Gordon Gray, Alexander Specht, November 29, 2018
Executive Summary
- The multiemployer pension system serves over 10 million
active and retired workers across 1,400 retirement plans.
- Federal law imposes a fee known as withdrawal liability
on employers that withdraw from sponsoring multiemployer pension plans,
but in practice, pension benefits owed to former employees of withdrawn
sponsors have exceeded withdrawal liability fees.
- The congressionally chartered Joint Select Committee on
Solvency of Multiemployer Pension Plans is likely to consider reforming
withdrawal liability, among other policies related to multiemployer
pensions.
Introduction: The
Multiemployer Pension System and Congress
Over 10 million active
and retired workers are covered under about 1,400 pension plans known as
multiemployer, defined-benefit plans. These are collectively bargained
retirement plans funded jointly by multiple employers that provide qualifying
retirees with fixed retirement benefit. Funding for these plans has
deteriorated over time and a number of significant plans face insolvency. The
insolvency of these plans would also swamp the federal backstop, the Pension
Benefit Guarantee Corporation (PBGC).
Congress established the
Joint Select Committee on Solvency of Multiemployer Pension Plans to grapple
with the challenges confronting the multiemployer pension system and the
projected insolvency of the federal failsafe, and to weigh appropriate federal
involvement. Among the issues with which the Committee must contend is
withdrawal liability.[1] When
a plan sponsor decides for any number of reasons to terminate its participation
in a multiemployer plan, it must pay a fee, known as withdrawal liability.
Withdrawal liability is nominally designed to cover the obligations that a plan
sponsor would have otherwise been required to meet to its retirees. So-called
“orphan” liabilities – pension obligations to retirees from sponsors that have withdrawn
– are a significant driver of the instability in the multiemployer pension
system, however, which suggests that withdrawal liability is insufficient.
While that simple
conclusion belies the complexity of the multiemployer pension system, the
structure of withdrawal liability is a likely target for reform. The Committee
has until November 30, 2018, to report recommendations to improve the solvency
of the multiemployer pension system. This primer examines the design of current
withdrawal liability rules and assesses considerations for reforming the
current withdrawal liability regime.
Withdrawal Liability:
History and Structure
The 1980 Multiemployer
Pension Plan Amendments Act (MPPAA) imposed an exit penalty, called a
“withdrawal liability,” on employers who withdraw from an underfunded plan.
Withdrawal liability was introduced to prevent withdrawing employers from
shifting pension obligations to the remaining employers in a plan. After a
withdrawal, the plan determines whether participants’ vested benefits are
greater than the value of plan assets. If this is the case, the plan will
calculate the withdrawing employer’s share of the unfunded vested benefits
based on the formula in the plan and collect it from the employer. A reduction
in the requirement to contribute, including layoffs, plant closures, or changes
in the collective bargaining agreement, can trigger a complete or partial
withdrawal from a plan, thus resulting in the imposition of withdrawal
liability. If all, or substantially all, of the contributing employers
withdraw, the withdrawal is categorized as a mass withdrawal.
An employer’s withdrawal
liability is based on its allocated share of the total plan’s unfunded vested
benefits (UVBs). The amount of the employer share further depends on the date
of valuation of the plan’s assets and liabilities, the actuarial assumptions
and methods used, and the allocation method adopted by the plan. The periodic
payment amount is calculated based on the employer’s historical contribution
rates and contribution base units (for example hours or wages).[2] In
general, the maximum amount of an annual payment is calculated by multiplying
the employer’s highest average annual contribution base units for any three
consecutive years during most recent 10 years, by the highest contribution rate
during those same 10 years.[3]
The law contains two
basic types of allocation methods:
- The direct attribution method, which involves tracing
UVBs attributable to the employer’s workers.
- The pro rata method, which allocates liability in
proportion to the employer’s share of the contributions over a period of
time.
Additionally, there are
special provisions meant to limit the impact of withdrawal liability. These
include a de minimis reduction adjustment, which reduces small
withdrawal liability obligations and a 20-year payment cap.
