Fiduciary Liability - HOT Topics Multiemployer Plans Jani K. Rachelson Cohen, Weiss and Simon LLP Brian L. Smith The Segal Company April 28/29, 2003

2 Pension Shortfalls Force Companies to Make Changes Pension Bill May Benefit Employees HIPAA SOA IRS, DOL and PBGC ERISA ESOP Unfunded or Underfunded Liabilities

3 Financial Issues - Funding  Corporate  360 of S&P contributions = $46B  = 6% of total cash flows  S&P puts 13 corporations on possible credit downgrades due to pension obligation concerns.  13 of 100 U.S. employer’s pension plans fully funded in 2002 versus 80% in 2000.*  Multiemployer (ME) Plan  Average funded ratio = 95%**  67%** of surveyed plans fully funded. * Milliman USA survey ** Segal’s 2002 Survey of the Funded Position of Multiemployer Plans ---Versus---

4 PBGC* Financial Data  FYE 2002 financial data for the ME plan:  Safeguards... about 9.5 million workers and retirees in about 1,650 ME defined benefit pension plans.  Since 1980, financial assistance to 31 ME plans.  During 2002, 23 of these 31 received assistance. * $775 million = nonrecoverable future financial assistance to the 23 plans currently receiving financial assistance and to other plans expected to receive such assistance in the future. * Source: Assets$944,000,000 Liabilities*$786,000,000 Net Position$158,000,000

5 Financial Issues - Funding Formulas & Terms  ERISA Full Funding Limit  OBRA ’87 Full Funding Limit  RPA ’94 Override  Actuarial Value  Segal Smoothing Technique  Withdrawal Liability  Multiemployer Pension Plan Amendments Act ’80  Terms: Normal Cost, Credit Balance, Scheduled Cost, ERISA Minimum Funding ME plans

6 ME Plans -- Questions  Where does a ME get its contributions?  What is the likelihood of insolvency?  How do multiemployer plans manage funding issues?  Health & Welfare  Pension Participants Reserves Scope of Benefits Administration Insured v. Self-insured Stop Loss Claim Appeal Procedures Participants Maturity Active v. Retired Scope of Benefits Accrual Formula Claim Appeal Procedures

7 ME Plan Fiduciary Liability Litigation  Who can sue?  For what?  What types of claims are most frequently seen?  Health & Welfare  Pension  What is the frequency and severity of ME plan Fiduciary liability litigation?  Is ME plan Fiduciary liability litigation a “target” for plaintiff class action litigants?

8 Board of Trustee Potential Actions* - Multiemployer Defined Benefit Plans  Evaluate current financial and actuarial positions,  Review current funding policies,  Identify minimum funding requirements,  Determine future annual liquidity requirements,  Determine future funding status, and  Review procedures for determining and assessing withdrawal liability. * Segal’s 2002 Survey of the Funded Position of Multiemployer Plans

9 Multiemployer Health Funds - Issues and BOT Potential Actions*  Issues  Rising costs - far faster than inflation,  Declining investment earnings on fund assets,  Lower than expected contributions,  Cost of compliance, and  Participant demographics.  Potential Actions  Vendor management,  Plan management, and  Individual health management. * Segal’s April 2003 NewsLetter “Strategies for Relieving the Financial Pressure on Multiemployer Health Funds”

10 PBGC*  Definition: A multiemployer plan is a collectively bargained pension arrangement involving unrelated employers, usually in a common industry, such as construction, trucking, textiles, or coal mining. This contrasts to a single-employer plan, which may be sponsored by either one employer (pursuant or not pursuant to a collective bargaining agreement) or by several unrelated employers (but not pursuant to a collective bargaining agreement). A defined benefit plan provides a specified monthly benefit at retirement. In many multiemployer plans, the participant’s benefit is based on a flat dollar amount for each year of service. * Source: