[Federal Register: August 6, 2003 (Volume 68, Number 151)]
[Notices]
[Page 46668-46672]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06au03-125]
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PENSION BENEFIT GUARANTY CORPORATION
Approval of Amendment to Special Withdrawal Liability Rules for
International Longshoremen's and Warehousemen's Union-Pacific Maritime
Association Pension Plan
AGENCY: Pension Benefit Guaranty Corporation.
ACTION: Notice of approval.
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SUMMARY: The International Longshoremen's and Warehousemen's Union-
Pacific Maritime Association Pension Plan requested the Pension Benefit
Guaranty Corporation (``PBGC'') to approve a second amendment to a
special withdrawal liability rule for
[[Page 46669]]
employers that maintain the Plan. PBGC approved the original rule in
1984 and an amended version in 1998. 49 FR 6043 (February 16, 1984); 63
FR 27774 (May 20, 1998). PBGC published a Notice of Pendency of the
Request for Approval of a second amendment on June 13, 2003 (68 FR
35462) (``Notice of Pendency''). In accordance with the provisions of
the Employee Retirement Income Security Act of 1974, PBGC is now
advising the public that the agency has approved the requested
amendment with certain modifications.
FOR FURTHER INFORMATION CONTACT: Gennice D. Brickhouse, Attorney,
Office of the General Counsel, Pension Benefit Guaranty Corporation,
1200 K Street, NW., Washington, DC 20005-4026; Telephone 202-326-4020
(For TTY/TDD users, call the Federal Relay Service toll-free at 1-800-
877-8339 and ask to be connected to 202-326-4020).
SUPPLEMENTARY INFORMATION:
Background
As explained in the Notice of Pendency (see 68 FR 35463-65), the
International Longshoremen's and Warehousemen's Union-Pacific Maritime
Association Pension Plan (``Plan'') has since 1984 operated under a
special modification to the usual employer withdrawal liability rules
of the Employee Retirement Income Security Act of 1974 (``ERISA''), as
amended by the Multiemployer Pension Plan Amendments Act of 1980,
Public Law 96-364, 94 Stat. 1208-1311. Under section 4201 of ERISA, an
employer who incurs either a complete or partial withdrawal from a
defined benefit multiemployer pension plan becomes liable for a
proportional share of the plan's unfunded vested benefits. The statute
specifies that a ``complete withdrawal'' occurs whenever an employer
either permanently (1) ceases to have an obligation to contribute to
the plan, or (2) ceases all operations covered under the plan. See
ERISA section 4203(a). Under the second test, therefore, an employer
who closes or sells its operations will incur withdrawal liability.
Under the first test, an employer who remains in business but who no
longer has an obligation to contribute to the plan also suffers
liability. The ``partial withdrawal'' provisions of sections 4205 and
4206 impose a lesser measure of liability upon employers who greatly
reduce, but do not entirely eliminate, the operations that generate
contributions to the plan.
The withdrawal liability provisions of ERISA are a critical factor
in maintaining the solvency of these pension plans and reducing claims
made on the multiemployer plan guaranty fund maintained by PBGC, which
is much less robustly funded than the comparable single employer
fund.\1\ In the absence of withdrawal liability rules, an employer who
participates in an underfunded multiemployer plan would have a powerful
economic incentive to reduce expenses by withdrawing from the plan at
the first convenient opportunity.
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\1\ The PBGC multiemployer guaranty fund receives only $25
million in annual premiums. In contrast, the single employer funds
received premiums of $787 million in the 2002 fiscal year. PBGC
Pension Insurance Data Book 2002 at 2.
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Congress nevertheless allowed for the possibility that, in certain
industries, the fact that particular employers go out of business (or
cease operations in a specific geographic region) might not result in
permanent damage to the pension plan's contribution base. In the case
of the construction industry, for example, the work must necessarily
take place at the construction site; if that work generates
contributions to the pension plan, it does not much matter which
employer performs the work. Put another way, if a construction employer
goes out of business, or stops operations in a geographic area, pension
plan contributions will not diminish if a second employer who
contributes to the plan fills the void. The plan's contribution base is
damaged, therefore, only if the employer stops contributing to the plan
but continues to perform construction work in the jurisdiction of the
collective bargaining agreement.
