Editor's note: On May 6, 2016, a U.S. Treasury Department mediator rejected a huge proposed cut in retirement payouts for hundreds of thousands of workers tied to the woefully underfunded Teamsters Central States Pension Fund. The decision by mediator Kenneth Feinberg temporarily put a stop to plans to cut the fund's pension payouts ranging anywhere from the average of 23 percent all the way up to 90 percent.

The decision also leaves pension administrators of all multiemployer plans - like those in the building trades - wondering about how they would hypothetically proceed with drastic schemes to save their pension plans should they become in a similarly dire position, although none are nearly as bad off as the Teamsters Central States Plan.

The Teamsters pension administrators submitted a plan that maxxed out benefit payments to a bit more than $13,000 per participant per year, not much more than the fallback Pension Benefit Guaranty Board's maximum payout of $12,870 per year if a pension plan fails. That left everyone with an interest in multiemployer pensions asking, if that cut was rejected and wasn't deep enough to save the plan, what is?

By Paul O. Catenacci, Esq.

Novara Tesija PLLC

Many of you may have heard about the recent attempt by the Central States Pension Fund to put into place cutbacks of accrued benefits for its participants.  You may also have heard that not only was its application rejected, but that every other plan to date that has sought to cut benefits has also been denied the ability to do so.  In this issue we look into this development, and how it may affect the construction industry as a whole.

When the Employee Retirement Income Security Act (or “ERISA”) was passed in 1974, its most famous provision was called the “anti-cutback rule.”  This rule prevented plans from cutting back on benefits participants had accrued during their years of service. Future benefits could be reduced, but what a person earned in the past could not be touched. 

This promise is backstopped (to a degree) by an entity known as the Pension Benefit Guaranty Corporation or “PBGC.”  The PBGC receives its funding from premiums charged to multiemployer defined benefit pension plans.  It also relies upon something known as withdrawal liability, which means when a contractor withdraws from a pension plan and later continues with nonunion operations, it is assessed its share of the yet to be funded liabilities of that pension plan. 

If things fall apart and a pension plan runs out of money to pay its benefits, the PBGC can step in. However, the PBGC only pays out a small percentage of the person’s benefit (the amount varies, and is based on the plan’s provisions and years of service). 

In 2014, legislation called the Multiemployer Pension Reform Act was passed.  This law took the extraordinary step of allowing pension plans to cut accrued benefits if certain circumstances existed – a step previously prohibited by ERISA’s anti-cutback rule.              

The driving force behind this law was a fear that due to the massive unfunded liability of Central States, its collapse would bankrupt the PBGC.  While the process of attaining approval for cuts under this law is quite complex, so far the federal government has not approved any of the applications despite fears of serious harm to the PBGC.

What will happen? No one knows for sure.  The plans that were rejected may apply again with an alternative plan in place.  Others may wait until the election is concluded, and determine a course of action then.  It is also possible that new legislation will be passed that will change the process entirely.  But, no matter what happens, it is important to remember is that despite what you hear in the news, the majority of union-sponsored pension plans are not struggling, and have recovered very well from the recession and the housing market collapse the country experienced several years ago.           

Union-sponsored benefits remain very much viable, and are without question the best benefits available to working families.  History has shown this to be the case, and while things do change, the commitment of America’s unions and their families to the labor movement will continue to hold true.