By now, most members of ICSOM orchestras who are participants in the American Federation of Musicians and Employers’ Pension Fund (AFM-EPF) are aware of the possibility that their expected pension benefit might be reduced. In this article, I discuss the legal framework under which such a reduction could take place: the Multiemployer Pension Reform Act (MPRA), enacted in 2014.
MPRA is an exception to a fundamental principle of pensions: when you have earned and are promised a pension benefit, that benefit cannot be reduced or eliminated. That principle is enshrined in the employee-benefits legislative regime known as ERISA, which governs both single-employer defined-benefit pension plans and multiemployer plans like the AFM-EPF. As with any rule, of course, there are exceptions; but the overarching aim of ERISA is to preserve a benefit once it is earned.
To that end, pension plan sponsors must fund their pensions so that assets will be available to pay benefits. In a single-employer plan, the plan is typically funded by minimum annual contributions by the employer, the amounts of which are determined by an actuarial analysis of the level of assets needed to pay current and future benefits. In a multiemployer plan, like the AFM-EPF, contributions come from various employers, based on a contribution rate—a percentage of an employee’s earnings that is set in collective bargaining agreements—that each employer pays to the Fund on a periodic basis.
So, what happens when the system breaks down? The backstop is supposed to be the Pension Benefit Guarantee Corporation (PBGC), a government-chartered corporation whose function is, stated broadly, to insure pensions. When a single-employer plan fails (if, for example, the employer goes bankrupt), the PBGC takes over the plan and becomes responsible for paying out benefits that have been earned—often, however, with reduced benefit amounts. Separately, the PBGC has a multiemployer insurance program, so that if a multiemployer plan fails, then (theoretically at least), the PBGC provides financial assistance to cover the plan’s guaranteed benefits—again, though, with reductions. Indeed, the benefit reduction once the PBGC becomes responsible for benefit payments can be substantial.
Before 2014, the PBGC’s multiemployer insurance program was the only option for a failing multiemployer plan. There was no mechanism for a multiemployer plan to reduce the basic level of benefits. A fund in “critical” status could institute a rehabilitation plan (like the AFM-EPF did in 2010) that could scale back certain “adjustable” benefits and impose a surcharge on employer contributions to bring in more money; but the basic promised benefit could not be touched.
Congress enacted MPRA in 2014 because it was faced with a multiemployer pension plan crisis. Many plans were failing. Even before the collapse of financial markets in 2008 that walloped virtually every pension plan, there were signs of trouble. Like the AFM-EPF, many plans were established (and benefits promised) at a time when many more people worked under union contracts. But union membership has steadily declined and the number of union workplaces has dwindled. (Note that AFM membership declined from 110,000 in 2001 to 75,000 in 2016.) As a result, fewer employers are required to make pension contributions, and thus less money comes into multiemployer plans. At the same time, though, the number of participants entitled to benefit payments is going up, as workers who earned benefits in unions’ heyday retire (and live longer than expected). The result: there is often less and less money coming in, but more and more money going out. To be able to afford to pay benefits, therefore, multiemployer plans have been forced to rely more and more on earning healthy investment returns.
The 2008 crash foreclosed that option for many multiemployer pension plans. Suddenly, a swath of plans was at risk of insolvency. The highest-profile plan, the giant Central States plan (the Teamsters’ plan in the trucking industry, with 400,000 members) is expected to be insolvent by 2025.
Relying on PBGC assistance is no longer an option, for one simple reason: the PBGC can’t afford it. In August 2017, the PBGC announced that its multiemployer insurance program is likely to run out of money by the end of fiscal year 2025 (or even earlier) under a number of different scenarios. If a plan like Central States fails, the PBGC will itself be insolvent. Hundreds of thousands of retirees would be at risk of receiving no pension benefits at all.
MPRA was Congress’ attempt to resolve this problem. What MPRA does, broadly speaking, is provide a mechanism through which a multiemployer pension plan can suspend or reduce benefits to stave off insolvency, without going to the PBCG.
The mechanism works like this: first, to be eligible, a multiemployer plan must be in “critical and declining” status. (Plans that are merely “critical” are not eligible.) “Critical and declining” in most cases means that actuaries have projected the plan will be insolvent within 20 years.
Next, the trustees must develop a plan for benefit reductions. Such a plan must meet certain criteria:
- The total reduction in benefits must be large enough to keep the plan from running out of money, but no larger than is needed to do that;
- Monthly benefits cannot be reduced below 110% of the amount that the PBGC would have paid;
- Disability benefits cannot be reduced;
- Benefits of participants who are at least 80 years old, and their beneficiaries, cannot be reduced;
- Benefits of participants who are at least 75 years old, and their beneficiaries, can be only partially reduced, and the closer the participant is to age 80, the less the benefits can be reduced; and
- The reduction of benefits must be “equitably distributed”—i.e., spread fairly.
