Western States Office &
Professional Employees
Pension Fund

Pension Benefit Reduction and Recovery Plan

With no action, our Pension Plan is projected to become insolvent during 2034.

This section describes how this happened, how the proposed Pension Benefit Reduction and Recovery Plan will work, what the alternatives are, and what you need to do to protect your pension.

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To fund and pay pension benefits to Plan participants, two key elements come into play: Plan liabilities and Plan assets.

 

Plan Liabilities

Plan Assets

Plan liabilities are the benefits earned by and owed to Plan participants. Liabilities include:

  • Benefits being earned by active participants, which will be paid out in the future.
  • Benefits owed to participants who no longer work with a contributing employer (these are called “vested terminated participants”).
  • Benefits currently being paid to retirees, disabled pensioners, and their beneficiaries.

Plan assets are the funds used to pay benefits and Plan expenses, now and in the future. Assets come from:

  • Employer contributions, including withdrawal liability contributions and Rehabilitation Plan payments.
  • Investment earnings.

To remain solvent, a pension plan must have sufficient assets to meet its liability to participants. Our Plan is in trouble, because its liability to participants far exceeds its assets.

  • The Plan’s liability as of January 1, 2016, was $535 million.
  • The value of the Plan’s assets as of January 1, 2016, was $334 million.
  • This means the Plan’s funded percentage—or how the Plan’s assets compare to its liabilities to participants—has dipped to 62.5%. This is well below the federal government funding requirements. And more importantly, our funding situation is not expected to recover unless we make significant changes to the Plan.

A combination of forces have battered the Plan’s finances and threaten its survival:

  • The inactive to active participant ratio. The number of retired participants, combined with inactive participants who have earned a benefit but no longer contribute to the Plan, far outweighs the number of active participants—by an 8 to 1 ratio. This is mainly due to the following factors:
    • A spike in the number of terminated vested participants due to the 2008 recession and slow economic recovery.
    • A substantial number of employer withdrawals that have occurred since the Plan was first certified as "critical and declining."
    • A higher-than-expected number of participants retired when the Plan was first certified as "critical and declining," before the initial 2010 Rehabilitation Plan changes took place.
  • The number of contributing employers. Employer contributions are a critical source of Plan funding. However, due to the recession and subsequent slow economic recovery, the number of employers contributing to our Plan is significantly down, from 280 in 2008, to just 180 in 2016. And, while employers exiting the Plan are required to pay withdrawal liability, there is a dwindling level of “new money” coming into the Plan.
  • The number of active participants. The number of active participants is significantly down from 2008—by 62%. Fewer active employees mean fewer ongoing contributions coming into our Plan to fund future benefits earned.
  • Short-sighted federal laws. Government regulations for multiemployer pension plans, like ours, have made it difficult for the Plan to save for a financial crisis, and to retain and bring new employers and active participants into the Plan.
  • Investment returns. The Plan invests its assets and uses investment returns as one source for paying benefits. We suffered huge losses (-32%) in 2008 due to the stock market crash; subsequent returns through 2016 have not achieved the expected results. And we are not alone—the Great Recession impacted multiemployer pension plans across industries*:
    • Average investment losses in 2008 were close to -23%.
    • The average plan funding ratio dropped from 89% in 2008 to 65% in 2009.
    • The number of “Red Zone” plans jumped from 9% in 2008 to 42% in 2009.

To sum it up, the effect of losing contributing employers and active participants was compounded by many Pension Plan participants retiring. The Plan is now overly reliant on market returns and vulnerable to market fluctuations.

 *National Coordinating Committee for Multiemployer Plans, Multiemployer Pension Plans: Main Street’s Invisible Victims of the Great Recession of 2008. April 2010.

A law called the Multiemployer Pension Relief Act of 2014 (“MPRA”) allows trustees of severely underfunded multiemployer pension funds, like ours, to develop a “Pension Benefit Reduction and Recovery Plan.”

