ERISA Changes Passed as Part of Controversial Spending Bill

In one fell swoop last week, a once-sacrosanct tenet of the 1974 omnibus pension law, the Employee Retirement Income Security Act (more commonly known by its acronym, ERISA), was overturned. For its sponsors, the measure meant saving troubled multiemployer pensions heading for insolvency. For others, a change to the 40-year law that many believe banned reductions in accrued pension benefits was yet another step to ending true pension benefits.

The controversy surrounding the new Multiemployer Pension Reform Act of 2014, part of the $1.1 trillion year-end omnibus bill passed late last week and signed into law by President Barack Obama, hinges on a misperception that ERISA has never allowed cuts in accrued pension benefits. Reductions occur, in fact, when a company in bankruptcy hands its pension over to the Pension Benefit Guaranty Corp. to make the promised benefit payments. Because the PBGC often cannot provide a benefit at the level once promised by the employer, benefits are cut. What is alarming to some about the new legislation is that another means of restructuring benefits has been handed to multiemployer plan trustees.

As often happens in lame-duck sessions, especially as the legislative calendar winds down before the December break, special-interest provisions get stuffed into massive pieces of legislation and are passed without the usual debate. Along with the measure allowing pension cutbacks was the controversialrepeal of a provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Actthat several major banks lobbied hard for, including JPMorgan Chase & Co. CEO Jamie Dimon, who made personal calls to members of Congress. Another was a large increase in allowable political donations.

The pension cutbacks, which were approved by the House last Thursday and the Senate Saturday night, began life as merely one solution to the looming exhaustion of an estimated 200 multiemployer, or Taft-Hartley, plans, involving about 15 percent of 1,400 union- and employer-sponsored pension funds that cover more than 10 million workers and retirees.

Solutions were first sought when the National Coordinating Committee for Multiemployer Plans (NCCMP) in 2012 formed a coalition of labor and management, the Retirement Security Review Commission. In early 2013 the group published its recommendations in a report called “Solutions Not Bailouts.” Among the proposed remedies to underfunded multiemployer plans were tweaks to rules established in the Pension Protection Act of 2006. But the group endorsed a suspension in benefits, within certain limits, for those plans deemed “deeply troubled,” defined as facing projected insolvencies within 15 years.

There are several other proposed remedies to underfunded pensions in the commission report, aside from the one enacted in last week’s spending bill. One is the concept of alliances and mergers of pension plans to achieve economies of scale. The most ambitious and farsighted recommendation was innovation in the form of new pension plan designs that would mitigate some of the problems that have developed in older pension structures.

The latest crop of reforms was introduced by the chairman of the House Committee on Education and the Workforce,Minnesota Republican John Kline, and George Miller of California, a longtime pension advocate and ranking Democrat on the House committee, after it became apparent that Congress had no appetite to lean on taxpayers to bail out seriously underfunded multiemployer pensions. Joshua Gotbaum, who recently left as director of the PBGC, worked with the congressmen andNCCMP executive director Randy DeFrehnto pass the multiemployer reform plan. “This is a matter where arithmetic trumps policy,” says DeFrehn. His main argument: When actuaries ran the numbers on troubled pensions, they discovered that small cuts today would maintain some benefit for all participants in the long term, as opposed to waiting until the funds were entirely depleted. For some people, saving imperiled plans is ERISA holy writ.

Gotbaum believes that empowering trustees to restructure plans is the only way to ensure a viable future for deeply troubled plans. In the case of multiemployer plans, the PBGC can pay a maximum annual benefit of only $12,870. “It is absolutely not reversing a provision of ERISA,” Gotbaum says about the multiemployer compromise. Gotbaum also oversaw a doubling in premiums paid by employers in union plans to $26 per participant, to be indexed to wage growth thereafter. “In the next three to five years, the multiemployer system can save itself,” he says. “The PBGC will be at the center of that.”

A host of multiemployer plans agree with DeFrehn and Gotbaum, including the most troubled of all, theInternational Brotherhood of Teamsters’ Central States Fund, which has not recovered from losing $8.8 billion in the financial crisis. Others, such as those of the United Food and Commercial Workers International Union, the Associated General Contractors of America, the National Electrical Contractors Association, the United Brotherhood of Carpenters and Joiners of America, and the Service Employees International Union, came down on the side of pension cuts to save plans, as did Cincinnati-based supermarket chain Kroger Co., with its large unionized workforce.

But the notion of allowing pension trustees to determine which pension members receive benefit cuts is anathema to many in the pension world. “Extremely troubling is the secretive process by which these provisions were pushed through Congress, buried in a must-pass bill in the last days of a lame-duck session, without input from the pensioners whose lives could be devastated by the cutbacks authorized by the measure,” saysKaren Friedman, executive vice president and policy director of the Pension Rights Center in Washington. “The process was undemocratic and unfair.”

Friedman notes that the PRC is going to work to repeal the measure. “It is a cruel irony that, on the 40th anniversary of ERISA, Congress has scrapped the most essential protections of the law,” she says. “We are furious that without debate Congress is now making a mockery of the law, enabling trustees to cut already-earned pensions of retirees, which could open the door for cuts in other types of plans, including single-employer, state and local plans, and in Social Security. Congress should be ashamed.”

A number of union executives also criticized the measure. One, R. Thomas Buffenbarger, the international president of the International Association of Machinists and Aerospace Workers, wrote to House members on December 3 concerning “the IAM’s strong opposition to any legislation that would allow the trustees of ‘deeply troubled’ multiemployer plans to solve funding challenges by impoverishing current retirees.” Democratic Senators Tom Harkin of Iowa and Ron Wyden of Oregon have also dissented, as has the AARP.

Although ERISA has until now prevented most cutbacks to earned pension income, it is not unheard of for benefit adjustments to be built into retirement systems at inception as a way to prevent insolvency in dire economic times. For example,Wisconsin has an adjustable pension trust designthat changes each year with the ups and downs of its investment portfolio. In the wake of the financial crisis, and after 17 uninterrupted years of gains, pensioners in that state saw their benefits shaved for five years as the fund recovered. The vauntedDutch pension system, upon which Wisconsin’s plan is based, also makes monetary adjustments as the investment portfolio fluctuates.

Time will tell if plan trustees will make judicious use of their new powers to cut benefits, as the act’s sponsors fervently wish, thus rescuing underwater plans. Time will also tell if — as the act’s detractors fear — this measure will lead to further erosion of pension benefits in single-employer and public plans.

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