{ "id": "IN10491", "type": "CRS Insight", "typeId": "INSIGHTS", "number": "IN10491", "active": false, "source": "EveryCRSReport.com", "versions": [ { "source": "EveryCRSReport.com", "id": 452660, "date": "2016-05-18", "retrieved": "2017-04-21T15:20:13.308632", "title": "U.S. Department of the Treasury Denial of Benefit Reductions in the Central States Pension Plan", "summary": "On May 6, 2016, the U.S. Department of the Treasury denied an application submitted by the Central States, Southeast and Southwest Areas Pension Plan (Central States) that would have reduced benefits to about 270,000 of the nearly 400,000 participants in the plan. The total amount of benefit reductions would have been about $11.0 billion (see page 13.2.1 of Checklist 13: Equitably Distributed). The application was submitted under the authority of The Multiemployer Pension Reform Act of 2014 (MPRA enacted as Division O in the Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235)).\nBackground on Central States and Pension Benefit Guaranty Corporation\nCentral States has estimated that it would likely become insolvent by 2026 and then would no longer be able to pay participants\u2019 benefits. When a multiemployer plan becomes insolvent, the Pension Benefit Guaranty Corporation (PBGC) provides financial assistance so that participants can continue to receive benefits (up to a statutory maximum benefit, which is currently $12,870 for a participant with 30 years of service in a plan). PBGC was established by the Employee Retirement Income Security Act (ERISA; P.L. 93-406) to insure participants in private-sector DB pension plans and operates separate insurance programs for single-employer and multiemployer plans. The benefit obligations to Central States would likely lead to PBGC\u2019s insolvency. On September 30, 2015, PBGC\u2019s Annual Report stated that it had about $1.9 billion in assets. It had income of $280 million from premium revenue and investment income in FY2015. It paid $103 million in financial assistance to about 54,000 participants in 57 plans in FY2015. In 2014 (the most recent year for which data are available), Central States paid $2.8 billion in benefits to participants. In the event of PBGC\u2019s insolvency, financial assistance from Treasury is not assured.\nBackground on the Multiemployer Pension Reform Act of 2014\nMPRA allows financially troubled multiemployer defined benefit (DB) pension plans that meet specified conditions to apply to the U.S. Treasury to reduce benefits to plan participants if the benefit reductions would restore the plan to solvency. Prior to the passage of MPRA, under the anti-cutback provision in ERISA, pension plans generally did not have the authority to reduce participants\u2019 benefits. Now, plans that seek to reduce benefits must submit an application to Treasury, which must approve the application if the proposed benefit reductions meet criteria specified in MPRA (such as being equitably distributed and enabling the plan to avoid insolvency). \nUnder MPRA, disabled individuals and retirees aged 80 or older may not have their benefits reduced. The benefits of individuals aged 75 to 80 may be reduced, but to a lesser extent than those younger than 75. In addition, benefits may not be reduced to below 110% of PBGC\u2019s guaranteed level.\nStated Reasons for Treasury\u2019s Denial\nTreasury indicated that the application failed to meet three of the requirements in MPRA:\nAssumptions used by Central States (see for example, page 5.1.13 of Checklist 5: Critical and Declining Status Certification) regarding (1) the rate of return on investments and (2) the age at which new participants enter the plan are not reasonable. Central States assumed a 7.5% rate of return, which Treasury said was inappropriate as this was higher than investment professionals\u2019 forecasts of future investment returns. Additionally, Central States assumed that new participants would be 32 years old when they entered the plan. According to Treasury, this led to materially different cash flow forecasts than if more realistic demographic assumptions had been made;\nThe proposed benefit suspensions are not distributed equitably. Central States proposed to reduce benefits differently to former United Parcel Service (UPS) employees depending on whether they were part of a make-whole agreement that UPS had with some of its employees; and \nThe notices of proposed benefit suspensions were not written so as to be understood by the average plan participant. The notices extensively used technical language and the definitions of critical terms were defined in documents that were not understandable to the average plan participant.\nPotential Next Steps\nMPRA does not prohibit a plan from resubmitting an application. Central States has not indicated whether they will submit a new application for benefit reductions. A new application would have to address Treasury\u2019s reasons for the denial while meeting the other criteria for approval of benefit reductions under MPRA (e.g., any proposed reductions would have to restore the plan to solvency). All else being equal, a new application that addressed Treasury\u2019s concerns could require deeper benefit reductions than were proposed in the rejected application.\nAbsent any action from Central States or Congress, the plan will likely become insolvent by 2026, or possibly sooner if a large number of employers withdraw from the plan. In the event of Central States\u2019 insolvency, PBGC would provide financial assistance so the plan could continue to pay benefits. Participants\u2019 benefits would be reduced to the PBGC maximum benefit level.\nCentral States\u2019 insolvency would likely lead to PBGC\u2019s insolvency, because the benefit obligations to Central States would exhaust PBGC\u2019s resources. If PBGC were to exhaust its assets, then it would only be able to provide financial assistance to plans equal to its premium revenue.\nLegislation in the 114th Congress\nIn the 114th Congress, a number of bills have been introduced that would affect potentially insolvent multiemployer DB pension plans.\nH.R. 2844/S. 1631. The Keep Our Pension Promises Act, would, among other provisions, repeal the benefit reductions enacted in MPRA.\nH.R. 4029/S. 2147. The Pension Accountability Act would (1) change the participant vote to approve a plan to reduce benefits from a majority of plan participants and beneficiaries to a majority of participants and beneficiaries who vote and (2) eliminate the ability of Treasury to allow systematically important plans to implement benefit reductions regardless of the outcome of the participant vote.\nS. 2894. The Pension Fund Integrity Act of 2016 would reduce the pay for executives of the largest pension plans if they reduce participants\u2019 benefits. In addition, the bill would prohibit the plan from using pension plan assets to hire outside lobbying firms.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": false, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "http://www.crs.gov/Reports/IN10491", "sha1": "c198d9e75b09385c3f23fa7e55fc81ed9def8f17", "filename": "files/20160518_IN10491_c198d9e75b09385c3f23fa7e55fc81ed9def8f17.html", "images": null } ], "topics": [] } ], "topics": [ "Appropriations", "CRS Insights", "Domestic Social Policy" ] }