Posted:
September 8, 2009
By Tom Bethel
National President
In August 2006, President Bush signed the Pension Protection Act into law. Despite its appealing name, the measure actually made it more difficult for traditional retirement plans to meet their commitments to participants. Among other things, the law effectively doubled the cost of defined benefit pension plans, under which participants earn monthly benefits based on wages and length of service.
At about the same time two years later, investment markets went into sustained freefall. By December 2008, the median funding status among defined benefit pension plans in the private and public sectors nationwide had fallen to 72 percent, compared to 94 percent in 2007. The data thus far suggest that the average funding level will plunge even further in 2009.
The collapse of the stock and bond markets in 2008 wiped out approximately 10 years’ worth of gain by defined benefit pension plans, but the plans’ liabilities were left standing — assets held by defined benefit pension plans in 2008 lagged liabilities by a staggering $310 billion.
The difficulties experienced by all single and multiemployer defined benefit pension plans have since been aggravated by a severe and seemingly relentless economic recession and by persistent market instability.
The impact on AMO
Like all other traditional retirement plans, the defined benefit American Maritime Officers Pension Plan suffered in this climate. The AMO Pension Plan — funded at 92 percent in 2007 — lost $100 million on Wall Street while coping with the unrealistic, unreasonable and uncompromising requirements of the Pension Protection Act.
As a consequence, the AMO Pension Plan on October 1 will reach the “critical” point and operate in the “red zone” as defined and categorized in the Pension Protection Act. By the law’s standard, the AMO Pension Plan will be funded at 65 percent or less as of October 1. To put it another way, the Plan will be underfunded by at least 35 percent.
The word “underfunded” has an ominous ring to it, but United States Comptroller General David M. Walker put it in clear and reasoned perspective in testimony before the Senate Finance Committee in June 2005.
“An underfunded plan does not necessarily indicate that the sponsor is unable to pay current benefits,” Walker explained in a footnote to his prepared statement. “Underfunding means that the plan does not currently have enough assets to pay all accrued benefits, the majority of which will be paid in the future, under the given actuarial assumptions about asset rate of return, retirement age, mortality and other factors that affect the amount and timing of benefits.”
As a “critical” plan operating in the “red zone” under the Pension Protection Act, the American Maritime Officers Pension Plan will meet all of its current obligations. All deep-sea, Great Lakes and inland waters retirees and survivors now on the pension roll will continue to receive their monthly benefits with no interruption, and these benefits will not be reduced.
But federal law will prohibit lump-sum benefit distribution by the AMO Pension Plan to qualified participants while the Plan is in the “red zone.” The Internal Revenue Service, which developed many of the regulations resulting from the pension law, frowns upon lump-sum retirement benefits in general because the IRS believes the pay-outs undermine a defined benefit plan’s ability to provide monthly benefits (annuities).
With this one exception, the AMO Pension Plan will operate as it always has through December 2009.
For example, individuals who qualify for “20 and out” monthly pension benefits before the end of this year and who wish to retire can do so, regardless of age. This is important because the IRS objects to 20-year retirement below age 55 in all pension plans, regardless of the plans’ respective standings under the Pension Protection Act.
On January 1, 2010, the American Maritime Officers Pension Plan will be frozen — participants will earn pension credits beyond January 1, but only for vesting and benefit eligibility purposes. Wages earned after January 1, 2010, will not be considered in the calculation of monthly pension benefits. The joint union-employer trustees of the AMO Pension Plan believe this will help stabilize funding significantly, and they expect that this will be a temporary measure.
Meanwhile, the trustees will meet during the week of October 5, 2009, to consider a proposed “rehabilitation plan” as required under the Pension Protection Act. The rehab strategy would address underfunding in the American Maritime Officers Pension Plan, and it would require difficult negotiation between our union and all deep-sea, Great Lakes and inland waters vessel operating employers. The “rehabilitation plan” would have to be written into a minimum of 70 percent of our union’s deep-sea, Great Lakes and inland waters collective bargaining agreements before it could go into effect.
The required “rehabilitation plan” would, among other things, take up the issue of retirement from sea after 20 years, regardless of age — assuming, of course, that the IRS provides the requested clarification of its position on this specific benefit. If it becomes apparent at some point that the benefit cannot be restored under IRS restrictions — even with adequate funding — the AMO Pension Plan will notify all participants in advance so that each individual can decide between remaining at work at sea or retiring.