This reasoning led Congress to adopt a special definition of the
term ``withdrawal'' for construction industry plans. Section 4203(b)(2)
of ERISA provides that a complete withdrawal occurs only if an employer
ceases to have an obligation to contribute under a plan, but the
employer nevertheless performs previously covered work in the
jurisdiction of the collective bargaining agreement at any time within
five years after the employer ceased its contributions.\2\ There is a
parallel rule for partial withdrawals from construction plans. Under
section 4208(d)(1) of ERISA, ``[a]n employer to whom section 4203(b)
(relating to the building and construction industry) applies is liable
for a partial withdrawal only if the employer's obligation to
contribute under the plan is continued for no more than an
insubstantial portion of its work in the craft and area jurisdiction of
the collective bargaining agreement of the type for which contributions
are required.''
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\2\ Section 4203(c)(1) of ERISA applies a similar definition of
complete withdrawal to the entertainment industry, except that the
pertinent jurisdiction is the jurisdiction of the plan rather than
the jurisdiction of the collective bargaining agreement. No plan has
ever requested PBGC to determine that it shares the characteristics
of an entertainment plan.
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Section 4203(f) of ERISA provides that PBGC may prescribe
regulations under which plans that are not in the construction industry
may be amended to use special withdrawal liability rules similar to
those that apply to construction plans. Under the statute, the
regulations ``shall permit the use of special withdrawal liability
rules * * * only in industries'' that PBGC determines share the
characteristics of the construction industry. In addition, each plan
application must demonstrate that the special rule ``will not pose a
significant risk to the [PBGC] insurance system.'' Section 4208(e)(3)
of ERISA provides for parallel treatment of partial withdrawal
liability rules.
The regulation on Extension of Special Withdrawal Liability Rules
(29 CFR part 4203), prescribes the procedures a multiemployer plan must
follow to request PBGC approval of a plan amendment that establishes
special complete or partial withdrawal liability rules. Under 29 CFR
4203.3(a), a complete withdrawal rule must be similar to the statutory
provision that applies to construction industry plans under section
4203(b) of ERISA. Any special rule for partial withdrawals must be
consistent with the construction industry partial withdrawal
provisions.
Each request for approval of a plan amendment establishing special
withdrawal liability rules must provide PBGC with detailed financial
and actuarial data about the plan. In addition, the applicant must
provide PBGC with information about the effects of withdrawals on the
plan's contribution base. As a practical matter, the plan must
demonstrate that the characteristics of employment and labor relations
in its industry are sufficiently similar to those in the construction
industry that use of the construction rule would be appropriate.
Relevant factors include the mobility of the employees, the
intermittent nature of the employment, the project-by-project nature of
the work, extreme fluctuations in the level of an employer's covered
work under the plan, the existence of a consistent pattern of entry and
withdrawal by employers, and the local nature of the work performed.
PBGC will approve a special withdrawal liability rule only if a
review of the record shows that:
(1) The industry has characteristics that would make use of the
special construction withdrawal rules appropriate; and
[[Page 46670]]
(2) The plan would not be aversely affected by the adoption of the
special rule.
After review of the application and all public comments, PBGC may
approve the amendment in the form proposed by the plan, approve the
application subject to conditions or revisions, or deny the
application.
