Adoption of the Multiemployer Pension Reform Act of 2014 (MPRA) as part of the federal government’s 2015 omnibus funding bill extended and expanded key provisions of the Pension Protection Act related to multiemployer plan funding remediation and administration.
Serena Simons, senior vice president and national retirement compliance practice leader for Segal Consulting, tells PLANSPONSOR that the passage of MPRA will be looked at as a significant step towards building a solid future for multiemployer pension plans.
“It’s an extensive and complicated piece of legislation, but the one piece of MPRA receiving the most attention thus far is the provision that gives trustees of deeply troubled plans the ability to avoid insolvency by reducing some benefits, including benefits in pay status, subject to various safeguards and requirements,” Simons notes.
As Simons explains, this piece of MPRA has its roots in the Pension Protection Act of 2006 (PPA), which initially established the “zone system” for rating the financial health of multiemployer pension plans. Under the zone system, plans are given a green, yellow or red financial health status, depending on their current status and future prospects for remaining solvent. Changes to the zone system included in MPRA provide that plans in critical status (i.e., plans in the red zone) that also are in “declining status” may reduce some benefits, including benefits in pay status, subject to various requirements and limitations. This is referred to as “suspension” of benefits under MPRA, Simons says, because as the funded status of a plan improves, suspended benefits could be reinstated.
As explained in a Segal client bulletin circulated upon the passage of MPRA in the U.S. Senate, a critical status plan is officially in declining status if it is projected to become insolvent within 15 years. This deadline is extended to 20 years if the inactive-to-active participant ratio is more than 2-to-1, or if the plan is less than 80% funded.
Plans in the red and declining status pool are permitted to cut back on benefit payments, Simons explains, but benefits cannot be suspended below the level necessary to avoid insolvency, and no benefit can be reduced below 110% of the benefit guaranteed by the Pension Benefit Guaranty Corporation (PBGC). There are other prohibitions on cutting benefits in pay status for those older than age 80, she adds. For participants who are between age 75 and 80, the reduction must be phased out.
Simons says much of the initial media coverage of this new ability under MPRA for severely stressed plans to cut benefit payments missed one key requirement established by the landmark law: After first requiring approval from the Department of Labor, the PBGC and the Department of the Treasury, benefit suspensions will only go into effect if a majority of all participants vote to approve them. MPRA provides that the government can step in to override a no-vote on benefit cuts, but only when the plan in question is projected to cost the PBGC more than $1 billion in financial assistance, should it go insolvent.
Simons says this caveat means it is not really a piece of legislation that is going to make it easier for sponsors of multiemployer pension plans to start cutting benefits at will.
“We’re talking about a pretty small segment of plans, you can call them structurally significant plans, which would be subject to an override from Labor and Treasury in the case of a no-vote by participants,” she explains. “And even a plan in this category would have to already have done everything else it can possibly do to try to remediate its poor funded status—basically the tools available to red zone plans, which involve cutting back on some things while avoiding cuts to the basic benefit.”
According to an extensive 2013 report from the PBGC required by the PPA, there are about 1,500 multiemployer defined benefit pension plans in the U.S. covering about 10 million participants. This includes about 70 multiemployer plans with assets of $1 billion or more and two plans with assets in excess of $10 billion. Many multiemployer plan participants are employed by small companies in the building and construction industries, PBGC says. Other industries with significant numbers of workers covered by multiemployer plans are retail and service industries, manufacturing, mining, trucking, transportation and entertainment.
Simons says it’s probably safe to assume that very few plan populations would actually vote to reduce their own benefits, even knowing it could jeopardize the long-term health of the plan.
“Really we’ll have to wait to see how this works out from plan to plan to get a better idea of how that will go,” she continues. “It would be quite an economic argument the sponsor would have to make to get participants to vote yes to benefit cuts, but given that declining red status plans are usually just 15 years or so from insolvency, participants may be willing to go along with the sponsor's remediation plan.”
Simons suggests the most important pieces of MPRA might be those impacting plans with better funded statuses, but which are declining towards red.
“The law makes a number of expansions that are very helpful for plans that are perhaps experiencing some financial concern, but which are still in a more normal state than critical and declining plans,” Simons says. “Changes in the law have basically made it easier for plans that are heading into the red zone to actually get into the red zone sooner, allowing them to start using the red zone tools earlier to start turning the plan around. That’s a very helpful change for both sponsors and participants, which may help avoid benefit cuts in the future.”
Simons concludes by noting that, while MPRA was enacted by Congress, many of the ideas it includes were developed through the work of the National Coordinating Committee for Multiemployer Plans (NCCMP), a nonprofit membership organization dedicated to the advocacy and protection of multiemployer plans.
“MPRA reflects many if not most of the recommendations included in ‘Solutions not Bailouts,’ the important report issued in 2013 by the NCCMP,” Simons says. “In this sense, MPRA really represents the consensus of both sides of the bargaining table, the government regulators and the industry practitioners. I feel comfortable saying there are changes in MPRA that are helpful for lots of plans in lots of different circumstances.”