A practical, permanent solution
I have served as a trustee of the AMO Plans for 20 years, and I have never seen conditions as dire as those that combined to cripple the AMO Pension Plan in the last two years. There is no fault among the Plan’s trustees, administration, actuaries or investment managers — the steep losses here were unavoidable and reflective of a nationwide retirement crisis brought on by excessive federal regulation, the market meltdown and the deep-dive downturn in the economy.
As national president of American Maritime Officers, and as alternating chairman and secretary of the AMO Pension Plan Board of Trustees, I cannot simply let the funding and rehabilitation strategy run its course, hope for the Plan’s recovery in my lifetime and trust that the AMO Pension Plan will never again be swept by unpredictable, uncontrollable conditions comparable to those that brought the Plan to its present point.
Our union needs a realistic and responsible long-term approach to retirement security, a sensible alternative to the inherently perilous defined benefit pension plan, which can no longer be seen as a reliable retirement resource. A defined benefit pension plan is much too dependent upon assumptions (interest rates and mortality rates, for example) that can no longer be made accurately, and is much too vulnerable to business failure, job loss and other economic hazards.
In this context, I have developed a plan that would begin by acknowledging a tough truth: no defined benefit pension plan, including the AMO Pension Plan, can expect to regain what it lost in investment markets in the last two years — and, as the trend of the last 30 years indicates, the increasingly expensive defined benefit pension plan could be in its last throes.
Under this plan, all of the AMO Pension Plan’s existing liabilities would be satisfied over an extended period, and no new liabilities would be accepted.
In time, the defined benefit AMO Pension Plan would be replaced by a defined contribution plan that would cost less, be subject to less government regulation, restriction and intervention, require little or no guesswork (educated or not), operate without the pitfalls that mar defined benefit retirement plans, give participants direct control over how and where the money is invested, and enhance the competitive standings of AMO employers.
This new plan would be in addition to the AMO 401(k) Plan and the AMO Pension Plan Money Purchase Benefit, both of which are defined contribution plans. I cannot discuss the details or the transition or funding mechanics here, but AMO Plans Executive Director Steve Nickerson, AMO Vice President at Large Mike Murphy and I are already hitting vessels to discuss this with AMO members and applicants for AMO membership, and there will be extensive written communications to AMO families from me and from Steve as developments occur.
This initiative represents a practical, permanent solution to a worsening problem, and I am confident that AMO members everywhere will see it that way. It will not be easy at first, but innovation and security never are.
AMO retirement security: in time, a much better way
By Tom Bethel
National President
In August 2006, President Bush signed the Pension Protection Act into law. Despite its appealing name, the measure actually made it more difficult for traditional retirement plans to meet their commitments to participants. Among other things, the law effectively doubled the cost of defined benefit pension plans, under which participants earn monthly benefits based on wages and length of service.
At about the same time two years later, investment markets went into sustained freefall. By December 2008, the median funding status among defined benefit pension plans in the private and public sectors nationwide had fallen to 72 percent, compared to 94 percent in 2007. The data thus far suggest that the average funding level will plunge even further in 2009.
The collapse of the stock and bond markets in 2008 wiped out approximately 10 years’ worth of gain by defined benefit pension plans, but the plans’ liabilities were left standing — assets held by defined benefit pension plans in 2008 lagged liabilities by a staggering $310 billion.
The difficulties experienced by all single and multiemployer defined benefit pension plans have since been aggravated by a severe and seemingly relentless economic recession and by persistent market instability.
The impact on AMO
Like all other traditional retirement plans, the defined benefit American Maritime Officers Pension Plan suffered in this climate. The AMO Pension Plan — funded at 92 percent in 2007 — lost $100 million on Wall Street while coping with the unrealistic, unreasonable and uncompromising requirements of the Pension Protection Act.
As a consequence, the AMO Pension Plan on October 1 will reach the “critical” point and operate in the “red zone” as defined and categorized in the Pension Protection Act. By the law’s standard, the AMO Pension Plan will be funded at 65 percent or less as of October 1. To put it another way, the Plan will be underfunded by at least 35 percent.
The word “underfunded” has an ominous ring to it, but United States Comptroller General David M. Walker put it in clear and reasoned perspective in testimony before the Senate Finance Committee in June 2005.
“An underfunded plan does not necessarily indicate that the sponsor is unable to pay current benefits,” Walker explained in a footnote to his prepared statement. “Underfunding means that the plan does not currently have enough assets to pay all accrued benefits, the majority of which will be paid in the future, under the given actuarial assumptions about asset rate of return, retirement age, mortality and other factors that affect the amount and timing of benefits.”
