POLITICO PRO Pension crisis looms

First we had the fiscal cliff, then the highway cliff. Now get ready for the pension cliff.

The lame-duck session will determine the fate of so-called multi-employer pensions. With many of these plans skittering toward insolvency in the next decade, nervous employers want to get out while the getting is still good. Pension reform advocates fear that if Congress fails to intervene before the end of this year, employers will stampede out of the plans, costing the Treasury billions.


Multi-employer plans are defined-benefit pension plans maintained not by a single company but by several companies, typically within a single industry, and by at least one union.

“In some industries, if nothing is done this year, they will have to take a look at what their alternatives are,” said Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans (NCCMP), a nonprofit trade group. One clear alternative is to pull out.

The imminent retirement of two key congressional figures — Senate Health, Education, Labor and Pensions Committee Chairman Tom Harkin (D-Iowa) and House Ways and Means Committee Chairman Dave Camp (R- Mich.) — doesn’t help. Rep. John Kline (R-Minn.), another point person on multi-employer pensions, is ending his term as chairman of the Education and the Workforce Committee.

“By the time their successors learn the ropes, it will likely be too late,” said Josh Gotbaum, former director the Pension Benefit Guaranty Corporation who is now at Brookings.

More than 10 million Americans are part of multi-employer plans. Though most common in the construction industry, the plans also cover many workers in the retail, manufacturing, mining, transportation and entertainment industries.

Historically, these plans have been viewed as the Rock of Gibraltar. If one employer decided to withdraw, the liabilities could always be redistributed. The Pension Benefit Guaranty Corporation, the federal government’s pension insurer, acknowledged indirectly the inherent solvency of multi-employer plans by intervening only after an entire plan became insolvent — a departure from its practice with single-employer plans, where the PBGC often intervenes much earlier. Initially, some unions and employers didn’t think PBGC guarantees for multi-employer plans were even necessary, since the industries that had them were, at that time, stable.

Such forbearance remains PBGC’s policy toward multi-employer pensions today, even as the underlying reality has changed dramatically.

The past two recessions changed the equation by reducing employer funding for multi-employer plans, many of which happen to be in industries that have lately suffered decline, like mining and trucking. For the first time, the PBGC has to worry about the plans’s solvency.

According to the PBGC, there are currently three million people in “red zone,” or severely distressed, multi-employer plans. These plans risk running out of funding within the next 20 years. While some of these plans will recover as the economy improves, 1.5 million people are in plans that will most likely fail. A string of multi-employer failures could trigger other companies to pull out, creating a tidal wave of pension bankruptcies.

In times past, the shared burden of multi-employer plans was their strength; if one company pulled out, plenty of others remained. But with many companies now contemplating an exit, this interdependence poses a hazard. The plans have “become a ticking time bomb,” Gotbaum said. “Unless Congress acts now, employers will rush for the door.”

Two of the largest plans at risk are the United Mine Workers of America Health and Retirement Funds and the Teamsters’ Central States plan, which has about 450,000 members in a range of industries.

Based on current investment returns, Thomas Nyhan, executive director of the Central States plan, predicts that the plan will run out of money by 2026. Currently, the plan has between $16 billion and $17 billion in unfunded liabilities.

“We’re faced with the prospect that our members will have benefits paid until 2026 and then nothing paid after,” he said.

In 2011, NCCMP brought together 42 organizations representing business and labor to develop possible solutions to the multi-employer problem. Two years later NCCMP offered up a number of policy alternatives, most notably a proposal to cut benefits for current retirees that would require an amendment to the Employment Retirement Income Security Act of 1974 (ERISA). As currently written, ERISA prohibits cutting back on benefits that employees have already earned.

“By Congress granting the additional tools to these at risk plans, they’ll have the ability to act earlier and remain solvent,” NCCMP’s DeFrehn said.

But the proposed cuts create a political dilemma for union leaders and for Democrats in Congress, since neither wishes to be associated with cutting pension benefits. Although unions participated in the NCCMP’s discussions, some, like the Teamsters, have since spoken out against the proposed cuts. Teamsters President James Hoffa, in a letter to the House Committee on Education and the Workforce, said, “We cannot at this time support any proposal that would cut accrued benefits of participants, including cutting the pension benefits of current retirees in endangered plans.”

Ken Paff, national organizer for Teamsters for a Democratic Union, said an alternative would be to increase premiums to the PBGC and to have Congress provide financial backing to the agency.

Some groups, including the Pension Rights Center, say any cuts would be premature, since many of the plans in question still have a decade or two to avoid bankruptcy. “We’re talking about cutting the benefits of people who have already retired, who are rightly on a fixed income,” said Nancy Hwa, a spokeswoman for the Pension Rights Center. “These are benefits that they have earned, and it’s just unprecedented to cut earned benefits like that.”

But employers participating in the multi-employer plans have grown restless. One concern they have is that they’ll end up absorbing the cost of paying for “orphans,” or employees whose employers are no longer part of the plan. Another is the underfunding of the PBGC. According to the PBGC’s projection report for FY 2013, the agency’s multi-employer program is already facing $8.3 billion in deficit. Even without the failure of large plans like Central States, the PBGC is expected to become bankrupt within the next 10 years, given the number of plans that have already failed. If large plans like Central States fail, some projections predict the PBGC will have a deficit of nearly $50 billion by 2023.

Some say benefit cuts will not be enough to save multi-employer plans headed for insolvency. Premiums to PBGC, they say, must also increase to ensure that the federal agency will be able to bail out failed multi-employer plans. In addition, some say the PBGC needs to have more money to take over “orphans” now instead of waiting for entire plans to collapse.

At present, the PBGC would only be able to furnish about $13,000 a year in benefits to a participant with 30 years of service. But increasing premiums also brings risk. If premiums are too high, employers might be pushed into leaving the multi-employer plans altogether.

Democrats and Republicans are considering these politically radioactive measures, Gotbaum says, because the alternative is much worse. “The alternative is that multi-employer plans will fail, and millions of people will have no pensions left at all.”

While Congress has held six hearings on multi-employer plans, actual legislation has yet to be introduced. But consensus appears to be forming around the NCCMP’s proposed pension cuts.

At a Bloomberg Government event earlier this year, Kline said, “If we do nothing, benefits will be cut. … It’s only a question of when and by whom. […] The choice NCCMP offers is between an axe in the hand of a first-year med student or a scalpel in the hand of a trusted surgeon.”

A spokesman for Kline said the Education and the Workforce Committee hopes to resolve this by the end of this year.

Still, given the unpopularity of benefits cuts and contribution increases, any solution would probably have to be attached as unceremoniously as possible to another free-standing, must-pass bill. One possibility is a tax extenders’ bill. The Ways and Means Committee has some jurisdiction over pension reform and is simultaneously facing pressure to pass an extender before the end of the lame-duck session. That prompts many to identify the extender as the most likely vehicle.

Dallas Salisbury, president and CEO of the Employee Benefits Research Institute, says that while anything is possible, he remains pessimistic that any reform will take place before the new Congress. More likely, Salisbury said, Congress will merely extend its existing provisions for multi-employer plans in order to have more time to develop a “more substantive solution” while hoping the situation will improve on its own.

“If the reform measures for the system can’t be passed, the employers will simply leave, and that means that more plans will fail,” DeFrehn said. “That’s the way it has to work.”