Steeling Themselves For Pension Benefit Cuts

Photo Credit: Tony Hisgett?|| Only 20 years more and I can retire with a full pension!

========================================================

Aside from the bankruptcy of a plan sponsor, the benefits of someone being paid their pension can’t be cut. ?Right?

Well, mostly true. ?With governments in trouble, benefits have been cut, as in Rhode Island, Detroit, and a variety of other places with badly managed finances. ?Usually that’s a big political fight. ?Concessions come partly as a result that you could end up with less if you fight it, and don’t take the deal.

With corporations, the protection of the Pension Benefits Guarantee Corporation [PBGC] has kept pensions safe up to a limit — as of 2016, up to roughly $60K/year for those retiring at age 65 (less for younger retirees) from single-employer plans, and $12,870/year at most for those in multiemployer plans. ?(For some complexities, read more here. ?Also note that the PBGC itself is underfunded and faces antiselection problems as well.)

Multiemployer plans are an inherently weak structure, because?insolvent employers can’t contribute to fund plan deficits, and typically, multiemployer plans arise from collective bargaining arrangements, so that the firms employing the laborers are all in the same industry. ?Insolvency in industries, particularly where there is collective bargaining pushing up costs and limiting work process flexibility, tends to be correlated across firms. ?My poster child for that was the steel industry in 2002, where 20+ firms went insolvent. ?Employer insolvencies in an underfunded multiemployer plan affect all participants, including those working for solvent firms. ?(Note that solvent employers have to pay their pro-rata?share of underfunding in order to exit a multiemployer plan, as I noted for UPS in this article.)

Now in 2014, Congress passed a law called the?Kline-Miller Multiemployer Pension Reform Act of 2014. ?That allowed the PBGC, together with the Departments of Treasury and Labor, to negotiate benefit cuts to the pension plans in order to avoid the plans going insolvent — at which point, all pensioners would be limited to the PBGC limits for their payments. ?Workers in the plan — active, vested, and retired, would have to vote on any deal. ?Majority of those voting wins, so to speak.

The first plan to successfully go through this procedure and cut benefits to participants happened a few weeks ago, in the Iron Workers Local 17 Pension fund. ?Average benefits were cut 20%, with some cut as much as 60%, and some not cut at all. ?The plan was funded to a 24% level, and there are only 632 active employed workers to cover the benefits of 2,042 participants. ?The fund would likely run out of money in 2024. ?Note that only 900+ voted on the cuts, with the cuts passing at roughly 2-1.

There are at least four other multiemployer plans with similar applications to cut benefit payments. ?Prior to this four other multiemployer plans had such applications denied — there were a variety of reasons for the denials: the cuts were done in an inequitable way in some cases, return assumptions were unreasonably high, etc.

My original source for this piece is note by David Gonzales of Moody’s. ?They rate these actions as credit positive because it potentially ends the process where an underfunded multiemployer plan would encourage an employer to default because it can’t afford the liability. ?Somewhat perverse in a way, because the pain has to go somewhere on an underfunded plan — it’s all a question of who gets tapped. ?Note that it also protects the PBGC Multiemployer Trust, which itself is likely to run out of money by 2025. ?After that, those relying on the PBGC for multiemployer pension payments get zero, unless something changes.

For those wanting 30 pages of informative data on scope of the matter, here is a useful piece from the Congressional Research Service.

Final Note

You might think this is an extreme situation, and yes, it is extreme. ?It’s not so extreme that there aren’t other underfunded plans as bad off as this multiemployer plan. ?I would encourage everyone who has a defined benefit plan to take a close look at their funded status. ?I don’t care about what your state constitution says on protecting your pension benefits. ?If the cash gets close to running out, “the?powers that be” will find a way around that. ?After all, what happened with the?Iron Workers Local 17 Pension Fund was illegal prior to 2014. ?Now it is 2017, and benefits were cut.

Because of underfunding, there will be more cuts. ?Depend on that happening for the worst funds, and at least run through the risk analysis of what you would do if your pension benefit were cut by 20% for a municipal plan, or to the PBGC limit for a corporate plan. ?Why? ?Because it could happen.

5 thoughts on “Steeling Themselves For Pension Benefit Cuts

  1. I wonder if municipalities will resort to competitive bankruptcy restructurings in order to shed postretirement benefits in the same manner as private industry. If the taxes required to fund the benefits rise too much so that a city can no longer compete with its neighbors, will the political leadership take the expedient route and curtail the benefits under the bankruptcy code? That certainly has happened in a number of industries (i.e., the financially weak company becomes stronger through the bankruptcy process, which then forces the next weak company to go BK, and so on).

    Nick de Peyster
    http://undervaluedstocks.info/

  2. I think the public unions have had their heads in the sand. The disappearance of private sector unions and the replacement of pensions by 401ks throughout the private sector means that the taxpayers will have little sympathy for public sector workers with underfunded pensions. The taxpayers who are struggling to save enough to cover their own retirement funding through their 401ks with little help from their employers are unlikely to be voting for massive tax increases to fund somebody else’s pension. Once the critical mass gets big enough, the state constitutions will get amended to remove the pension protection.

    If the Social Security Trust Fund runs out without a fix so that retirees see 20% or so cuts to their Social Security, then all bets will be off for future public sector pensions in any form as the retirees with low 401k balances and reduced Social Security payments revolt at the ballot box.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Theme: Overlay by Kaira