Multi employer pensions part 2

*Note: This is part 2 of a mini series on multi employer pensions*

Part 1 left us with a host of problems which I tried to outline what they were and some of the reasons why.

This post I will try to focus in on some of the particulars regarding pension reform, pension plan rehabilitation woes, what happens when a pension plan goes bust, and the governments role in all this (once again).

*Disclaimer: I feel the need to remind readers before we get heavy into the mechanics of this that I am not a fiduciary on any funds, nor am I a licensed financial advisor. Rather, I have paid close attention to multi employer pension plans, their decline, the governments response, and what’s on the horizon. I research quite a bit and am sharing a mix of what I have found and what’s taken place.*

Let’s start off with pension reform.

Pension Reform

If a pension plan experienced any of the trouble I mentioned before or found itself in troubled waters it was left with little recourse to address those woes. Eventually, pension plans had additional choices in dealing with problems but unfortunately many came either when damage was already done or certain stipulations had to be met before being utilized, thereby limiting their effectiveness. As it currently stands, many plans saw mediocre measures and implementation, as I hope to outline below.

In 2006, the Pension Protection Act addressed the overfunding (100%) limit (eliminated it) but was for most plans too late. It was before the 2008 great recession but not enough time to make a true difference. While it might help pension plans seek to achieve more than 100% for financial stability now, the reality is back when it was enacted it didn’t have the effect hoped for.

When 2008 came around many plans lost a large percentage of wealth, some experiencing a 20% to 30% decline or more. I don’t know exact numbers but I’ve read of individuals who lost almost 50% of their net worth so I do not think 20% to 30% is that big of a stretch. What a steep hit. Furthermore, the retirement age rules for many plans were less restrictive also. Many took advantage of them and left the workforce in disproportionate amounts, leaving a shortage of skilled workers to satisfy contractors and provide much needed manhours. Those who couldn’t retire experienced less opportunities because of economic instability and fewer projects were done (skilled trades are not immune to market woes, unfortunately). This too resulted in less manhours being worked and contributed to the multi employer pension plans.

When the above conditions are coupled together they create a perfect storm culminating in a poor market, less work and less money coming in, reduced income, skilled trades decline, and the beginning of a death spiral for many pension plans.

The government had their finger on the pulse of pension plans but didn’t recognize the symptoms of cardiac arrest. Go figure.

By the time restrictive rules were removed the damage had begun. The meltdown might have been in 2008 but before then plans had taken steps to ensure they adhered to government regulations – and their steps were binding and debilitating.

For example, if a plan chose to increase the retirement payout per month to be in line with government rules (keeping the plan from being overfunded) that was a binding decision which couldn’t be altered. Those amounts were set in stone, as it were. When the bottom fell out many plans were stuck paying out monthly credits higher than what was fiscally responsible now that investment gains were nil and net worth of many plans was drastically reduced.

Worse still was the fact those plans couldn’t alter their structure, or adjust if you prefer, in accordance with investment gains and/or losses. What do I mean?

Let’s say a multi employer pension plan was experiencing woes from the financial crisis and had locked in monthly pension credits higher than normal (remember, the trustees raised them to be in accordance with government regulations which prohibited the plan from being more than 100% funded). Those same trustees now have to really look into ways to bandage their hurting plan (in accordance with government regulations, of course). They couldn’t change anything going out to retirees; that was set in stone. They couldn’t do anything about the market and investment gains/losses, nor could they really do anything about the lingering affects of the market (less jobs, skilled trades shortage). What could they do?

Many plans began to cut future retiree benefits, lowering the pension credit as well as raising the retirement age. For many plans, that was what they COULD do. Another win for government oversight. It would not let plans prepare for financial difficulty by being over 100% funded and then they severely limited plans when trouble reared its ugly head.

Let me tell you this: it’s awful hard to attract and retain quality skilled tradesmen when they are getting pennies on the dollar for their pension investment. To prop up a system that is flawed because of government regulation and intrinsic design shortcomings is a bit distasteful. They are putting in increased amounts of money (because the government abolished the 25% rule, also) and getting far less per credit hour than many who retired before them.

As an example, let’s say someone comes into the trade and for their first few years, they see their pension credit hour increase from $60 per year vested to $90 (remember that pesky no being overfunded rule is at play here and is why the amount was raised in the first place). Let’s say that person also sees $5.00 per hour go into the pension plan.

