One of the nation's largest union pension funds plans on cutting retirement benefits by 40 percent moving forward despite its overall fiscal health.
The International Association of Machinists National Pension Fund announced that it will scale back retirement funds for workers. While the system has 89 percent of the money necessary to cover projected benefits, fund director Ryk Tierney said the Board of Trustees voted to declare the fund in the "red zone," a label applied to plans that are in danger of insolvency within seven years and only have a 65 percent funding rate. The red zone status allows retirement plan managers to cut benefits under a pension reform plan established by the Obama administration in 2014. IAM is using the declaration to put into place a rehabilitation plan.
"Voluntarily declaring red zone while the fund remains well funded at 89% allows the trustees to implement a plan to strengthen the funds financial future," Tierney said in an April YouTube announcement.
The rehabilitation plan will eliminate all early retirement subsidies moving forward and also force employers to chip in an additional 6 percent of wages to the fund. It will also change how benefits are calculated, moving away from a service time-based approach to a flat 1 percent of monthly contributions. This will lead to a steep decrease in benefit accruals for workers, but is necessary to protect the fund's future, according to Tierney.
"The default schedule means an average reduction in future accruals of 39 percent for participants," he said. "These benefit changes and additional employer contributions are designed to strengthen the financial health of the fund."
The rehabilitation plan will be implemented in the wake of a nepotism scandal at the fund. In 2016, union administrators agreed to pay back $200,000 that it had taken from the system to settle a conflict of interest case following a Labor Department investigation. It was forced to pay $40,000 penalty to address accusations of "spending and permitting others to spend fund assets lavishly on unnecessary trips, parties and extravagant food, wine and accommodations." Union officials attempted to reassure members and retirees that their money was well taken care of despite the scandal by pointing to the system's status, which at that time was "close to 100 percent funded, making it the healthiest of the healthy."
Representatives for the pension fund did not return requests for comment.
More than 300,000 workers are enrolled in the multi-billion-dollar fund. The plan will only apply to future retirement benefits. Current retirees will not see benefits cut and the cuts will not apply to those benefits already accrued by younger workers. The union sent notices to employees informing them of the decision. It blamed the stock market for the scaling back of future benefits, which it said would "take advantage of tools … to implement a plan to solidify the fund's financial position."
"As a result of a challenging investment environment and the decline of the Fund's credit balance, the IAM National Pension Fund Board of Trustees has made the difficult but important decision to voluntarily elect to place the fund in the Red Zone for 2019," an April 26 letter obtained by the Washington Free Beacon says. "The Trustees have always acted prudently to maintain the long-term financial health of the Fund and provide core retirement benefits."
The plan changes are scheduled to go into effect on Sept. 1.