Expert Q&A: Horizon Multiemployer Pension Plan Issues for Employers Facing Collective Bargaining and Union Organizing

Practical Law Article 9-574-4246 (Approx. 8 pages)

Expert Q&A: Horizon Multiemployer Pension Plan Issues for Employers Facing Collective Bargaining and Union Organizing

by Practical Law Labor & Employment

Is there any issue that unions have been prioritizing in collective bargaining during the first half of 2014?

Collective bargaining priorities and tactics vary across bargaining units, unions, employers and industries. However, a trend in collective bargaining, and contract and benefit fund administration, for those matters, is that unions and multiemployer defined benefit pension plan trustees are demanding much higher employer contributions to shore-up balances for underfunded multiemployer defined benefit pension plans.

Why do you suppose that unions are focusing on pension fund contributions?

It is common for unions to tout multiemployer defined benefit pension plans included in most of the collective bargaining agreements that they negotiate as providing comfortable retirement security superior to that offered by employer or individual retirement programs. The future stream of retirement income from these defined benefit pension plans is a mainstay of unions' pitches to retain support from the employees they represent and to organize employees into new bargaining units.

However, the combination of several factors has led many defined benefit pension funds to be underfunded based on benchmarks set by the Pension Benefit Guaranty Corporation (PBGC) in recent years. The number of underfunded multiemployer pension plans is large and continually increasing. To keep the public aware of this increasing concern, The Department of Labor's (DOL) Employee Benefit Security Administration (EBSA) publishes copies of notices from the hundreds of multiemployer pension plans that have fallen into "critical" and "endangered" statuses (based on the degrees they are underfunded) on its website.

In turn, through collective bargaining, unions are demanding higher contributions to multiemployer pension plans from employers to solve part of the funds' financial troubles.

What factors have contributed to the financial decline of multiemployer defined benefit pension funds?

There are many factors, but the critical points are that:

Multiemployer defined benefit pension plans have relied on a pyramid structure, where contributions for a base of new entrants to the plan by current and newly contributing employers cover retirement payments to a smaller number of retirees.
The anticipated near-term demand for retirement benefits by baby-boomer generation retirees and soon-to-be retirees is greater than the anticipated contributions made on behalf of current unionized employees.
Pension funds suffered substantial investment losses in the market downturn of 2008.
There is little opportunity for fund trustees to organically grow pension fund assets to meet anticipated near-term benefit demands because:
- many funds have adopted more conservative investment strategies (meaning their investment portfolios are underperforming stock market indexes during the recovery in recent years) in part to satisfy statutory diversification requirements, but also because of skittishness about the severe market declines they may have suffered; and
- private sector union membership rate (6.7% in 2013) has been static for several years and mostly declining over the past 50 years, eroding the base of the pyramid structure needed to sustain the promised retirement benefits.

As a result, for many multiemployer pension plans, the pyramid is currently inverted with:

Fewer dollars flowing in from fewer employers and for fewer active employees.
Greater numbers of individuals having vested benefits for themselves and their spouses.

Without required growth in investments or new plan entrants to fund retirement benefit payments, pension funds demand higher employer contributions to amortize unfunded liabilities. They also adjust accrual rate formulas and use other authorized actuarial devices to decrease the retirement benefits they plan to pay current workers for whom employers are making current contributions.

Why should unionized employers be concerned about the financial statuses of the multiemployer pension funds?

Employers that have unionized employees and are obligated to contribute to multiemployer pension funds have many reasons to be concerned about the financial conditions of those funds. For example, employers generally want to know that their many years of pension fund contributions are used to benefit their long-term employees, as intended. An underfunded pension fund cannot earmark contributions for specific employee groups. Current contributions are applied to existing funding shortfalls, so they may cover vested benefits for earlier retirees of defunct industry competitors. It is like having to pay off part of your neighbor's mortgage every time you pay your own. That means the amount applied to benefit the employers' current workers is reduced.

Similarly, from a strategic human resource management perspective, employers expect that investments they make in wages, fringe benefits and overall compensation will generate corresponding human resources returns. For example, employers expect to attract, retain and motivate qualified workers in part through those workers' expectations of receiving the retirement benefits the employers fund through their contributions. If the retirement benefits for which employers are paying 100 cents on the dollar are at risk or likely to be reduced because of poor pension fund demographics or financial conditions, workers will value their retirement benefits less and may likewise reduce their interest in, and commitments to, working for the contributing employers.

Contributing employers also should be concerned about the financial conditions of multiemployer pension funds because poor performance or value may prompt healthy companies to withdraw, putting even more pressure on the funds. To remain solvent when withdrawals occur, the funds:

Seek (not always successfully) withdrawal liability payments from the withdrawing employers under the Multiemployer Pension Plan Amendments Act of 1980 (MPPAA).
Cap and likely reduce all future retiree pension accruals, even for employees of employers that continue to contribute at top rates to the funds.
Ratchet-up contributions from employers that continue to contribute, effectively putting the funding burden on remaining contributing employers and their employees who suffer a dilution in the value of each dollar contributed for them.

Employers that have collective bargaining obligations but are not yet obligated to contribute to a multiemployer pension plan should be concerned about the financial health of any pension plan to which unions propose they contribute for the same reasons.

What can employers that contribute to multiemployer pension funds do in collective bargaining to control pension fund contributions and reduce withdrawal liability risks?

Employers that are preparing for negotiations first should conduct due diligence about multiemployer defined benefit funds so they can:

Engage in principled negotiations.
Understand the latent costs associated with being a contributing employer to multiemployer pension plans.
Have educated talking points about the parties' respective proposals for messaging to employees and others in the market or media who may be critical.