Then 2008 happens and everything changes.

The first thing that person sees is a reduction in future accruals. The monthly pension credit goes from $90 to $60 per year vested. Then the amount of money going into the pension plan increases from $5.00 to $7.00 per hour. Less money for their pocket, health and welfare, and annuity to fund a declining pension.

A few years goes by and the amount of yearly accrual drops to $45 per year vested and the amount of money going into the pension plan has increased to $9.00 an hour. All to prop up a pension plan that they see doesn’t really help them in retirement at all.

For those interested, the example above saw a reduction in benefits of 50% and an increase in funding of 80%! Wow.

Let’s run the numbers for the duration of that persons career and see where they come out.

• $5.00 (old pension contribution) x 40 (hours) x 52 (weeks) = $10,400 yearly contribution.
• $10,400 x 35 (years) = $364,000 total contribution
• $90.00 (per credit year vested) x 35 (years worked) = $3,150 monthly pension received.

Now let’s look at some of the increased numbers because of the pension decline.

• $9.00 (new pension contribution) x 40 (hours) x 52 (weeks) = $18,720 yearly contribution.
• $18,720 x 35 (years) = $655,200 total contribution
• $45.00 (per credit year vested) x 35 (years worked) = $1,575 monthly pension received.

How about that? There are SO MANY VARIABLES that could throw the above off in either direction but this you can bank on: many will contribute well over twice what their predecessors put in and likely get less than half of what their predecessors received. And even that is not a guarantee. In some examples, the pension plans are not salvaged and the payee ends up receiving MUCH less than the example above. All in all, is it any wonder why those plans fail to attract and/or retain people?

Welcome to the world of pension plan reforms. I realize I am oversimplifying a large scale problem but many who are in the midst of battle can read what I’ve wrote and identify heartily. I know fiduciaries who have been entrenched for years in scenarios very similar to this. They have watched with hands tied as the pension plans they are trustees for decline with little recourse. Even worse is the governments reoccurring role in the rehabilitation process which compounds the pain.

The pension plan rehabilitation woes

The Pension Protection Act of 2006 requires single and multi employer pension plans to provide annual funding notices to participants, informing them among other things just how solvent the plan is. If the plan is not 100% funded they are required to tell you how funded the plan actually is. That isn’t a bad thing at all, really. But that’s not all plans have to do, though.

IF plans are funded more than 80% they should consider themselves fortunate. They are lumped into a “green” status; that is, they are well funded and are strong.

Plans funded ratio of 79% to 65% are called “yellow”, or if you prefer, “endangered.” They have funding issues that need to be addressed.

Lastly, plans with a funding ratio of less than 65% are labeled “critical” and “red” for danger is appropriate here. These plans have serious funding problems and need immediate attention.

When plans find themselves in either the endangered or critical status they have to adopt rehabilitation measures to address the declining funding the pension plan is experiencing. This too, is heavily regulated. All in all regulation isn’t bad but it seems in many cases some measures actually speed up pension plan declines rather than help preserve them. What measures am I referring to?

Think about it this way. What many multi employer pension plans are currently experiencing is a decline in funding. As already outlined, the government restricts what trustees can do and two specific moves are made to shore up these plans: a cut in future pension credits and increased funding.

Sounds good until you realize it’s not enough. It’s not enough for the pension plan in many instances to see a reversal in funding and it’s not enough to attract and retain new pension contributors (whether they are employers or employees).

What’s an exhausted, sleep deprived trustee to do? The one thing that would help immediately, and is certainly detestable, is lowering the amount of money going out to current retirees. That action has some teeth and merit and until 2014 was not even an option.

*NOTE: I fully realize the idea of cutting benefits for retirees is a horrible one. I don’t like it at all. But if we are going to be realistic about our current predicament, how we got here, how we proceed, and salvage many multi employer pension plans the option drastically needs to be considered. Otherwise, as you will read in this very post, those cuts WILL happen, anyway. Keep a compassionate but open mind with me here.*

Unfortunately, the legislation passed in 2014, the Multi employer Pension Reform Act, doesn’t go far enough nor does it allow plans to truly address the main issue: too much money going out.

Imagine a pension plan that sees steady decline in funding. One year it’s at 75% and the following year it’s at 70% with evidence the trend will continue. Let’s say it gets to 50%, is in “critical” status, adopts rehabilitation measures per government regulation, cuts future accruals, and increases contributions only to discover the plan is still in decline. Simply put, there is too much money going out.