Previous Agency Action Involving This Plan
The Notice of Pendency explained how the Plan operates under a
modification to the employer withdrawal liability rules of ERISA, as
amended by the Multiemployer Pension Plan Amendments Act of 1980 (see
68 FR 35463-65). Under the initial recension of the special Plan rule-
which was approved in 1984 (see 49 FR 6043)--a complete withdrawal
occurs if a contributing employer permanently ceases to have an
obligation to contribute to the Plan, and: (1) Continues to perform
work of the type for which contributions to the Plan are currently or
were previously required at any Pacific Coast port in the United
States; (2) resumes such work-- without renewal of the obligation to
contribute--at any time before the end of the fifth Plan Year
commencing after the obligation ceased; (3) sells or transfers a
substantial portion of its business or assets to another person that
performs such work without having an obligation to make contributions
to the Plan; or (4) is found to have ceased Plan contributions in
connection with the withdrawal of all, or substantially all, employers
from the Plan as described in 4219(c)(1)(D) of ERISA. Parallel
provisions were adopted for partial withdrawals.
Because the Plan had a substantial shortfall between assets and
vested liabilities, the 1984 approval was conditioned upon the
satisfaction of twin contribution tests crafted to protect Plan
participants and the PBGC. First, the Plan was amended to provide that
``[c]ontributions for each Plan Year shall be not less than the total
administrative costs and benefits to be paid by the Trustee during the
Plan Year.'' Second, the Plan committed itself to satisfy a ``Funding
Goal'' designed to ensure that the Plan accumulated sufficient assets
to pay for the massive benefit promises already made-but not yet paid
for-by the bargaining parties. The Plan was required to become 50%
funded within 10 years, and had to achieve 80% funding in accordance
with this schedule:
------------------------------------------------------------------------
Plan year Percent
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10........................................................... 50
11........................................................... 53
12........................................................... 56
13........................................................... 59
14........................................................... 62
15........................................................... 65
16........................................................... 68
17........................................................... 71
18........................................................... 74
19........................................................... 77
20 and over.................................................. 80
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As a result of these measures, the funded status of the Plan
improved over the next decade, even though the bargaining parties
instituted continuous benefit improvements under which the monthly
benefit accruals promised under the labor contract rose by 270%, from
$26 in 1983 to $70 in 1996. This trend is illustrated by table that the
Plan presented to PBGC in 1997.
Table 1.--Summary of Actuarial Valuation Results \1\
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Valuation date
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7/1/96 7/1/95 7/1/94 7/1/93 7/1/92 7/1/91
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Number of active participants..... 8,185 7,856 7,682 8,141 8,339 8,469
Number of retired participants.... 9,049 9,236 9,244 8,979 9,132 9,214
Monthly benefit accrual rate...... 70 69 69 69 39 37
Maximum monthly benefit........... 2,450 2,415 2,415 2,415 1,365 1,295
Contributions (000)............... 99,700 99,696 99,023 87,316 74,139 71,074
Benefits (000).................... 96,900 94,963 92,437 85,293 71,321 68,848
Market value assets (000)......... 1,329,082 1,143,335 957,661 950,030 835,063 746,993
Net minimum funding charges w/o 79,154 85,787 81,247 80,034 47,307 43,987
credit balance (000).............
Normal cost, including operating 20,527 19,180 17,831 18,529 12,821 12,334
expenses (000)...................
Unfunded accrued liability (assets 534,416 637,646 710,802 664,096 341,037 360,009
at market value) (000)...........
Unfunded liability--vested 354,821 462,132 530,092 476,168 N/A N/A
benefits (assets at market value)
(000)............................
Valuation interest rate........... 6.5 6.5 6.5 6.5 6.5 6.5
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\1\ Taken from actuarial reports submitted by the Plan to PBGC in 1997.
The 1997 Amendments
In 1997, the trustees of the Plan submitted a proposed revision of
their special rules to the PBGC. Their submission represented that
employer contributions that equaled benefit payments and administrative
expenses would exceed the limits for tax-deductibility set forth in the
Internal Revenue Code. The trustees requested PBGC allow them to
eliminate the contribution floor requirement, and the agency approved a
modified version of the request in 1998. 63 FR 27774. Under the
modification, the ``annual contribution equal to annual benefit
payments'' rule was waived unless the Plan became less than 85% funded;
if the Plan failed the 85% Funding Goal, then employer
``[c]ontributions in the following Plan Year shall be not less than the
lesser of'' the Plan's benefit payments and administrative expenses or
``the amount required to increase the Funding Percentage * * * to
eighty-five percent (85%).'' 63 FR 27777. If the Plan failed to satisfy
these remedial measures, the special withdrawal liability rule would
become void.