As a “critical” plan operating in the “red zone” under the Pension Protection Act, the American Maritime Officers Pension Plan will meet all of its current obligations. All deep-sea, Great Lakes and inland waters retirees and survivors now on the pension roll will continue to receive their monthly benefits with no interruption, and these benefits will not be reduced.
But federal law will prohibit lump-sum benefit distribution by the AMO Pension Plan to qualified participants while the Plan is in the “red zone.” The Internal Revenue Service, which developed many of the regulations resulting from the pension law, frowns upon lump-sum retirement benefits in general because the IRS believes the pay-outs undermine a defined benefit plan’s ability to provide monthly benefits (annuities).
With this one exception, the AMO Pension Plan will operate as it always has through December 2009.
For example, individuals who qualify for “20 and out” monthly pension benefits before the end of this year and who wish to retire can do so, regardless of age. This is important because the IRS objects to 20-year retirement below age 55 in all pension plans, regardless of the plans’ respective standings under the Pension Protection Act.
On January 1, 2010, the American Maritime Officers Pension Plan will be frozen — participants will earn pension credits beyond January 1, but only for vesting and benefit eligibility purposes. Wages earned after January 1, 2010, will not be considered in the calculation of monthly pension benefits. The joint union-employer trustees of the AMO Pension Plan believe this will help stabilize funding significantly, and they expect that this will be a temporary measure.
Meanwhile, the trustees will meet during the week of October 5, 2009, to consider a proposed “rehabilitation plan” as required under the Pension Protection Act. The rehab strategy would address underfunding in the American Maritime Officers Pension Plan, and it would require difficult negotiation between our union and all deep-sea, Great Lakes and inland waters vessel operating employers. The “rehabilitation plan” would have to be written into a minimum of 70 percent of our union’s deep-sea, Great Lakes and inland waters collective bargaining agreements before it could go into effect.
The required “rehabilitation plan” would, among other things, take up the issue of retirement from sea after 20 years, regardless of age — assuming, of course, that the IRS provides the requested clarification of its position on this specific benefit. If it becomes apparent at some point that the benefit cannot be restored under IRS restrictions — even with adequate funding — the AMO Pension Plan will notify all participants in advance so that each individual can decide between remaining at work at sea or retiring.
A practical, permanent solution
I have served as a trustee of the AMO Plans for 20 years, and I have never seen conditions as dire as those that combined to cripple the AMO Pension Plan in the last two years. There is no fault among the Plan’s trustees, administration, actuaries or investment managers — the steep losses here were unavoidable and reflective of a nationwide retirement crisis brought on by excessive federal regulation, the market meltdown and the deep-dive downturn in the economy.
As national president of American Maritime Officers, and as alternating chairman and secretary of the AMO Pension Plan Board of Trustees, I cannot simply let the funding and rehabilitation strategy run its course, hope for the Plan’s recovery in my lifetime and trust that the AMO Pension Plan will never again be swept by unpredictable, uncontrollable conditions comparable to those that brought the Plan to its present point.
Our union needs a realistic and responsible long-term approach to retirement security, a sensible alternative to the inherently perilous defined benefit pension plan, which can no longer be seen as a reliable retirement resource. A defined benefit pension plan is much too dependent upon assumptions (interest rates and mortality rates, for example) that can no longer be made accurately, and is much too vulnerable to business failure, job loss and other economic hazards.
In this context, I have developed a plan that would begin by acknowledging a tough truth: no defined benefit pension plan, including the AMO Pension Plan, can expect to regain what it lost in investment markets in the last two years — and, as the trend of the last 30 years indicates, the increasingly expensive defined benefit pension plan could be in its last throes.
Under this plan, all of the AMO Pension Plan’s existing liabilities would be satisfied over an extended period, and no new liabilities would be accepted.
In time, the defined benefit AMO Pension Plan would be replaced by a defined contribution plan that would cost less, be subject to less government regulation, restriction and intervention, require little or no guesswork (educated or not), operate without the pitfalls that mar defined benefit retirement plans, give participants direct control over how and where the money is invested, and enhance the competitive standings of AMO employers.
This new plan would be in addition to the AMO 401(k) Plan and the AMO Pension Plan Money Purchase Benefit, both of which are defined contribution plans. I cannot discuss the details or the transition or funding mechanics here, but AMO Plans Executive Director Steve Nickerson, AMO Vice President at Large Mike Murphy and I are already hitting vessels to discuss this with AMO members and applicants for AMO membership, and there will be extensive written communications to AMO families from me and from Steve as developments occur.
This initiative represents a practical, permanent solution to a worsening problem, and I am confident that AMO members everywhere will see it that way. It will not be easy at first, but innovation and security never are.