Under MPRA, a Pension Benefit Reduction and Recovery Plan is designed to stabilize the Plan, avoid insolvency, and allow the Plan to continue paying benefits to participants in the future.

Here is how the MPRA process works.

The Pension Plan's Board, financial professionals, and legal counsel develop a proposed Pension Benefit Reduction and Recovery Plan. This includes benefit reductions for most Plan participants (within certain limits). The reductions apply to future pension payments for actives (and terminated vested participants) and to current payments for participants who already receive benefits.

In designing a Pension Benefit Reduction and Recovery Plan, several MPRA rules must be followed:

  • Benefit reductions cannot be more than what is needed to avoid insolvency.
  • There are certain protections for participants age 75 and older, and those receiving a disability pension, which mitigate the impact of benefit reductions.
  • The proposed benefit reductions cannot take benefits for any participant below 110% of the Pension Benefit Guaranty Corporation’s guaranteed benefit.

Once designed, the Pension Benefit Reduction and Recovery Plan must be submitted to the U.S. Treasury Department for review and approval. Our Pension Plan submitted its application on August 24, 2017; it was accepted for review by Treasury on August 28, 2017. On its acceptance, Treasury now has up to 225 days to complete its review and make its decision.

If approved by Treasury, all participants then have the opportunity to approve or reject the proposed Pension Benefit Reduction and Recovery Plan through a vote.

Note: To date, several multiemployer pension plans have submitted a Pension Benefit Reduction and Recovery Plan application with the U.S. Treasury Department, including the Automotive Industries Pension Fund and the New York State Teamsters Conference Pension & Retirement Fund.  You can follow progress on the Treasury website at www.treasury.gov/services/Pages/Plan-Applications.aspx.

Under the proposed Pension Benefit Reduction and Recovery Plan, most Plan participants will see a benefit reduction. The amount is based on your age at the time the Pension Benefit Reduction and Recovery Plan takes effect, and certain limits and exemptions apply.

Here is how it works:

  • Retirees and beneficiaries age 80 and older and disability pensioners are exempt from the proposed benefit reduction. They will continue to receive their current benefit.
  • Active participants, vested terminated participants, and retirees and beneficiaries age 75 and under will see a 30% benefit reduction.
  • Benefits are partially protected for participants between ages 75 and 80; the reduction will be calculated on a sliding scale, as follows:

Age

Proposed Benefit Reduction

Age 75

Up to 100% of the reduction amount

Age 76

Up to 80% of the reduction amount (e.g., 80% of the 29% reduction) 

Age 77

Up to 60% of the reduction amount

Age 78

Up to 40% of the reduction amount

Age 79

Up to 20% of the reduction amount

Age 80

No benefit reduction

Your benefit reduction will remain at the rate applied on the Pension Benefit Reduction and Recovery Plan effective date for as long as you collect a pension benefit.

All Plan participants will receive a personalized benefit estimate, showing the amount of your proposed benefit reduction. The estimate also shows the benefit amount covered by the PBGC if the Pension Benefit Reduction and Recovery Plan is not approved and the Pension Plan becomes insolvent.

The estimate was mailed on August 30, 2017. Contact the Plan Administrator if you do not receive your statement or if you believe the information provided on the statement is incorrect (e.g., the years of credited service is inaccurate).

View sample benefit estimates here.

The Pension Benefit Guaranty Corporation, or “PBGC,” is a federal agency that protects pension benefits for over 10 million workers and retirees in about 1,400 multiemployer pension plans.

If the Pension Benefit Reduction and Recovery Plan is not approved, the PBGC will provide financial assistance to our Pension Plan when it runs out of money. Under this scenario, all participants will face pension cuts regardless of their age, active or retired status, or disability.

The PBGC uses a set formula to determine your reduced benefit. At this time, the formula is:

[(100% paid on the first $11 of your monthly benefit accrual rate) + (75% paid on the next $33 of your monthly benefit accrual rate)] x (your years of credited service)

View an example of the PBGC benefit calculation here.

