[Federal Register Volume 82, Number 72 (Monday, April 17, 2017)]
[Notices]
[Pages 18165-18168]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-07719]


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PENSION BENEFIT GUARANTY CORPORATION


Approval of Special Withdrawal Liability Rules: the Service 
Employees International Union Local 1 Cleveland Pension Plan

AGENCY: Pension Benefit Guaranty Corporation.

ACTION: Notice of Approval.

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SUMMARY: The Service Employees International Union Local 1 Cleveland 
Pension Plan requested the Pension Benefit Guaranty Corporation (PBGC) 
to approve a plan amendment providing for special withdrawal liability 
rules for employers that maintain the Plan. PBGC published a Notice of 
Pendency of the Request for Approval of the amendment. In accordance 
with the provisions of the Employee Retirement Income Security Act of 
1974, as amended (ERISA), PBGC is now advising the public that the 
agency has approved the requested amendment.

ADDRESSES: A copy of the plan's complete request may be requested from 
the Disclosure Officer, Pension Benefit Guaranty Corporation, 1200 K 
Street NW., Suite 11101, Washington, DC 20005 (fax 202-326-4042).

FOR FURTHER INFORMATION CONTACT: Bruce Perlin, Assistant Chief Counsel 
([email protected]), 202-326-4020, ext. 6818 or Jon Chatalian, 
Deputy Assistant Chief Counsel ([email protected]), ext. 6757, 
Office of the Chief Counsel, Suite 340, 1200 K Street NW., Washington, 
DC 20005-4026; (TTY/TDD users may call the Federal relay service toll-
free at 1-800-877-8339 and ask to be connected to 202-326-4020.)

SUPPLEMENTARY INFORMATION: 

Background

    The Pension Benefit Guaranty Corporation (PBGC) administers title 
IV of the Employee Retirement Income Security Act of 1974 (ERISA).
    Under section 4201 of ERISA, an employer that completely or 
partially withdraws from a defined benefit multiemployer pension plan 
becomes

[[Page 18166]]

