Your Multi-Employer Pension Fund is Broke (Congress to the rescue).
A discussion draft in congress to amend the Employee Retirement Income Security Act of 1974 has employees and retirees questioning the impact “composite” plans will have on multi-employer pension fund plans. To clear the cobwebs let us quickly define and explain the three plans. Then we will get into why employees and retirees are questioning the financial implication of the proposed “composite” plans.
Defining Retirement Plans
Defined Benefit Plans (DBP), define how much income the worker will be guaranteed every year in retirement. Technically speaking the DBP is “a company pension plan in which an employee’s pension payments are calculated according to the length of service and the salary they earned at the time of retirement.” The employee is guaranteed a “DEFINED” benefit or guaranteed lifetime income after so many work years. Defined benefit plans define how much the worker will be guaranteed as income every year in retirement.
Defined Contribution Plans is “a type of retirement plan in which the employer, employee, or both make contributions on a regular basis.” These are familiar to millions of Americans as 401K plans. The employer defines what their contribution will be to the plan and the employee can define or match that contribution amount.
Composite Plans aim to merge the defined benefit and defined contribution plans in order to provide a lifetime income payment to retirees while giving employers a predictable contribution structure.
Dangers of the Composite Plan
Employers will begin to draw new employees into these composite plans, which will put the pension plans at greater risk of being underfunded. An underfunded pension plan will result in greater liabilities and fewer assets. Simply speaking, more money going out to retirees than money going into the pension fund. There are two primary ways pension funds “get more money”, asset growth and employer or employee contributions.
In a letter to congress Teamsters and Machinists opposed the plan. Here is the core of the letter, “It is our understanding that House Education and the Workforce Committee, in conjunction with the National Coordinating Committee of Multiemployer Pension Plans, is drafting legislation that would permit plans to create “composite” plans that would weaken rather than strengthen funding in existing plans. The legislative draft being circulated would reduce current funding requirements and enable many employers to escape from withdrawal liability even when a plan is underfunded. These and other provisions would substantially increase the risk that those already retired will not receive their earned pensions. Without adequate plan funding, the legislation will not only put retirees’ pensions at risk, but will add significant new liabilities to the Pension Benefit Guaranty Corporation’s already underfunded multiemployer insurance program.”
The concern is that greater default liabilities will be placed on the Pension Benefit Guaranty Corporation (PBGC) which is an agency of the United States Government. Who will bail out the liabilities of the PBGC? You the taxpayer. Just like the financial collapse, the taxpayer will bail out these multi-employer pension funds if they go into default.
Key Features of the Multiemployer Pension Modernization Act (Composite Plans)
- Secure American worker’s retirement. The flexibility of composite plans will provide flexibility so the employer has defined contributions and the employee has lifetime income upon retiring. If the composite plan is not properly funded in 15 years then a few triggers will be enacted. These triggers will include contribution increases, benefit accrual decreases, and benefit adjustments. When the plan is underfunded the employer will contribute more to the plan and the employee (retiree) will have less of a defined benefit.
- Multi-employer pension plans will still be funded. The employers will still be mandated to continue to fund the multi-employer pension plans even if they switch to the proposed composite plans. What is not defined is how much the employer will be required to contribute, in order to maintain the current pension funds solvency. This is a solvency concern.
- American businesses will be more competitive. The belief that new composite plans will improve greater certainty and flexibility for businesses, so that they can hire new employees and continue to grow. I don’t believe a “composite” plan will bring “certainty and flexibility” to a business all by itself. These may be good plans, but only time will tell if the composite plans work and bring greater “certainty” to businesses.
- Protecting taxpayers from bailing out pension plans. These new composite plans would not be protected by the Pension Benefit Guaranty Corporation (taxpayers). Therefore, the risk on taxpayers would be reduced, while the burden would shift to the employer and the employee (retiree) would bare the brunt of a composite plan that does not fund its obligations.
Composite Plans (Good or Bad)
Time will tell if composite plans will have a true financial impact on businesses and improve the retirement security for American workers. My concern is focused on the already underfunded liabilities of the current pension plans. New employees that are hired could be under a composite plan. This means that fewer assets will be funneled into the current pension plans. Therefore, a greater risk that pension plans will default, which will result in taxpayers (PBGC) bailing out more pension plans. The risk of making weak pension funds weaker is the greatest concern of putting a new retirement option into the market.
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