D EPART M EN T OF T H E TR EASURY 

WAS H INGTON, D.C . 2 0 220 

May 6, 2016 

Board ofTrustees, Central States, Southeast and Southwest Areas Pension Plan 

9377 West Higgins Road 

Rosemont, IL 600 18 

Dear Mr. Nyhan, Mr. Ford, and the Board of Trustees: 

On September 25, 201 5, you submitted an application to the Secretary of the Treasury (Secretary 

or Treasury) on behalf of the Board of Trustees of the Central States, Southeast and Southwest 

Areas Pension Plan (Plan). The application you submitted (Application) requests approval to 

reduce benefits under the Multiemployer Pension Reform Act of20 14 (Kline-Miller or Act). 

As Special Master, appointed by the Secretary, I am writing to notify you ofTreasury's decision 

to deny the Application because the suspension fails to satisfy the stah1tory criteria for approval 

of benefit suspensions. 

In my role as Special Master, I have reviewed the Application under the terms ofKiine-Miller, 

its implementing regulations, and other applicable law. I also have reviewed numerous 

comments received on the Application from organi zations and individuals. The Application 

states that the Plan is projected, absent suspension, to become insolvent within ten years, and 

that, if the Application were approved, approximately 270,000 people would have some portion 

of their pension benefits reduced beginning in July of this year. Keeping in mind the potential 

impact on so many people's lives, I have held meetings, including conference calls and a series 

of public sessions around the country, with a wide range of stakeholders, including Plan 

representatives and several thousand Plan participants and beneficiaries, as well as others who 

have commented on the Application. 

Under the Act, Treasury, in consultation with the Pension Benefit Guaranty Corporation (PBGC) 

and the Secretary of Labor (DOL), must approve an application upon finding that the plan is 

eligible for the benefit suspensions and has satisfied the applicable statutory requirements. 

1 The 

Act requires, among other things, that the proposed benefit suspensions be reasonably estimated 

to allow the plan to avoid insolvency? Put another way, a key test for any application under 

Kline-Miller is whether the proposed benefit suspensions take a plan off the path to insolvency. 

As described further below, Treasury finds that the Plan's proposed benefit suspensions are not 

reasonably estimated to allow the Plan to avoid insolvency. 

1 Code§ 432(e)(9)(G)(i); 29 U.S.C. § 1085(e)(9)(G)(i). 2 "Limitations on Suspension-Any suspension of benefits made by a sponsor pursuant to this paragraph shall be 

subject to the following limitations: ... Any suspension of benefits in the aggregate ... shall be reasonably estimated 

to achieve ... the level that is necessary to avoid insolvency .. .. " Code§ 432(e)(9)(D)(iv); 29 U.S.C. 

§ 1085(e)(9)(D)(iv). In the interest of simplicity, all citations below to Kline-Miller will refer only to the Internal 

Revenue Code even though Treasury's findings and conclusions have been made under both the Internal Revenue 

Code and the Employee Retirement Income Security Act of 1974, as amended. 
Specifically, after reviewing the Application and consulting with PBGC and DOL, Treasury has 

determined that the suspensions described in the Application fail to satisfy the following t!U'ee 

requirements set forth in Kline-Miller: 

• that the proposed benefit suspensions, in the aggregate, be reasonably estimated to 

achieve, but not materially exceed, the level that is necessary to avoid insolvency, 

because the investment return and entry age assumptions used for this purpose are not 

reasonable. Code§ 432(e)(9)(D)(iv). 

• that the proposed benefit suspensions be equitably distributed across the participant and 

beneficiary population. Code§ 432(e)(9)(D)(vi). 

• that the notices of proposed benefit suspensions be written so as to be understood by the 

average plan participant. Code§ 439(e)(9)(F). 

Treasury's key findings are described below. 

FINDINGS 

Kline-Miller requires the Secretary of the Treasury to approve, in consultation with PBGC and 

DOL, an application for suspension of benefits "upon finding that the plan is eligible for the 

suspensions and has satisfied the criteria of subparagraphs (C), (D), (E), and (F)" of section 

432(e)(9) of the Internal Revenue Code, as amended by Kline-Miller.3 The Application fails to 

satisfy the criteria of subparagraphs (D) and (F), as further described below. 

