Plan Merger - What are the issues?

[AndyH]

Sponsor has four DB plans: 3 frozen union plans and one active non union plan with no HCEs (hourly only).

Sponsor wishes to consider merging them as a cost cutting move. The plans have the same major provisions (NRA, normal form, optional form, death benefit). Three are funded about 75-80% on CL basis (pre-2006 rates), one is funded at 92%. All are well over 100 participants.

None of the plans are funded on "termination basis" using lump sum methodology or on an annuity basis using any realistic discount rate, which seems to require mainenance of termination priority classification data, whatever that might entail.

Are there any major pitfalls to merging plans in this situation?

Is the termination priority data maintenance problematic?

I can see possible shifts in 412(l) levels being a possible issue. Others?

[Effen]

One issue off the top is the union. Are they three seperate agreements? Are they three seperate unions? Doesn't he need union approval to merge the plans?

Negotiations could become more complex if the union wants to know how well funded status of "their" plan. How is the employer going to negotiate if they don't really know how much a particular benefit formula and employee group is costing them? You may find yourself doing seperate valuations anyway, even though they are all one plan. Also, since they will have a right to the valuation report, I hope all the benefits are all comparable, otherwise he will start hearing a lot more about what the other guys are getting. The potential head aches can go a long way in offsetting any potential admin savings.

If I remember right, you don't really need to do the list, you just need to maintain the data necessary to prepare the lists if the plan should terminate during the next X years. I would hope they maintain this type of data anyway.

[AndyH]

That is a good point to consider. I would not have thought that the employer would need union approval as to the plan structure, just what is being provided. The contracts that I have seen over the years have always been unspecific about the hows but that doesn't mean they all are.

But certainly that should be looked at.

In this case the union actives are dwindling so I don't think there will be future CBA's to deal with, or issues with benefit levels. The union plans will all cover exclusively inactives soon. But actually you are right; the one active group better have equal or better benefit levels or there could be PR issues.

Thanks for the comments.

[david rigby]

I agree with Effen's points. If a union plan is "stand alone", it is very unlikely that any changes are permitted without negotiation. The "dwindling" comment may also be a red flag, at least with respect to long term prospects for getting the plan(s) fully funded. Does the sponsor have a plan for doing so? expect to have the money? The sponsor's negotation position with respect to one union may be enhanced, but diminished with respect to another union.

(Another example of why the ABO/PVAB should be fully funded at all times! OK, I'll get down off my soapbox.)

If the plans do not have the same plan year, merging will probably mean giving someone extra vesting and/or credited service for a short plan year.

You may also wish to review the "pension reform" proposals to consider what could happen in 2007 and beyond.

[AndyH]

Thanks for the comments. I would welcome opinions from attorneys as well. I am having a bit of trouble with the need to negotiate the source of the benefits rather than the benefits themselves. Probably just my lack of knowledge in this area but the contracts I have seen say very little about pension benefits except the basic formula and some plan highlights. Is the document some sort of implied contract?

p.s. From what I've learned from experience of others, Effen and pax's comments are right on. Thank you.