Pension ERISA anti-cutback Rule at Risk?

[gauss]

It appears that during this lame duck session in congress, a major component of the ERISA laws that protect private pensions may be repealed.

I am referring to the anti-cutback rule that prevents the retroactive decrease of accrued pension benefits except in extreme cases such as employer bankruptcy.

This proposal would only effect multi-employer plans, but could this not be a template for other classes of pensions?

A quick hypothetical evaluation of the effect on DW's pension would yield a 60% reduction on a $35,000 year pension with 30 years of service had she been part of the multi-employer system. The PBGCs guarantee amounts for multi-employer plans are much less generous than single-employer coverage under current law

Note that these measures are not implemented when the plans fail but rather up to 20 years in advance of this if the plans appears to be on track to insolvency. The plans would be cut down up to 110% of the PBGC guarantee amount.

There is no H.R. bill number for this in that the sponsors are attempting to implement it via insertion to an omnibus spending bill.

This would appear to be one of the biggest threats to retirement income security that has surfaced yet.

Reps. John Kline (R-Minnesota) and George Miller (D-California), the highest-ranking members on the House Education and Workforce Committee, have brokered a last-minute deal to reform multi-employer pensions, In These Times has learned. They’re now urging party leaders to include the plan as part of an omnibus spending bill, just before the 113th Congress is set to leave Washington for good on December 11.
The full extent of the Kline-Miller proposal remains unclear. In addition to providing trustees with new benefit-gutting powers, it may include other less high-profile elements from the “Solutions Not Bailouts” report, a proposal authored last year by the National Coordinating Committee for Multiemployer Plans (NCCMP), a labor-management coalition.

Intelligent thoughts sought.

Please refrain from overtly political/partisan, thread-closing comments.

-gauss

 

[daylatedollarshort]

I think they have no choice but to do something:

Federal Private-Pension Safety Net Running $62 Billion Deficit - WSJ

Multi-employer plans alone are running a $62B deficit. It is either a bailout, benefit cut or simply run out of money by doing nothing. The single employer plans are not in quite as bad shape.

 

[gauss]

Wouldn't you want to see this debated out in the open? Perhaps alternate proposals would arise? How about this one:

#1) Provide a one-time bailout.
#2) Change the rules so that multi-employer pension boards no longer hold the money, but rather purchase deferred annuities each year from insurance companies for the incremental service earned.
#3) Insurance companies would insure each other as is done now with the state based annuity protection system.

Seems like this might help with the problems such as the actuarial community promoting 8% rates of return on pension fund investments. If the insurance company assumed the risk, better numbers might come out of the process.

 

[daylatedollarshort]

Seems like this might help with the problems such as the actuarial community promoting 8% rates of return on pension fund investments. If the insurance company assumed the risk, better numbers might come out of the process.

The 8% is based on "happy thoughts" -

"The California Public Employees Retirement System’s report this week of a 1 percent return for the fiscal year ended June 30 was “well below” the 7.5 percent return the system uses to calculate its condition, Fitch said. "

U.S. Public-Pension Shortfall $4.6 Trillion, Group Says - Bloomberg

I don't have any solutions. This is a problem way above my pay grade. If you look at the retirement savings and percent of people in the U.S. actually covered by pensions these days (the masses are not) bailing out pensions using tax money, especially higher income pensions, from people who have nothing but SS to look forward to is not going to be politically popular.

I am surprised this topic doesn't come up for discussion here even more than it pops up. I don't read usually about people here planning on only getting 50% or 30% of their pensions but the reality is that for some pensions that is all that is actually funded.

 

[Options]

This law is significant, IMO. It sets the stage for future pension reform. Also provides insight into what Congress is capable of doing with respect to SS reform. Most surprising is the 30-50% reduction to benefits to people all the way up to age 75, when it's supposedly too late to make course corrections.

 

[pb4uski]

I think you are reading way too much into it as Congress is unlikely to bite the hand that feeds them unless they have no other choice but only time will tell.

 

[Options]

I think you are reading way too much into it as Congress is unlikely to bite the hand that feeds them unless they have no other choice but only time will tell.

What do you mean by Congress is unlikely to bit the hand that feeds them? They just did by opening the door to cuts for pensioners up to age 75. How am I reading too much into that? Here's the link to Michelle Singletary's take on it, and it ain't pretty:

New law lets some pension plans cut promised benefits - The Washington Post


Wharton School of Business has weighed in on as well:

As Benefits Cuts Loom, Prepare to Work Longer




You can use this link, too, to calculate max benefits cuts under the law. It's an eye opener:

Multiemployer Retiree Cutback Calculator | Pension Rights Center


If they'll do this to pensioners under 75, what's to stop this from happening to social security claimants under 75?