I. Suspension Must Be Reasonably Estimated to Avoid Insolvency 

Kline-Miller provides that: 

[a]ny suspensions of benefits under a plan, in the aggregate . . . , shall be 

reasonably estimated to achieve, but not materially exceed, the level that is 

'd. I 4 

necessary to avm mso vency. 

To demonstrate that a suspension satisfies this requirement under the regulations implementing 

this provision, an applicant must use actuarial projections. One type of required projection is a 

deterministic projection of cash flows, under which the plan's asset balance is proj ected forward 

using assumptions regarding the amounts of money coming into the plan (e.g., contributions, 

withdrawal liability payments, and investment returns) and going out of the plan (e.g., benefit 

payments and administrative expenses). A second type of projection, required for the largest 

plans, is a stochastic projection, which also projects the plan's asset balance going forward using 

assumptions. However, the stochastic proj ection does not use fixed assumptions for the rate of 

3 Code§ 432(e)(9)(G)(i). 4 Code§ 432(c)(9)(D)(iv). 

2 
investment rehtrn, but instead projects a range of possible outcomes to take into account the 

variability of investment returns. 

Treasury evaluated the assumptions and methods used in the Application based on the 

regulations. The regulations require that each of the achtarial assumptions or methods, as well as 

the combination of achtarial assumptions and methods, used for the required actuarial projections 

be reasonable, taking into account the experience of the plan and reasonable expectations.5 In 

applying the regulations, Treasury referred to guidance provided by the standards of the actuarial 

profession (primarily Actuarial Standards of Practice (ASOPs) numbers 4, 27 and 35). 

The regulations and ASOPs require that, to be reasonable, each of the assumptions or methods 

must be appropriate for the purposes of these cash flow projections (whi ch means, among other 

things, that factors specific to these cash flow projections must be taken into account). The 

ASOPs also require taking into account historical and current economic data that is relevant as of 

the measurement date and require that assumptions have no significant bias. The actuary also 

must consider the materiality of the assumptions and the balance between the benefits of using 

refined assumptions (that is, assumptions that are based upon more extensive and specific study 

and research) and the cost of using those refinements. 

Treasury has concluded that two of the assumptions used for the actuarial projections in the 

Application are not reasonable. 

Investment Return Assumptions Are Not Reasonable 

The Application uses a 7.5% annual investment rate of reh.trn assumption for the deterministic 

projections and uses conesponding ammal investment rate of rehtrn assumptions by asset class 

as inputs for the stochastic projections.

6 The Plan has asserted that (1) the 7.5% assumed rate of 

return is reasonable because it is based on the amlllal investment rate of return assumptions by 

asset class that were used as inputs for the stochastic projections,

7 (2) the annual investment rate 

of return assumptions by asset class that were used as inputs for the stochastic projections are 

reasonable because they were selected based on average expected rates of rehtrn by asset class 

over a 50-year future time horizon (the time horizon selected by the Plan as the extended period 

over which the cash flow projections are required for the Plan under the regulations),8 and (3) the 

common use of a 7.5% investment return assumption for pension plan annual funding valuation 

purposes further supports the choice of the 7.5% assumption for the deterministic cash flow 

projections.

9 

5 26 C.r.R. § 1.432(e)(9)-l(d)(5)(iv)(B). 6 Application 7.1 .22, 7. 1.24. 7 Thomas C. Nyhan, Executive Director and General Counsel, Cenh·al States, Southeast and Southwest Areas 

Pension rune!, Comment on Central States Pension Plan Application for Benefit Suspension 3 (Mar. I, 20 16), 

https://www.regulations.gov/#!documentDetaii;D=TREAS-D0-20 15-0009-2789 (Central States Comment Letter). 8 Application 7.1.22, 7.1.24. 9 Central States Comment Letter 4. 

3 
These assumptions are not reasonable because they: 

1. are not appropriate for the purpose of the measurement (cash flow projections relating to 

proposed benefit suspensions under Kline-Miller), taking into account the Plan's negative 

cash flows and other factors; 

2. do not adequately take into account relevant current economic data (that is, appropriate 

investment forecast data); and 

3. have a significant bias in that they are significantly optimistic. 

Not Appropriate for the Pwpose ofthe .Measurement 

To be appropriate for the purpose of the measurement, investment ret11l'n assumptions must be 

selected in a manner that takes into account factors specific to the measurement. In this case, 

considering all of the circumstances, Treasury has determined that the following factors should 

have been taken into account in the selection of the investment return assumptions: 

• the timing of future expected contributions and benefit payments, which- when taken into 

account- results in the Plan having significant negative cash flow and therefore declining 

asset levels; 

• the greater materiality of asset returns during the earlier years of the cash flow projections 

because, based on the anticipated pattern and magnitude of change in the level of Plan 

assets resulting from the timing of future expected contributions and benefit payments, 

asset levels are projected to be higher during the earlier years of the projections than they 

are projected to be during the later years (i.e., these projections are extremely sensitive to 

variations in asset returns in the near term because the same percentage gain or loss has a 

greater impact if it occurs earlier, when asset levels are higher, than in later years, when 

asset levels are lower); 

• a participant's or beneficiary's 10 loss of benefits (once reduced pursuant to a suspension) is 

permanent- amounts reduced will not be returned; and 

• the fact that the amount of the suspension cannot easily be (and will not automatically be) 

increased or decreased in a later year if the plan's actual experience proves to be different 

than projected. 

Based on these factors, the investment return assumptions for purposes of these cash flow 

projections must be developed in a refined marmer that reflects and gives appropriate weight to 

near-term expected rates of return. For this purpose, it is not appropriate to develop investment 

return assumptions based solely on the time-weighted average expected returns over the long 

term or based on the assumptions used for other purposes (such as for purposes of determining a 

plan's minimum funding requirement) if doing so produces materially different results than use 

of a refined assumption. 

Relevant Current Economic Data Not Taken into Account 

The investment return assumptions used in the Application do not adequately take into account 

relevant current economic data. Relevant current economic data (i.e., including near-term 

1

° For convenience of reference, participants and bene ficiaries are referred to below simply as "pmticipants." 

4 
current investment forecast data for each asset class) must be reviewed to determine whether 

refined investment return assumptions would be expected to produce materially different results. 

A review of relevant current economic data clearly demonstrates that refined investment return 

assumptions that take into account appropriate investment forecast data regarding expected nearterm rates of return would be expected to produce materially different results. For example, 

commenters, as well as the Plan, used the Horizon Survey of investment forecasts of29 

investment professionals for purposes of comparison. In comparison to the Horizon Survey data, 

the Plan's investment return assumptions are in excess of the 1 0-year 50th and 75th percentile 

survey results for every asset class. For the Plan's total portfolio, the estimated 1 0-year average 

rate of return based on 1 0-year average expected results for the corresponding asset classes in the 

Horizon Survey is estimated to be 6.43o/o-a fulll 23 basis points less than the 7.66% average 

annual rate of return for the portfolio based on average expected rates of return for the Plan's 

asset classes provided by the Plan. The Plan's investment return assumptions also exceed 

longer-term expected rates of return- the 20-year average expected returns in the Horizon 

Survey- in every corresponding asset class (and the Plan's 7.5% assumed rate of return is 

estimated to exceed the 20-year average rate of return for the total portfolio based on 20-year 

average expected results for the corresponding asset classes in the Horizon Survey). 11 

Bias 

The investment return assumptions used in the Application do not satisfy the requirement that 

assumptions have no bias (i.e., not be significantly optimistic or pessimistic) outside of narrowly 

specified circumstances. The assumptions are significantly optimistic, as evidenced by the 

available relevant investment return forecast data in the Horizon Survey described above, which 

the Plan cites as supportive of the reasonableness of its investment return assumptions. 

Based on the foregoing, Treasury has determined that the investment return assumptions 

are not reasonable, and therefore the proposed suspension does not satisfy the statntOIJ' 

requirement that it be reasonably estimated to avoid insolvency. 

