Letter from the US: Central States snag
A pensions bust-up is looming on the fringes of the 2016 Presidential campaign, involving the 115,500 retirees of the Central States Pension Fund (CSPF) who face a 28% average cut of their monthly pension. But the stakes are much larger. Senator Bernie Sanders, one of the Democratic presidential contenders, is championing the rights of those retirees. His attempt to stop the cuts with a new law could affect the whole pension industry.
The CSPF is one of the nation’s largest multi-employer plans with 407,000 members from 1,500 different companies across a range of industries, including trucking, construction and even Disneyland employees. It is also the first fund to seek benefit reductions under the Multi-employer Pension Reform Act (referred to as Kline-Miller or MPRA), a bipartisan bill enacted in December 2014.
Multi-employer plans are collectively bargained plans maintained by one or more unions and multiple companies, generally in the same industry or as members of an association. There are about 1,400 such plans covering an estimated 10m Americans. They were established in 1947 to provide retirement security to workers in industries where employers are typically small and employees frequently switch jobs.
Unfortunately, such small businesses often close and many multi-employer plans have run into trouble as participating companies have become insolvent, leaving orphaned workers and retirees for the surviving companies in the pool to cover. If a plan becomes insolvent, the Pension Benefit Guaranty Corporation (PBGC) will have to provide financial assistance to cover guaranteed benefits and expenses.
Trouble runs so deep that the PBGC forecasts that its guarantee programme for the multi-employer funds will run out of money by 2025. Moreover, the Government Accountability Office has warned that the PBGC faces “an immediate and critical challenge with its multi-employer programme”, meaning also that the programme for single-employer plans is at risk because of the mounting deficit, which totalled $61.8bn (€56bn) at the end of 2014.
This is why Congress approved the MPRA in 2014 to allow financially troubled multi-employer plans to cut retiree benefits if the plan is considered significant enough to pose a threat to the PGBC. Only retirees aged 80 or older or who receive a disability pension would not have their benefits reduced; the cuts will be smaller for those aged 75 to 79 than for those under 75. Previously, cutting retirees’ pensions was illegal because benefits were protected by the Employee Retirement Income Security Act (ERISA) of 1974.
Thomas Nyhan, executive director of CSPF, has sought benefit reductions as the fund is projected to run out of money in 2025. The fund is currently paying out $3.46 in retiree benefits for every dollar received in employer contributions.
Since 1982, the CSPF’s assets have been managed by a group of financial institutions under a federal consent decree due to the Teamsters union’s ties to organised crime. In the 1960s and the 1970s, the Teamsters’ leader Jimmy Hoffa lent funds to mobsters to take control of Las Vegas casinos.
The current Teamsters president, James P Hoffa, last September wrote to Nyhan, stating that the new restructuring law “creates the false illusion of participatory democracy” because it requires a vote “that can simply be ignored”.
The fund’s members will vote on the proposed cuts if the Treasury Department approves the CSPF restructuring plan, which should happen by next May. But the cuts may still be imposed regardless of the outcome of the vote because the fund qualifies as “systemically important” due to the fact that failure would jeopardise the stability of the PGBC.
The outcome could set a precedent for cuts in other underfunded plans, including public ones. The alternative proposed by Senator Sanders is legislation to prevent pension benefit cuts and increase taxes on the wealthy to support underfunded multi-employer plans.
However, Nyhan has said a new law may come too late to rescue the CSPF.