The Background of the Proposed Second Amendment
In autumn 2002, the Director of the Federal Mediation and
Conciliation Service (``FMCS'') urgently requested the staff of the
Secretary of Labor and the Executive Director of PBGC to provide
technical comments and observations about pension-related issues to the
International Longshoremen's and Warehousemen's Union (``ILWU'') and
U.S. based representatives of the Pacific Maritime Association
(``PMA''). Those parties were then negotiating a new collective
bargaining agreement for west coast
[[Page 46671]]
ports. Under most circumstances the PBGC would not become involved in
private sector labor negotiations. As stated in the Notice of Pendency,
however, the 2002 negotiations were extraordinary in several respects.
Despite the personal efforts of the Chairman of the FMCS, the parties
reached a bargaining deadlock and a lockout was called that paralyzed
the west coast docks. For the first time in a generation, the United
States government invoked the provisions of the Taft-Hartley Act and
obtained an injunction from a federal court to halt the work stoppage
and reopen the ports. The FMCS vouched that no agreement could be
reached unless federal pension agencies provided informal reactions to
proposed modifications to the 1984 and 1998 recensions of the rule.
On that basis, PBGC listened to various proposals and provided the
FMCS and the parties with general guidance concerning benefit increases
and temporary changes to the Funding Goal. The ILWU and PMA represented
that compliance with the 85% Funding Goal would prevent them from
bargaining for an increase in pension benefits to a level that was
sufficiently attractive to convince current workers to acquiesce in
work rule changes and employment reductions desired by the PMA shipping
interests. They argued also that PMA ``could not afford'' to honor the
``equal contribution and benefit payment'' rule because PMA ``needed to
invest elsewhere in the industry.''
The parties reached an agreement in November of 2002 but did not
finalize their pension proposals and submit them for formal approval
PBGC until March 29, 2003.
Prior to the November 2002 amendments, the Plan was said to be in
compliance with the 85% Funding Goal established under the 1998
recension of the special rule.
Table 2.--Select Financial Data Submitted by Plan on March 28, 2003
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Plan year ending Plan year ending Plan year ending Plan year ending Plan year ending Plan year ending
June 30, 1997 June 30, 1998 June 30, 1999 June 30, 2000 June 30, 2001 June 30, 2002
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Assets....................... $1.63 billion...... $1.91 billion...... $2.16 billion...... $2.40 billion..... $2.22 billion..... $1.93 billion.
Vested Benefits.............. $1.69 billion...... $1.66 billion...... $1.63 billion...... $1.83 billion..... $1.99 billion..... $1.84 billion.
Active Participants.......... 8,315.............. 8,859.............. 9,572.............. 9,395............. 10,070............ 10,113.
Contributions................ $104 million....... $35.0 million...... $28.8 million...... $32.5 million..... $26.9 million..... $23.5 million.
Benefit Payments............. $101.5 million..... $108.0 million..... $110.6 million..... $126.4 million.... $132.9 million.... $154 million.
Plan Assets As Multiple of 16.1............... 17.7............... 19.6............... 19.0.............. 16.6.............. 12.5.
Benefits.
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Materials that the Plan submitted to PBGC in March 2003, however,
indicated that the cost of the 2002 benefit increases caused the Plan
to fail the Funding Goal from July 2002 through July 2012. Thus, the
Plan would require annual ``catch-up'' contributions equal to benefit
payments. The ``catch up'' contributions, however, would greatly exceed
the amount the Plan would otherwise need to satisfy the ``minimum
funding'' provisions of the Internal Revenue Code.