 

[gauss]

What will be interesting and perhaps more directly relevant is if the ERISA Private Pension guarantee will be reformed as well. This might be less controversial in the near term than actually reforming Social Security.

In the past, the sponsoring firms of ERISA private DB plans only had two main options to get out of the pension business:

1. Reorganize under bankruptcy law
2. Terminate the plan and purchase annuities for all participants that would preserve the terms of the plan.

A third option could materialize in Congress where one could underfund a plan to the point of it being declared "likely to be insolvent" upon which accrued benefits could be cut retroactively. This would of course create perverse incentives to the plan sponsor.

Any reform would probably not be so transparent as to allow this directly, but I would not put it past the armies of benefits consulting firms to try to get something complex into the legislation that could be exploited down the line to achieve this goal.

-gauss

 

[Options]

...

Any reform would probably not be so transparent as to allow this directly, but I would not put it past the armies of benefits consulting firms to try to get something complex into the legislation that could be exploited down the line to achieve this goal.

-gauss

My thoughts exactly. One provision of this new law is that any company reducing pension benefits cannot be sued under any law, including ERISA. If you want to get an idea of initial public reaction, read some of the comments below the Washington Post article I posted above.

 

[pb4uski]

What do you mean by Congress is unlikely to bit the hand that feeds them? ....

The reality is that there are so few pensions left these days and many are adequately funded so the impact will not be widespread. But I do feel for those who are impacted.

Beyond that, I'm out of tin foil so I guess we'll just agree to disagree.

 

[Beststash]

The hand that feeds them is definitely not the pensioner. That is probably the most important message this reform makes clear.

 

[Helen]

The reality is that there are so few pensions left these days and many are adequately funded so the impact will not be widespread. But I do feel for those who are impacted..

What do you mean by the impact will not be widespread? Do you mean those of us not impacted by a pension cut will not feel the pain?

Beyond that, I'm out of tin foil so I guess we'll just agree to disagree.

I have watched the middle class be eroded left and right for the last 30 some years, this pension legislation is just one more example. There is nothing tinfoil hat about it.

 

[gauss]

Glad to see more discussion of what I consider a serious ER topic. I too am surprised that there was not more discussion of this before, and even after the law passed.

I found a poll here from 10 years ago that showed that at that time 50% of people had pension income as part of their plan.

I wonder if we reran the poll today if the numbers would be significantly different and if so the cause. (Do we have many new members who never had pensions skewing the numbers, or perhaps many people cashed out their DB pensions when given the chance?)

My pension plan has long been frozen, but I am still planning on the $2k/month non-COLA'd at age 65. I always considered this to me more secure than SS given that the plan was funded to a reasonable level, the company is large and has been around for a while, and that the PBGC back stop was there. Under current law it would take a change in all of these assumptions plus the ERISA law to change this assumption.

In recent years, many of the pension participants who were already in payout status were transferred to a commercial annuity, but mine was not part of this. I am looking forward to the next report that shows the new size of the number of participants (ie those not transferred to the annuity) and the new funding levels. Perhaps the new remaining plan will have liabilities so small and with no future accruals that it will hold up well.

Perhaps it is still relatively secure (ie Pb4uskis comments) but I wonder how much expected robustness may have been lost due to the ERISA changes.

Let's keep up the good discussion -- just make sure to not turn overtly political and have the thread closed like what happened at the Pension Plan cuts discussion.

 

[GreenER]

I could easily imagine my employer intentionally underfunding the pension if they thought that they would then be able to just cut benefits down the line. We were recently merged with a company that didn't have a pension program and the only thing keeping them from freezing it is a union contract. The pension is no longer available for new hires but I fully expect them to try to put the pension back on the table this summer despite having previously promised to leave it as is after the agreement was reached to not offer a pension to new hires.

 

[pb4uski]

What do you mean by the impact will not be widespread? Do you mean those of us not impacted by a pension cut will not feel the pain?

No, in fact I meant the exact opposite of what you inferred. Where I said that I don't think the impact will be widespread is that I believe that a small percentage of plans will be so troubled that they will consider reducing benefits and an even smaller percentage will be so troubled that they actually reduce benefits.

Where I said that if feel for those impacted is that I am sympathetic to those few who end up with significant cuts to the benefits that they have been promised.

 

[GreenER]

As the pension is what has kept me there and commuting for all of these years and given the fact that I'm getting close enough to smell the barn, lets just say I would not be amused. This is a company that is not struggling and has seemingly unlimited funds for expansion and CEO salaries

 

[pb4uski]

The hand that feeds them is definitely not the pensioner. That is probably the most important message this reform makes clear.

