A Road Map to Major Changes Coming to Multi-Employer Pension Plans: What Participating Employers...

Polsinelli PC. In California, Polsinelli LLP

A Road Map to Major Changes Coming to Multi-Employer Pension Plans: What Participating Employers Should Do Now

Andrew Douglass, Chair of Employee Benefits and Executive Compensation Practice GroupDirect: 312.873.2933 Email: [email protected]

Bradley Kafka, Vice Chair of Labor and Employment Practice GroupDirect: 314. 622.6623 Email: [email protected]

Presented by:

real challenges. real answers. sm

MPRA Executive Summary

� In December 2014, the Multi-Employer Pension Reform Act of 2014("MPRA") was enacted to help address the severe underfunding ofmulti-employer pension plans and the teetering finances of thePension Benefit Guaranty Corporation ("PBGC").

� The MPRA is the most significant legislation affecting multi-employer plans since 1980.

� Troubled pension funds may now seek to reduce the benefits ofparticipants, including benefits for retirees already in pay-status.

� The PBGC will have additional flexibility to help underfunded plansby providing its financial assistance and facilitating fund mergersand partitions.

� The MPRA may also impact an employer's withdrawal liability.


Today’s Learning Objectives

• How you can evaluate the current fundedstatus of a multi-employer pension fund inlight of the MPRA changes

• The ongoing risks of continuedparticipation in multiemployer pensionfunds

• How your company's collective bargainingand overall business strategies may beimpacted by the MPRA


Our “Road Map”… in 4 Steps

Step 1Understand current state of multiemployerpension funds generally and the key MPRAchanges that will impact them.

Step 2Identify all collective bargaining agreements,participation agreements, and multiemployerpension funds which require your company tomake contributions.


Our “Road Map”… in 4 Steps

Step 3Analyze each pension fund’s status – and where itmay be heading in future years.

Step 4Evaluate your company’s options and determineoptimal course of action:

– Maintain ongoing participation?– Withdraw from the fund?– Adjust collective bargaining strategies?– Consider other ways to mitigate business

risks?


Background

� ERISA enacted in 1974– Comprehensive rules for employee benefit plans– Many protections for employees, including “anti-

cutback” prohibition for accrued benefits under pension plans

� ERISA amended by MPPAA in 1980– Added withdrawal liability rules and other specific

requirements for multiemployer plans

� Pension Protection Act of 2006 (PPA) added new rules to improve funded status of plans over time


Background

� Market downturns have caused volatility in funds’ asset investments– “Dot com” market bust of early 2000s– Great recession 2008-2009

� Low interest rate environment has increased benefit liabilities of funds

� Loss of market share by unionized employers� Demographic trends with increasing numbers

of retirees, but fewer and fewer active employees


Current Situation

� 1,400 multiemployer pension plans in U.S.� 10 million union workers covered� Total unfunded liabilities for all plans is

over $300 billion– PBGC is quasi-governmental agency that

provides limited insurance guarantees for multiemployer plans


Key MPRA changes

� Changes to improve PBGC’s finances and provide additional flexibility to its multiemployer plan insurance program– Beginning in 2015, PBGC insurance premiums

will double from $13 per participant to $26; premiums in future years increased for inflation

– Additional tools to provide PBGC financial assistance to facilitate plan mergers and “partitions”� May allow funds to carve off “orphan” liabilities

of those employers who previously withdrew and did not pay off total withdrawal liabilities


Key MPRA changes

� Withdrawal liability changes– “Red” and “Yellow” zone funds no longer permitted

to include certain contribution surcharges in the calculation of an employer’s withdrawal liability

– Should reduce an employer’s withdrawal liability if it decides to leave the fund in the future, although the amount of any reduction will vary greatly by employer and fund

– Additional rules if fund seeks MPRA benefit reductions

� Expanded disclosure obligations for funds – Funds must now provide additional governing

documents and detailed financial information to employers, participants, and labor organizations


Key MPRA changes

� New funded status rules for funds– New funding-based classifications for

multiemployer plans and additional flexibility for funds’ actuaries

– “Critical and declining” status determination needed to allow funds to seek reductions in benefits� Requires determination of number of years before fund

is projected to become “insolvent”� Special rules if plan is less than 80% funded or has

greater than 2-to-1 ratio for inactive-to-active participant counts


Key MPRA changes

� Most significant change made by MPRAallows “critical and declining” status funds to suspend benefit payments– “Suspend” means a temporary or permanent

reduction necessary to avoid fund insolvency– No reductions below 110% of PBGC annual

benefit guarantee (currently $12,870 per year)� Retirees over the age of 80 and disabled

participants are fully protected from benefit cuts,– Retirees between the ages of 75 and 80 are

partially protected


Key MPRA changes

� Strict rules before fund can reduce benefits, including extensive approval process overseen by the Treasury Department– Participants will be allowed to vote against benefit cuts– Majority of all participants must vote against cuts to be

effective– Treasury can override participant rejection vote for

“systemically important” funds – i.e., those large funds that could require at least $1 billion in PBGC assistance if cuts are not implemented

� PBGC and IRS have both recently requested public comments on MPRA benefit reduction procedures– Stay tuned as funds start planning to reduce benefits!


How to evaluate a plan’s funded status

� Review latest asset and liability information – Funded percentage (assets divided by liabilities)– Asset mixes (stock, debt, real estate, “other”)

� Demographics– Ratio of inactive participants to active participants– Most funds have more retirees/term vesteds than actives

� Number of participating employers– How many have companies have withdrawn– Total withdrawal liability assessed

� “Burn rate” – is fund collecting more in annualcontributions than it is in paying benefits?

