NCCMP Update The Pension Protection Act of 2006

1. NCCMP UpdateThe Pension Protection Act of 2006 Presented to: Sheet Metal and Air Conditioning Contractors National Association 2006 Convention October 9, 2006 By: Randy G. DeFrehn Executive Director, nccmp

2. What is the NCCMP? • A non-partisan, non-profit advocacy organization Established in 1974 • Protect the interests of multiemployer Pension, Health and Training trust funds, participants and their sponsors • Advocate for plans with congress • Interface with federal agencies with jurisdiction over multiemployer plans • Intervene with Federal Courts

3. Who Are the NCCMP Members? • Approximately 200 groups representing over 600 individual funds • Membership spans 26 International Unions in virtually every part of the economy with multiemployer plan benefit structures

5. Today’s Focus • Background of Problem • Comparison of Single vs. Multiemployer Rules • Multiemployer Funding Rules • New Categories of Funding • Tighter Rules for Well Funded Plans • Additional Spending Discipline for Plans beginning to see Funding levels erode • Relief for most troubled plans from potentially devastating contribution and excise taxes, plan failures and low guaranteed benefits for participants

6. Background and Problem Definition

7. Sources of Plan Funding(Mature Plans)

8. ERISA Rules forPension Plan Funding • Funding Range • Minimum Required Contributions • Maximum Deductible Contributions • Funding Standard Account • Credit Balance

9. Funding Range Exceeds Max Permissible Range Below Minimum

10. Hypothetical FundBeginning Assets - 1999 $1 Billion Total Required Income $87 Mil • Assumptions: • Active Employees 4,000 • Average Hours Worked 1,500 • Contribution Rate $2.00 • Rate of Return on Investments 7.50%

11. Normal Funding ConditionsAssets $1billionActual Return 7.5%(in Millions) (4,000 X 1,500 X $2) ( $1 bil. X 7.5%)

12. What if The Assumptions Aren’t Met?

13. Bull Market ImplicationsActual Returns 10%Assets $1 Billion( In Millions)

14. Consequences of Exceeding the Max • Contributions May Not Be Currently Deductible • Employers May Be Subject to Excise Taxes • What Are the Remedies?

15. Consequences of Exceeding the Max • Bargaining Parties may Decide to Suspend Contributions (“Contribution Holiday”) • Trustees must increase benefit levels to raise plan costs, making contributions fully deductible

16. Bear Market ImplicationsActual Returns 7.5%Assets $800 Million(In Millions) (@4,000 X 1,500 = $2.50 Per Hr.)

17. Consequences of Failing to Meet the Minimum • Sponsoring Employers must contribute amounts sufficient to meet the minimumEVEN ABOVE NEGOTIATED AMOUNTS • Sponsoring Employers Subject to Excise Taxes ranging from 5% to 100% • Trustees must pursue additional contributions like delinquencies

18. Consequences of Failing to Meet Minimum Funding • Potential Bankruptcy for some employers • Redistribution of shortfall among remaining employers – “Domino Effect” • Possible plan terminations • Benefit Reductions forALLparticipants to PBGC Guarantee levels

19. What to Do… • Administrative Options?? • Legislative Options • Pension Funding Equity Act of 2004 • Nothing for Multiemployer Plans • No Relief without Reform • Pension Protection Act of 2006

20. Pension Protection Act of 2006 The Process

21. Multiemployer Pension Plan Coalition: • Coalition of more than 50 Labor Organizations, Large Employers, Employer Associations and Plans • Includes All Construction Industry Unions and Employer Associations • Represents virtually all labor* & employer groups in the Multiemployer Universe • The International Brotherhood of Teamsters withdrew from the Coalition in December – See their website for Details

22. American Benefits Council American Federation of Musicians American Federation of Television and Radio Artists American Trucking Associations Associated General Contractors of America Associated Maintenance Contractors Bechtel Construction Company The Bituminous Coal Operators Association The Affiliated Unions of the Building and Construction Trades Department Carhaul D’Agostino Supermarkets, Inc. Food Marketing Institute Finishing Contractors Association International Association of Machinists International Council of Employers of Bricklayers & Allied Craftworkers International Union of Operating Engineers The Kroger Co. Laborers International Union of North America Mechanical Contractors Association of America Motion Picture Association of America Motor Freight Carriers The Newspaper Association of America National Association of Construction Boilermaker Employers National Electrical Contractors Association National Coordinating Committee for Multiemployer Plans National Roofing Contractors of America Office and Professional Employees International Union Pathmark Stores, Inc. The Printing Industries Association Recording Industry Assoc. of America Safeway Schnuck Markets, Inc. Sheet Metal & Air Conditioning Contractors’ National Association The Stop & Shop Supermarket Company LLC/Giant Food LLC SUPERVALU INC. NEA/The Association of Union Constructors United Brotherhood of Carpenters and Joiners of America United Food & Commercial Workers Union United Parcel Service (UPS) US Chamber of Commerce Washington International Group Yellow Roadway Corporation Multiemployer Pension Plans Coalition (Partial List)

