Multiemployer Pension Plans: Unions and Their Retirees, Management, and Policymakers Must Share the Burden

Pensions have been a hot topic of discussion over the past several months due to a growing concern that a significant number of pension plans are “underfunded.” As practitioners know, if an underfunded plan goes insolvent, any promised pension payment could be significantly reduced. In addition, the federal government—through the Pension Benefit Guaranty Corporation (PBGC)—could be required to assume a specified amount of the unfunded pension liabilities.

While pension plans sponsored by state and local governments and single, for-profit employers have recently been scrutinized in the media, multiemployer pension plans—which provide benefits to union workers and are funded by two or more employers in a common industry—appear to be the most politicized. Arguments can be made that the attention given to multiemployer plans should be focused on the continued viability of the employers contributing to the plan, but instead, the political baggage that unions carry skews the debate over how best to resolve the issues these pension plans face. Add in the fact that many multiemployer plans are underfunded, and any political solution attempting to place multiemployer plans on a path toward continued solvency is characterized as a union bailout.

Setting political rhetoric aside, the reality is that a solution must be found in the near-term to ensure that (1) pension benefits are not significantly reduced for current and future retirees, and (2) the federal government is not forced to pay the lion’s share of these promised benefits in the long-run. To avoid this result, unions and their retirees, management, and policymakers—which all have a stake in the continued viability of the multiemployer pension system—must make necessary concessions if Congress is going to agree to change the current pension rules. ¹While multiemployer plans have been around since the early 1900s, in general, multiemployer pension plans were not regulated until the Labor Management Relations Act of 1947 — otherwise known as the Taft-Hartley Act — was enacted into law. In 1980, Congress added to the regulation of multiemployer plans through the enactment of the Multiemployer Pension Plan Amendments Act (MPPAA).

This solution may be found in a compromise that involves three integral components: benefit reductions, continued employer contributions, and the federal government assuming a specified amount of unfunded liabilities.

Withdrawal Liability and `Last-Man Standing’

Strong arguments have been made that the rules enacted under the Multiemployer Pension Plan Amendments Act (MPPAA)—in particular, withdrawal liability ²Under the MPPAA, Congress sought to strengthen the manner in which pension payments made under a multiemployer plan were protected. In particular, the MPPAA requires contributing employers to guarantee the plan’s funding by requiring employers that exit a multiemployer pension plan to continue payments to the plan to cover any unfunded liabilities of the exiting employer’s workforce. This is known as “withdrawal liability.” and the last-man standing rule ³In cases where the exiting employer is unable to cover all of the liabilities of its workforce, MPPAA requires that these unfunded liabilities be shifted to the remaining contributing employers. This is referred to as the “last-man standing” rule. It is important to emphasize that the last-man standing rule requires the remaining contributing employers to absorb the unfunded liabilities of the current and future retirees of the exiting employer. The result is that the remaining employers are required to pay the pension benefits of retirees who never worked for the employer. —are the root cause for the problems plaguing multiemployer plans today. ⁴Market losses, age demographics, growing unemployment, and diminished union membership have also had a significant effect on the continued viability of the multiemployer pension plan system.

Withdrawal Liability.

From a policy perspective, withdrawal liability is arguably a justifiable rule. That is, a company whose workforce has accrued pension benefits—but where such benefits do not have adequate funding to cover all of the promised payments—should be required to fund the otherwise unfunded liabilities upon leaving the multiemployer plan.

Last-Man Standing Rule.

The last-man standing rule on the other hand, while well-intentioned, has effectively deterred new employers from joining the multiemployer pension system, and has had a devastating effect on the continued viability of many multiemployer plans.

Over the past two decades, thousands of companies otherwise participating in and contributing to a multiemployer plan have gone out of business, as the companies’ industries fell prey to cheaper labor overseas or growing competition from non-unionized firms. In many cases, these companies declared bankruptcy, while others have simply slipped away into the night, never to be heard from again.

Irrespective of the manner in which a company closed up shop, the unfunded liabilities of the exiting companies’ current and future retirees remain. These retirees—and their unfunded liabilities—are often referred to as “orphan” retirees. Under the last-man standing rule, the remaining contributing employers to the particular multiemployer fund are responsible for paying the unfunded promised benefits of these orphaned retirees. Every stakeholder must recognize that while the last-man standing rule may have been an acceptable policy in 1980 when a large number of employers contributed to a particular fund, the rule’s inability to attract new employers in a changing economic environment is leading to the eventual demise of the system. In short, the last-man standing rule is ill-fitted for a competitive, global economy.

Tipping Point.

We are at a tipping point. The unfunded liabilities shouldered by the remaining contributing employers to multiemployer plans are too great to bear. Many of these employers are trying to find a way out of the system. In most cases, paying the employer’s unfunded liabilities—as is required under the withdrawal liability rules—is not economically feasible. This is due in large part to the liabilities of the orphaned retirees that many employers carry like an anchor around their neck. Projections show that if the status quo is maintained, however, some of these plans will become insolvent. As discussed above, in the case of insolvency, pension benefits will be reduced significantly and the federal government may be required to make these pension payments with government resources. ⁵The Pension Benefit Guaranty Corporation plays a secondary role in terms of guaranteeing multiemployer pension benefits. Unlike troubled single-employer pension plans—where PBGC receives the assets and assumes the pension liabilities in the case of a plan termination—PBGC only steps in if the multiemployer plan runs out of money, at which point PBGC loans money to the plan to pay benefits. If this occurs, the pension payments must be reduced to the extent that they exceed PBGC’s guaranteed amount (currently $12,870 for a retiree with 30 years of service at normal retirement age). If PBGC’s obligation with respect to multiemployer plans is such that it does not have enough assets to fund its guaranteed payments, Congress would either have to appropriate additional funds or allow PBGC to default on its obligation.

Impractical Solutions

Unfortunately, there are no appealing options for resolving the issues that multiemployer plans face. There are two options that are often discussed, each of which is impractical from an equity and political perspective.

Insolvency

On one end of the spectrum, unions, management, and policymakers could let these underfunded plans go insolvent. In this case, every current and future retiree would see their pension benefits significantly reduced, taking away the promised pension payments that current and future retirees were counting on for post-employment income. Most policymakers will view this as an inequitable and unacceptable result.

Federal Government Takeover.

On the other end of the spectrum, the federal government could take over the plans and use government resources to pay all of the promised pension payments. In this case, Congress would be required to appropriate specified amounts to cover the pension benefits. This action would result in significant new government spending. Most policymakers already concerned about debt and our nation’s growing deficit will not find this option acceptable. Also, this option will stir up partisan politics, as policymakers and interest groups will characterize this action as benefiting a politically divisive constituency—unions—at the taxpayers’ expense.

Sharing the Burden

A different option for averting deep benefit cuts or a federal government takeover of the multiemployer pension system should be considered. This option must strike the right balance of compromise where all of the stakeholders—unions and their retirees, management, and policymakers—make sacrifices to head off the unacceptable reality that would otherwise occur if the status quo is maintained. As stated earlier, the solution may be found in a compromise that involves three integral components: benefit reductions, continued employer contributions, and the federal government assuming a specified amount of unfunded liabilities.

Benefit Reductions.

First, for the system to survive, current and future retirees may have to accept some reduction in pension benefits that they have already earned. It is important to emphasize such a reduction would be slight compared to the reduction in pension payments each current and future retiree would experience if the plan were to go insolvent. As a result, it would be in the best interest of current and former participants to agree to benefit reductions now to avoid much deeper benefit reductions later.

Continued Employer Contributions.

At the same time, contributing employers to multiemployer plans must continue to participate in these plans, and fund their pension promises. While contributing employers continue to operate on a shoestring budget—especially in this economy—it is imperative that employers ensure that pension promises they made are kept.

Federal Assistance.

Finally, the federal government—through the PBGC—would have to agree to assume a limited amount of unfunded orphan liabilities from a limited number of multiemployer plans. In this case, PBGC would guarantee the unfunded liabilities of the orphaned retirees covered under these troubled plans. PBGC’s assumption of these orphan liabilities would be structured so that PBGC’s contribution is less than it would be if the plans became insolvent. The significance of this option is that PBGC would assume a limited amount of liabilities now so PBGC and the federal government would not have to assume a significant amount of pension liabilities later.

Conclusion

Many observers argue that the multiemployer pension system is unsustainable, and that wholesale changes to the system must be made. Irrespective of whether these arguments have merit, it is important to enact a proposal that would place multiemployer plans on sound financial footing now, so policymakers are not faced with the prospect of choosing between steep benefit cuts or the need for significant federal government intervention as they debate how to reasonably and equitably address the future of the multiemployer system. The best way to accomplish this goal is to consider a proposal involving benefit reductions, continued employer contributions, and the federal government assuming a limited amount of unfunded orphan liabilities as a stepping stone to more fundamental changes.