Central Pension Fund

New Pension Law A Boost For Multiemployer Plans

In August 2006 the Pension Protection Act was signed into law. It is the most wide-ranging pension legislation in the United States in over 30 years.

While the new law was intended to strengthen traditional defined benefit pension plans, experts agree that it will likely cause many employers with single-employer plans to abandon them. At the same time, it is anticipated that multiemployer plans, like the Central Pension Fund and those sponsored by IUOE Local Unions throughout the United States, will become even more attractive to employers and employees alike.

The reason that many single-employer plans will likely be terminated is because the new law makes it more difficult for an employer to accurately predict how much money it will need to contribute to its pension plan each year. This is because the law no longer permits these plans to average-out their investment gains and losses over long time periods. Accordingly, they will be required to contribute large amounts in years when their investments decline, and nothing when they have gains. This kind of stop-and-go funding volatility is something most employers want to avoid. They want predictability.

To avoid this new funding uncertainty employers that do not have union agreements, but still want to provide some kind of retirement benefit for their employees, will have little choice other than setting up a 401(k) savings plan. In these plans, the employer can predict its financial obligation with precision, and avoid funding uncertainty.

Unfortunately, by moving to a 401(k) plan the employer shifts all of the funding risk to the employees. If investment markets decline, it is the employee not the employer that has to come up with additional funding for their retirement.

But employers with agreements with Local Unions of the International Union of Operating Engineers, who may be considering terminating their own plans, have an alternative to the 401(k) world that perfectly suits their desire to avoid funding uncertainty, without shifting that uncertainty to their employees. That alternative is the Central Pension Fund and the nationwide network of 30 other multiemployer plans sponsored by IUOE Local Unions.

From an employer’s point of view, multiemployer plans operate just like 401(k) plans. The employer is financially obligated to make a contribution on behalf of each employee at the rate specified in the collective bargaining agreement --- and nothing more. There is no funding uncertainty.

But from the employee’s point of view, the multiemployer plan is far superior to the 401(k) plan. There is a defined benefit for life with no investment risk.

It is because multiemployer plans so perfectly fit the needs of employers and employees alike that it is anticipated that the new pension law will increase participation in these plans nationwide.

In fact this trend had begun even before the new law. Several major airlines that have terminated their single-employer plans recently have already moved their union-represented employees into their union’s multiemployer plan, while leaving their non-represented employees with only a 401(k).

United Airlines, US Airways, Continental Airlines and Aloha Airlines, after terminating their single-employer pension plans, agreed to move all of their employees represented by the International Association of Machinists (IAM) into the Machinists National Pension Fund. The Machinists National Pension Fund is a multiemployer plan like the Central Pension Fund. Those airline companies are now making contributions to the Machinists’ Fund on behalf of more than 30,000 IAM members.

It is expected that the new pension law will produce more examples like these airline companies as employers seek to avoid funding risks, and employees seek to avoid the risks of 401(k) plans.

August 24, 2006