On May 6, 2016, the U.S. Department of the Treasury denied an application submitted by the Central States, Southeast and Southwest Areas Pension Plan (Central States) that would have reduced benefits to about 270,000 of the nearly 400,000 participants in the plan. The total amount of benefit reductions would have been about $11.0 billion (see page 13.2.1 of Checklist 13: Equitably Distributed). The application was submitted under the authority of The Multiemployer Pension Reform Act of 2014 (MPRA enacted as Division O in the Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235)).

Background on Central States and Pension Benefit Guaranty Corporation

Central States has estimated that it would likely become insolvent by 2026 and then would no longer be able to pay participants' benefits. When a multiemployer plan becomes insolvent, the Pension Benefit Guaranty Corporation (PBGC) provides financial assistance so that participants can continue to receive benefits (up to a statutory maximum benefit, which is currently $12,870 for a participant with 30 years of service in a plan). PBGC was established by the Employee Retirement Income Security Act (ERISA; P.L. 93-406) to insure participants in private-sector DB pension plans and operates separate insurance programs for single-employer and multiemployer plans. The benefit obligations to Central States would likely lead to PBGC's insolvency. On September 30, 2015, PBGC's Annual Report stated that it had about $1.9 billion in assets. It had income of $280 million from premium revenue and investment income in FY2015. It paid $103 million in financial assistance to about 54,000 participants in 57 plans in FY2015. In 2014 (the most recent year for which data are available), Central States paid $2.8 billion in benefits to participants. In the event of PBGC's insolvency, financial assistance from Treasury is not assured.

Background on the Multiemployer Pension Reform Act of 2014

MPRA allows financially troubled multiemployer defined benefit (DB) pension plans that meet specified conditions to apply to the U.S. Treasury to reduce benefits to plan participants if the benefit reductions would restore the plan to solvency. Prior to the passage of MPRA, under the anti-cutback provision in ERISA, pension plans generally did not have the authority to reduce participants' benefits. Now, plans that seek to reduce benefits must submit an application to Treasury, which must approve the application if the proposed benefit reductions meet criteria specified in MPRA (such as being equitably distributed and enabling the plan to avoid insolvency).

Under MPRA, disabled individuals and retirees aged 80 or older may not have their benefits reduced. The benefits of individuals aged 75 to 80 may be reduced, but to a lesser extent than those younger than 75. In addition, benefits may not be reduced to below 110% of PBGC's guaranteed level.

Stated Reasons for Treasury's Denial

Treasury indicated that the application failed to meet three of the requirements in MPRA:

• Assumptions used by Central States (see for example, page 5.1.13 of Checklist 5: Critical and Declining Status Certification) regarding (1) the rate of return on investments and (2) the age at which new participants enter the plan are not reasonable. Central States assumed a 7.5% rate of return, which Treasury said was inappropriate as this was higher than investment professionals' forecasts of future investment returns. Additionally, Central States assumed that new participants would be 32 years old when they entered the plan. According to Treasury, this led to materially different cash flow forecasts than if more realistic demographic assumptions had been made;
• The proposed benefit suspensions are not distributed equitably. Central States proposed to reduce benefits differently to former United Parcel Service (UPS) employees depending on whether they were part of a make-whole agreement that UPS had with some of its employees; and
• The notices of proposed benefit suspensions were not written so as to be understood by the average plan participant. The notices extensively used technical language and the definitions of critical terms were defined in documents that were not understandable to the average plan participant.

Potential Next Steps

MPRA does not prohibit a plan from resubmitting an application. Central States has not indicated whether they will submit a new application for benefit reductions. A new application would have to address Treasury's reasons for the denial while meeting the other criteria for approval of benefit reductions under MPRA (e.g., any proposed reductions would have to restore the plan to solvency). All else being equal, a new application that addressed Treasury's concerns could require deeper benefit reductions than were proposed in the rejected application.

Absent any action from Central States or Congress, the plan will likely become insolvent by 2026, or possibly sooner if a large number of employers withdraw from the plan. In the event of Central States' insolvency, PBGC would provide financial assistance so the plan could continue to pay benefits. Participants' benefits would be reduced to the PBGC maximum benefit level.

Central States' insolvency would likely lead to PBGC's insolvency, because the benefit obligations to Central States would exhaust PBGC's resources. If PBGC were to exhaust its assets, then it would only be able to provide financial assistance to plans equal to its premium revenue.

Legislation in the 114^th Congress

In the 114^th Congress, a number of bills have been introduced that would affect potentially insolvent multiemployer DB pension plans.

H.R. 2844/S. 1631. The Keep Our Pension Promises Act, would, among other provisions, repeal the benefit reductions enacted in MPRA.

H.R. 4029/S. 2147. The Pension Accountability Act would (1) change the participant vote to approve a plan to reduce benefits from a majority of plan participants and beneficiaries to a majority of participants and beneficiaries who vote and (2) eliminate the ability of Treasury to allow systematically important plans to implement benefit reductions regardless of the outcome of the participant vote.

S. 2894. The Pension Fund Integrity Act of 2016 would reduce the pay for executives of the largest pension plans if they reduce participants' benefits. In addition, the bill would prohibit the plan from using pension plan assets to hire outside lobbying firms.