liable for a proportional share of the plan's unfunded vested benefits. 
The statute specifies that a ``complete withdrawal'' occurs whenever an 
employer either permanently (1) ceases to have an obligation to 
contribute to the plan, or (2) ceases all operations covered under the 
plan. See ERISA section 4203(a). Under the first test, an employer that 
remains in business but no longer has an obligation to contribute to 
the plan will incur withdrawal liability. Under the second test, an 
employer that closes or sells its operations will also incur withdrawal 
liability. The ``partial withdrawal'' provisions of sections 4205 and 
4206 impose a lesser measure of liability upon employers who reduce, 
but do not eliminate, the obligations or operations that generate 
contributions to the plan. The withdrawal liability provisions of ERISA 
are a critical factor in maintaining the solvency of these pension 
plans and reducing claims made on the multiemployer plan insurance fund 
maintained by PBGC. Without withdrawal liability rules, an employer 
that participates in an underfunded multiemployer plan would have a 
powerful economic incentive to reduce expenses by withdrawing from the 
plan.
    Congress nevertheless allowed for the possibility that, in certain 
industries, the fact that particular employers go out of business (or 
cease operations in a specific geographic region) might not result in 
permanent damage to the pension plan's contribution base. In the 
construction industry, for example, the funding base of a pension plan 
is the construction projects in the area covered by the collective 
bargaining agreements under which a pension plan is maintained. Even if 
the amount of work performed by a particular employer fluctuates 
markedly in any given year, individual employees will typically 
continue to work for other contributing employers in the same 
geographic area. Consequently, the withdrawal of an employer does not 
remove jobs from or damage the pension plan's contribution base unless 
the employer continues to work in the geographic area covered by 
collective bargaining agreement without contributing to the plan.
    Although the general rules on complete and partial withdrawal 
identify events that normally result in a diminution of the plan's 
contribution base, Congress recognized that, in certain industries and 
under certain circumstances, a complete or partial cessation of the 
obligation to contribute normally does not weaken the plan's 
contribution base. This reasoning led Congress to establish special 
withdrawal rules for the construction and entertainment industries.
    Section 4203(b)(2) of ERISA provides that a complete withdrawal 
occurs only if an employer ceases to have an obligation to contribute 
under a plan and the employer either continues to perform previously 
covered work in the jurisdiction of the collective bargaining agreement 
or resumes such work within five years without renewing the obligation 
to contribute. In the case of a plan terminated by mass withdrawal 
(within the meaning of ERISA section 4041(A)(2)), section 4203(b)(3) 
provides that the five-year restriction on an employer resuming covered 
work is reduced to three years. Section 4203(c)(1) of ERISA applies the 
same special definition of complete withdrawal to the entertainment 
industry, except that the pertinent jurisdiction is the jurisdiction of 
the plan rather than the jurisdiction of the collective bargaining 
agreement. In contrast, the general definition of complete withdrawal 
in section 4203(a) of ERISA includes the permanent cessation of the 
obligation to contribute regardless of the continued activities of the 
withdrawn employer.
    Congress also established special partial withdrawal liability 
rules for the construction and entertainment industries. Under section 
4208(d)(1) of ERISA, ``[a]n employer to whom section 4203(b) (relating 
to the building and construction industry) applies is liable for a 
partial withdrawal only if the employer's obligation to contribute 
under the plan is continued for no more than an insubstantial portion 
of its work in the craft and area jurisdiction of the collective 
bargaining agreement of the type for which contributions are 
required.'' Under section 4208(d)(2) of ERISA, ``[a]n employer to whom 
section 4203(c) (relating to the entertainment industry) applies shall 
have no liability for a partial withdrawal except under the conditions 
and to the extent prescribed by the [PBGC] by regulation.''
    Section 4203(f) of ERISA provides that PBGC may prescribe 
regulations under which plans that are not in the construction industry 
may be amended to use special withdrawal liability rules similar to 
those that apply to construction plans. Under the statute, the 
regulations shall permit the use of special withdrawal liability rules 
only in industries that PBGC determines have characteristics that would 
make use of the special withdrawal liability rules appropriate. ERISA 
section 4203(f)(2)(A). In addition, each plan application must show 
that the special rule will not pose a significant risk to the PBGC. 
ERISA section 4203(f)(2)(B). Section 4208(e)(3) of ERISA provides that 
a plan may adopt rules for the reduction or elimination of partial 
withdrawal liability--under regulations prescribed by PBGC--subject to 
PBGC's determination that such rules are consistent with the purpose of 
ERISA.
    PBGC's regulation on Extension of Special Withdrawal Liability 
Rules (29 CFR part 4203) prescribes the procedures a multiemployer plan 
must follow to request PBGC approval of a plan amendment that 
establishes special complete or partial withdrawal liability rules. The 
regulation may be accessed on PBGC's Web site (http://www.pbgc.gov). 
Under 29 CFR 4203.3(a), a complete withdrawal rule must be similar to 
the statutory provision that applies to construction industry plans 
under section 4203(b) of ERISA. Any special rule for partial 
withdrawals must be consistent with the construction industry partial 
withdrawal provisions.
    Each request for approval of a plan amendment establishing special 
withdrawal liability rules must provide PBGC with detailed financial 
and actuarial data about the plan. In addition, the applicant must 
provide PBGC with information about the effects of withdrawals on the 
plan's contribution base. As a practical matter, the plan must show 
that the characteristics of employment and labor relations in its 
industry are sufficiently similar to those in the construction industry 
that use of the construction rule would be appropriate. Relevant 
factors include the mobility of the employees, the intermittent nature 
of the employment, the project-by-project nature of the work, extreme 
fluctuations in the level of an employer's covered work under the plan, 
the existence of a consistent pattern of entry and withdrawal by 
employers, and the local nature of the work performed. PBGC will 
approve a special withdrawal liability rule only if a review of the 
record shows that:
    (1) The industry has characteristics that would make use of the 
special construction withdrawal rules appropriate; and
    (2) The adoption of the special rule will not pose a significant 
risk to the PBGC.
    After review of the application and all public comments, PBGC may 
approve the amendment in the form proposed by the plan, approve the 
application subject to conditions or revisions, or deny the 
application.