Entry Age Assumption Is Not Reasonable 

To project cash flows, an applicant must make an assumption regarding demographic 

characteristics of plan participants, including the demographic characteristics of employees who 

replace terminating and retiring workers (i.e., future new entrants to the plan). With the 

exception of entry age, the Application assumed that in all other respects new entrants would 

reflect the demographic mix of the participants who entered the Plan during the last full year 

before the Application was submitted (i.e., 20 14) for purposes of other actuarial projections in 

the Application. However, for entry age, the Plan used a single assumed age (32 years old, the 

average age at entry for the entire current active workforce) instead of using the demographic 

mix that it used for other purposes. Assuming a single (relatively young) age of entry enabled 

11 The 50th and 75th percentile results derived from the Horizon Survey presented in this paragraph are arithmetic 

averages (used as inputs for the stochastic projections). The average rates of return for the p011folio in this 

paragraph are geometric averages (used as the basis for the assumption for the deterministic projections). 

5 
the Plan to project effectively zero benefit payments for these new employees for more than 20 

years. 

The entry age assumption is not reasonable because it: 

I. is not appropriate for the purpose of the measurement (cash flow projections relating to 

proposed benefit suspensions under Kline-Miller), taking into account the Plan's negative 

cash flows and other factors; and 

2. does not take into account relevant historical and current demographic data (that is, data 

available regarding entry age). 

To be appropriate for the purpose of the measurement, the entry age assumption, like the 

investment return assumptions, must be selected in a mmmer that takes into account factors 

specific to the measurement. In addition to the factors described above in the investment return 

assumptions section, the fact that the anticipated pattern and magnitude of change in the level of 

Plan assets is extremely sensitive to assumptions (like the entry age assumption) that affect the 

amount and timing of anticipated benefit payments, particularly during the earlier years of the 

cash flow projections, should have been taken into account in the selection of the entry age 

assumption. 

The entry age assumption must take into account all of the factors described above, including 

that it will be used for a cash flow negative plan's solvency determination in the context of a 

benefit suspension application that will result in benefit reductions that will not be returned and 

catmot easily be increased or decreased in a later year if future experience differs from expected 

experience. Based on these factors, the entry age assumption for purposes of these cash flow 

projections must be developed in a refined manner that reflects and gives appropriate weight to 

near-term expected cash flows. For this purpose, it is not appropriate to develop an entry age 

assumption based solely on the average entry age of all participants in a plan that happen to be 

active as of a certain date if doing so produces materially different results than use of a refined 

assumption. 

The Application's entry age assumption does not appropriately reflect the sensitivity of the cash 

flow projections to near-term cash flow or the fact that, for purposes of these cash flow 

projections, the assumption (in this case, an estimate that 100% of new entrants are age 32) 

materially fails to model anticipated plan experience. In addition, an assumption based on the 

age at entry of all active participants that remain in the Plan during 2014 is not an appropriate 

measure of new hire populations over time, because the existing population may exhibit 

survivorship bias. In other words, older new hires from prior years, who are more likely to have 

already retired or died, are likely underrepresented in a snapshot of the workforce in a given 

year. Because older new hires may generate much earlier cash outflows, which can materially 

affect cash outflows of the Plan as a whole, refined assumptions are required if material to the 

measurement. 

In this case, use of the new entrant profile used for purposes other than entry age-that is, an 

assumption that new entrants have a demographic mix consistent with recent entrants during the 

past year-produces materially different results. For example, if this assumption were applied 

6 
consistently and the actual distribution of ages of new entrants in 201 4 12 were used as the entry 

age assumption instead of age 32, the proposed suspension would not be estimated to enable the 

Plan to satisfy the requirement that the suspension be reasonably estimated to achieve, but not 

materially exceed, the level that is necessary to avoid insolvency. Relevant historical and current 

demographic data, such as data on the actual entry ages of all new entrants to the Plan over any 

relevant period of time, should have been reviewed and taken into account in the selection of the 

entry age assumption. 

Based on the foregoing, Treasury has determined that the new entrant age assumption is 

not reasonable, and therefore the proposed suspension does not satisfy the statutory 

requirement that it be reasonably estimated to avoid insolvency. 