Table 3.--Segal Company Projected PBGC Funding Percentages
[Submitted to plan on March 10, 2003]
------------------------------------------------------------------------
Funding Benefit Code
Year level payments funding
(percent) (millions) (millions)
------------------------------------------------------------------------
2002............................. 87 $154 23
2003............................. 84 167 44
2004............................. 80 179 72
2005............................. 76 192 98
2006............................. 71 211 122
2007............................. 67 230 148
2008............................. 68 238 213
2009............................. 71 247 303
2010............................. 76 253 304
2011............................. 82 259 304
2012............................. 88 264 304
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Decision on the Proposed Second Amendment
The statute and the implementing regulation state that PBGC must
make two factual determinations before it approves a request for an
amendment that adopts a special withdrawal liability rule. ERISA
section 4203(f); 29 CFR 4203.4(a). First, on the basis of a showing by
the plan, PBGC must determine that the amendment will apply to an
industry that has characteristics that would make use of the special
rules appropriate. Second, PBGC must determine that the plan amendment
will not pose a significant risk to the insurance system. PBGC's
discussion on each of those issues follows. After review of the record
submitted by the Plan, and having received no public comments, PBGC has
entered the following determinations.
1. What Is the Nature of the Industry?
In determining whether an industry has the characteristics that
would make an amendment to special rules appropriate, an important line
of inquiry is the extent to which the Plan's contribution base
resembles that found in the construction industry. This threshold
question requires consideration of the effect of employer withdrawals
on the Plan's contribution base.
[[Page 46672]]
The characteristics of the west coast longshore industry that
supported approval of special withdrawal liability rules in 1984 and
1998 apparently continue to apply today. Specifically, work covered
under the Plan is dependent on the comings and goings of ocean-going
vessels at west coast ports. The work must be performed at the port of
embarkation or debarkation. Thus, the work will continue to be covered
by the Plan unless future shipping is diverted to Canadian, Mexican or
Central American ports.
In addition, an employer in this industry cannot withdraw from the
Plan while continuing to perform longshore work at Pacific ports:
longshore work along the entire west coast of the United States for all
ocean-going dry cargo work is covered under collective bargaining
agreements that require contributions to the Plan. Because the entire
coast is one bargaining unit, and all ports through which ocean-going
dry cargo is shipped are completely organized by the ILWU, it is not
feasible to load or unload cargo unless contributions being paid to the
Plan. Moreover, a former employer who did resume operations on a
noncontributory basis would incur withdrawal liability.
2. What Is the Exposure and Risk of Loss to PBGC and Participants?
Exposure. The bargaining parties have increased benefits for active
workers by over 50%, from $95 a month for each year of service to $150
per month. For a participant who retires with 33 years of service (as
is typical) the annual benefit rises from $37,620 to $59,400. Thus,
benefit liabilities will rise substantially. It should also be noted
that Congress raised the PBGC guarantee for multiemployer plans in
2001: the guaranteed benefit for a participant with 33 years of service
has risen from $6435 to $13,365. It follows that PBGC's exposure has
increased.
Risk of loss. When the PBGC considered this question in 1998, the
record indicated that the Plan presented a low risk of loss to PBGC
guaranty funds. The agency expressed this view because actuarial
reports for the period from July 1991 through July 1996:
* * * show a stable Plan population, an increase in annual
contributions ($71.1 million to $99.7 million), and an increase in
Plan assets ($747 million to $1.329 billion). Plan income has also
consistently exceeded benefit payouts. The Plan and the covered
industry have unique characteristics that suggest that the Plan's
contribution base is likely to remain stable. Contributions to the
Plan are made with respect to all west coast dry cargo . * * *
Consequently, the Plan's contribution base is secure and the
departure of one employer from the Plan is not likely to have an
adverse effect on the contribution base so long as the level of
shipping does not decline.
As noted in the tables (supra) the risk of loss has increased due
to the funding pressure that the Plan will encounter due to a
combination of (1) reduced contributions \3\; and (2) increased benefit
costs spread across a fixed or declining number of employers.
