mpra webinar deck (10 20-2015)

Polsinelli PC. In California, Polsinelli LLP

Managing Your Withdrawal Liability Risks: What's Next for Employers Participating in Troubled Multiemployer Pension Funds?

Andrew Douglass, Chair of Employee Benefits and Executive Compensation Practice GroupDirect: 312.873.2933 Email: [email protected]

Bradley Kafka, Vice Chair of Labor and Employment Practice GroupDirect: 314. 622.6623 Email: [email protected]

Presented by:

real challenges. real answers. sm

Today’s Learning Objectives

• How to evaluate the current funded statusof a multi-employer pension fund due tochanges made by the Multi-EmployerPension Reform Act of 2014 (“MPRA”)

• Ongoing risks of continued participation inmultiemployer pension funds

• How your company's collective bargainingand overall business strategies may beimpacted by the MPRA

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Our “Road Map”… in 4 Steps

Step 1Understand current state of multiemployerpension funds generally and the key MPRAchanges that impact them.

Step 2Identify all collective bargaining agreements,participation agreements, and multiemployerpension funds which require your company tomake contributions.

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Our “Road Map”… in 4 Steps

Step 3Analyze each pension fund’s status – and where itmay be heading in future years.

Step 4Evaluate your company’s options and determineoptimal course of action:

– Maintain ongoing participation?– Withdraw from the fund?– Adjust collective bargaining strategies?– Consider other ways to mitigate business

risks? 4


Current State of Multi-Employer Plans

� 1,400 multiemployer pension plans in U.S.– Over 10% of funds expected to become insolvent

in the future

� 10 million union workers covered� Total unfunded liabilities for all plans is over

$300 billion– PBGC is quasi-governmental agency that

provides limited insurance guarantees for multiemployer plans

– Latest PBGC report says that MEP insurance program will run out of money by 2025

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MPRA Executive Summary

� December 2014: MPRA enacted to help address the severeunderfunding of multi-employer pension plans and the teeteringfinances of the Pension Benefit Guaranty Corporation("PBGC")

� Most significant legislation affecting multi-employer plans sinceMPPAA introduced the withdrawal liability rules in 1980

� Troubled pension funds may now seek to reduce the benefits ofparticipants, including benefits for retirees already in pay-status– Requires governmental approval and vote by participants

� The PBGC will have additional flexibility to help underfundedplans by providing its financial assistance and facilitating fundmergers and partitions.

� The MPRA may also impact an employer's withdrawalliability…but generally only after 10 years or more

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Key Post-MPRA Developments

� June 2015: IRS issues guidance for MPRA benefitsuspension rules– Revenue Procedure 2015-34– Outlines the application procedures that the pension fund must follow

when requesting a benefit suspension from Secretary of the Treasury– The fund’s application must contain detailed financial and actuarial

information that demonstrates its eligibility for a benefit suspension, aswell as the fund’s determination that reasonable measures have been(or will be) taken to avoid insolvency

– Treasury then makes decision in consultation with DOL and PBGC– Applications for benefit suspensions by “critical and declining” funds

began being accepted by Treasury on June 19, 2015� Requires determination by fund’s actuary of number of years before

fund is projected to become “insolvent”� Special rules if plan is less than 80% funded or has greater than 2-

to-1 ratio for inactive-to-active participant counts7



� June 2015: PBGC issues guidance on MPRA plan partitionrules– Interim final rules– Apples to “critical and declining” funds– The fund must establish that all reasonable measures to avoid

insolvency have been exhausted -- including a “suspension” of benefitsunder MPRA rules

– Partition must be necessary in order for the plan to remain solvent, andmust reduce PBGC’s expected long-term loss concerning the plan

– If PBGC grants partition, the participants and beneficiaries whoseemployers are no longer plan contributors are separated into thesuccessor plan

– PBGC then provides 100% of the minimum statutorily guaranteedbenefits to the participants and beneficiaries allocated to the successorplan

