“Although reducing earned benefits will be painful, the Trustees have decided to apply to do so because it is better than the alternative, which is running out of money and leaving everyone with almost no benefits in the future,” the fund wrote on its official website.
“Critical and declining” status is reached when a pension fund is projected to run out of money to pay benefits within 20 years.
The fund notes that pension reductions will likely kick in either late 2020 or early 2021, and that trustees won’t know the total amount of benefit reductions until just before the MPRA application is filed. This is because calculations are based on “financial information for the calendar quarter” just before the application is submitted. If the Treasury approves the MPRA application, the department then holds a vote among fund participants and beneficiaries for approval -- though it has the option to override a majority “no” vote if the AFM-EPF is found to be "systemically important” to the overall multi-employer pension system.
The AFM-EPF has been dealt a series of blows over the last few years. In addition to suffering a $122 million shortfall in 2016, the fund was hit with a class-action lawsuit in 2017 that accused trustees of making a series of risky investments to make up for heavy losses suffered during the 2008 recession. The suit (which trustees affirm has “no merit”) claims this put the pensions of thousands of participants at risk.
For the fiscal year that ended on March 31, 2018, the fund says it paid out $171 million in benefits but received only $68 million in contributions. “This negative cash flow is projected to continue -- and worsen,” reads a statement on its website. “Every year, if investment returns don’t make up this shortfall, the Fund has to draw down assets, which leaves less of an asset base on which to generate investment returns the following year.”
As part of the reduction, the fund says that some of its “unique benefit features that were instituted when the Fund was in excellent financial condition” --including a subsidized early retirement benefit that participants received if they retired before the age of 65 prior to June 1, 2010 -- may be eliminated.
Not all participants will receive a reduction. Pensioners over the age of 80 and those who receive disability pensions will be exempt. Meanwhile, those with relatively small pensions will be only minimally affected, if at all, and pensioners ages 75-79 will receive “partial protection” from the reductions. The worst hit will be younger pensioners and those with relatively large pensions, according to the fund, though trustees say they are considering including a “maximum percentage benefit reduction” with the MPRA filing “so that no participant can have his or her benefit reduced more than this maximum percentage.”
The fund indicates the MPRA filing is a last-ditch effort, and that contribution increases are not a feasible way to keep the AFM-EPF solvent. “The Fund's actuary has calculated that contributions would have to increase by 25% across the board immediately just for the Fund to remain solvent over the next 30 years, and by 50% for the Fund to be projected to be fully funded 30 years from now.... Contribution increases that high are not achievable,” reads a statement on its website.
Additionally, the fund says that while it is actively pushing for legislation in Congress that would provide assistance to the AFM-EPF along with 120 other multi-employer pension funds currently facing insolvency (called the Rehabilitation for Multiemployer Pensions Act), it has deemed it necessary to simultaneously take “every action available under existing federal law” to prevent the fund from running out of money.
The fund also notes that while the federal government’s Pension Benefit Guaranty Corporation (PBGC) was set up to insure benefits for multi-employer plans like the AFM-EPF, that agency too is projected to run out of money by 2025.