In a mutual effort to improve a Taft-Hartley multiemployer plan's funded status, the employers and the union had agreed in May 2006 on a contract with significant annual contribution increases extending into 2009.

Then on August, 17, 2006, the Pension Protection Act of 2006 (PPA) was enacted.

Under PPA rules, this plan would be considered in critical status, or in the "red zone." The trustees of a plan in critical status are required to work with their actuary to develop optional "rehabilitation" plans that will allow the actuary to certify that the plan is projected to emerge from critical status.

The rehabilitation plans are then presented to the bargaining parties. If the bargaining parties do not agree on a rehabilitation plan within a short timeframe, automatic 5% and 10% contribution increases are imposed—in this case, above the large increases the parties had just negotiated. These mandated increases remain in effect until the parties adopt a rehabilitation plan. (If the parties failed to agree on a rehabilitation plan by the end of the current bargaining agreement, a default rehabilitation plan would go into effect.)

In this situation, the employer and the union agreed that they wanted to avoid the additional, mandated 5% and 10% contribution increases at all costs, given the difficult bargaining process the parties had recently concluded and the significant contribution increases already agreed upon.

Exploring the alternatives

The Milliman consultant reviewed the options available under PPA and presented several alternatives to the plan trustees. The plan offered a generous unreduced early retirement benefit, which was resulting in the loss of experienced workers at young ages, a fact that displeased both the union and the employers. An actuarial study indicated that replacing the unreduced early retirement benefit with one that provided reduced early retirement benefits would actually bring the plan from "red zone" into "green zone," or compliance, without the need for any contribution increases beyond those already negotiated. (Before PPA, the generous early retirement benefits could not be taken away on benefits already earned, but PPA now allows for this change for critical status plans.)

Under PPA, the trustees are permitted to change early retirement rules (and modify certain other benefits that would otherwise be protected) only if a plan is critical, and only for retirements that occur after the plan notifies participants.

The trustees acted quickly and directed Milliman to issue a PPA certification that the plan would become critical under its current structure. This allowed the plan to send out notices in advance of the PPA effective date indicating that when the plan fell under PPA, the trustees would eliminate unreduced early retirement for all retirements after the notice date. This step allowed the trustees to close the door on future liability for unreduced early retirement benefits.

Two months later, when PPA became effective, the trustees retained Milliman to develop additional rehabilitation plans. Two plans were selected. One involved the change to early retirement benefits described above; the other involved significant contribution increases.

Working quickly brought the plan out of critical status

The actuarial studies were completed quickly, so all required actions were done within the PPA deadlines and the 5% and 10% contribution increases were avoided. The trustees adopted the rehabilitation program that removed the unreduced early retirement benefit and the plan was subsequently approved by the bargaining parties and came out of critical status. As well, the trustees were able to remove a provision that the union felt was causing its most valuable members to exit early.