Forty years ago, contributions to Taft-Hartley pension trusts were booming as active union membership soared and generous pension benefits were commonplace.  Over the years since then, however, the numbers of employed union members has shrunk dramatically while the numbers of retiring baby boomers have exploded.  Contributions are down, benefit obligations are up, and multiemployer pension plans are more dependent than ever on investment returns to continue paying benefits.  In many cases, this leaves union members with reduced benefits and prevents contributing employers from leaving the union without incurring substantial withdrawal liability.  Enter the coronavirus, whose impact on the economy will almost certainly exacerbate these issues and possibly deal a death blow to faltering Taft-Hartley pension trusts.

A Taft-Hartley pension trust is a multiemployer pension plan jointly administered by representatives of labor and employers that are parties to a collective bargaining agreement.  These trusts came into existence under the Labor Management Relations Act of 1947, also known as the Taft-Hartley Act, which set standards for the use of employer funding of pensions for union employees.  Traditionally, multiemployer pension plans depend on employer contributions and investment returns to pay the benefits owed to union members and their dependents.  Unfortunately, even as the stock market reached historically high values in early 2020, the returns on stocks in recent years have not been sufficient to make up for the shrinking contributions, resulting in many Taft-Hartley plans projecting insufficient assets to pay the benefits already earned.  

In recent weeks, we have witnessed the sudden impact of the coronavirus on the stock market and economy (and nearly every aspect of life as we know it).  When trading closed April 1, 2020, the S&P 500 was down 27% from its all-time high of 3,386.15 on February 19, 2020, and no one knows where it will go over the next several days, months, and years.  What is at stake for multiemployer plans and their participating employers?

Increasing Costs to Withdraw from Taft-Hartley Plans.  All Taft-Hartley plans retain actuaries who calculate whether the plan’s current assets will be sufficient to pay benefits coming due in future years.  If the actuary determines that the current assets will not be sufficient to pay benefits already earned, employers electing to withdraw from the plan are generally obligated to pay a portion of the underfunded amount allocable to that employer, referred to as the employer’s “withdrawal liability.”  The allocation is typically based on the employer’s contributions to the plan over the most recent five to ten years as compared to all of the contributions to the plan over the same period.  The steep reductions we have seen in recent weeks to the value of stock will undoubtedly affect the value of assets held by Taft Hartley plans, although losses are often taken into account over several years through an actuarial process referred to as “smoothing.”  Nonetheless, the market losses can increase an employer’s withdrawal liability in two ways:

1. A reduction in the plan’s current asset values will increase the gap between the amount needed to pay benefits and the amount held by the plan (i.e., the unfunded amount); and
2. Reduced stock valuations and a slowing economy could result in a plan’s actuary changing the assumed rate of return applied to the plan’s assets in the future.  As the actuary reduces the assumed rate of return, the plan’s underfunded amount increases, and so does each employer’s potential withdrawal liability.

Withdrawal liability is calculated based on the plan’s funded status as of the end of the plan year preceding the year of the withdrawal, so if we do not see a dramatic improvement in the markets this year, employers considering withdrawal in a plan year beginning on or after January 1, 2020 may face a much tougher decision.

Rehabilitation Plans.  Under the Pension Protection Act of 2006, certain underfunded Taft-Hartley plans are required to adopt a rehabilitation plan to address the funding deficiencies.  In this economic environment, more plans will likely be required to adopt rehabilitation plans that may include reducing the benefits payable to retirees (and future retirees) and requiring larger contributions from participating employers.  Existing rehabilitation plans may be updated to further reduce benefits or require larger contributions from participating employers.

PBGC Takeover.  It is quite possible, of course, that some plans that were already severely underfunded will terminate due to their inability to overcome the losses caused by the coronavirus and will be taken over by the Pension Benefit Guaranty Corporation (PBGC).  The PBGC is a quasi-governmental agency that insures pension plans and takes over pension plans in severe distress.  When the PBGC takes over, benefit payments are generally reduced to maximum amounts set by law. 

Certain sectors of the economy, such as hotels and restaurants, are being severely harmed by recent events.  In the restaurant industry, it is predicted that at least 10% of businesses will not reopen.  A significant percentage of small and independent hotels are also expected to file for bankruptcy, with larger hotel chains laying off up to 90% of hotel staff.  Employers contributing to Taft-Harley plans are not required to make contributions on behalf of laid-off employees.  For plans with large numbers of laid-off employees, it may be years before contribution levels return to those that existed just before the coronavirus pandemic, and future recovery may not happen soon enough to save them. 

Government Intervention.  In recent years, there has been an ongoing discussion on Capitol Hill regarding what can be done to save Taft-Hartley plans, including proposals for no- or low-interest loans, tax credits for employers that make stabilizing contributions, additional PBGC interventions, and plan restructuring.  Millions of retirees (and soon-to-be retirees) could be impacted by failing multiemployer plans in the coming years.  Those retirees may bring considerable political pressure on the government to intervene. 

What can employers do?  If you are an employer already making contributions to a Taft-Hartley plan, we recommend obtaining a withdrawal liability estimate from the plan administrator each year.  Obtaining an annual estimate allows you to see how your business’s potential liability changes over time.  If you are considering selling or changing your business, it is critical that you know the business’s liability to a multiemployer plan.  A potential buyer engaging in due diligence will want to know the extent of the liability and will likely discount the purchase price if necessary to account for any such liability. 

If you are an employer who is considering participation in a multiemployer pension plan under a collective bargaining agreement, conduct due diligence and discuss your options with legal counsel, who can help explain the potential legal and financial consequences that you may face once you begin making contributions to the plan.