plans. Which are pretty much not happening due to what happened to the old plans.

It would have been really nice if anybody followed those recommendations even 20 years ago.

APPROVAL AND DENIALS: DIFFERENCES

Each denial of an MPRA application comes with an explanatory letter. Each approval simply says the plan is approved.

So first I’m going to look at the denials, and then see what differs from the two approvals thus far.

I did this analysis earlier on denials, so I’m going to combine the reasons into a single list.

List of denials:

I want to note that some of these are denials from re-applications after withdrawals. After seeing earlier denials, they adjusted their applications… and they still got denied/

MORTALITY ASSUMPTION

Here are the mortality assumptions for the plans, where it was specifically noted in the denial letters:

  • Automotive Industries Pension Fund: Blue collar RP-2014, setforward 1 year… and the recent experience has been 90% RP-2014
  • Ironworkers Local 16 Pension Plan: both the base table and mortality improvement assumptions deemed unreasonable; used 1983 GAM table (!!!!) which is, to be as charitable as possible, a very out-of-date table…and they had no mortality improvement…evidently, 1983 GAM was what was being used for the minimum funding requirements, and they are making clear that what is needed for these cash flow projections is something realistic, not convenient

Lower retiree mortality means higher pension benefit value. So if the experience is actually 90% of the base table, that means mortality is lower, not that life expectancy is lower.

What was the mortality assumptions for the others?

  • Ironworkers Local 17 (the one approved): RP-2014 Blue Collar Mortality Tables with generational projection using Scale MP-2014 for non-disabled participants, RP-2014 Disabled Retire Mortality Tables with generational projection using Scale MP-2014 for participants disabled on and after May 1, 1997, and a 50/50 blend of the two preceding mortality assumptions for participants disabled prior to May 1, 1997
  • United Furniture Workers Pension Fund A (approved): RPH-2014 Healthy Blue Collar Mortality Table adjusted back to 2006 (?!) using 2014 and brought forward with generational mortality improvements using MP-2016 [and a similar approach for disabled lives]
  • Central States, Southeast & Southwest Areas (denied for items other than mortality assumption): RP-2000 Combined Healthy Blue Collar Mortality Table
    (sex distinct), projected on a generational basis using Scale AA for 13 years and Scale BB thereafter as described in Table D — they projected it ahead 13 years, and used generational improvement going forward
  • (denied for items other than mortality assumption):RP-2014 Sex Distinct Table with Blue Collar Adjustment, set forward 2 years for males and 2 years for females, using scale BB improvement from year 2014.

So basically, you need to use a current mortality table, using mortality improvement going forward.

Note: the RP-2000 table didn’t get Central States dinged, because they projected it to 2013 and then had generational improvement from there.

Ironworkers Local 16 used an absurd mortality assumption, inappropriate for the use of projection; Automotive Industries used a mortality assumption that was a bit too high.

RETURN ON ASSETS

  • Central States, Southeast & Southwest Areas Pension Plan: 7.5% deemed too high
  • Teamsters Local 469: 7.25% deemed too high

And both were using flat investment rates.

The other applications:

  • Ironworkers Local 17: 1.1% for plan year ending April 30, 2016 and 6.5% thereafter
  • United Furniture workers: 12.95% for plan year ending Feb 2017, 6.75% thereafter
  • Automative Industries: the link doesn’t seem to work to get to the application. SHAME!
  • Ironworkers Local 16: 7% per year

Okay, so it seems the highest rate of return one can get away with is 7%

OTHER OBJECTIONS

So that was related to the projection assumptions. Here are other items remarked upon in denying applications — I’m not marking which plan had the issue. You can go to my earlier post to see that.

  • Assumption that 100% of married retirees will take joint & survivor coverage (as the insolvency is based on cash flow model, the lower benefit flows in short term were an issue… only 42% of recent married retirees took joint & survivor)
  • Terminated vested participants electing to start taking benefits…namely that those terminated vested over age 70 will never draw benefits
  • Entry age assumption unreasonable — too low, and a single number. Assumes that new participants to the pension wouldn’t be getting any benefits for at least 20 years.
  • Hours of service assumption — ties to employee contributions, and deemed too high
  • Spousal benefit survival benefit — they assume nobody elects this (come on, y’all)

I’m just looking at the projection assumptions — there were also objections to some of the applications with regards to fairness in how the cuts are replied and how comprehensible member communications were with regards to explaining the proposed cuts.

How cuts are allocated (they’re not supposed to be across the board, fwiw) can be complicated; communications to members can always be fixed. If you want to fix it, that is.

MORE PAIN TO COME

That’s become the theme of this blog lately, hasn’t it?

Using spreadsheets compiled by John Bury, I have some stats.

And graphs!

Here’s a histogram of all the funded ratios (both by plan count and liability-weighted, with the MPRA plans marked out):

You can see that most MEPs are greatly underfunded, not just the MPRA-applied plans. I didn’t even distinguish between those who were approved and those denied. It’s not necessarily the funded ratios that are determinative.

Let’s do a column graph showing how the total liability breaks out:

Well, that gives us a clue — the percentage of the liability that’s for active employees is very low for the MPRA plans compared to all the other MEPs. For all the other MEPs, almost 40% of the total liability was for active employees.

If you don’t like graphs, but prefer tables, here ya go:

I colored the ratios along the columns to help make comparisons – the color scheme differs by column.

Spreadsheet underlying the graphs here.


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It's Happening: First Union Voted to Reduce Retiree Benefits
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