Category Archives: Public News

New Pension Law

Original story may be found here.

January 27, 2015

Ray Hair – AFM International President

Note: Although I promised to provide further details this month concerning newly concluded Federation agreements in Symphonic Media and Motion Picture-TV Film, I will defer until March in order to clarify an avalanche of questions received about new pension fund legislation and its impact upon AFM-EPF. Thanks to Fund Counsel Anne Mayerson for her assistance in preparing this month’s column.

In December, Congress passed the Multiemployer Pension Reform Act of 2014. This legislation is not currently relevant for the American Federation of Musicians & Employers’ Pension Fund (AFM-EPF) because it applies only to severely underfunded plans. The AFM-EPF is not severely underfunded.
Contrary to what you might have heard, the new legislation will help to protect the pensions of millions of Americans. Here’s why:

Defined Benefit Plans: Basic Principles

There are two basic types of retirement plans. Under a “defined contribution” plan, the employer contributes (and/or allows the employees to contribute out of wages) a fixed amount of money to each employee’s plan account. That money is then invested. When the employee retires, he or she gets whatever is in the account; that is, the fixed contribution, plus investment earnings or minus investment losses.

By contrast, under a “defined benefit” plan, the employer contributes an amount of money required to pay a fixed benefit—the AFM-EPF fixed benefit provides a specified dollar amount per $100 of contributions. The age 65 benefit that has been earned at any particular point during an employee’s career generally cannot be reduced by the plan or by the employer.

The Role of the Pension Benefit Guaranty Corporation

Federal law contains detailed rules to ensure that defined benefit plans have enough money over time to pay all of the benefits that have been earned. However, certain plans in extreme situations become insolvent because they are not able to satisfy these rules. In that case, the plan relies on the Pension Benefit Guaranty Corporation (PBGC) to pay a portion of the benefits.

PBGC is a federal government agency that serves as an insurance company for defined benefit plans. The PBGC is not funded by tax revenues, but by premiums paid to it by defined benefit plans; in return, the PBGC guarantees a portion of the benefits earned under each plan (the maximum guarantee for a participant in a multiemployer plan is just under $13,000 a year).

The guarantee can be only provided, however, so long as the PBGC remains a viable entity. Unfortunately, the PBGC is on shaky financial ground. Two recent studies, one by the PBGC itself and one by the federal government’s General Accounting Office, conclude that the PBGC is likely to run out of money in the near future (the next 10-20 years) and that the insolvency of just two severely underfunded plans would almost entirely deplete its resources. PBGC says funds sponsored by the Electrical Workers and the Teamsters are most at risk.

Benefit Reductions Under the Recent Pension Legislation

The primary goal of the recent pension legislation was to give severely underfunded plans—which AFM-EPF is not—an opportunity to recover from the lingering effects of the economic turbulence of recent years, rather than letting them become insolvent and thereby jeopardizing the viability of the PBGC. It’s estimated that, while at least 90% of multiemployer defined benefit pension plans are on solid financial footing, about 5-10% of such plans, covering as many as 1.5 million participants, are severely underfunded. The legislation permits those plans to reduce benefits in certain circumstances, but in no event to a level that is less than 110% of the PBGC guarantee.

Specifically, a severely underfunded multiemployer defined benefit plan may reduce its benefits only if it applies to the government, and the government finds that:

the plan is in “critical and declining status.” That it is, not only in “critical” status under the 2006 Pension Protection Act, but it also is projected to become insolvent during the current plan year or any of the next 14 plan years (or next 19 plan years, if the plan is less than 80% funded or its nonworking participants outnumber working participants by a ratio of more than two to one), and
the plan’s board of trustees has determined that, even though all reasonable measures to avoid insolvency have been taken, the plan is still projected to become insolvent unless benefits are suspended, and
the plan’s actuary has certified that the reductions are projected to allow the plan to avoid insolvency, and
a majority of all participants and beneficiaries of the plan have not voted to reject the reduction of benefits (the government can override a negative vote in some circumstances).
Benefits may not be reduced for participants on a disability pension or for those age 80 and older. (Restrictions on reductions also apply to participants between age 75 and 80.)

I want to reiterate that the AFM-EPF is not severely underfunded under this new law, is not projected to become insolvent, and the new law does not authorize benefit reductions to the AFM-EPF. But by protecting PBGC’s solvency, the new law is good for AFM-EPF participants, along with participants in the other multiemployer pension plans that are not severely underfunded.

No one I know thinks that reducing pension benefits is a good thing. But ignoring the effect that the economic struggles of a few multiemployer defined benefit plans could have on participants in all multiemployer defined benefit plans is a worse thing. Like many other labor organizations and multiemployer pension funds, the AFM and AFM-EPF applaud the recent pension legislation as the only opportunity for the recovery of severely underfunded plans and the preservation of the PBGC’s benefit guarantees for all participants in multiemployer defined benefit plans.

AFM-EPF Trustees Statement on Effect of Omnibus Bill

Dear Colleagues,
As you may be aware, last week Congress passed a spending bill to prevent a federal government shutdown. Attached to the legislation were 162 pages of changes to the government’s multi employer pension rules. Many of these were technical modifications to the existing law. However, a significant new provision would allow certain financially troubled Funds to lower benefits already earned by participants, including those receiving pensions. The provisions would apply only to those Funds facing imminent insolvency (within 10 to 20 years). Each eligible Fund’s trustees could decide whether or not to use the provisions and, should they decide to apply them, there is a provision for a participant vote to reject the reductions, although it is at present unclear how that would work. No benefit could be lowered to less than 110% of the Pension Benefit Guarantee Corporation’s guarantees, right now just under $13,000 a year. Those provisions would not apply to the AFM-EPF at present since it is currently projected to be solvent through at least 2047, which is the longest period for which the actuaries have made projections.
Bill Moriarty, Laura Ross, Brian Rood, Phil Yao

AFM-EPF Trustees

This expresses our individual views; if the Board of Trustees subsequently issues an official statement, we will provide it to you right away.