Magazine article International Musician

New Pension Law Is a Plus for Defined Benefit Plans

Magazine article International Musician

New Pension Law Is a Plus for Defined Benefit Plans

Article excerpt

Note: Although I promised to provide further details this month concerning newly concluded Federation agreements in Symphonic Media and Motion Picture-TV Film, I will defer until March in order to clarify an avalanche of questions received about new pension fund legislation and its impact upon AFM-EPF. Thanks to Fund Counsel Anne Mayerson for her assistance in preparing this months column.

In December, Congress passed the Multiemployer Pension Reform Act of 2014. This legislation is not currently relevant for the American Federation of Musicians & Employers' Pension Fund (AFM-EPF) because it applies only to severely underfunded plans. The AFM-EPF is not severely underfunded.

Contrary to what you might have heard, the new legislation will help to protect the pensions of millions of Americans. Here's why:

Defined Benefit Plans: Basic Principles

There are two basic types of retirement plans. Under a "defined contribution" plan, the employer contributes (and/or allows the employees to contribute out of wages) a fixed amount of money to each employee's plan account That money is then invested. When the employee retires, he or she gets whatever is in the account; that is, the fixed contribution, plus investment earnings or minus investment losses.

By contrast, under a "defined benefit" plan, the employer contributes an amount of money required to pay a fixed benefit-the AFM-EPF fixed benefit provides a specified dollar amount per $100 of contributions. The age 65 benefit that has been earned at any particular point during an employee's career generally cannot be reduced by the plan or by the employer.

The Role of the Pension Benefit Guaranty Corporation

Federal law contains detailed rules to ensure that defined benefit plans have enough money over time to pay all of the benefits that have been earned. However, certain plans in extreme situations become insolvent because they are not able to satisfy these rules. In that case, the plan relies on the Pension Benefit Guaranty Corporation (PBGC) to pay a portion of the benefits.

PBGC is a federal government agency that serves as an insurance company for defined benefit plans. The PBGC is not funded by tax revenues, but by premiums paid to it by defined benefit plans; in return, the PBGC guarantees a portion of the benefits earned under each plan (the maximum guarantee for a participant in a multiemployer plan is just under $13,000 a year).

The guarantee can be only provided, however, so long as the PBGC remains a viable entity. Unfortunately, the PBGC is on shaky financial ground. Two recent studies, one by the PBGC itself and one by the federal government's General Accounting Office, conclude that the PBGC is likely to run out of money in the near future (the next 10-20 years) and that the insolvency of just two severely underfunded plans would almost entirely deplete its resources. PBGC says funds sponsored by the Electrical Workers and the Teamsters are most at risk.

Benefit Reductions Under the Recent Pension Legislation

The primary goal of the recent pension legislation was to give severely underfunded plans-which AFM-EPF is not-an opportunity to recover from the lingering effects of the economic turbulence of recent years, rather than letting them become insolvent and thereby jeopardizing the viability of the PBGC. …

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