[[Page 18167]]

The Request

    PBGC received a request, dated September 16, 2011, from the Service 
Employees International Union Local 1 Cleveland Pension Plan (the 
``Plan''), for approval of a plan amendment providing for special 
withdrawal liability rules. Subsequently, the Plan requested that PBGC 
suspend review of the amendment. On January 24, 2014, the Plan 
requested that PBGC again consider the amendment and provided updated 
actuarial information. PBGC published a Notice of Pendency of the 
Request for Approval of the amendment on August 19, 2015 (80 FR 50339). 
PBGC's summary of the actuarial reports provided by the Plan may be 
accessed on PBGC's Web site (https://www.pbgc.gov/prac/pg/other/guidance/multiemployer-notices.html).
    The Plan is a multiemployer pension plan covering the commercial 
building cleaning and security industries in the greater Cleveland, 
Ohio area. The Plan represents in its submission that the industry for 
which the rule is requested--the commercial building cleaning 
industry--has characteristics similar to those of the construction 
industry. According to the Plan's submission, the principal similarity 
is that when a contributing employer's contract to clean a building 
expires, the cleaning work will generally continue to be performed by 
employees covered by the Plan, irrespective of the employer retained to 
perform the cleaning services. Under the proposed amendment, a complete 
withdrawal of an employer whose employees perform substantially all 
work in the commercial building cleaning industry will occur only when: 
(a) The employer ceases to have an obligation to contribute under the 
Plan and (b) the employer continues to perform work in the jurisdiction 
of the Plan of the type for which contributions were previously 
required or resumes such work within five years after the date on which 
the obligation to contribute under the plan ceases and does not renew 
the obligation at the time of the resumption. Additionally, the 
proposed amendment provides that a withdrawal from the Plan occurs if 
an employer sells or otherwise transfers a substantial portion of its 
business or assets to another individual or entity that performs work 
in the jurisdiction of the Plan of the type for which contributions are 
required without having an obligation to make contributions to the 
Plan. In the case of termination by mass withdrawal (within the meaning 
of ERISA section 4041A(a)(2)), the proposed amendment provides that 
section 4203(b)(3), permitting a construction employer to resume 
covered work after three years of withdrawal instead of the standard 
five-year restriction, is not applicable to withdrawing commercial 
building cleaning industry employers. Therefore, in the event of a mass 
withdrawal, there is still a five-year restriction on resuming covered 
work in the jurisdiction of the Plan.
    The request includes the actuarial data on which the Plan relies to 
support its contention that the amendment will not pose a significant 
risk to the insurance system under Title IV of ERISA. The Plan 
submitted actuarial valuation reports for Plan years 2007-2014. 
Although the Plan's financial condition deteriorated after the 2007-
2008 financial crisis, the Plan immediately took action to increase 
employer contributions, by diverting contributions allocated to other 
employee benefit plans.\1\ In 2011, the Plan's funding percentage and 
other tests of financial health placed the Plan in the Green zone 
(strongest category) and the Plan has been in the Green zone since.\2\ 
Although the number of active participants in the Plan dropped 19% 
between 2007 and 2013 (while retirees decreased 6%), contributions 
increased 13% over the same time period.\3\ To date, the Plan's active 
participant base remains solid--about 36% of the participant 
population--and contributions remain steady.
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    \1\ Under the Pension Protection Act of 2006 (PPA), the Plan 
would have certified as in critical status (Red zone) in 2009, but 
instead elected to freeze its 2008 Green zone status for one year 
pursuant to the Worker, Retiree, and Employer Recovery Act of 2008 
(WRERA).
    \2\ Updated actuarial information became available after the 
Notice of Pendency, and PBGC reviewed 5500s and Actuarial Valuation 
Reports for Plan years 2015-2016, which confirmed the Plan was still 
in the Green zone.
    \3\ During Plan years 2014-2016, active participants decreased 
by another 5% (while retirees decreased 6%). The number of separated 
vested participants increased in recent years, but the average 
monthly benefit of these participants is less than the average 
monthly benefit of the current retiree population. Additionally, the 
updated actuarial information demonstrates a commitment to sustained 
contributions, as evidenced by a 5% increase in the average employer 
contribution rate between 2013 and 2015.
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Decision on the Proposed Amendment

