Breaking News: Treasury Rejects Central States Benefit Reductions

That was how P&I headlined their report of what Special Master (yes, that is his real title) Kenneth R. Feinberg of the Department of the Treasury informed the Central States trustees in a just-released letter.

Excerpts follow:

As Special Master, appointed by the Secretary, I am writing to notify you of Treasury’s decision to deny the Application because the suspension fails to satisfy the stah1tory criteria for approval of benefit suspensions.

As described further below, Treasury finds that the Plan’s proposed benefit suspensions are not reasonably estimated to allow the Plan to avoid insolvency.

Treasury has concluded that two of the assumptions used for the actuarial projections in the Application are not reasonable.

Investment Return Assumptions Are Not Reasonable The Application uses a 7.5% annual investment rate of return assumption for the deterministic projections and uses corresponding annual investment rate of return assumptions by asset class as inputs for the stochastic projections. These assumptions are not reasonable because they:

  1. are not appropriate for the purpose of the measurement (cash flow projections relating to proposed benefit suspensions under Kline-Miller), taking into account the Plan‘s negative cash flows and other factors;
  2. do not adequately take into account relevant current economic data (that is, appropriate investment forecast data); and
  3. have a significant bias in that they are significantly optimistic.

Entry Age Assumption Is Not Reasonable. The entry age assumption is not reasonable because it:

  1. is not appropriate for the purpose of the measurement (cash flow projections relating to proposed benefit suspensions under Kline-Miller), taking into account the Plan‘s negative cash flows and other factors; and
  2. does not take into account relevant historical and current demographic data (that is, data available regarding entry age).

Application of Special Limitation on Suspension of Benefits Specifically, Treasury has concluded that it is not reasonable to justify larger benefit suspensions for one group of UPS participants based on the fact that those participants are not covered by a make-whole agreement (and therefore are less protected from benefit cuts) than for another group of UPS articipants who are covered by a make-whole agreement (and thus are more protected from benefit cuts). Applying a factor in a manner that justifies larger cuts for participants who are otherwise less protected (and therefore stand to receive smaller benefits) is not a reasonable application of the factor.

Treasury has found that the notices provided to participants in connection with the Application fail to meet this standard because they are, in important respects, not written in a manner so as to be understood by the average plan participant. This is because:

  1. the notices extensively use technical language without adequate explanation;
  2. critical terms used in the notices are not defined in the notices but only by cross-reference to other documents (e.g., the Plan document and the rehabilitation plan document); and
  3. the cross-referenced definitions in those other documents are not understandable to the average plan participant.

The Application fails to meet the requirements of Kline-Miller for the reasons described above. This notification letter will be made public in order to inform plan participants of the outcome of Treasury’s review.

5 responses to this post.

  1. Posted by Anonymous on May 6, 2016 at 5:20 pm

    Not to worry taxpayers, I’m sure this will have zero impact on pending & upcoming public pension matters?

    Reply

  2. Posted by MJ on May 6, 2016 at 6:21 pm

    John, so where does this leave the pensioners and the funds? and why were you thinking that it would be approved?

    Reply

    • They will likely re-file using different assumptions (or thrown in the towel and let PBGC take it all but that is unlikely since it would cut off income for most of the people involved in running the plan and give PBGC more work than they might care to do – or farm out).

      I just read in detail the letter and am waiting for some jubilant headlines from Central States unions and lawyers before translating what the DOT really said – and it’s not good for Central States participants.

      I was guessing and underestimated the pull of UPS.

      Reply

  3. Posted by Mark on May 8, 2016 at 10:04 pm

    Can you explain your UPS comment? Thank you.

    Reply

    • According to this story:
      http://www.businessinsurance.com/article/20160502/NEWS03/160509984/ups-kroger-sue-teamsters-central-states-southeast-southwest-areas?tags%3D%257C62%257C63%257C80%257C82%257C307

      “UPS, which in 2007 withdrew from the Central States pension fund as part of a collective bargaining agreement with the International Brotherhood of Teamsters, might be required to pay $3.2 billion to $3.8 billion in benefit payments if the pending benefit reduction application is approved by the Treasury Department.

      A “backstop agreement” in the 2007 bargaining agreement stated that in the event “at some point in the future if Central States ever lawfully cut benefits to that group, UPS would provide a supplemental retiree benefit” only to its participants, UPS spokesman Steve Gaut said in a telephone interview.”

      When UPS bought their way out of the plan in 2007 there was no MPRA law so that make-good provision would have only kicked in if the plan had been taken over by the PBGC with it’s limit on benefits that it covered. They don’t want to do that so they pointed out that two separate tiers of UPS employees covered by the plan have different caps on how much their benefits can be cut (40% and 50%) and Feinberg bought their argument.

      Reply

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