The U.S. Treasury Department has received an application by the American Federation of Musicians and Employers’ Pension Fund (the “Plan”) to suspend benefits under the Multiemployer Pension Reform Act of 2014. Multiemployer pension plans cover union-represented workers and are run by a board of trustees, half appointed by the union and half appointed by employers. Most provide a traditional defined benefit, based on years of service and career contributions or a flat multiplier.
Under 2014 amendments to the Employee Retirement Income Security Act of 1974 (“ERISA”) and the Internal Revenue Code, multiemployer plan trustees can reduce benefits if necessary to keep the plan afloat. According to reports, more than 20,000 musicians, mainly younger ones, are likely to see reductions ranging from 2% to (in some cases) nearly 40% in their monthly benefits. If Treasury approves, after conferring with the U.S. Department of Labor and the Pension Benefit Guaranty Corporation, the suspension proposal would go to the Plan’s 50,000 participants and beneficiaries for a vote.
The Plan’s suspension application is the latest of more than 30 by multiemployer plans. So far, the applications have mainly covered workers in transportation and the building trades. But upwards of 120 plans in a number of industries are considered “critical and declining” – expected to run out of money within 20 years – and may suspend benefits if that would prevent insolvency.
Musicians sometimes call themselves “the original gig workers.” In addition to those employed by symphonies and opera companies, unionized musicians make studio recordings, play for Broadway shows, and appear in regional and traveling musical productions. Pooling of employer contributions makes their pensions possible, as in other industries where workers lack close ties to single employer.
But the world has changed since the heyday of multiemployer plans in the 1960s and ’70s, and live and recorded music is no exception. Technological advances, the decline of unions, and longevity improvements often result in inverted demographics, with fewer workers supporting more retirees through their paychecks. As the paycheck is finite, workers often earn smaller benefits for their own retirement.
Since 2006, Congress has treated troubled multiemployer pension plans as restructuring candidates. Under amendments to ERISA made by the Pension Protection Act of 2006, plans that are endangered (“yellow zone”) must adopt funding improvement plans, and plans that are “critical” (“red zone”) must adopt rehabilitation plans. Generally, zone status corresponds to funding percentage, 80% for yellow zone plans and 65% for red zone plans.
As the name implies, a funding improvement plans involves increases in contributions, designed to increase the plan’s funding by 33% within 10 years. The plan’s trustees can impose a default funding schedule unless employers agree to a different schedule in collective bargaining. A rehabilitation plan involves not just potential contribution “surcharges” but downward adjustments to certain benefits, including early retirement subsidies, death benefits, and disability benefits, designed so that the plan will exit critical status within 10 years.
Many multiemployer plans suffered losses in the Great Recession of 2008-09, from which they have not recovered, and are expected to become insolvent within 20 years. For these “critical and declining plans,” Congress permitted suspensions of even normal retirement benefits. The suspensions must meet a “Goldilocks” standard – under ERISA section 305(e)(9)(D)(iv), suspensions “shall be reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency.”
Some plans will never recover even if they suspend benefits. Those plans cannot suspend benefits, but must take “reasonable measures” to postpone insolvency.
“When a multiemployer plan becomes insolvent, it is entitled to financial assistance from PBGC. Financial assistance is a loan to pay benefits at the PBGC-guaranteed level and reasonable administrative costs. As a practical matter, it is a loan that will never be repaid.
The guaranteed monthly benefit limit is about $36 per month per year of service, or about $13,000 annually with 30 years of service, far less than the PBGC single-employer guarantee of about $65,000. And unlike the single-employer guaranty, the multiemployer guaranty is not adjusted for inflation.
Worse, PBGC’s multiemployer insurance fund is itself projected to become insolvent no later than 2026. At that point, there will be no backstop for plans that fail or for the 1.3 million people who depend on them. That includes 400,000 people in the Teamsters Central States plan alone.
It is therefore not surprising that Congress has been considering solutions for this problem. In July 2019, the House passed H.R. 397, the Rehabilitation for Multiemployer Pensions Act (or “Butch Lewis” bill). The bill calls for low-interest federal loans to multiemployer plans (financed by the issuance of bonds), repayable interest-only for 29 years, with a balloon payment in 30 years; no benefit cuts; and restoration of benefit adjustments and suspensions.
Senators Grassley and Alexander, who chair the Senate Finance and HELP Committees, recently issued a proposal called the Multiemployer Pension Recapitalization and Reform Plan. Their proposal calls for continued benefit cuts; employer, union, and retiree “copayments”; funding, withdrawal liability, zone status, and governance reforms; and more PBGC partitions (into a “healthy” plan and a “sick” plan whose benefits would be cut to the PBGC limit). The Senate proposal would also increase PBGC premiums and the PBGC guaranty.
Either proposal would involve a cost to taxpayers, with interest groups citing various figures. Butch Lewis proponents point out that retiree spending has a multiplier effect, as most retirement income is spent quickly on goods and services, keeping others at work and generating tax revenues. A compromise may be reached, but we can only speculate when that may happen or what a compromise would look like.
These issues should be of concern to companies that participate in multiemployer defined benefit plans, to unions, and to retirees. They should also be of interest to those seeking to lend to or acquire such companies. If you have questions about these issues or any aspect of multiemployer plans, please contact Israel Goldowitz or your regular Wagner Law Group attorney.