Kline Releases Composite Plan Proposal for Multiemployer Pension Plans

On September 9, 2016, Representative John Kline (R-MN), Chairman of the House Education and the Workforce Committee published a discussion draft of the Multiemployer Pension Modernization Act of 2016, a proposal to “modernize multiemployer pensions and strengthen retirement security.”  The draft bill outlines a new “composite plan” design for multiemployer defined benefit pension plans.
 
The composite plan design was originally included as part of the Solutions Not Bailouts proposals developed by the National Coordinating Committee for Multiemployer Plans (“NCCMP”) Retirement Security Review Commission.  This hybrid design combines aspects of traditional defined benefit and defined contribution plan designs – intending to spread investment risks between plan participants and sponsors, while still providing lifetime retirement income to plan participants.
 
The following points highlight some of the key aspects of the composite plan proposal, as outlined in the discussion draft.  These points are not intended to be a comprehensive summary of the proposal, which may change in the coming weeks and months.  Please contact your Horizon Actuarial consultant for more information.
 
General Highlights

• Optional plan design.  There is no requirement for the trustees of a multiemployer plan to adopt the composite plan design; it is purely optional.  In fact, there are restrictions on which plans may adopt the composite plan feature.  For example, plans currently in critical status or plans projected to be in critical status in the following 5 years are not eligible.
• Two plan components.  If the composite plan feature is added to an existing multiemployer plan, there will be two components to the plan: the “composite plan” and the “legacy plan.”  When benefit accruals cease under the legacy plan (past service), they begin under the composite plan (future service).  Separate funding rules and contribution requirements apply to the two different components.

 
Composite Plan Highlights 

• No unfunded liability.  By definition, the composite plan has no unfunded liability.  As a result, there is no employer withdrawal liability associated with the composite plan component.  There is also no benefit guaranteed by the Pension Benefit Guaranty Corporation (“PBGC”) and no premium requirement. 
• Annual certification.  The composite plan actuary must issue an annual certification of the current and projected funded ratios for the composite plan.  If the projected funded ratio in 15 years is less than 120%, the trustees of the composite plan must adopt a “realignment program.”  The certification is due 120 days into the plan year. 
• Realignment program.  The realignment program consists of reasonable measures designed to return the projected funded ratio to at least 120% in 15 years (other tests may apply).  The measures consist of proposed increases to employer contribution rates and reductions in participant benefits and are prioritized into three tiers:  
  1. First tier measures includes proposed contribution rate increases, reductions in the rate of future benefit accruals, and the reduction or elimination of “adjustable” or other ancillary benefits.  Future benefit accruals cannot be reduced below the equivalent of 1% of contributions.  As under current law, adjustable benefits include early retirement benefits and other subsidies not already in pay status.
  2. Second tier measures include reductions in accrued benefits not already in pay status, as well as reductions to non-core benefits in pay status.  For this purpose, “core” benefits include accrued benefits payable at normal retirement age.  “Non-core” benefits include early retirement benefits, subsidies, and post-retirement increases.
  3. Third tier measures include further reductions to the rate of future accruals (below the equivalent of 1% of contributions if needed) and reductions in core benefits already in pay status.  Any reductions to in-pay core benefits must be distributed equitably, considering the same criteria as for suspensions of benefits for plans in critical and declining status.  Trustees should incorporate third tier measures into the realignment program only after all reasonable measures in the first two tiers have been exhausted. 
• Restrictions on benefit increases.  The composite plan design imposes restrictions on plan amendments that increase benefits.  For example, for an amendment that increases plan liabilities by no more than 3%, the resulting projected funded ratio must be at least 120%.  If the amendment increases plan liabilities by more than 3%, the resulting projected funded ratio must be at least 140%.  Additional restrictions apply to restoring core benefits that were previously reduced under a realignment program.

 
Legacy Plan Highlights

• Existing rules still apply.  The legacy plan remains a defined benefit plan, and in general, existing rules continue to apply.  For example, the legacy plan actuary will still issue annual certifications as to whether the legacy plan is in endangered or critical status. Withdrawal liability and PBGC premiums still apply, as well.  However, legacy plan withdrawal liability will be eliminated once certain full-funding thresholds are met. 
• Transition contributions.  Contributions to the legacy plan must be sufficient to cover the cost of benefit accruals (if any) and allocable administrative expenses, as well as to pay down the unfunded liability over time.  The initial unfunded liability must be paid down over 25 years, and any subsequent changes in the unfunded liability must be paid down over 15 years.  These contributions continue until the legacy plan liability is fully funded. 

 
Again, these points provide only a high-level summary of the key provisions of the composite plan proposal.  As noted above, the proposed legislation is a "discussion draft" and subject to change.  Please contact your Horizon Actuarial consultant for more information.
 
Related links:
 
Contact a Horizon Actuarial consultant.
contactus@horizonactuarial.com
 
Press Release (4.29.2015): “Time to Modernize Multiemployer Pension System” http://edworkforce.house.gov/news/documentsingle.aspx?DocumentID=398799
 
Press Release (9.9.2016): “Kline Releases Discussion Draft to Modernize Multiemployer Pensions”
http://edworkforce.house.gov/news/documentsingle.aspx?DocumentID=400989
 
Discussion Draft: “Multiemployer Pension Modernization Act of 2016” http://edworkforce.house.gov/uploadedfiles/composite_a_xml.pdf
 
Questions and Answers: “A Discussion Draft to Modernize Multiemployer Pensions” http://edworkforce.house.gov/uploadedfiles/basic_q_and_as_on_a_discussion_draft.pdf
 
Press Release (9.14.2016): “Modernizing Multiemployer Pensions” http://edworkforce.house.gov/news/documentsingle.aspx?DocumentID=401019