23. Reform Proposal Designed to Prevent Disintegration of Multiemployer Plans • Funding Deficiencies could lead to employer bankruptcies, voluntary withdrawals and plan failures • Plan failures will result in significant participant benefit reduction to PBGC minimums for all participants and retirees

24. Reform Proposal Designed to Prevent Disintegration of Multiemployer Plans • Proposal represented compromise negotiated over approximately 8 months among significant stakeholders from both labor and management • Was not a proposal that would have been independently endorsed by either without the agreement of both

26. Pension Protection Act of 2006 The Content

27. Pension Protection Act (PPA) of 2006 • Most Sweeping Pension Legislation in more than 30 years • Imposes Major New Funding Rules • Changes rules for: • Single and Multiemployer Defined Benefit Plans • Defined Contribution Plans • Disclosure • Investment Advice and Fiduciary Requirements • Cash Balance or “Hybrid” Plans

28. Comparison: Multiemployer vs.Single Employer Pension Reform Rules

29. Comparison: Multiemployer vs.Single Employer Pension Reform Rules (cont.)

30. Pension Protection Act of 2006 Multiemployer Provisions

31. Pension Protection Act • Bold Structural Changes • Restores Trustee and Bargainers’ flexibility to salvage severely under funded plans • Protects normal retirement benefits at Normal Retirement Age • NO PANACEA – Tough Medicine to Protect Plans, Participants and Employers • Imposes a notion of “Shared Pain” • Traffic Light Analogy

32. For Well Funded Plans“Green Zone” • 70% of all plans • Tightens Amortization to 15 years for benefit improvements and assumption changes • Increases maximum deductible limits to 140% of previous limits • Eliminates 25% of Compensation Combined limits on contributions to defined benefit and defined contribution plans • Provides automatic access to 5 year Amortization Extensions • Must be within 10 years of Funding Deficiency • Must use plan’s assumed interest rate • Use of Shortfall no longer requires IRS OK (within limits)

33. Endangered Plans“Yellow Zone” • 20 - 25% of plans • Below 80% funded • Facing Funding Deficiency within 7 years • Actuarially Certified Status Must Be Disclosed to Stakeholders Within 90 days of Start of Plan Year • Requires Trustees to develop & Recommend to Bargaining Parties a “Funding Improvement Plan” (FIP) over next 240 days • Imposes hard funding benchmarks • one or more contribution schedules designed to improve the plan’s funded status by 1/3 over the Funding Improvement Period • Law Distinguishes between “Endangered” and “Seriously Endangered” (failing both criteria) regarding benchmarks (Improvement of1/5 over 15 years) as determined by the plan actuary

34. Endangered Plans“Yellow Zone” • Restricts Benefit Improvements not included in Funding Improvement Plan • While plan is in Yellow Zone Trustees may not accept bargaining agreements that: • reduce contributions • grant contribution holidays, or • exclude new hires • Interim steps required for Seriously Endangered Plans before adoption of FIP to delay funding deficiency and increase funded levels

35. Critical Status Plans“Red Zone” • 5 to10% of all plans – those most seriously at risk • Triggers related to Problems Stemming From: • Funding Deficiencies: within 4 years (5 years if below 65% funded) • Solvency Risk– Assets and income projected to be insufficient to meet benefit and expense obligations for at least 5 years (6 yrs if less than 65% funded); and • Demographic Risk - For plans with liabilities for retired and inactive vested participants that exceed those of active employees and: • Contributions for the year are insufficient to cover the plan’s normal cost plus interest on the unfunded liabilities; and • The plan faces a funding deficiency within the next 5 years