\3\ If the ``contributions must equal benefit payments''
provision of the 1984 amendment had been retained, this Plan would
have received an additional $639 million in contributions between
1997 and 2003.
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Conclusion. The Plan should continue to resemble a construction
plan so long as virtually all foreign-flag shipping flows into and out
of west coast ports, and so long as U.S. labor relations law continues
to treat the ILWU as the exclusive bargaining representative of all
west coast dockworkers. However, if either condition should change, the
Plan's contribution base would be at risk. In addition, the Plan will
be less robust than it was in 1998, and the economic pressures that
plan funding will place on contributing employers (and, indirectly, the
workforce) will increase dramatically after 2009--which is exactly the
point when the Plan falls to its lowest level of funding. In view of
the foregoing, approval of the amendment should be conditioned, for
each of the plan years commencing from July 2003 through July 2012,
upon the Plan's compliance with the enhanced reporting, disclosure and
certification requirements.
Wherefore, the following amendments are approved to the enumerated
sections of the ILWU-PMA Pension Agreement:
In paragraph 4.4042(c)(iv), the ``Accelerated Funding Schedule''
shall be 65% for each plan year commencing from July 2002 through July
2007; and rising by three percent each year thereafter until it reaches
80% in the plan year commencing July 1, 2012, remaining at 80% for all
years thereafter;
In paragraph 4.4042(c)(vi), the table is amended to state a Funding
Percentage of 65% for each plan year commencing from July 2002 through
July 2007; and rising by three percent each year thereafter until it
reaches 83% in the plan year commencing July 1, 2013, and then
increasing to 85% for the plan year commencing July 1, 2014, and all
subsequent years;
Paragraph 4.402(c)(v) may be amended to allow for revisions of
certain actuarial assumptions as set forth in the experience study and
recommendation of the plan actuary in January 2003, but such revised
assumptions may apply only to plan years commencing after June 30,
2002; provided, however,
That the foregoing amendments are approved subject to the following
reporting requirements;
(1) The Plan shall provide PBGC with copies of all actuarial
valuation reports, as well as drafts of such reports, within 5 business
days after the reports or drafts are received by any of the Plan, its
trustees, the ILWU or the PMA;
(2) The Plan shall provide PBGC with copies of all independent
auditor's reports and financial statements, as well as drafts thereof,
within 5 business days after the reports or drafts are received by any
of the Plan, its trustees, the ILWU or the PMA; and
(3) The annual actuarial certification heretofore filed by the Plan
with PBGC shall, for all plan years that commence after July 1, 2003,
be filed with PBGC no later than 90 days after the close of the plan
year (unless this period is extended by PBGC for good cause shown), and
this certification shall state whether the contributions received by
the Plan are at least equal to the amounts listed under column 4
(headed ``Code Funding'') of Table 3 of this Notice of Approval.
Based on the facts of this case and the representations and
statements made in connection with the request for approval, PBGC has
determined that the Plan Amendment modifying special withdrawal
liability rules (1) will apply only to an industry that has
characteristics that would make the use of special withdrawal liability
rules appropriate, and (2) will not pose a significant risk to the
insurance system. Therefore, PBGC hereby grants the Plan's request for
approval of a plan amendment modifying special withdrawal liability
rules, as set forth herein. The Plan must agree to certify annually its
compliance with the conditions set forth at 49 FR 6043 and 63 FR 27774,
as modified by this Notice of Approval, with such certification to be
filed within the deadlines established in this Notice of Approval.
Should the Plan wish to again amend these rules at any time, PBGC
approval of the amendment will be required. In the absence of
extraordinary circumstances, the PBGC will not approve any amendments
with retroactive effect.
Issued at Washington, DC, on this 31st day of July, 2003.
Steven A. Kandarian,
Executive Director, Pension Benefit Guaranty Corporation.
[FR Doc. 03-19956 Filed 8-5-03; 8:45 am]
BILLING CODE 7708-01-P