The Central States, Southeast and Southwest Areas Pension Plan (Central States) is a multiemployer defined benefit (DB) pension plan and is projected to become insolvent by 2026 and then will be unable to pay benefits. On September 26, 2015, Central States submitted an application to the U.S. Department of the Treasury to reduce benefits to two-thirds of the plan participants. Central States is one of the largest multiemployer DB pension plans and is the largest (by number of participants) among plans that may be eligible to reduce benefits as a result of the Multiemployer Pension Reform Act (MPRA), enacted as Division O in the Consolidated and Further Continuing Appropriations Act, 2015 ( P.L. 113-235 ). MPRA allows certain multiemployer plans that are expected to become insolvent to apply to Treasury for authorization to reduce benefits to participants in the plan, if the benefit reductions can restore the plan to solvency. When a multiemployer DB pension plan becomes insolvent, PBGC provides financial assistance to the plan to pay participants' benefits. When a multiemployer plan receives financial assistance from PBGC, the plan must reduce participants' benefits to a maximum per participant benefit. However, if Central States (or another large multiemployer plan) were to become insolvent, PBGC would likely be unable to provide sufficient financial assistance to pay participants' maximum insured benefit. PBGC's multiemployer program does not receive any federal funding. Participants in multiemployer plans that receive financial assistance from PBGC would not receive 100% of their promised benefits. In the event of PBGC's insolvency, financial assistance from Treasury is not assured. As shown in Table 1 , Central States paid $2.8 billion in benefits in 2014. If PBGC were required to provide financial assistance to the Central States plan, it is likely that PBGC would quickly become insolvent. It also requires that an individual's benefit be reduced to no less than 110% of the PBGC maximum guarantee. The Central States application for benefit reductions lists three tiers of benefits. Central States submitted its proposal to reduce participants' benefits on September 25, 2015. Treasury is currently evaluating Central States' application. Under MPRA, Treasury must approve or deny the application within 225 days of receipt, which is May 7, 2016. In general, the Secretary of the Treasury must approve the application for benefit suspensions if Central States' financial condition (such as the plan being in critical and declining status) and proposed benefit suspensions meet the criteria specified in MPRA (such as the benefit suspensions being equitably distributed and no benefit suspensions for participants aged 80 and older). Is a Vote of Participants Required to Approve Benefit Reductions? Under MPRA, if Treasury determines that a plan is systematically important then Treasury may permit (1) the benefit suspensions to occur regardless of the participant vote or (2) the implementation of a modified plan of benefit suspensions to take effect, provided the modified plan would enable the pension plan to avoid insolvency. Treasury would most likely determine that Central States is a systematically important plan. In the 114 th Congress, a number of bills have been introduced that would affect potentially insolvent multiemployer DB pension plans. H.R. 2844 / S. 1631 . Representative Marcy Kaptur and Senator Bernie Sanders introduced companion legislation, the Keep Our Pension Promises Act, on June 19, 2015, that would, among other provisions, repeal the benefit suspensions enacted in MPRA. H.R. 4029 / S. 2147 . Representative David Joyce on November 17, 2015, and Senator Rob Portman on October 7, 2015, introduced companion legislation, the Pension Accountability Act, that would (1) change the participant vote to approve a plan to reduce benefits from a majority of plan participants to a majority of participants who vote and (2) eliminate the ability of systematically important plans to implement benefit suspensions regardless of the outcome of the participant vote.
Under the Multiemployer Pension Reform Act (MPRA), enacted as Division O in the Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235) on December 16, 2014, certain multiemployer defined benefit (DB) pension plans that are projected to become insolvent and therefore have insufficient funds from which to pay benefits may apply to the U.S. Department of the Treasury to reduce participants' benefits. The benefit reductions can apply to both retirees who are currently receiving benefits from a plan and current workers who have earned the right to future benefits.
On September 25, 2015, the Central States, Southeast and Southwest Areas Pension Plan (Central States) applied to the Treasury to reduce benefits to plan participants in order to avoid becoming insolvent. At the end of 2014, Central States had almost 400,000 participants, of whom about 200,000 received $2.8 billion in benefits that year. The plan reported $18.7 billion in assets that was sufficient to pay 53% of promised benefits. In its application to reduce benefits, Central States projects that it will become insolvent in 2026.
If Central States does not reduce participants' benefits and the plan becomes insolvent, then the Pension Benefit Guaranty Corporation (PBGC) would provide financial assistance to the plan. PBGC is an independent U.S. government agency that insures participants' benefits in private-sector DB pension plans. Multiemployer plans that receive financial assistance from PBGC are required to reduce participants' benefits to a maximum of $12,870 per year in 2016. However, the insolvency of Central States would likely result in the insolvency of PBGC, as PBGC would likely have insufficient resources from which to provide financial assistance to Central States to pay 100% of its guaranteed benefits. Treasury is not obligated to provide financial assistance if PBGC were to become insolvent.
Under MPRA, participants' benefits in the Central States plan could be reduced to 110% of the PBGC maximum guarantee level. However, participants aged 80 and older, receiving a disability pension, or who are receiving a benefit that is already less than the PBGC maximum benefit would not receive any reduction in benefits. Central States' application for benefit reductions indicates that about two-thirds of participants would receive reductions in benefits. About 185,000 (almost 40%) participants would receive at least 30% or higher reductions in their benefits.
Treasury is currently reviewing Central States' application and must approve or deny the application by May 7, 2016. If Central States' financial condition and proposed benefit suspensions meet the criteria specified in MPRA, then Treasury must approve the application for benefit reductions. The plan has proposed to begin implementing the benefit reductions beginning in July 2016. If Treasury approves a plan's application to reduce benefits, it must also obtain the approval of the plan's participants via a vote of plan participants. However, MPRA requires Treasury to designate certain plans as systematically important if a plan is projected to require $1 billion or more in financial assistance from PBGC. Plans that are labelled systematically important may implement benefit suspensions regardless of the outcome of the participant vote. Central States is likely a systematically important plan.
Legislation has been introduced in the 114th Congress that would affect potentially insolvent multiemployer DB pension plans. H.R. 2844 and S. 1631, the Keep Our Pension Promises Act, would, among other provisions, repeal the benefit reductions enacted in MPRA. H.R. 4029 and S. 2147, the Pension Accountability Act, would change the criteria of the participant vote and would eliminate the ability of systematically important plans to implement benefit suspensions regardless of the participant vote.