Employers should investigate:

How dollars contributed potentially benefit employees on whose behalf the contributions are made. Precise measures are not generally available. However, defined benefit pension fund contributions typically are based on units or periods of work and employers can look at this data, which they possess, in combination with other information they can often request from funds. That information includes:
- benefit accrual rates (typically defined benefits are the function of contributions, credited years of service and a benefit multiplier, the last of which tends to be decreased for current employees when pension funds need money to reduce underfunding);
- applicable caps on service credits (many funds collect contributions based on all hours worked or all hours paid, including paid time off, but they may cap service credits at an annual amount, meaning that employer contributions beyond the cap yield no benefit to the workers who, for example, work overtime);
- surcharges and amortizing formulas for plans in "critical" status;
- whether liquidity problem thresholds set by the PBGC and funding deficiencies required the funds to reduce or eliminate certain benefits, such as post-retirement death benefits or disability benefits that are not already in payment status; and
- funds' rules about forfeiture of expected benefits in certain circumstances, such as when an employee dies before starting to receive benefits or without a surviving spouse.
Their potential withdrawal liability exposure if their obligation to contribute to the multiemployer plans ended, such as when an employer sells or permanently closes the business unit or facility that was subject to collective bargaining. Calculating withdrawal liability is technical and subject to actuarial determinations. The amount of liability is generally a contributing employer's proportionate share of the multiemployer pension plan's unfunded vested benefits. However, employers need to investigate a particular plan's actuarial protocols because pension funds may:
- adopt different allocation methods for calculating withdrawal liability;
- apply different actuarial assumptions; and
- set procedures that affect the extent and pace of withdrawal liability exposure for newly contributing employers.
Whether there are plans for pension fund mergers. The merger of pension funds can vitally affect each fund's financial condition.

The financial health of the pension funds associated with unions dictates bargaining objectives and tactics of unions and employers. However, an employer that is already contributing to a multiemployer pension fund may consider negotiating for a provision through which the union agrees that the contribution rate set out in a collective bargaining agreement represents the maximum amount that the employer is obligated to provide the fund and that the union agrees to indemnify the employer for any additional contributions or any contingent withdrawal liability assessments that the fund imposes on the employer. This type of provision has been approved and enforced by one circuit court of appeals (see Shelter Distribution, Inc. v. Gen. Drivers, Warehousemen & Helpers Local Union No. 89, 674 F.3d 608 (6th Cir. 2012), petition for cert. denied, 133 S. Ct. 233 (2012) and Legal Update, Union Can Indemnify Employer through CBA for Withdrawal Liability under ERISA: Sixth Circuit).

In addition, an employer may consider negotiating a provision requiring the union to:

Inform it of any planned mergers of the union's related multiemployer pension plans.
Reopen the collective bargaining agreement to bargain about continuing fund contributions on behalf of the employer's employees when a fund merger is planned.

What postures should employers that have collective bargaining obligations but no multiemployer pension fund contribution obligations consider taking when unions demand contributions to their related multiemployer pension funds?

Employers that have collective bargaining obligations but are not yet obligated to contribute to a multiemployer pension plan should conduct similar due diligence to anticipate the risks of becoming contributors to the pension funds associated with their counterpart unions and prepare to engage in principled negotiations.

These employers should not approach bargaining about retirement benefits passively or assume, based on unions' representations or otherwise, that contributions are an inevitable fixture of collective bargaining. For unionized employers and their employees, defined benefit pension plans are much more than the fringe benefit that they may once have been. If these employers conduct proper due diligence about a union's pension fund, there is an opportunity to craft bargaining table proposals most beneficial to the current and anticipated workforce and the sustainability of business and compensation objectives. This may be particularly true if an employer can objectively show at the bargaining table and through messages to bargaining unit employees the comparative value of retirement benefits that employees are likely to receive based on equal employer payments to:

The union's multiemployer defined benefit pension fund.
The employer's existing retirement benefit program.
An alternative retirement benefit program.

Additionally, nonunionized employers in industries and geographic regions targeted for union organizing should be aware of what enticements unions are likely to pitch to their employees during organizing and they should consider conducting similar types of due diligence as the unionized employers about those unions' related multiemployer pension funds. These employers should expect that when a union tries to organize their employees, the union will tout its defined benefit pension fund, likely without mentioning:

The scope of the fund's unfunded liabilities.
The prospects that the fund will reduce benefits for future retirees.
The comparative benefits the employees would receive from equal employer payments in the fund versus other employer-sponsored retirement benefits.

Employers that are inclined to oppose unionization should:

Regularly remind employees of the retirement and other fringe benefits the employer provides them.
Be prepared to debunk unions' propaganda about the benefits of membership, including participation in the multiemployer pension plans that may be severely underfunded.

Traditionally, employers would have several weeks after a union petitioned for a representation election at the National Labor Relations Board (NLRB) to hear, investigate and refute union organizing propaganda before the union election. However, the NLRB's proposed union representation case (R-Case) rules, which are expected to be finalized before the end of the year, compress the period between the union's petition and the NLRB election, making anticipatory due diligence and prepared campaign talking points critical for these employers.

Even employers that are neutral about their employees' selecting union representation should consider investigating relevant multiemployer pension funds and preparing talking points to demystify the unions' pension plan propaganda. In this way, if there eventually is collective bargaining, employers may start with a clean slate about retirement benefits rather than a presumption by the unions and bargaining unit members that the employers would agree to contribute to the unions' related pension funds.

For more information about the pending R-case rules, see Legal Update, NLRB Again Proposes Amendments to Hasten Union Election Procedures.

Expert Q&A: Horizon Multiemployer Pension Plan Issues for Employers Facing Collective Bargaining and Union Organizing | Practical Law