The controversial law, passed as part of the government’s omnibus spending bill in the waning hours of the last Congress, established a new process for the most critically underfunded multiemployer pension plans to reduce benefits to existing retirees as a measure to maintain future solvency.
Under provisions of the Kline-Miller reform act, multiemployer plans are deemed to be in “critical and declining” status if they expect to be insolvent in 15 years, or insolvent in 20 years and have a ratio of inactive-to-active participants exceeding 2 to 1, or are less than 80 percent funded.
Those plans can now reduce retirees’ pension benefits to stave insolvency but need Treasury’s approval to do so.
In conjunction with the publishing of new regulations in the Federal Register, Treasury Secretary Jack Lew announced the appointment of Kenneth Feinberg as Special Master to oversee those stressed plans’ applications for benefit reductions.
Previously, Feinberg has held similar appointments, overseeing executive compensation of TARP-funded financial institutions after the government bailouts of the last recession, and insurance claims made after the British Petroleum Deepwater Horizon oil spill in the Gulf of Mexico and the September 11 terrorist attacks on New York and Washington D.C.
In a press call, Feinberg said he serves at the discretion of the Treasury Secretary and that he will receive no compensation for the post.
In order for benefit reductions to be approved by Treasury, sponsors will have to prove they have taken all “reasonable measures apart from reducing benefits” to avoid insolvency, according to a Treasury representative.
Those measures include increasing sponsor and participant contributions, and reducing ancillary benefits, like early retirement subsidies.
“The statute is clear,” said Feinberg. “I am obligated to follow the law. These plans have a wide-ranging impact on retirees. The law is designed to deal with a very challenging public issue.”
If Treasury approves reductions to previously protected benefits, plan trustees will be able to reduce participants’ benefits to 110 percent of the benefits guaranteed by the Pension Benefit Guaranty Corp.
PBGC guarantees limited benefits to participants in the multiemployer plans it insures. The highest guaranty is about $13,000 annually.
That means under Kline-Miller, if a participant’s PBGC-guaranteed benefit is $1,000 a month, plan trustees would not be able to reduce benefits below $1,100 per month. Retirees 80 and older and participants on disability would be exempted from the cuts.
Union-member participants will have the chance to vote down benefit reductions. But, if they do not agree to the reductions, Treasury can override their vote if the plans are deemed systemically important, meaning they would require more than $1 billion in PBGC assistance were the plans to become insolvent.
According to the latest projections from the PBGC, about 1 million of the 10 million participants in multiemployer pensions insured by the agency are in plans that are on a path to insolvency.
Last year’s annual report showed PBGC’s multiemployer insurance program holding about $2 billion in assets, against $40 billion in projected liabilities.
PBGC also issued an interim final regulation in accord with the Kline-Miller Act.
After plans have reduced benefits, they may be eligible for further assistance from PBGC.
The new law grants PBGC the authority to partition a portion of a plan’s liabilities into a new plan, which would be funded by the PBGC, but only after the benefit reductions have been approved and enacted.
The amount partitioned is limited to the amount needed to keep the plan from going insolvent, according to a PBGC representative, who was part of the press call with Treasury.
In effect, PBGC would be taking responsibility for some plans’ liabilities, but only if doing so proves less costly to the PBGC than if the plans were to go insolvent.
Also, in order for liabilities to be partitioned, PBGC would have to determine that doing so would not impair its ability to insure other plans, according to the PBGC rep.
The PBGC representative emphasized partitions will be limited by the massive debt in the agency’s multiemployer program. He estimated that about $60 million worth of partitions would be available and that about six plans will seek partition in the first years of the new program.