The Pension Benefit Guaranty Corp., the federal backstop for pension plans, has approved the merger of two Laborers’ International Union of North America pension funds in New York state, one of which was in serious financial trouble.
The PBGC’s merger approval, which it announced on Jan. 14, is its first under the 2014 Multiemployer Pension Reform Act. The two plans are the Local 1000 Pension Fund, which covers more than 400 participants, and the Local 235 Pension Plan, which has more than 1,100 participants.
The Local 235 fund is in the PBGC “green zone,” denoting its financial condition. But the Local 1000 fund was in “critical and declining” status, the lowest category under the pension law, and was projected to turn insolvent in 2026, according to the PBGC.
To assist the merger, the PBGC is providing $8.9 million a year for three years to the combined plans. It made the first payment on Jan. 15.
Matthew Berger, an attorney for Local 235, said via email that with the $26.7 million from the PBGC, the Local 235 fund is projected to be 100% funded on the same date as it would have been if the pension funds hadn't merged.
If the Local 1000 fund were to become insolvent, Berger said that it would have been unable to pay the full benefits that pension plan participants had accrued. Instead, he added, the pensioners would have received the PBGC-guaranteed benefit levels, which were likely to be less than the full accrued benefits.
That guaranteed benefit varies by a pensioner's year of service, but PBGC estimates the maximum guarantee for someone with 30 years' service at $12,870 per year.
According to PBGC, the merger won’t reduce benefits for participants and beneficiaries of either plan.
PBGC Director Gordon Hartogensis said in a statement, “Through this facilitated merger, we are preventing a failing plan from going broke and preserving benefits in a financially responsible way.”
Matt Pavesi, a vice president with consulting firm Segal—and the actuary for Local 235—said in a statement that the biggest winners from the merger are "the plan participants of Local 1000, who can now retire with the benefits that they worked hard to obtain." Pavesi added, "Thanks to everyone involved in this merger, and the PBGC's assistance, their full benefits were preserved."
Pavesi said in an interview that there will be other PBGC-facilitated mergers but added that they won't work for every plan. "These two funds were in the PBGC's sweet spot and luckily it was approved and it worked," he said.
Berger, who is with the law firm of Barnes, Iaccarino & Shepherd in Hempstead, N.Y., said that several factors led to the Local 1000 Pension Fund's problems, He points to the "downsizing" of one of the largest employer-contributors to the fund and the impact of the 2008 Great Recession and added that the Local 1000 fund "continued to struggle in 2012 and 2013 due to a slowdown in work."
In February 2014, Local 1000 merged with Local 235, but their respective pension funds remained separate. Moreover, no new members took part in the Local 1000 fund "and the ratio of actives-to-inactives continued to gradually decline as active participants retired or left the industry," Berger said. "This left fewer active members to support the benefits paid to Local 1000 pensioners."
Story updated on 1/16/20 with comments from Local 235 attorney and Local 235 actuary.