The IFEBP reports that for 2008, 20.7% of multiemployer pension funds were in safe status (more than 80% funded), 41.4% were in endangered status (65-85% funded) and a whopping 37.9% of surveyed plans were in critical status (less than 65% funded). That's an awful lot of unfunded liability waiting to strike employers and potentially a big 2010 budget concern because these figures make it very likely that required contributions to these pension funds are going to skyrocket.
If an employer is participating in a multiemployer pension plan by way of a collective bargaining agreement, there are two things that have to be considered about budgeting for 2010 employee benefit cost concerns. The Pension Protection Act ("PPA") of 2006 provides that plans certified as critical or endangered have to develop rehabilitation plans to correct their underfunding. While the plan can limit benefit accruals and eliminate some types of benefits, the most likely target to improve funding is to increase employer contributions. After the plan has been certified as critical, the actuary is going to recommend to the plan administrator a "required contribution level" that will be part of the rehabilitation plan and that recommendation is likely going to be made in 2009.
Under the PPA, the employer and the union have to agree to adopt the new contribution as part of their bargaining agreement. If no agreement is made, there is a 10% surcharge that the employer has to pay to the fund over and above the current contribution level. This is a very broad summary of the impact and more detail is available in earlier posts, but generally employers should be anticipating that, if they are in a critical or endangered plan, the contributions for the remainder of 2009 are going to go up at least for the amount of the surcharge. Plus, if your collective bargaining agreement expires before the end of 2009, or even in 2010, you can anticipate a higher required contribution.
This last paragraph is the true purpose behind this post. In dealing with clients who are preparing their 2010 budget and trying to anticipate increased labor costs, I find that they could be overlooking this potential cost increase: the added expense of being in an underfunded multiemployer pension fund. At the bare minimum, the cost associated with being in a critical plan is going to be 10% higher based on the surcharge. Plus the surcharge is mandatory so there is not even room to negotiate it downward. Add that to the uncertainty of the increased amount of the contributions due under the rehabilitation plan, and you have a potential time bomb of expense waiting to explode.
What should you do? If you are contributing to a multiemployer pension fund, first find out what status it is. Ask the plan administrator for verification of the funding levels. If you have not received a notice with this information, ask for one. If you have received a notice, ask your counsel what it means. Second, find out what the time frame is for that plan to adopt a rehabilitation plan. Ask if they trustees have started the process. Ask if the actuary has made any recommendations with respect to increased contributions. Third, if you are headed into negotiations with the union, make sure this issue is clearly discussed and get commitments about how funding increases will be treated against other costs. Consider making wage increases contingent upon the impact of increased pension costs, or building in other concessions depending on required contribution levels. Make sure you negotiate with the understanding that your pension costs will be going up (unless you are in that rare 20.7% of safe plans).
Above all, budget accordingly. Don't let this cost increase come as a surprise. There is no easy solution to this nationwide problem of underfunded plans. But knowing what to expect can make dealing with it easier.