� Review health of largest contributing employers


How to evaluate a plan’s funded status

� Trends over recent years are also important!– Change in funded percentage – Reduction in number of active participants– Reduction in number of participating employers– Increases in withdrawal liability estimates– Changes in plan asset mixes

� Comparisons to other funds of similar sizes and employee populations will also be helpful for determining potential MPRA impact


Looking into the future…

� Perform projections of funded status and withdrawal liability exposure over the next 5-10 years

� Determine whether fund could experience a “mass withdrawal” of all (or substantially) all participating employers

� Consider retention of pension actuary through legal counsel to maintain privilege and coordinate with legal advice

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Should we withdraw from the fund?

� After reviewing funded status of plan, evaluate other risks associated with withdrawal from the fund:– Is a strike, picketing or work stoppage likely?– Can the company operate a facility if a strike

occurs?– Can the work be performed at other facilities?– What alternative retirement plans can the

employer offer to employees?– What else can employer offer employees in a

collective bargaining agreement to diminish the likelihood of a strike?

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Other questions to consider

� What effect can the MPRA have on the funds in which the employer participates?– Are the trustees likely to utilize some of the

available tools, such as partition and merger? – What impact would application of new tools

under the MPRA have on the employer’s withdrawal liability in future years?

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What Strategies Should Employer Utilize if it Makes a Determination to Continue to Participate in a Fund?


Strategies for staying in fund

� Make evaluation previously discussed of present funded status, funded status in future years, recent trends, and comparisons to other funds

� Consider either a role as a management trustee or establish regular contacts with trustees and professionals in the fund office

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� Encourage trustees to explore options that will improve funded status, if necessary. – Is a reduction of benefits necessary to

salvage the fund?– Is the fund sufficiently large that it is

“systemically significant”?– Have large employers or numerous smaller

employers recently withdrawn from the pension fund?

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� Would the funded status of the plan be improved if the fund partitioned the “orphaned” employees of withdrawn employers from the existing fund?

� Is there a meaningful merger partner associated with the same international union that would allow both funds to become stronger and reduce overhead?– What role can the employer play in facilitating

such a process.

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� Use collective bargaining process to encourage change with fund– Consider CBA proposals that are contingent upon

improvement of the funded status– Determine whether additional CBA provisions can

be negotiated to ensure cost certainty and protections for any future legislative/regulatory changes

� Work with other employers who are committed to the fund to develop a strategy to improve the fund’s financial status

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What Strategies Should an Employer Utilize if it Makes a Determination to Withdraw from a Multi-Employer Pension Fund?


Strategies for withdrawal

� Evaluate the best time to withdraw from the fund based on a calculation of the minimal possible withdrawal liability.– Use legal counsel and retained actuary for

projections.– Evaluate the best timing with respect to

contract expiration and collective bargaining negotiations.

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Strategies for withdrawal

� Determine best practices in the event of a strike.– Communicate with union officials and

evaluate their resistance to withdrawal.– Evaluate the likelihood of a work stoppage.– Determine whether the facility can continue to

operate.– Determine whether supplies can be delivered

and product can be sent from the facility.

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Additional Risk Mitigation Strategies

� Evaluate whether union work can be performed at other facilities or subcontracted on a profitable basis

� Look at alternative retirement plans with defined contribution benefits that can be offered to employees

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Other Polsinelli MPRA Resources

� E-Alert: December 17, 2014: Employers Should Start Preparing Now for Big Changes Coming to Multiemployer Pension Plans

� Podcast: February 9, 2015 - Major Changes to Multi-Employer Pension Plans

� E-Alert: February 10, 2015 - Update Series: Multiemployer Pension Plans

� Polsinelli fixed-fee counseling services - MPRACounseling Services


Additional Information

For additional information, please visit us atwww.polsinelli.com to learn more about ourEmployee Benefits and Labor Law PracticeGroups, including our suite of fixed-feecounseling services to help your companyevaluate the MPRA and its potential impact onyour company’s collective bargaining strategiesand other business risks.


About Polsinelli

Polsinelli, a national law firm ranked among the Am Law 100 with over 740 attorneys located in 19 offices, deliberatelyseeks constant improvement in all that we do. At its inception more than forty years ago, the firm established a cultureof openness and entrepreneurship that still pervades today. As the fastest growing U.S. law firm for the past six yearsas ranked by The American Lawyer*, the firm’s growth has been fueled by the recruitment of like-minded attorneys fromtop law firms across the country.

Polsinelli attorneys successfully build enduring client relationships by providing practical legal counsel infused withbusiness insight, and with a passion for assisting General Counsel and CEOs in achieving their objectives. The firmfocuses on healthcare, financial services, real estate, life sciences and technology, and energy and business litigation,and has depth of experience in 100 service areas and 70 industries.

*The American Lawyer 2013 and 2014 reports

Polsinelli provides this material for informational purposes only. The material provided herein is general and is not intended to be legal advice. Nothing herein should be relied upon or used without consulting a lawyer to consider your specific circumstances, possible changes to applicable laws, rules and regulations and other legal issues. Receipt of this material does not establish an attorney-client relationship.

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A Road Map to Major Changes Coming to Multi-Employer Pension Plans: What Participating Employers...

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