You read on the annual pension funding notice the numbers say IF the trend stays on track the pension plan will be in a default status (the plan can’t pay out benefits) in 15 years. What do you do? Panic? Most certainly. You probably get on the phone, call the labor trustees on the plan, and yell at them for all the problems associated with the decline. TRUST me: your trustees know all too well what’s happening and likely know a great deal more than what you do.

Seriously though, what recourse is left? Cutting benefits going out now is your only choice IF you wish to save the plan. The other option, should the plan continue to decline, is the plan taken over by the Pension Benefit Guarantee Corporation, PBGC for short, and STEEP CUTS WILL HAPPEN. (I will write about the PBGC in a separate post).

The only difference then is when cuts come by your current trustees they come with compassion. The trustees don’t want to cut benefits and they likely know a great number of retirees drawing off the plan. They may even be related to some of them. They also have a vested interest in wanting to salvage the pension plan because they too would like to draw from it one day. But they are fiduciaries and as such they must look at a number of issues including funding.

Remember, past trustees probably raised the pension credit in response to investments doing well and to prevent from being more than 100% funded. Those plans are now paying out much more and are locked in place no matter how the funding for the pension plan currently is.

While the end of 2014 allowed for pension cuts to current retirees it didn’t come without massive hurdles to overcome.

First off, a plan has to be in bad shape to be considered, you have to adopt/put forth a complicated plan that is likely to get rejected by the federal government at least one time, there are age limits placed on the proposed plans (you can’t cut benefits for people over a certain age, for example), and after you have met the criteria above THEN the plan has to be approved by everyone who draws from it. That’s right; a notice is sent out to all who either draw from it currently (retirees) or could draw from it (future retiree hopefuls as well as future widows of those already drawing from it).

The above process takes time and a lot of it to boot. Recall your pension plan had to be in poor shape to begin with before you could even be considered; now you start taking steps to address stability issues while time quickly ticks by and funding status for your plan is steadily declining.

Do you know just how hard it is to get the federal government (the Treasury department) to actually approve a plan devised by actuaries to stemmy the tide of pension decline? You have to make cuts to future accruals and increase contributions, demonstrate you have done all you can do and the plan is still declining. You have to have projections, estimations, etc. just to hopefully submit a plan to BEGIN addressing a serious plan failure. I cannot overstate just how hard it is to get a plan approved.

While researching for this post I came across a series of multi employer pension plan posts written by an actuary from her field standpoint. The article, written by Elizabeth Bauer on Forbes, was well written and she had this to say about the above:

“Folks, this is like prohibiting first aid and demanding treatment start only in the hospital, with a full treatment plan, rather than stemming the bleeding first.”

I heartily concur.

In essence, the federal government restricts multi employer pension plan trustees from performing any real and substantive measures that will help address their declining status. Well, they can, AFTER they check all the right boxes and AFTER the pension plan has bled out a tremendous amount of money. It’s as if the government doesn’t want pension plans to be solvent with their ridiculous and short sighted regulations.

It’s as if the government says to the trustees: “you can begin to seriously address your pension plan’s woes after your plan has pretty much tanked. Until then, watch with hands tied as your plan declines.”

That’s effectively what regulations the government has in place silently scream from the rooftops.

To me, the rub lies in the fact that after much work has been done to submit a plan, get it approved by the federal government, and then those who draw or potentially will draw from the pension plan can, driven by pure emotion, decline the measure. Sure, no one wants to reduce their own retirement income but facts must prevail here. When the money isn’t there, it isn’t there.

Many plans are in dire need of overhaul and when trustees have exhausted all of their options only to be shot down by the pension drawing body, they have NO OTHER OPTIONS. The same plan I referenced above (hypothetically), WILL slide into default status, be taken over by the PBGC (look for multi employer pensions part 3) and will pay out benefits to the tune of pennies on the dollar. The pension drawing body most certainly would had faired better with the trustees who knew many of them; once the government steps in they are but a mere number, devoid of compassion and interested in the bottom line. The cuts came regardless, the body just opted to be masochists and cut themselves in the process.

I understand the problem of quick and drastic changes. We are talking about some serious life altering changes when talking about pension cuts. But I stress again the need to salvage the plan and exercise compassion BUT with an open mind. The government isn’t compassionate; they look at the bottom line and what they have to do to meet guidelines. The trustees, however, hopefully will exercise a measure of compassion in trying to stabilize a pension plan and righting the ship, as it were.

