Pension Benefit Reduction Plan Explained

March 3, 2020

Ray Hair  -  AFM International President

As many of you know, on December 30, 2019, the AFM-EPF Trustees filed an application to reduce benefits under the Multiemployer Pension Reform Act (MPRA). The decision was reached after the trustees had engaged in more than two years of difficult discussions. The reductions are projected to allow the Fund to avoid insolvency and preserve a meaningful benefit for Fund participants and their beneficiaries. Far more drastic benefit reductions would result if the Fund were to become insolvent.

More work is needed in order to strengthen the Fund, particularly by bargaining improvements in employer contributions into the Fund, as the Federation has done over the past several years, and by earning good investment returns, as we have since the 2008-2009 financial crisis—an average annual return of nearly 9%. But the benefit increases that were adopted repeatedly through the 1990s and other generous benefit features provided by the Fund have ultimately proven unaffordable after the 2001 dot-com bubble burst and the 2008-2009 financial crisis. This has left us no alternative but to reduce benefits in order to keep the Fund solvent for future generations of participants.

The MPRA application is a very long and complex document, running over 1,500 pages. You can review it on the US Treasury website at www.treasury.gov/services/Pages/American-Federation-Of-Musicians-And-Employers-Pension-Fund.aspx, but in this month’s column, I will summarize the main features of the proposed benefit reductions and answer some questions we have received from a number of participants.

There are three underlying principles in our proposed reduction plan: level the playing field, protect the $1 multiplier, and minimize benefit reductions as much as possible.

Removing the Subsidies and Other Costly Features

The first principle involves leveling the playing field by reducing costly benefits and features of the plan that are richer than the regular pension benefit payable at age 65. These include the early retirement subsidy and certain other generous plan features that the trustees considered to have the same effect as subsidies. The trustees decided that the fairest way to distribute the reductions was first to eliminate the subsidies and other costly features that are not applicable to all participants. That allowed us to minimize the reductions to multipliers other than the $1 multiplier, which we decided to protect, without any reduction.

As we have informed participants, the flat percentage cut to the multipliers above $1 was 15.5%. If we had not removed the early retirement subsidy (which only those who started to collect before June 2010 have been eligible to receive), the flat percentage cut for multipliers above $1 would have been 17.3% instead of 15.5%. Since the regular pension benefit—the age 65 benefit—is the Fund’s core promise, we determined that it was fair to protect that to the maximum extent possible.

There have been lots of questions about the early retirement subsidy. An early retirement benefit is “subsidized” if it is not reduced as low as the actuarial equivalent amount that would cost the plan the same as the regular pension benefit payable at age 65 over the expected lifetime of a participant. Because the benefit begins earlier, it is payable for a longer period of time and, over thousands of participants, the costs quickly become significant. And, because the money is being paid earlier, the Fund cannot earn investment income for those years prior to normal retirement age.

For Benefit Period A (through 12/31/2003) at age 55, the multiplier was $2.33 for retirements before June 2010, while the unsubsidized multiplier that went into effect for retirements on and after June 1, 2010 was only $1.70. The $2.33 multiplier is subsidized because it is 37% higher than the $1.70 multiplier. This means that the early retirees who started collecting before June 2010 are receiving more than the actuarial value of their age-65 benefit.

Like many other Taft-Hartley funds, the AFM-EPF has offered a subsidized early retirement benefit since at least 1972. However, the Fund can no longer afford this subsidy. The trustees also determined it would be unfair to continue this subsidy for those who are receiving it and who retired before June 2010 because it was already taken away from everyone else, even those who worked prior to 2003 while the subsidy was in effect, if they did not retire before June 2010. Moreover, those who will lose their early retirement subsidy by the 2021 effective date of the change if the application is approved will have already received the subsidized early retirement benefit for 10 years, and in some cases many more years. The Fund is not taking back that “excess” value. The trustees are very aware that this change, as well as other changes described below, will adversely affect the retirement benefits for a number of participants, but we believe that eliminating subsidies is the most equitable way to distribute the benefit reductions.

The proposed reduction plan also removes certain other generous, subsidy-like benefit features in order to reduce benefit costs, help preserve the $1 multiplier, and minimize the flat percentage reduction. The two most prevalent and expensive are the re-retirement benefit and the re-determination benefit.

The re-retirement benefit is the additional benefit participants earn if they retire before age 65 and then return to work. It is a very unusual benefit for a pension plan. Under existing rules, when such a retiree reaches age 65, the total benefit is recalculated as if the individual were first retiring at age 65, using the age-65 multiplier for all benefits. That amount is then reduced to reflect the early retirement benefits actually paid to the person during the years before age 65. The existing methodology produces an increased benefit that is like a subsidy because it provides a larger re-retirement benefit when compared to the benefit based solely on the new contributions earned during post-retirement employment.