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� September 2015: IRS issues guidance for participant votingprocedures for MPRA benefit suspensions– Proposed and temporary regulations– MPRA require that, before a benefit suspension can take effect, plan

participants and beneficiaries must be allowed to vote– Majority of all participants must vote against cuts to be effective– IRS regulations address voting procedures and administrative

procedures that funds must follow to notify participants, distributeballots, tabulate votes, and contract with third-party vendors to assist inthese processes

– Treasury, in consultation with PBGC and DOL, will determine whether amajority of eligible voters has voted to reject the proposed suspension� Treasury can override participant rejection vote for “systemically

important” funds – i.e., those large funds that could require at least$1 billion in PBGC assistance if cuts are not implemented

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� Keep Our Pension Promises Act of 2015 (“KOPPA”)– Proposed legislation sponsored by Sen. Bernie Sanders (I-Vt.) and Rep.

Marcy Kaptur (D-Ohio)– Would roll back certain MPRA provisions relating to benefit suspensions– Would eliminate certain tax advantages used predominately by wealthy

individuals for “like-kind” exchanges and “minority valuation” discountsfor gifts and inheritances

– Supported by Jim Hoffa and other union leaders– KOPPA not expected to pass in current political climate

� Recent court decisions involving withdrawal liability issues– Potential successor liability cases for asset buyers in certain M&A situations

(Tsareff v. ManWeb Services, Inc., 794 F.3d 841 (7th Cir. 2015) and ResilientFloor Covering Pension Trust Fund Board of Trustees v. Michael’s FloorCovering Inc. No. 12-17675 (9th Cir. Sep. 11, 2015))

– PPA surcharges not included in withdrawal liability calculations (Bd. of Trusteesof the IBT Local 863 Pension Fund v. C&S Wholesale Grocers, Inc., No. 14-1956(3d Cir. Sept. 16, 2015)).

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Update on Central States Pension Fund

� 400,000 plan participants � Currently 48% funded

– Approx. $17 billion in unfunded benefit liabilities� Plan pays out $3.46 in benefits for every $1 in employer

contributions– $2 billion+ negative “burn rate” each year

� September 25, 2015: CSPF submitted its proposed MPRA“rescue plan” to Treasury for its review and approval– “Average” benefit reduction of 22.6%

� Reductions will vary greatly by group and age (e.g., disabled retirees and retirees over age 80 will be fully protected by cuts under MPRA rules; retirees between ages 75 and 80 will be partially protected)

– Certain early retirement benefits and subsidies will be eliminated over time between 2021 and 2025

� Plan participants, unions, and employers have been notified

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� Treasury now has up to 225 days to rule on the fund’s application – Could either be an approval or denial, or an

approval conditioned on making changes to the proposed rescue plan.

– If Central States receives IRS approval, it expects that the rescue plan (including the significant benefit reductions) will take effect as of July 1, 2016.

� Central States is a “systemically important” fund under MPRA rules– If enough participants vote to reject benefit

reductions, Treasury can override vote result

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� If the proposed rescue plan is fully implemented, Central States’ funded status would improve immediately from 48% funded to over 70% funded.

� While this is good, it will not immediately reduce a company’s potential withdrawal liability.– Only after 10 years will the withdrawal liability reflect the

improvement in funded status due to the rescue plan � Requirement under MPRA to restrict the ability of companies

to withdraw soon after a rescue plan goes into effect– Effectively, this means that an employer’s withdrawal liability

exposure will likely not improve over the short term– As a result, employer will need to factor this into decisions that it

may make in future CBA negotiations with the union as to whether it will stay in Central States (and/or move to the hybrid option)

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How to evaluate a plan’s funded status

� Review latest asset and liability information - for calendar year plans, this has likely been updated with most recent Form 5500 filings– Funded percentage (assets divided by liabilities)– Asset mixes (stock, debt, real estate, “other”)

� Demographics– Ratio of inactive participants to active participants– Most funds have more retirees/term vesteds than actives

� Number of participating employers– How many have companies have withdrawn– Total withdrawal liability assessed

� “Burn rate” – is fund collecting more in annual contributions than it is in paying benefits?