MPRA provides guidance in what it means for the reduction to be spread fairly. The proposed plan should take into account the following factors with respect to participants, their beneficiaries, and their benefits:
- Age and life expectancy;
- Length of time in pay status;
- Amount of benefit;
- Type of benefit (e.g., survivor, normal retirement, or early retirement);
- Extent to which a participant or beneficiary is receiving a “subsidized” benefit (i.e., an unreduced early-retirement benefit, if allowed);
- Extent to which there have been post-retirement benefit increases;
- History of benefit increases and reductions;
- Years to retirement for active employees;
- Any discrepancies between active and retiree benefits (i.e., the extent to which benefit cuts would be different for retirees and those still working);
- Extent to which active participants are reasonably likely to withdraw support for the plan, accelerating employer withdrawals from the plan and increasing the risk of additional benefit reductions; and
- Extent to which benefits are attributed to service with an employer that failed to pay its full withdrawal liability.
Also note that if a plan has 10,000 or more participants (which the AFM-EPF does), then the trustees must select a “retiree representative” to advocate for the interests of retirees and beneficiaries as part of this process. After the plan has been developed, the trustees must then submit it to the Treasury Department for approval. If Treasury determines that the plan satisfies the criteria listed above, then it goes to a vote of the plan participants. However, the vote is heavily weighted in favor of approval. That is because a majority of plan participants—not just those who cast a ballot—must vote to actually reject the plan. Members who don’t vote are considered to have voted in favor of the cuts.
Moreover, for multiemployer plans that are deemed “systemically important”—those that would need PBGC assistance valued at more than $1 billion if the proposed benefit reductions were not adopted—Treasury is permitted to simply implement the reductions regardless of the outcome of the vote.
In other words, in most cases it would be virtually impossible for plan participants to successfully vote against cuts to benefits under MPRA. It is also hard to imagine why they would want to do so, for if they did and the plan went insolvent (as it likely would), then the cuts imposed by the PBGC would be more severe. (Remember that under MPRA, benefits can’t be reduced lower than 110% of what the PBGC guarantees.) And that’s only if the PBGC itself remains solvent.
One of the first multiemployer plans to apply for MPRA relief was the huge Central States plan, which was the most pressing concern when MPRA was passed. Ironically, the Treasury Department rejected its application in May 2016, primarily on the grounds that Central States’ proposed reduction in benefits still would not do enough to stave off insolvency. (Central States may try again; but it is also pushing for legislation that would have the effect of using taxpayer money to guarantee benefits. That seems rather hopeless given the current Congress and Administration.)
More recently, three applications have been approved: an Ohio-based Ironworkers plan in January 2017; a Nashville-based United Furniture Workers fund in July 2017; and a New York State Teamsters fund in August 2017. Each plan is different, but the latter is illustrative of the kind of cuts that can be made under MPRA. About 27% of the 35,000 members of the New York Teamsters fund will see no cuts at all; about 43% will see cuts of 18%, and the remainder will face cuts of 29%. Five additional multiemployer plans have submitted applications that the Treasury Department is reviewing. (See a listing of applications and their status.)
That brings us to the AFM-EPF. The Trustees notified plan participants last December that the Fund was in danger of entering “critical and declining” status, at which point the Fund would likely seek relief under the MPRA process. As luck would have it, the continuation of the bull market kept the Fund out of critical and declining status when the Fund’s fiscal year ended on March 31, 2017.
But markets can’t keep going up forever, and given the ever-increasing amounts of AFM-EPF annual benefit payments—rising from $152 million in the fiscal year that ended March 31, 2016, to a projected $228 million nine years later—it is probably only a matter of time. President Hair has been making strenuous efforts to bring more money into the Fund, and those efforts have been successful at increasing the dollar amount of employer contributions even as the number of contributing employers has fallen. But it is highly unlikely that the funding shortfall can be fixed with increased employer contributions alone, absent a massive reversal in the macro trends of declining union membership and less work done under union contracts.
I also note that there has been some talk of new legislation proposed by Senators Bernie Sanders and Al Franken, the “Keep Our Pension Promises Act” (KOPPA). KOPPA will not help the AFM-EPF. It is targeted to multiemployer plans that are in trouble for a very particular reason: employers who withdrew from the plan without paying withdrawal liability. In its current form, KOPPA applies only to plans in which 20% or more of the amount by which liabilities exceed assets is attributable to employers who withdrew and failed to pay up. That isn’t the case with the AFM-EPF.
I can guarantee that you will be hearing more about MPRA going forward. This will be a major topic for ICSOM over the next several years, given that for more than three-quarters of our orchestras, the AFM-EPF is their primary retirement-benefit plan. (Full disclosure: I am also an AFM-EPF participant, as I earned benefits as a freelance violinist for a good number of years before going to law school.) The law also imposes stringent disclosure obligations on multiemployer plans that apply for reductions under MPRA. If the AFM-EPF indeed goes into critical and declining status, you will start to receive multiple notices in the mail; hopefully you are now better prepared to read them.