If the proposed MPRA application is approved, re-retirement benefits would be calculated based only on the contributions earned after the early retirement pension begins, until age 65. For virtually all musicians not yet in pay status, the re-retirement benefit for service in and after June 2010 will use the $1 multiplier for contributions credited after the person’s early retirement through age 65, which amount will be added to the amount of the early retirement benefit, and adjusted for the forms of benefit selected.

Another costly benefit that would be modified if the application is approved is the re-determination benefit. The re-determination benefit is the additional benefit that a musician earns by working in covered employment after age 65 and after starting to collect a pension. Currently, the re-determination benefit is based on contributions received in the prior calendar year, reduced by the value of all re-determination benefits received in the year before that. Many pension plans do not permit participants to receive pension benefits while also earning additional pension credit. Under the proposed MPRA suspension, participants will still be able to return to work after age 65 while receiving their pensions, but their re-determination benefits will be offset by the total amount of all benefits already received from the Fund, rather than just the re-determination benefits in the year before. If the application is approved, current re-determination benefits will be reduced to $0, and re-determination benefits after January 1, 2021 will likely not result in any additional accruals.

Protecting the $1 Multiplier

The trustees concluded that the fairest way to design the proposed reduction plan was to protect the $1 multiplier from any reduction. We believe this is of paramount importance in order to maintain Fund support from active participants—those who are still employed and earning contributions but not yet retired. We know that the $1 multiplier, which has been in effect since 2010, is not a rich benefit. But it can provide a meaningful benefit payable over a lifetime starting at age 65. We also know that further reductions to this already reduced amount would jeopardize not only ongoing contributions, but also increases to contributions, which are critically important to the Fund. Eliminating the subsidies and the costly features that are effective subsidies helped us maintain this basic benefit.

Minimizing the Flat Percentage Reduction

After eliminating the subsidies, the central feature of the proposal is a flat 15.5% reduction to all multipliers other than the $1 multiplier. Each of the higher, pre-2010 multipliers would be reduced by 15.5%, although various statutory protections apply to different participants, resulting in either no reductions for some participants or reductions for many that amounted to less than 15.5% in total.

Benefit estimate statements were mailed to all participants on January 6. These statements provide participants with current and estimated future reduced benefits, if the MPRA application is approved and plan reductions become effective. We know that the information included on the statements does not provide the detailed calculation of your estimate. If you wish to receive a statement that will include all calculation details, you can call the Fund office at 212-284-1311 and request a detailed statement. When your detailed statement is available, it will be posted to the benefit estimate icon in the registered participant’s portal on the plan’s website. You will be advised by email that it is available or you can request a copy to be sent in the mail to you. Fund representatives will walk you through it and help you understand the detailed calculations.

Removing the subsidies is painful, and will be difficult for many participants, but the regular pension benefit, that is, contributions from the $1 multiplier payable at age 65, is the core promise of the Fund. We believe it would be unfair to reduce that benefit or to reduce the other multipliers even more in order to maintain the early retirement subsidy and other costly features that the Fund can no longer afford.

No Easy Choices

The trustees agonized over decisions that we knew would affect the lives and families of thousands of participants, and we struggled over how to make those decisions in a fair and equitable manner. The trustees capped the MPRA reduction so that, even with the elimination of the subsidies, no individual benefit would be reduced more than 40%, and, as it turned out, the cap applied to only 0.35% of participants. The law provides protection for participants who receive smaller benefits, for disability pensions, and for people who are over 75 years of age.

The vast majority of the plan’s participants had either no reduction or a smaller than 20% reduction.

Here is a breakdown of numbers of participants and percentage of benefit reductions: The total number of Fund participants is 50,782. Of that number, 27,099 either earned all their credit at the $1 multiplier or were protected by law and received no benefit reduction. This meant that the money to address the problem of fund sustainability had to come from the remaining 23,683 participants. Of those, 11,483 received a reduction of 0%-9%; 11,270 received a reduction of 10%-19%; 374 received a reduction of 20%-29%; 376 received a reduction of 30%-39%; and 180 participants received a reduction of 40%. 

Finally, given the choice of preserving the Fund or letting it become insolvent, the trustees chose to propose a benefit reduction plan that adjusts benefits in the fairest way possible under the circumstances to allow the Fund to continue to serve past, current, and new participants into the foreseeable future.

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