Proposed Ban on Shutdown Benefits Raises Need For Alternatives

As part of its pension reform proposal, the Bush administration is seeking a ban on so-called “shutdown” pension benefits, and employers should start thinking about alternatives to offer unions during contract negotiations if the measure is passed, consultants and labor attorneys say.

These benefits, which are most common in the steel, tire, automotive and auto parts industries, are promised in employment contracts by companies in the event of a plant or division closure that displaces workers. The pension benefits are invaluable to workers who are too young to retire but too old to start a new job, experts say.

The benefits are a concern to the federal government because they cannot be prefunded under current laws. And by the time shutdown benefits are triggered, the company is often already in financial trouble, so the Pension Benefit Guaranty Corp., which insures private pensions, often winds up paying the pensions. The PBGC already is facing a $23.3 billion deficit, and in an apparent effort to limit further liabilities it has refused to pay out the benefits.

Observers say that a proposal for an all-out ban came as a bit of shock. “It’s surprising because the employees that are going to be affected by this will lose benefits, and typically the administration does not come out with proposals that obviously hurt some employees,” says Jan Jacobson, director of retirement policy at the American Benefits Council.

The shutdown-benefits controversy came to a head in 2002. That’s when the PBGC went up against the United Steelworkers by pre-emptively terminating four pension plans at Republic Technologies International, a Fairlawn, Ohio-based steel maker, says Tom Gigot, a partner at Washington, D.C.-based Groom Law Group who is representing the steelworkers in the case.

The agency projected that paying pensions to the estimated 2,500 workers would have cost it $170 million. The union filed suit against the PBGC and won at trial, but the decision was reversed in an appeals court last year. In March, the Supreme Court declined to hear the case, and the appellate decision stands.

Employers should now start figuring out what else they can offer up to unions if shutdown benefits are banned, pension experts say.

“From a union’s perspective, taking away the shutdown benefit is taking away something of value that will have to be replaced,” Gigot says. “I think their first choice would be an increase in the traditional side of the benefit formula rather than an increase in take-home pay.”

Jacobson, however, believes that employers should consider increasing severance packages for these workers.

Yet another option for employers is to work with Congress on a way to prefund shutdown benefits, says Bill Beyer, an attorney at Washington, D.C.-based Keighton & Ashner. Beyer is part of an American Bar Association task force that is working to help Congress analyze the issues involved with reforming the pension system.

Actuaries and members of Congress could develop a new type of vehicle that provides relief, Beyer says. Congress is concerned, however, that if it allows for prefunding of shutdown benefits, companies will use it to gain tax deductions.

“Maybe actuaries will be able to come up with a way of developing a funding formula that would appear to be not just an opportunity for tax deductions,” Beyer says. “I think it is worth it to be creative to find a way to cover the individuals that would be affected by a ban.”

—Jessica Marquez