Lawmakers Should Let the Sun Set
on the Pension Protection Act
George M. Kraw and Katherine McDonough
The National Law Journal | December 16, 2013
The Pension Protection Act was signed into law in 2006 and provides strict funding rules for multiemployer
plans. These rules are due to sunset in 2014 and should not be renewed.
The solution to the financial problems of multiemployer plans — those plans that are maintained under
collective-bargaining agreements to which more than one employer contributes — is not found in
laws that hamstring governance, discourage innovation and stifle self-sufficiency. Instead, the federal
government should remove barriers that prevent troubled multiemployer plans from fixing themselves
by restructuring their benefits and attracting new employee and employer participation.
Over the past decade, the federal government has proven incapable of ensuring the financial stability of
all the nation’s 1,500-odd multiemployer pension plans. Despite the Pension Protection Act (PPA) and
other laws designed to regulate the multiemployer plans into solvency, some of the largest plans today
face severe financial threats. The Pension Benefit Guaranty Corp. — the government-sponsored entity
that insures that participants in failed plans receive at least a portion of their promised pension — has
warned that its multiemployer insurance program is at risk of collapse. Even well-funded plans face a
difficult future.
The plans and their participants have played by the government’s rules since the Taft-Hartley Act of
1947 authorized the plans through collective bargaining between unions and employers. Today, 10
million participants rely upon the plans to provide the economic protection and dignity in retirement
that Social Security alone cannot. Plans are found in the construction, trucking, longshore and other
industries with transitory work forces that otherwise would not receive significant retirement benefits.
Troubled plans suffer from the still stagnant economy and other problems: legacy costs, decreasing
participation, unfavorable demographics, poor investment returns and unwise regulatory constraints.
The plans’ woes are made worse by the Federal Reserve’s policy of malign neglect toward savers
at large and defined-benefit pension funds in particular.
The artificially suppressed interest rates resulting from quantitative easing drive up pension costs
and drive down fixed-income returns. Shortfalls in plan funding are made up by increased employer
contributions, but forcing employers to pay more than the industry as a whole can afford ultimately
destroys jobs. Even though targeted federal assistance for troubled plans is completely justified in the
aftermath of the Great Recession — the government helps the victims of natural disasters at home
and abroad and it should do the same for domestic victims of economic calamities — such aid will not
be forthcoming at a time of bailout fatigue and general indifference to the problems of union workers.
The best alternative is to give the plans and their sponsors the flexibility they need to adjust individual
plans to specific circumstances: trusting the stakeholders to determine the best solution for each
troubled plan.
UNINTENDED CONSEQUENCES
The PPA’s funding rules are well intended, but their unintended consequences have been to weaken
many of the industries that pay into the plans and to advantage their nonunion competition. The law put
the burden of legacy costs on current participants and employers, regardless of their ability to shoulder
them. It did not give troubled plans sufficient ability to act early and decisively to restructure benefits.
Preserving pensions is sacrosanct in ERISA, the Employee Retirement Income Security Act. Restructuring
means cutting some vested benefits to more equitably divide the plan’s assets and extend its life. For
some plans in declining industries, it will be impossible to pay all promised benefits. The goal for these
plans should be to pay out available assets to the greatest number of participants in the fairest possible
way. Under the current system, employees who are already retired will often bear less of a burden than
those who are still working. The latter have not only their pensions at risk, but also their jobs. Among
other things, the PPA failed to distinguish between plans in viable industries that can provide additional
funding from those plans in declining industries unable to raise contribution rates.
The best approach is to reform ERISA and allow plan trustees and sponsoring unions and employers
to determine how to deal with the problems. For some plans, that may mean significant cuts in benefits
before the plan reaches insolvency. These reductions may include cutting some pensions for retirees
in pay status, when those pensions are unsustainable. Plans should be able to choose to revise how
benefits are accrued and how much of the pension is guaranteed. Plans also should be able to seek to
attract new employers by reducing potential withdrawal liability. If trustee and sponsor decisions affect
future obligations of the Pension Benefit Guaranty Corp., these obligations should be adjusted accordingly,
to protect corporation finances.
Multiemployer plans offer a viable basic structure that can provide superior social protection, so long
as the plans have sufficient flexibility to adjust to current realities. A less controlling, less paternalistic
regulatory approach to plan oversight is the way to ensure the plans’ survival.
George M. Kraw and Katherine McDonough are attorneys at the Kraw Law Group in Mountain View
and Newport Beach, Calif. Kraw is a former labor representative to the Pension Benefit Guaranty
Corp.’s Advisory Committee.
“Reprinted with permission from the December 16 issue of The National Law Journal (c) 2013 ALM Media Properties, LLC.
Further duplication without permission is prohibited. All rights reserved.”