| Print | Close Window | AMO Currents - Posted: July 9, 2009 |
AMO and the national retirement crisis
National President
Editor’s note — this article supplements information posted recently on AMO Currents by Steve Nickerson, executive director of American Maritime Officers Plans, concerning the AMO Pension Plan. This article provides brief but essential background on factors affecting the AMO Pension Plan. AMO National President Tom Bethel is alternating chairman and secretary of the joint union-employer boards of trustees that govern the AMO benefit funds.
Like all pension plans in the private and public sectors nationwide, the American Maritime Officers Pension Plan is stressed by three separate but not unrelated harmful influences:
- A severe economic recession and declining waterborne trade in the United States and worldwide.
- The collapse of investment markets in 2008 and persistent market instability.
As I noted in a letter to all active and retired deep-sea, Great Lakes and inland waters members early this year, the defined benefit AMO Pension Plan suffered “steep losses in the stock and bond markets” in 2008, as did “all individual and institutional investors.” According to the Center for Retirement Research at Boston College, defined benefit pension plans nationwide lost an estimated $10 billion in investment markets last year. - Difficult new funding rules and benefit restrictions on defined benefit pension plans (in which participants earn retirement benefits based on wages and years of service) under federal law — specifically, the Pension Protection Act.
Signed into law by President Bush in August 2006, the 1,000-page Pension Protection Act was triggered in significant part by bankruptcies that left thousands of workers in the airline, steel and other industries without pensions.
The legislation was presented as a way to prevent or at least limit new strain on the Pension Benefit Guaranty Corporation (PBGC), which guarantees only 10 percent of earned retirement benefits provided by defined benefit pension plans, which are referred to more commonly as “traditional” retirement plans.
The PBGC — which is supported by premiums assessed on all single and multiemployer defined benefit pension plans, including the multiemployer AMO Pension Plan — was operating at a deficit in excess of $25 billion and anticipating another $108 billion in liabilities, according to a recent report in The Wall Street Journal.
The Pension Protection Act was also promoted as a way to strengthen remaining defined benefit retirement plans. But the law actually made it more difficult for these plans to meet their commitments to all participants by requiring — among other things — that the plans fund past service liabilities over 15 years instead of over 30 years, beginning in October 2008.
The consequences of the Pension Protection Act’s accelerated funding mandate include significantly higher costs of supporting defined benefit pension plans, higher consumer prices for goods and services manufactured or provided by companies bound by the requirement, the diversion by these companies of available funds from capital investment and other accounts to pension funds, and real risk of competitive failure by companies that provide defined benefit pension plans.
The Pension Protection Act — which could be referred to more appropriately as the “Pension Prevention Act” — also limited some retirement benefit options available under some plans, including the AMO Pension Plan. For example, the law discouraged lump-sum pension benefit distributions, and it upheld an Internal Revenue Service determination that “normal retirement age” is 55, regardless of length of service. The AMO Pension Plan now offers lump-sum benefits to qualified participants and normal retirement at 20 years, regardless of age.
Three weeks after the Pension Protection Act went on the federal books, several large companies — including DuPont, the chemical conglomerate — announced that they would “freeze” their defined benefit pension plans. When a pension plan is “frozen,” workers earn no additional pension income from that point.
“You’ll probably see a lot of companies freeze their plans” in response to the impractical and burdensome funding requirements of the Pension Protection Act, American Benefits Council Vice President Lynn Dudley told The Los Angeles Times in September 2006. “Nothing in this legislation served as an incentive for anyone to keep their plans — the American people should know that this is a real missed opportunity.” Another benefit analyst told the newspaper that, in their haste to “save defined benefit pension plans,” Congress and the President instead “accelerated their demise.”
Pension plan ‘zones’
The Pension Protection Act required defined benefit plans to project their funding needs over 7 to 10 years. The law also established three color-coded “zones” indicating a plan’s proximity to funding targets:
- Plans funded at 80 percent or higher are considered under the law to be sound, and they are in the “green” zone. In 2007, the AMO Pension Plan was funded at 92 percent.
- Plans funded at less than 80 percent but greater than 65 percent are said under the law to be “endangered,” and they are in the “yellow” zone.
- Plans funded at 65 percent or less are said under the Pension Protection Act to be “critical,” and they are in the “red” zone. Actuaries expect the AMO Pension Plan — which has not cut or altered benefits in place for many years — to be in the “red” zone by the beginning of fiscal year 2010 on October 1, 2009.
Otherwise, the AMO Pension Plan will operate as it has all along through December 31, 2009. Twenty-year pensions providing monthly benefits will be paid to eligible individuals who wish to retire by the end of this year, whether they are 55 years of age or not.
In January 2010, the AMO Pension Plan will be frozen, meaning that participants will continue to earn pension credits for benefit eligibility and vesting purposes only — money earned on or after January 1, 2010, will not be a factor in the calculation of monthly pension benefits. This will help stabilize funding, and the AMO Pension Plan anticipates that this will be a temporary measure.
The AMO Pension Plan will also develop a “rehabilitation plan,” which will consider — among other things — funding of the “20 and out” pension benefit, which the IRS considers a “subsidized” benefit when it goes to individuals younger than 55. This will involve difficult collective bargaining between our union and all deep-sea, Great Lakes and inland waters vessel operating employers.
Meanwhile, the AMO Pension Plan will ask the Internal Revenue Service to clarify its position on 20-year retirement below age 55. This would make it easier for the AMO Pension Plan administration, trustees, counsel, actuaries and staff to develop a lasting solution for what seems at this point to be a lasting problem.
Retirement security has emerged as the most important issue facing American Maritime Officers, which remains the largest and strongest union of U.S. merchant marine officers. It is also the most difficult issue to understand and address.
But my administration remains firm — anything that can be done within the law to bring greater peace of mind to all AMO members and their families on this front will be done, and all AMO members and their families will be kept informed along the way.
Until then, I ask that all deep-sea, Great Lakes and inland waters AMO members rely exclusively on AMO Pension Plan personnel for accurate information specific to their individual situations with respect to age, length of service and benefit eligibility. Each case is different, each case is unique, and each case requires direct attention that AMO officials and representatives cannot provide during membership meetings or aboard ship.
This is a nationwide crisis, and its impact on the AMO Pension Plan was inevitable, given the depth and strength of the recession, the market meltdown and a flawed federal law with unintended consequences. But our union and its benefit funds have endured crisis before, emerging most often with clarity, confidence and even greater strength, thanks to the patience and professionalism displayed routinely by AMO members in deep-sea, Great Lakes and inland waters trades. I have no doubt that AMO will pass this test as well.
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