The PGBC sets the maximum monthly benefit at $35.75 times your years of credited service. Thus, your PBGC benefit is likely to be significantly lower than the benefit provided under our Pension Recovery Plan.

View comparisons of the Pension Benefit Reduction and Recovery Plan benefit versus the PBGC benefit here.

If our Pension Plan goes to the PGBC, it is essentially ended and cannot be changed in the future.

And, to make matters worse, there is a strong likelihood that the PBGC will become insolvent itself in 2025, leaving our participants with even less.

The Board must submit the proposed Pension Benefit Reduction and Recovery Plan to the U.S. Treasury Department for approval. Treasury will review the Pension Benefit Reduction and Recovery Plan to verify it meets federal legal requirements. If it meets the requirements, Treasury must approve it. If it does not meet the requirements, Treasury will deny it. (Refer to "What happens if the Pension Benefit Reduction and Recovery Plan is rejected?" below to see what happens if the application is denied.)

Treasury has until April 6, 2018 to make a decision.

Assuming the Treasury Department approves the application, all participants and beneficiaries will be given 21 days to vote on the Pension Benefit Reduction and Recovery Plan. Unless a majority of all participants and beneficiaries vote to reject the Pension Benefit Reduction and Recovery Plan, it will pass.

If the vote passes, the Plan will avoid insolvency and preserve the greatest benefits for all participants.

Keeping track of the Pension Benefit Reduction and Recovery Plan application

A copy of the Pension Benefit Reduction and Recovery Plan application is available through the U.S. Treasury Department at www.treasury.gov/services/Pages/Benefit-Suspensions.aspx. The application includes more information about the proposed reduction, including:

  • The Plan actuary’s certification that the Plan will run out of money.
  • How the proposed reduction would satisfy the requirement that it is sufficient to ensure the plan does not run out of money, while not being larger than required.
  • The steps the Board has already taken to keep the Plan from running out of money and why the Board believes that a benefit reduction is the last best option to keep the Plan solvent.
  • The reasons the Board believes that the proposed reduction is spread fairly among Plan participants.

The Treasury website will also provide updated information on the application, such as whether the Pension Benefit Reduction and Recovery Plan has been amended or withdrawn.

You can submit a comment on the application by going to www.treasury.gov/services/Pages/Benefit-Suspensions.aspx. Comments may also be mailed to Treasury at:

Department of the Treasury
Attn: MPRA Office, Room 1001
1500 Pennsylvania Avenue, NW
Washington, DC 20220

All interested parties can make comments, and the comments will be publicly available.

Assuming the U.S. Treasury Department approves the proposed Pension Recovery Plan, the next step is for Plan participants to vote to adopt the proposed benefit reductions. All participants are eligible to vote (actively employed participants, current retirees and beneficiaries, and vested terminated participants).

The Pension Recovery Plan can be rejected ONLY if a majority of the Plan’s participants vote against it.

The vote must take place within 30 days of the Pension Benefit Reduction and Recovery Plan’s approval by Treasury, and the voting period runs for 21 days.

The Treasury Department has sole responsibility for the voting process, which will be conducted by phone or online by a third-party administrator—you will receive more information following the Treasury review period.

If the U.S. Treasury Department denies the Pension Benefit Reduction and Recovery Plan or the participant vote does not pass, it does not mean that the Pension Plan can simply continue the way it is today. It is projected to run out of money during 2034.

The Board may choose to rework the Pension Benefit Reduction and Recovery Plan and reapply with the U.S. Treasury Department. In this case, larger benefit reductions will most likely be required, and the Treasury review and participant voting process, as described in the sections above, will start over.

Also remember, if the Plan runs out of money, the PBGC will provide financial assistance to the Plan and benefits will be reduced to PBGC guarantee levels. This would result in larger benefit reductions than are being proposed under the Pension Benefit Reduction and Recovery Plan.

Also, if the PBGC runs out of money, which is projected to happen within 10 years, your PBGC benefit will be reduced to almost nothing.