    The statute and the implementing regulation state that PBGC must 
make two factual determinations before it approves a request for an 
amendment that adopts a special withdrawal liability rule. ERISA 
section 4203(f); 29 CFR 4203.5(a). First, on the basis of a showing by 
the plan, PBGC must determine that the amendment will apply to an 
industry that has characteristics that would make use of the special 
rules appropriate. Second, PBGC must determine that the plan amendment 
will not pose a significant risk to the insurance system. PBGC's 
discussion on each of those issues follows. After review of the record 
submitted by the Plan, and having received no public comments, PBGC has 
entered the following determinations.

1. What is the nature of the industry?

    In determining whether an industry has the characteristics that 
would make an amendment to special rules appropriate, an important line 
of inquiry is the extent to which the Plan's contribution base 
resembles that found in the construction industry. This threshold 
question requires consideration of the effect of employer withdrawals 
on the Plan's contribution base.
    As the Plan has asserted, covered work must be performed at a 
commercial building located in the Cleveland, Ohio region. The work is 
local in nature and generally continues to be covered by the Plan 
regardless of the employer retained to do those services. An employer 
ceases to have an obligation to contribute when it loses a cleaning or 
security contract because the building owner outsources the work or 
retains a different service provider, or when the employer closes its 
business due to bankruptcy, retirement, or business relocation. Over 
the past 10 years, cessation of contributions by any individual 
employer has not had an adverse impact on the Plan's contribution base. 
Most of the employers that have ceased to contribute have been replaced 
by another employer who begins contributions for the same employees at 
the same location for the same work. The Plan presented historical data 
supporting the notion that building contract employer withdrawals have 
not negatively affected the Plan's contribution base.

2. What is the exposure and risk of loss to PBGC and participants?

    Exposure. Although the Plan's financial condition deteriorated as a 
result of the 2007-2008 financial crisis, the Plan sponsor took 
assertive actions to help the Plan recover, significantly increasing 
contributions in Plan years 2010 and 2011. As a result, in 2011 the 
Plan's actuary determined that the Plan's financial health placed it in 
the Green zone and the Plan continues to be in the Green zone to date. 
Active participants in the Plan decreased by 19% from 2007 to 2013 (and 
retirees decreased by 6%), but contributions increased by 13% over the 
same time

[[Page 18168]]

period. Thus, the parties have worked to preserve an adequate cushion 
against market downturns.
    Risk of loss. The record shows that the Plan presents a low risk of 
loss to PBGC's multiemployer insurance program. The Plan and the 
covered industry have unique characteristics that suggest that the 
Plan's contribution base is likely to remain stable. Contributions to 
the Plan are made with respect to commercial buildings in the greater 
Cleveland area. Plan representatives presented data demonstrating that 
building cleaning contracts for covered employment under the collective 
bargaining agreement have changed hands approximately 20-25 times 
during the past 18 years, and the rate at which a new signatory 
employer has assumed a prior signatory employer's building contract and 
has hired the prior employer's employees to clean the same building is 
90-92%. Accordingly, the data substantiates the Plan's assertion that 
the contribution base is secure and the departure of one employer from 
the Plan is not likely to have an adverse effect on the contribution 
base so long as the number of buildings covered does not decline.

Conclusion

    Based on the Plan's submissions and the representations and 
statements made in connection with the request for approval, PBGC has 
determined that the plan amendment adopting the special withdrawal 
liability rules (1) will apply only to an industry that has 
characteristics that would make the use of special withdrawal liability 
rules appropriate, and (2) will not pose a significant risk to the 
insurance system. Therefore, PBGC hereby grants the Plan's request for 
approval of a plan amendment providing special withdrawal liability 
rules, as set forth herein. Should the Plan wish to amend these rules 
at any time, PBGC approval of the amendment will be required.

W. Thomas Reeder,
Director, Pension Benefit Guaranty Corporation.
[FR Doc. 2017-07719 Filed 4-14-17; 8:45 am]
 BILLING CODE 7709-01-P