The Central States application, comments on the application, and the Treasury decision can all be found on the Treasury website, at www.treasury.gov/mpra. Applications for suspensions of benefits submitted by other plans can also be found on the website.
The following summary of the Treasury decision on Central States is intended for general informational use only. It does not represent legal, tax, or other professional advice. Please contact your Horizon Actuarial consultant for more information.
Under the Multiemployer Pension Reform Act of 2014 (“MPRA”), a plan is in “critical and declining” status if it is projected to go insolvent (in other words, run out of money) in the next 15 to 20 years. Plans in critical and declining status may submit an application to Treasury to suspend benefits. A benefit suspension is either a temporary or permanent reduction in benefits payable to plan participants and beneficiaries. While certain classes of participants are protected due to age or disability, suspensions may apply to benefits that were previously protected, including accrued benefits and benefits already in payment status.
MPRA requires that the proposed suspensions be sufficient to enable the plan to avoid insolvency. The suspensions must also not materially exceed the level needed to avoid insolvency, and they must be distributed equitably across the participant population.
Treasury released proposed and temporary regulations on MPRA benefit suspensions in June 2015. At that time, Treasury announced it had appointed Ken Feinberg to be Special Master responsible for overseeing the implementation of MPRA. In early 2016, Treasury issued a few sets of final regulations, with the latest regulations coming on April 26 and May 5.
Central States was the first such plan to submit an application, which it did on September 25, 2016. In conjunction with its application, Central States launched a special “Rescue Plan” website, www.cspensionrescue.com, which describes the proposed suspensions and provides updates on the process.
Under MPRA, Treasury had 225 days to review the application and render a decision. As noted above, Treasury issued its decision on May 6, 2016 after reviewing both the Central States application and nearly 3,000 comments on the application submitted by interested parties. This was the first decision from Treasury on an application to suspend benefits under MPRA.
As of the date of this post, we are aware of two letters from Treasury regarding its decision on the Central States application. The first letter is from Special Master Feinberg to Central States, detailing the reasons for the rejection. The second letter is from Secretary Jacob Lew to Congressional leaders reporting the decision and outlining issues that emerged during the review process.
The Feinberg decision letter to Central States listed four factors contributing to its rejection of the application, as described below. Trustees of plans in critical and declining status considering a suspension of benefits should consider these factors when preparing their applications.
The first two factors in the decision letter were actuarial assumptions that Treasury determined to be not reasonable, and as a result would cause Central States to fail to demonstrate that the proposed suspensions are sufficient to avoid insolvency. The third and fourth factors related to the design and notice requirements, respectively, of the proposed suspensions.
- Investment return assumption. Treasury stated that the investment return assumption used by Central States was not reasonable. Both in this letter and in its final regulations, Treasury noted that it expects the investment return assumption to consider timing of plan cash flows and to give appropriate weight to near-term expected returns, which are generally expected to be lower than over the long term. In its decision letter, Treasury referenced the 2015 Survey of Capital Market Assumptions published by Horizon Actuarial.
- Entry age assumption. Treasury stated that the assumption used by Central States in projecting new active participants in future years was not reasonable. The assumption included a single hire age for all new active participants, which Treasury determined did not adequately reflect recent demographic experience.
- Equitable distribution of suspensions. Treasury stated the suspensions proposed by Central States were not equitably distributed, because different levels of suspensions applied to participants currently or formerly employed by United Parcel Service, Inc. (UPS) depending on whether the participant is covered under a separate company plan sponsored by UPS. It is important to note that this issue applies to a special rule under MPRA, which is believed to apply only to Central States.
- Understandable notices. Under MPRA, a plan that applies to suspend benefits must send notices to participants describing the proposed suspensions and their impact on each individual’s benefits. MPRA requires that the notices must be written so as to be understood by the average plan participant. In its decision letter, Treasury stated that the notices sent by Central States did not meet this requirement, citing overly technical and wordy language.
It should be noted that Central States has posted an update regarding the Treasury decision on its Rescue Plan website.
The letter from Secretary Lew reported to Congress the decision to reject the Central States application. The letter stated that without congressional action, the Central States Pension Fund will likely become insolvent within 10 years and that the Pension Benefit Guaranty Corporation (PBGC) multiemployer program may also be insolvent by that time.
The letter to Congress also outlined issues that emerged during Treasury’s review of the Central States application. For example, Treasury noted that some commenters suggested that smaller benefit reductions should be allowed before committing to deeper cuts, which is not permitted under MPRA. Treasury also called into question the provision under MPRA that imposes maximum benefit suspensions on Central States “orphan” participants as well as the requirement that Treasury override a vote by participants rejecting a proposed suspension if the plan is deemed to be “systemically important.”