What happens when a pension plan goes bust

Once a pension plan is in the red, “critical and declining status”, it will continue to decline until it can no longer pay out benefits. THEN and only then will the PBGC step in to take over the plan and pay out benefits. They will do so, however, at a rate of pennies on the dollar.

As outlined above, pension plan trustees have adopted rehabilitation plans, cut future accruals, increased current pension contributions, watched the decline of those pension plans regardless, and in 2014 were given the opportunity to try and lower the amount of pension payout as a last measure. As of this writing I know of only a few pension plans who have been approved to reduce retiree benefits, the vast majority either are rejected or don’t have enough time to meet the tremendous hurdles placed in their way before too much damage had been done.

Options have been exhausted, sleep has been lost, dreams have turned into nightmares, and those with intimate knowledge of pension plans age at a rate faster than their “ignorance is bliss” counterparts. After all of this, when on the cusp of despair, when nothing else can be done THEN and only THEN does the PBGC step in and assume control/pay out benefits (at much reduced rates, I might emphasize, again).

Essentially, your pension plan wittles away to basically nothing and the government insurance for pension plans, aka the Pension Benefit Guarantee Corporation (PBGC) takes control. They have specific formulas they use to determine what exactly is paid out to pensioners and there is no compassion, only numbers. With a reduction from trustees they have rules they have to follow (I.e. they can’t reduce rates of people over 80 for example and are limited in reducing benefits of those from 75 to 80); the PBGC cuts to the bone. It is most certainly better to receive cuts from trustees vs the PBGC. But if your pension plan goes bust, the PBGC will take over.

The governments role

Without a doubt the government owns a large portion of what’s taken place. While no one can control the market, the regulations the government has implemented most certainly have steered the ship to the course we are on now. From limiting pension funding ( no more than 100%), to limiting total wage contribution (25% into retirement funds), restricting trustees with large hurdles to meet BEFORE trying to stemmy pension funding bleedout, and everything in between the government has really done a number on pension plans. That’s not to say ill informed trustees, dishonest pension fund administers, and market fluxations haven’t played a part because they most certainly have. But the crux of my point is this: by and large, the actions which have been implemented over the past 40 years have been from government regulation, and bad regulation has its place.

All you need to do is read through this post and part 1 to see how the government has a major part to play here. It’s evident at every turn.

Multi employer pensions part 3 will focus on the Pension Benefit Guarantee Corporation, or PBGC as it is known in the pension world. It’s a beast of a topic and such an important part of multi employer pensions. As such, it deserves its own post.

*Note: This is part 2 of a mini series on multi employer pensions*

*Below are links which I’ve posted in case you, the astute reader, wanted to further your knowledge regarding multi employer pensions.

Janetheactuary.com is a treasure trove of articles on retirement plans, trouble, and an in depth look into multi employer pension plans. Below are her multiple posts on Forbes regarding those multi employer pension plans. Ordinarily I would hyperlink them but I do not want a string of here, here, here, here, etc. Yes, I could get clever and write some more but this is my addendum and I would rather focus on other items. Thus, the links are below as such.

https://www.forbes.com/sites/ebauer/2018/11/27/a-tale-of-two-multi-employer-plan-systems/#71a406922484

https://www.forbes.com/sites/ebauer/2018/12/03/understanding-the-central-states-pension-plans-tale-of-woe/#96a71b66c10b

https://www.forbes.com/sites/ebauer/2018/12/06/could-the-butch-lewis-act-solve-the-multiemployer-solvency-crisis/#1e6b07fc6f15

https://www.forbes.com/sites/ebauer/2018/12/10/actually-central-states-pension-plan-is-fully-funded/#1c61e8bd4134

https://www.forbes.com/sites/ebauer/2018/12/11/the-second-fatal-flaw-of-multi-employer-plan-laws/#33499ffa362f

https://www.forbes.com/sites/ebauer/2018/12/17/more-tales-of-woe-the-united-mine-workers-of-america-1974-pension-plan/#224fd27067aa

https://www.forbes.com/sites/ebauer/2018/12/19/suck-it-up-buttercup-no-one-will-be-happy-with-multi-employer-pension-fixes/#336755efd0c5

These were all her posts regarding multi employer pensions at the time of writing this. She will likely add more in the future as their funding status continues to be a topic of discussion.