Pension Fund Heading into ‘Red Zone’
What the law means and how it protects you
Volume CX, No. 4April, 2010
The devil’s in the details.On Feb. 17, former Local 802 President Bill Moriarity attended our membership meeting to discuss the current status of the AFM Pension fund.
Moriarity is uniquely qualified to discuss this issue, having served both as a fund trustee and fund committee member for many years.
It would be fair to say that there was great interest in this subject among the membership, and Moriarity’s presentation was well received.
He was both thorough and incisive and was able to break down a very complex subject matter into fairly understandable terms.
For those who missed the meeting, I thought it would be useful for me to highlight here some of points made at the meeting.
Two kinds of plans
Generally, pension plans fall into two basic varieties: defined benefit plans and defined contributions plans.
Defined contributions plans are those that have a specific contribution rate to be made on behalf of covered employees.
Contributions are then invested and when the employee comes of retirement age, he or she will receive a pension benefit based upon the return on the invested contributions.
Whatever the invested contributions garner will be the total pension available to the participant.
In this respect, defined contribution plans will always be 100 percent funded.
A defined benefit plan involves an entirely different concept.
In this type of plan, the fund determines the level of pension benefits a retiree will receive.
Employer contributions are then invested to achieve this benchmark pension level.
Investment advisers and actuaries are utilized to ascertain the funding level of the plan.
If funding levels are either too high or too low, contribution rates or benefit amounts may be adjusted.
With a defined benefit plan, the possibility looms that “vested liability” (the amount of liability the fund would have if everyone who vested a pension retired at the same time) may exceed the present funding of the plan.
If that is the case, the fund is considered underfunded.
Pension protection act
In 2006, Congress passed the Pension Protection Act (“PPA”), to assist underfunded defined benefit pension plans decrease liability and minimize the risk that they one day will become insolvent.
Insolvency occurs if the fund is unable to pay its present liabilities.
In the case when a plan becomes insolvent, a government agency known as the Pension Guaranty Cooperation (“PBGC”) will guarantee that the pension or a portion of the pension will be paid.
For those interested in the maximum pension the PBGC will pay, I refer them to www.TinyURL.com/PBGCmaximum.
(Note that the maximum benefit the PBGC will guarantee for 2010 is actually $54,000 for an individual who retires at age 65. The example I read at the meeting was incorrect).
Under the PPA, a plan must certify its funding level to the Secretary of the U.S. Treasury.
Three funding categories were established by the statute: fully funded (green); endangered underfunded (yellow) and critically underfunded (red) .
A fund will be in the red zone if it is less than 65 percent funded; meaning that it only had less than 65 percent of the funds available to satisfy vested benefits.
At present only 20 percent of this country’s defined benefit pension plans are in the green zone due to substantial losses caused by the recent economic downturn.
When a fund is in critical status, it is legally required by the PPA to develop a rehabilitation plan.
The statute mandates some of the features of the plan.
For instance, a fund in critical status is required to impose a 5 percent surcharge on contributing employers.
The surcharge will increase to 10 percent in the second year if the employer fails to enter into a successor collective bargaining agreement that provides for additional rehabilitation.
Furthermore, a fund will be permitted upon notice to plan participants to decrease subsidized or adjustable benefits such as disability or early retirement benefits.
Finally, the fund must prohibit decreases in contribution rates presently contained in collective bargaining agreements.
Subsidized/adjustable benefits may be decreased only for individuals who are scheduled to receive benefits after the benefit reduction notification has been submitted.
Persons receiving the subsidized/adjustable benefit prior to the thirty day notice submission will not have their benefits reduced.
The PPA provides that “the sponsor of a plan in critical status shall not reduce adjustable benefits of any participant or beneficiary whose benefit commencement date is before the date on which the plan provides notice to the participants.”
We’re in ‘critical status’
Congress enacted the Worker, Retiree and Employer Recovery Act of 2008 (“WRERA”) to provide additional relief for multi-employer pension funds in endangered or critical status.
Under this statute, a fund in endangered or critical status may freeze its status at the previous year’s level and obtain an additional year to impose a rehabilitation plan.
This provides additional time for the fund to improve its funding levels.