An employer that
withdraws does not need to pay the withdrawal liability in a lump sum. Instead,
the employer may pay down its withdrawal liability obligation, with accumulated
interest, through periodic payments. In addition, the employer’s withdrawal
liability payments are limited to 20 years. After 20 years pass, any unpaid
withdrawal liability is reallocated among the remaining employers in the plan.
Under a mass withdrawal, however, the 20-year cap no longer applies.
In practice, an exiting
employer’s actual payment is often based its ability to pay. [4] The
lump sum settlement amount is usually just a percentage of the present value of
the future withdrawal liability payments. In very well-funded plans, there is
often no withdrawal liability associated with exiting. In plans that are
moderately well-funded, the withdrawal liability is usually paid off before the
20-year cap is hit. In poorly funded plans, however, withdrawal liability
payments are often limited by the 20-year cap.
Withdrawal Liability:
Considerations for Reform
Some employers may
calculate that withdrawing from an insolvent plan and paying their current
withdrawal liability is less burdensome than remaining in the plan and
continuing to pay high contribution rates. An employer that intentionally
withdraws from a plan expecting to pay its calculated withdrawal liability
could unintentionally become part of a mass withdrawal if substantially all of
the other employers in the plan withdraw within three years after the employer
withdraws. The risk of being part of a mass withdrawal is that an employer may
be required to pay significantly more in withdrawal liability than it would
have under a regular withdrawal. In a mass withdrawal, the withdrawal liability
is calculated using PBGC interest rates that are often lower than the rates
used by a plan for a regular withdrawal. In addition, reallocation liability
reallocates a plan’s costs of all unfunded vested benefits among all
withdrawing employers and can significantly increase the amount of the plan’s
unfunded liability that is allocated to a withdrawn employer. And further, the
20-year cap that applies to a regular withdrawal does not apply to mass
withdrawal, possibly resulting in some employers having to pay withdrawal
liability for more than 20 years. For exiting employers that represent a large
percentage of a plan’s contribution base, the risk of subsequent mass withdrawal
is particularly large because once smaller employers find out that a large
employer is exiting, smaller employers have an increased incentive to withdraw
so as not to be one of the last remaining employers in the plan. Unexpected and
expanded withdrawal liability has the potential to lead to employer
bankruptcies and deterioration of the sponsored pension plan.[5]
Ex-post, to the extent
that orphan liabilities are a significant contributor to the deleterious state
of multiemployer employer pension finances, the withdrawal liabilities designed
to cover them have been inadequate. Simply ratcheting up withdrawal liabilities
is unlikely to substantially enhance the solvency of the multiemployer pension
system, however, given the conditions that might precipitate an employer’s
withdrawal and the potential downside risks that attach to the mass withdrawal
regime.
Conclusion
The fundamental
challenge confronting the multiemployer pension system is underfunding of
promised benefits. There are myriad reasons for this funding deficiency, and no
simple policy change can quickly reverse the precarious and deteriorating
finances of the system as a whole. Reform of the withdrawal liability regime,
which has historically proven insufficient to offset orphan liabilities, is a
reasonable step. But alone the withdrawal regime is an inadequate policy lever
for the current challenge.
[1] For more on the multiemployer pension system and the Joint
Select Committee, see: https://www.americanactionforum.org/insight/multiemployer-pension-financing-and-federal-policy/
[2] Employee Retirement Income Security Act of 1974 (ERISA)
Secs. 4201, 4202, 4206, 4209, 4211 and 4219
[4] http://www.actuary.org/files/publications/Joint_Select_Committee_Multiemployer_Plans_Questions_for_Record_05.18.2018.pdf
[5] https://www.uschamber.com/sites/default/files/multiemployer_report_businesses_and_jobs_at_risk_final.pdf
https://www.americanactionforum.org/insight/issues-in-multiemployer-pensions-withdrawal-liability/#ixzz5YNRkSXBJ
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