In a much anticipated ruling, the Treasury Department has rejected the Central States pension fund’s controversial petition seeking to cut participant and retiree benefits.
The Central States application for consideration stated that, without a suspension in benefits, the plan was projected to become insolvent within 10 years – and that if the plan was approved, approximately 270,000 people would have some portion of their pension benefits reduced beginning in July of this year.
The Multiemployer Pension Reform Act of 2014 (a.k.a. the Kline-Miller Act) requires, among other things, that the proposed benefit suspensions be reasonably estimated to allow the plan to avoid insolvency, or as the alternative question posed by the Treasury Department, did the proposed benefit suspensions take a plan off the path to insolvency?
The Treasury Department, after reviewing the application and consulting with the Pension Benefit Guaranty Corporation (PBGC) and the Department of Labor (DOL), determined that the suspensions described in the application did not meet that test, nor did they find that the proposed benefit suspensions, in the aggregate, were reasonably estimated to achieve, but not materially exceed, the level that is necessary to avoid insolvency (in that the investment return and entry age assumptions used for this purpose are not reasonable. Their review also found that the proposed benefit suspensions were not “equitably distributed across the participant and beneficiary population,” nor were the notices of proposed benefit suspensions “written so as to be understood by the average plan participant.”
If Treasury had approved the application, an estimated two-thirds of the plan’s 400,000 participants would have seen their benefits reduced, with nearly 40% seeing cuts of 30% or higher, though older and disabled participants would not have had their pensions reduced. According to Pensions & Investments, the pension fund created three tiers of participants with different levels of benefit reductions. Tier I participants, whose employers left the plan, would have had the biggest cuts. Their benefits would be reduced to 110% of the PBGC guarantee, which is less than $13,000 for a participant with 30 years of service.
Central States Reaction
In a press release, the Central States Trustees said they were “disappointed with Treasury’s decision, as we believe the rescue plan provided the only realistic solution to avoiding insolvency.” They said that the Trustees will now “carefully consider the most appropriate next steps, based on this denial and the final guidance issued by Treasury on April 26.” They noted that the pension fund “remains in critical and declining status and is projected to run out of money within ten years, or even less,” and that since the Pension Benefit Guaranty Corporation (PBGC) is also projected to run out of money, “…today’s decision means that, absent legislative action or an approved rescue plan, Central States participants could see their pension benefits reduced to virtually nothing.”
The Teamsters were of a different opinion. In a press release, Teamsters General President Jim Hoffa said, “On behalf of our union and the more than 400,000 retirees and participants in Central States Pension Fund, I would like to thank Mr. Feinberg and the Department of Treasury for denying these massive cuts that would destroy so many lives. We worked with thousands of retirees to educate Treasury and Congress on the devastating impact of the proposed cuts. This decision means that there won’t be any cuts to retirees’ pensions this July or the foreseeable future. We will find a solution to this problem that will allow members and retirees to continue to retire with dignity.”
Immediately following the release, House Education and the Workforce Committee Chairman John Kline (R-Minn.) and Ranking Member Robert C. “Bobby” Scott (D-Va.), who rarely align on major issues, cautioned that while the Treasury Department’s “decision will temporarily spare many retirees from benefit cuts, but we must remain mindful that this pension plan continues to spiral toward insolvency. All of the men and women covered by this pension plan—not just those who would be impacted by the proposed cuts — are facing an even worse outcome within several years.”
Earlier this year, U.S. Sens. Debbie Stabenow and Gary Peters, along with a bipartisan group of 23 other senators, sent a letter urging the U.S. Treasury Department to prevent the Board of Trustees of the Central States, Southeast and Southwest Areas Pension Plan (Central States Plan) from enacting “drastic cuts to hard-earned employee pensions for thousands of retirees.”