The Pension Protection Act was signed in 2006 and provides strict funding rules for multi-employer plans. These rules are due to expire in 2014 and should not be renewed.
The solution to the financial problems of multi-employer plans—plans maintained under collective-bargaining agreements to which more than one employer contributes—is not found in laws that hamstring governance, discourage innovation and stifle self-sufficiency.
Instead, the federal government should remove barriers that prevent troubled multi-employer plans from fixing themselves by restructuring their benefits and attracting new employees and employers.
During the past decade, the federal government has proven incapable of ensuring the financial stability of the nation’s 1,500-odd multi-employer pension plans. Despite the Pension Protection Act (PPA) and other laws designed to regulate the multi-employer plans into solvency, some of the largest plans today face severe financial threats.
The Pension Benefit Guaranty Corp.—the government-sponsored entity that insures that participants in failed plans receive at least a portion of their promised pension—has warned that its multi-employer insurance program is at risk of collapse. Even well-funded plans face a difficult future.
The plans and their participants have played by the government’s rules since the Taft-Hartley Act of 1947 authorized the plans through collective bargaining between unions and employers. Today, 10 million participants rely on the plans to provide the economic protection and dignity in retirement that Social Security alone cannot. Plans are found in the construction, trucking, longshore and other industries with transitory work forces that otherwise would not receive significant retirement benefits.
Troubled plans suffer from the still-stagnant economy and other problems: legacy costs, decreasing participation, unfavorable demographics, poor investment returns and unwise regulatory constraints. The plans’ woes are made worse by the Federal Reserve’s policy of malign neglect toward savers at large and defined-benefit pension funds in particular.
The artificially suppressed interest rates resulting from quantitative easing drive up pension costs and drive down fixed-income returns. Shortfalls in plan funding are made up by increased employer contributions, but forcing employers to pay more than the industry as a whole can afford ultimately destroys jobs.
Even though targeted federal assistance for troubled plans is completely justified in the aftermath of the Great Recession—the government helps the victims of natural disasters at home and abroad and it should do the same for domestic victims of economic calamities—such aid will not be forthcoming at a time of bailout fatigue and general indifference to union workers’ problems.
The best alternative is to give the plans and their sponsors the flexibility to adjust individual plans to specific circumstances: trusting the stakeholders to determine the best solution for each troubled plan.
The PPA’s funding rules are well intended, but their unintended consequences have been to weaken many industries that pay into the plans and to advantage their nonunion competition. The law put the burden of legacy costs on current participants and employers, regardless of their ability to shoulder them. It did not give troubled plans sufficient ability to act early and decisively to restructure benefits.
Preserving pensions is sacrosanct in ERISA, the Employee Retirement Income Security Act. Restructuring means cutting some vested benefits to more equitably divide the plan’s assets and extend its life. For some plans in declining industries, it will be impossible to pay all promised benefits. The goal for these plans should be to pay out available assets to the greatest number of participants in the fairest possible way.
Under the current system, employees who are retired will often bear less of a burden than those who are still working. The latter have not only their pensions at risk, but also their jobs. Among other things, the PPA failed to distinguish between plans in viable industries that can provide additional funding from those plans in declining industries unable to raise contribution rates.
The best approach is to reform ERISA and allow plan trustees and sponsoring unions and employers to determine how to deal with the problems. For some plans, that may mean significant cuts in benefits before the plan reaches insolvency. These reductions may include cutting some pensions for retirees in pay status, when those pensions are unsustainable. Plans should be able to choose to revise how benefits are accrued and how much of the pension is guaranteed. Plans also should be able to seek to attract new employers by reducing potential withdrawal liability. If trustee and sponsor decisions affect future obligations of the Pension Benefit Guaranty Corp., these obligations should be adjusted accordingly, to protect corporation finances.
Multi-employer plans offer a viable basic structure that can provide superior social protection, so long as the plans have sufficient flexibility to adjust to current realities. A less controlling, less paternalistic regulatory approach to plan oversight is the way to ensure the plans’ survival. •