True that pensioners are not a group with huge political sway, but in earlier post there was a concern that cuts to benefit would extend to SS and SS recipients are definitely have significant political sway. Besides, other than chained CPI, I don't recall hearing of any reductions to current or near term SS retirement beneficiaries.

 

[Senator]

The move was the result of an alarm from the Pension Benefit Guaranty Corp. that multi-employer plans covering more than 1 million participants are substantially underfunded and, without legislative changes, will probably fail.

Congress created the PBGC to see to it that pensions are protected.

This is a government funded program, much like SS (or the USPS, or Amtrak, or ...). The money can be borrowed to fund the the program. Then, the government can print the money to pay back the borrowed funds.

I see means testing, smaller COLAs maybe, and other tweaks. It will not go away or be cut significantly, anymore than SS or Medicare.

Worrying about any cuts is like worrying about an asteroid hitting you. You have no control over it anyway. And even if it happens, you likely won't feel it.

 

[Beststash]

True that pensioners are not a group with huge political sway, but in earlier post there was a concern that cuts to benefit would extend to SS and SS recipients are definitely have significant political sway. Besides, other than chained CPI, I don't recall hearing of any reductions to current or near term SS retirement beneficiaries.

True, thanks for the clarification. I consider chained CPI a major problem for those dependent on SS as a primary source of income (most retirees).

I find bending the rules in favor of businesses that cannot or will not fund their promises to their employees unacceptable. Changing or modifing financial obligations midstream tends to destroy the credibility of our retirement system.

 

[pb4uski]

I agree with you in principle but this "bending of the rules" only apply to troubled plans and have due process protections. I think it makes sense to allow plan fiduciaries to proactively address underfunding.

Below are a couple relevant quotes from the Wharton article.

.....Congress gave the trustees of the plans — who are the legal fiduciaries — permission to cut benefits if a plan looked like it [would] go insolvent,” she added. In the past, benefits have been cut when a plan went insolvent. “But to do it proactively and try to keep the plans in business is a very different animal.” ....

Any cuts the trustees propose will require a vote by plan participants. But the federal department of treasury could override those votes if it feels a plan’s insolvency would threaten the survival of the PBGC. ......“A haircut is better than a beheading,” Mitchell said, quoting former Congressman Earl Pomeroy. “Many people may agree with [the benefits cuts], given that it is the lesser of two evils.”

 

[Chuckanut]

I agree that for most people who get a pension, this will not be a problem.

I also agree with those who advise the above people to be very watchful. There is to much crony capitalism and money in politics to relax and assume that the right things will be done.

 

[Options]

Glad to see more discussion of what I consider a serious ER topic.

...

Me, too, and I do consider it serious and took to heart Singletary's comment about this law opening the door to further cuts.

...

Beyond that, I'm out of tin foil so I guess we'll just agree to disagree.

I got a spare bunker if you need one...

Besides, other than chained CPI, I don't recall hearing of any reductions to current or near term SS retirement beneficiaries.

Me either. In fact, of the smattering of recent SS reforms that have been proposed, most have included grandfathering in those over 55, or even 60. This is what shocked me about this new pension law, in that no one under 75 is grandfathered in. Talk about means tested -- the calculator link I posted up thread shows a 60% benefits reduction to any pensioner under 75 with a $3K/mo benefit w/ 35 years of service (as an example). And this law has passed. If Congress would pass a law such as this for pensioners it has implications for what they would do for SS reform.

...

Worrying about any cuts is like worrying about an asteroid hitting you. You have no control over it anyway. And even if it happens, you likely won't feel it.

If you've got a pension, you may very well feel it and should be at least reviewing your plans, IMO. Another thought regarding SS reform is that according to the trustees latest report the SS fund is going to broke somewhere around 2030. In that case, only 75% of benefits could be paid out for something like the next 75 years. This means those planning for SS could get hit with a 25% cut at worst. This assumes no other measures (of which there are plenty) are taken to mitigate the cuts, so it's an absolute worst case scenario (at least at this point).

Still, I feel for those with a pension...

 

[Big_Hitter]

Still, I feel for those with a pension...

Why? It's almost impossible to retire in comfort without one.

 

[REWahoo]

Why? It's almost impossible to retire in comfort without one.

Sorry, but this is simply not true. Many of us here have no pension and not only retired in comfort, we did it significantly before the traditional retirement age.

Had you said it required planning, discipline and self-restraint to retire in comfort without a pension, I might agree with you.

 

[Big_Hitter]

I didn't say impossible, I said almost impossible. The vast majority of early retirees have a defined benefit pension.