36. Critical Status Plans“Red Zone” • Notice of Status required to be sent to all Stakeholders • Employers required to pay surcharge of 5% of current Contribution Rate (moves to 10% if not re-bargained within one year) • Surcharge is non-benefit bearing and is disregarded for withdrawal liability purposes • Sanctions: • Excise Taxes Imposed if benchmarks are unmet by the end of the Rehab period of if no progress is made over 3 consecutive years • - may be waived if the failure was due to market forces beyond trustees’ Control • Benefit Restrictions imposed

37. Critical Status Plans“Red Zone” • Trustees required to develop “Rehabilitation Plan” with a contribution schedule for bargaining parties’ consideration designed to get plan out of Critical Status within Rehabilitation period (Generally about 10 yrs from next bargaining period for units covering 75% of covered participants) and defer future funding deficiencies for 10 more • Expedited dispute resolution process is available if Trustees fail to adopt the Rehab plan

38. Critical Status Plans“Red Zone” • Rehab plan to include at least one schedule (“Default Schedule”) to go to bargaining parties that stipulates benefit reductions needed to align liabilities and resources under current contribution rates • contribution rate increase Included if needed because plan cannot be achieved after cutting benefits to the maximum extent permitted under law

39. Critical Status Plans“Red Zone” • Other schedules may be permitted by the plan trustees. • If parties fail to adopt any permissible schedule, the default schedule will be implemented • Default schedule includes maximum benefit reductions and continuation of surcharges

40. Critical Status Plans“Red Zone” • “Adjustable Benefits” are: • “(i) benefits, rights, and features under the plan, including post-retirement death benefits, 60-month guarantees, disability benefits not yet in pay status, and similar benefits, • (ii) any early retirement benefit or retirement-type subsidy and any benefit payment option (other than the 50% qualified joint and survivor annuity), and • (iii) benefit increases that would not be eligible for PBGC guarantee on the first day the plan entered critical status because the increases were adopted (or, if later, took effect) less than 60 months before such first day.”

41. Critical Status Plans“Red Zone” • Protections for Participants: • Normal Retirement Benefits at Normal Retirement age may not be modified • Accruals may not be reduced below 1% or actuarial equivalent (or existing rate if lower than 1%) • Trustee, union bargaining team and contract ratification processes provide employees additional protections

42. Critical Status Plans“Red Zone” • Protections for Contributing Employers (if Trustees Adopt and all Parties Follow Plans): • Protection against Additional Contribution Requirements (and “Domino Effect”) arising from Funding Deficiencies • Protection Against Excise Taxes of 5% to 100% of Shortfall

43. Grandfather Provisions • The general restrictions on benefit improvements are not applicable if improvements are the restoration of benefit reduced pursuant to a plan amendment after January 1, 2002 and before June 30, 2005 and provided further that such restoration was commenced pursuant to the Plan, trust agreement or formal written communication to plan participants before June 30, 2005.

44. Disclosure Rules • notice is required to go to participants, Union, employers, DOL and PBGC • Funding status within 30 days of receipt from actuary • Notice of possible reduction in adjustable benefits • On request participants and other stakeholders may request any financial reports or actuarial studies (including sensitivity testing) • No more Summary Annual Report • Many other changes

45. Withdrawal Liability Rules • Several changes in withdrawal liability rules – • Construction Industry Specific Changes • “Free Look” provisions • “Fresh start” provisions

46. Next Steps • Technical Corrections • Regulation Writing • Education for Trustees, Bargainers and Plan Professionals • What questions should you ask of them? • How might these funding categories affect investment policies and programs? • What Issues should the Bargaining parties anticipate?

47. But What Does That All Mean???? • Primary Objectives Accomplished • Protected Employers from Devastating Additional Contribution and excise tax requirements from funding deficiencies • Substituted 5% of negotiated rate surcharge for 5% of shortfall penalty plus devastating contribution increases • Protected Plans from Failure resulting from departure (Involuntary or voluntary) of contributing employers • Protected Participants from Benefit cuts to PBGC Levels

48. But What Does That All Mean???? • Changed Tax Code to allow plans to save for unexpected Contingencies • Protected Multiemployer Community from punitive Single employer rules • Puts responsibility back with the bargaining parties who created these plans to arrive at a solution the industries can afford and still provide good benefits to participants

49. But What Does That All Mean???? • Demonstrates the uncertainty of putting anything into the Legislative Process • Demonstrates what can be accomplished when Labor and Management work together toward a common objective

50. Questions?????