A game changer for pension relief

For companies with large work forces, the growing burdens of retirement pensions pose even greater existential threats than economic volatility. Reorganization in insolvency proceedings has allowed many notable companies to slough off or minimize this burden, but this procedure is massively disruptive and likely cost-prohibitive if pensions are the only concern. A new, revolutionary solution now allows some U.S. pensions to deal directly with their underfunding challenges without dragging their sponsor-companies into bankruptcy.

For years, Congress had been hearing dire warnings from the Pension Benefit Guarantee Corporation (PBGC), the agency that guarantees a portion of the benefit obligations of failed pension funds. After absorbing the burden of several large pensions abandoned by their sponsors in bankruptcy, the PBGC itself is in very serious financial distress, with a nearly $100 billion projected shortfall. Of particular concern, the majority of this shortfall is attributable to “multiemployer” plans, which pool liabilities and contributions from scores of companies. Concern rose that the failure of one more of these large multiemployer plans could ruin the PBGC and spell disaster for the partial guarantee system for pension beneficiaries.

Consequently, after intensive negotiations with a broad array of interest groups representing both management and labor, among others, Congress in late 2014 passed the Multiemployer Pension Reform Act (MPRA). The MPRA offers a new compromise solution for large pension funds in imminent danger of insolvency. Anticipating collapse in the face of mounting obligations to their sponsor-companies’ beneficiaries, a multiemployer pension fund’s trustees now have the option not only of demanding greater contributions from sponsor-companies (which is often not sustainable), but of reducing projected benefits to employee-participants.

This extraordinary abdication of contractual responsibility is available only to pension funds in “critical and declining status,” meaning that actuaries have determined that the fund is destined to become insolvent within 15 years. All other reasonable steps must have been taken to stave off insolvency, and benefits may not be reduced below the amount guaranteed by the PBGC, but this figure generally lies far below the promised benefits in common multiemployer plans.

The Department of the Treasury is charged with evaluating applications for benefit reductions under MPRA, in consultation with the PBGC and the Department of Labor, and it may approve an application only if the proposed benefit reduction is projected to allow the pension plan to avoid insolvency. If Treasury approves a proposed reduction as complying with MPRA’s requirements, the proposal is put to a vote of the plan participants. The voting is conducted by the Treasury Department, and a proposal is finally approved unless a majority of the plan participants votes to reject it – effectively, a presumption in favor of approval.

Navigating between the Scylla of Treasury Department application scrutiny and the Charybdis of plan participant-voting seems quite treacherous, and early results were discouraging. The first application for benefit reductions was submitted in September 2015 by a plan with over 400,000 participants and $35 billion in projected liabilities, 47 percent of which were unfunded, with a projection of insolvency within 10 years. The Obama administration rejected this application, purportedly because it concluded that the proposal would not return the fund to solvency. It similarly rejected four other applications during the course of 2016.

The picture began to improve with the first approved application in December 2016. The small applicant pension plan had only about $250 million in liabilities and was nearly 70 percent underfunded, but perhaps anticipating the imminent transition to a conservative administration under President-elect Donald Trump, the Treasury Department approved cuts averaging 20 percent (up to 60 percent for inactive, already retired participants, who represented the bulk of the plan’s obligations).

One might expect that participants would reject such aggressive benefit-reduction proposals, but plan participants approved the cuts by a margin of nearly 2 to 1. Both active and retired participants had been convinced that the frying pan of benefit reductions was better than the fire of plan insolvency and collapse.

The pace of reform picked up in the new Trump administration. No applications have been denied in the first nine months of the new regime, and two more have been approved. In July 2017, another small fund’s proposal was approved by Treasury, and its participants failed to reject the cuts. “Approved” would be too strong a word here, as the vote was 1,041 in favor and 1,928 against, so a powerful majority of those voting rejected the proposal. But the rule requires rejection by a majority of those eligible to vote, and only about 3,000 of the plan’s more than 9,000 participants cast a ballot. The proposed benefit reductions are thus effective as of September 2017, though the plan trustees must make an annual determination, supported by a written record, that the benefit reductions remain necessary to avoid plan insolvency despite all other reasonable measures being taken.

The second Trump-era approval is particularly noteworthy. The New York Teamsters Conference pension fund coordinates benefits for nearly 35,000 beneficiaries of nearly 200 company employers, including bellwether United Parcel Service (UPS). With more than $1.2 billion in assets, the fund is still 65 percent underfunded, with insolvency projected in fewer than 10 years. In mid-May 2017, the plan trustees proposed 20 percent cuts for about 9,000 active participants, and nearly 30 percent reductions for the remaining, retired and non-active participants. Treasury processed this application with blistering speed and approved it less than three months later, on Aug. 3. Consistent with a developing trend, actual participant ballots cast strongly opposed the measure by more than 2:1, but two-thirds of voters neglected to return a ballot, so the Teamsters plan revision is effective Oct. 1, 2017.

If the Trump administration continues this rapid pace of benefit reduction approval, the MPRA has the potential to usher in massive pension reforms without direct court oversight or general business reorganization. This could be a serious game changer for one of the most significant financial burdens facing large companies and their pension plans today.

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Jason Kilborn

Professor Jason Kilborn teaches business and commercial law at John Marshall Law School in Chicago.  His primary focus is on the comparative analysis of insolvency systems for individuals, though his interest extends to international bankruptcy as well. He recently co-authored a book on international co-operation in cross-border insolvency cases, published by Oxford University Press.

Jason Kilborn
Professor of Law
John Marshall Law School, Chicago
315 S. Plymouth Court
Chicago, IL 60604
USA

T: +1 (312) 386 2860+1 (312) 386 2860
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John Marshall Law

Throughout its history, The John Marshall Law School has upheld a tradition of diversity, innovation and opportunity, and has consistently provided an education that combines an understanding of the theory, the philosophy and the practice of law. Founded in 1899, The John Marshall Law School today is proud to be recognized as a dynamic independent law school, promoting excellence in all aspects of legal education.Our seven Centers for Excellence serve as an academic foundation for our students' successes. Their specialized curricula are among the most comprehensive in the country. In addition to our six LL.M. programs-employee benefits, information technology law, intellectual property law, international business and trade law, real estate law and tax law - John Marshall offers its students a joint JD/LLM, JD/MBA (in conjuction with Dominican University), JD/MPA and JD MA (in conjunction with Roosevelt University). Foreign students may elect to earn an LLM in Global Legal Studies.
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