In a letter to the Board of Trustees for the Central States, Southeast and Southwest Areas Pension Plan, Treasury Department-appointed Special Master Kenneth R. Feinberg says the plan’s proposed benefit suspensions are not reasonably estimated to allow the plan to avoid insolvency.
Specifically, after reviewing the application and consulting with the Pension Benefit Guaranty Corporation (PBGC) and the Department of Labor (DOL), Treasury determined that the proposal failed to satisfy three requirements set forth in the Multiemployer Pension Reform Act of 2014 (MPRA).
- The proposed benefit suspensions, in the aggregate, be reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency;
- The proposed benefit suspensions be equitably distributed across the participant and beneficiary population; and
- The notices of proposed benefit suspensions be written so as to be understood by the average plan participant.
According to the letter, Treasury found that the 7.5% annual investment return assumption used in projections in the plan’s application for suspension of benefits was too optimistic. It says the assumption is not appropriate taking into account the plan’s negative cash flows and other factors, and the assumption does not take into account appropriate investment forecast data.
Treasury further found the entry age assumption used in the projections in the application was not reasonable. The application used a single assumed entry age of 32. The letter says this does not take into account relevant historical and current demographic data of the plan.NEXT: Suspension of benefits not equitably distributed
Treasury determined that the proposal failed to satisfy the MPRA requirement that the proposed benefit suspensions be equitably distributed across the participant and beneficiary population because of the application’s treatment of United Parcel Service (UPS) employees. The application divided UPS employees into two groups: one group that was covered in the plan when UPS withdrew from the plan, paid its withdrawal liability and entered into a make-whole agreement; and another group that was not.
The application provides for a 40% cap on benefit reductions for the group covered under the make-whole agreement, but a 50% cap on benefit reductions for the other UPS employee group. Treasury found no justification for treating the two groups differently.
Finally, the letter says the notices of proposed benefit suspensions were not written so as to be understood by the average plan participant because the notices extensively use technical language without adequate explanation; critical terms used are not defined in the notices, but only cross-referenced to other documents; and the cross-referenced definitions are not understandable to the average plan participant.
In a statement, Thomas Nyhan, executive director of the Central States Pension Fund, said, “Although the decision by our Trustees to file this application under provisions of the Multiemployer Pension Reform Act of 2014 (MPRA) was gut wrenching, we are disappointed with Treasury’s decision, as we believe the rescue plan provided the only realistic solution to avoiding insolvency. The Central States Pension Fund Trustees will carefully consider the most appropriate next steps, based on this denial and the final guidance issued by Treasury on April 26.” Nyhan said the plan is projected to run out of money in 10 years.
However, the Pension Rights Center praised the Treasury for rejecting the Central States Pension Fund’s application to cut its retirees’ pensions. “The Treasury Department decision is a victory for democracy,” said Karen Friedman, the Center’s executive vice president and policy director. “Where the legislative process failed retirees with the passage of the Multiemployer Pension Reform Act (MPRA), the regulatory process worked to protect their interests. The Treasury Department made the legally-sound and morally-right decision that the Central States Pension Fund failed to meet MPRA's conditions.”Treasury’s decision about the Central States plan is just the first of several it will have to make. There are at least two other union plans that have applied for a suspension of benefits.