� Review health of largest contributing employers

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How to evaluate a plan’s funded status

� Trends over recent years are also important!– Change in funded percentage – Reduction in number of active participants– Reduction in number of participating employers– Increases in withdrawal liability estimates– Changes in plan asset mixes

� Comparisons to other funds of similar sizes and employee populations will also be helpful for determining potential MPRA impact

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Collective Bargaining Strategies

� A basic question in collective bargaining strategy is whether an employer shall remain in a multi-employer pension plan or withdraw from it.– Evaluate the plan’s funded status as Andrew

has described.– Seek legal counsel and, through legal

counsel, a pension actuary who can assist in projections as to the funded status in the future.

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Collective Bargaining Strategies

– Try to evaluate whether the Fund is going to utilize any of the tools made available through the MPRA.

– Are the trustees likely to utilize partition or merger?

– What impact would application of new tools under the MPRA have on the employer’s withdrawal liability in future years?

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Looking into the future…

� Perform projections of funded status and withdrawal liability exposure over the next 5-10 years

� Determine whether fund could experience a “mass withdrawal” of all (or substantially) all participating employers

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Other Factors to Consider Regarding Withdrawing from the Fund

– Is a strike, picketing or work stoppage likely?– Can the company operate a facility if a strike

occurs?– Can the work be performed at other facilities?– What alternative retirement plans can the

employer offer to employees?– What else can employer offer employees in a

collective bargaining agreement to diminish the likelihood of a strike?

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Strategies for Staying in Fund

What Strategies Should Employer Utilize if it Makes a Determination to Continue to Participate in a Fund?

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� Make evaluation previously discussed of present funded status, funded status in future years, recent trends, and comparisons to other funds

� Consider either a role as a management trustee or establish regular contacts with trustees and professionals in the fund office

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� Encourage trustees to explore options that will improve funded status, if necessary. – Is a reduction of benefits necessary to

salvage the fund?– Is the fund sufficiently large that it is

“systemically significant”?– Have large employers or numerous smaller

employers recently withdrawn from the pension fund?

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� Would the funded status of the plan be improved if the fund partitioned the “orphaned” employees of withdrawn employers from the existing fund?

� Is there a meaningful merger partner associated with the same international union that would allow both funds to become stronger and reduce overhead?– What role can the employer play in facilitating

such a process.

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� Use collective bargaining process to encourage change within fund– Consider CBA proposals that are contingent upon

improvement of the funded status– Determine whether additional CBA provisions can

be negotiated to ensure cost certainty and protections for any future legislative/regulatory changes

� Work with other employers who are committed to the fund to develop a strategy to improve the fund’s financial status

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Strategies for Withdrawal

What Strategies Should an Employer Utilize if it Makes a Determination to Withdraw from a Multi-Employer Pension Fund?

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� Evaluate the best time to withdraw from the fund based on a calculation of the minimal possible withdrawal liability.– Use legal counsel and retained actuary for

projections.– Evaluate the best timing with respect to

contract expiration and collective bargaining negotiations.

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� Determine best practices in the event of a strike.– Communicate with union officials and

evaluate their resistance to withdrawal.– Evaluate the likelihood of a work stoppage.– Determine whether the facility can continue to

operate.– Determine whether supplies can be delivered

and product can be sent from the facility.

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Additional Risk Mitigation Strategies

� Evaluate whether union work can be performed at other facilities or subcontracted on a profitable basis

� Look at alternative retirement plans with defined contribution benefits that can be offered to employees

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Other Polsinelli MPRA Resources

� E-Alert: December 17, 2014: Employers Should Start Preparing Now for Big Changes Coming to Multiemployer Pension Plans

� Podcast: February 9, 2015 - Major Changes to Multi-Employer Pension Plans

� Polsinelli Update Series: Multiemployer Pension Plans

� Polsinelli fixed-fee counseling services - MPRACounseling Services

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Additional Information

For additional information, please visit us at www.polsinelli.com tolearn more about our Employee Benefits and Labor Law PracticeGroups, including our suite of fixed-fee counseling services to helpyour company evaluate the MPRA and its potential impact on yourcompany’s collective bargaining strategies and other business risks.

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