It also permits pension funds to implement some rehabilitation efforts without being locked into all of the components the PPA requires.
Moriarity advised the membership that the AFM Pension fund, like a great many pension plans in this country, was presently in critical status and that it has exercised its deferral right under the WRERA.
The fund expects to be in the “red zone” beginning in its next fiscal year, which starts April 1. Therefore, it will almost certainly be implementing a rehabilitation plan.
In fact, the fund has already taken steps towards that end, such as decreasing the pension multiplier to 1, and freezing employer contribution levels.
It should be emphasized that individuals already receiving pensions are fully protected under Employee Retirement Income Security Act (“ERISA”) and will continue to be paid as they have in the past.
Further, the benefits multipliers from prior to Jan. 1, 2010 remain in effect for those time periods, and benefits will be paid in accordance with those percentages.
(Those multipliers are $4.65 for work done before 2004; $3.50 for work between Jan. 1, 2004 and March 31, 2007; $3.25 for work done between April 1, 2007 and April 30, 2009; and $2 for work done between May 1, 2009 and Dec. 31, 2009).
On March 1, 2010, the fund disclosed several features of its rehabilitation plan. These benefit reductions will apply to any application for a subsidized annuity benefit postmarked or received by the fund office on or after Feb. 25.
Applicants whose applications are postmarked or received prior to Feb. 24 will not be subject to any benefits reductions.
Reductions in plan benefits include the termination of single annuity benefits upon the participant’s death; early retirement benefits will no longer be subsidized and joint and survivor annuities will no longer convert to a single life annuity benefit if the joint annuitant dies within five years of the annuity starting date, or include a 60 month payment guarantee.
Finally, employers will not be charged the statutory surcharge if they agree to percentage increases in contribution rates.
At the conclusion of the meeting, Moriarity expressed confidence that even though the AFM Pension Fund was in some distress, it was in extremely capable hands.
Participants in the AFM pension fund should trust that the long term picture is not bleak and that panic is entirely unjustified.
Nonetheless, musicians, to the extent that they are able, may look to supplement pension benefits with other vehicles such as 401(k) and 403(b) plans.
In January 2008, Citizens United, a not-for-profit, conservative think tank, released a documentary largely critical of Hillary Clinton as a presidential candidate.
In anticipation of its release on cable right before the primaries, Citizens United sought a declaration from the courts that the Bipartisan Campaign Reform Act of 2002, which prohibited unions and corporations from engaging in explicit electioneering communications utilizing money from their general treasury, was unconstitutional under the First Amendment.
A ruling finding the BCRA unconstitutional was not anticipated at the time because it would require the Supreme Court to overrule its own precedent.
While it is possible for the Supreme Court to over rule itself, this is an extremely rare occurrence and has happened only a handful of times.
Well, folks, on Jan. 21, in Citizens United v. Federal Election Commission, (No. 08-205), the Supreme Court did just that and overruled its own 20-year-old precedent.
In a 5 to 4 decision, the court held that the prohibition on corporate and union electioneering was deemed in direct contradiction to the First Amendment.
This ruling will be debated for many years to come and probably – hopefully – will be the catalyst for remedial legislation.
The flaws in this decision are obvious.
Corporations, like unions, do enjoy First Amendment protection.
However, since they do not themselves have any specific voting rights, reasonable constraints on their free speech rights are not unjustified.
Nor are their political views reflective of the individuals and entities who contribute to their general treasury.
Corporations often wield large concentrations of money that may unduly influence an election’s results.
Unions are democratically run organizations. However, utilization of their general treasury funds for political reasons is sometimes hard to harmonize with their obligation to fully and fairly represent their membership, especially if the membership has no say in how the funds are being used.
(Individuals who do not wish their dues contributions being used for campaign financing have the burden of opting out).
Additionally, despite the BCRA’s prohibition on use of general treasury funds, corporations and unions can still pay for campaign advertisements and political endorsements through political action committees.
PAC’s are regulated and are required to file reports with the state and federal governments disclosing the sources and amounts of contributions being made.
The same level of transparency and accountability is not available when general funds are utilized.
In his 90 page dissent, Justice John Paul Stevens wrote that the decision “threatens to undermine the integrity of the elected institutions across the nation.”