II. Suspensions of Benefits Must Be Equitably Distributed 

Kline-Miller provides that: 

[a]ny suspensions of benefits shall be equitably distributed across the participant 

and beneficiary population, taking into account factors, with respect to 

participants and beneficiaries and their benefits ... . " 13 

An application must identify (1) the separate groups of participants and beneficiaries, as defined 

by the consistent treatment of individuals within each separate group; (2) the relevant 

factor(s) that were selected by the plan as the basis for the plan's different treatment of these 

groups; and (3) how the differences in treatment are based on a reasonable application of the 

factors selected by the plan. 14 

The Application describes an approach to benefit suspensions that would apply several different 

post-suspension benefit formulas, but it does not adequately explain why certain classes of 

participants would be placed in a group that is subj ect to a less favorable post-suspension benefit 

formula than other participants. An example is provided below. 

Application of Special Limitation on Suspension of Benefits 

The Application provides that the benefits of some United Parcel Service, Inc. (UPS) participants 

would be reduced more than the benefits of other UPS participants. Because the Application 

provides that the UPS-related benefits with the least protection are subj ect to the greatest 

reduction, Treasury has concluded that the proposed suspension of benefits is not equitably 

distributed. 

A special provision of Kline-Miller that applies only to certain plans (and which, based on 

representations in the Application, Treasury will assume applies to this Plan( directs how a 

suspension of benefits must be applied across certain categories of benefits. 5 Under tllis 

provision, and the applicable regulations, benefits directly attributable to a participant's service 

12 See Application 7 .2.51 for general experience regarding the age of new entrants for 2014. 13 Code§ 432(e)(9)(D)(vi); 26 C.F.R. § 1.432(e)(9)-l(d)(6)(i). 14 See 26 C.F.R. §§ 1.432(e)(9)-l (d)(6)(i); 1.432(e)(9)-1 (g)( I )(iv); Revenue Procedure 2015-34 § 4.04. 15 See Code § 432(e)(9)(D)(vii); 26 C.F.R. § 1.432(e)(9)-l (d)(8)(ii). 

7 
with a particular type of employer catmot be reduced more than other benefits under the Plan are 

reduced by the suspension. The type of employer that triggers the application of this provision is 

one that, before the enactment of Kline-Miller, (I) withdrew from the plan in a complete 

withdrawal, (2) paid the full amount of its withdrawal liability, and (3) pursuant to a collective 

bargaining agreement, assumed liability for providing benefits to participants and beneficiaries 

under a separate, single-employer plan sponsored by the employer, in an amount equal to any 

amount of benefits for these participants and beneficiaries reduced as a result of the financial 

status of the plan (a make-whole agreement). 

The Application identifies UPS as an employer that triggers this special provision because, 

before Kline-Miller was enacted, UPS withdrew from the Plan in a complete withdrawal, paid 

the full amount of its withdrawal liability, and, pursuant to a collective bargaining agreement, 

entered into a make-whole agreement. Although the UPS make-whole agreement applies only to 

some (and not all) of the benefits attributable to participants' service with UPS, the limitation on 

benefit reductions under this special statutory provision applies to all benefits attributable to 

service with the type of employer identified in the statute (in this case, UPS), regardless of 

whether they are covered by the make-whole agreement. 16 

In an attempt to comply with this special provision, the Application divides benefits under the 

Plan into categories (or tiers) corresponding to the Plan's interpretation of the provision. 

Benefits covered by the UPS make-whole agreement are referred to as "Tier 3" benefits. Under 

the Application, some of these Tier 3 benefits would be protected by a 40% cap on the 

percentage reduction of a participant's pre-suspension benefit. Benefits attributable to service 

with UPS that are not covered by the make-whole agreement are classified as benefits in a 

separate category (together with benefits attributable to service with many other employers) and 

are referred to as "Tier 2" benefits. 17 Under the Application, some of these Tier 2 benefits would 

receive less protection than Tier 3 benefits insofar as they would only be protected by a 50% cap 

on the percentage reduction of a participant's pre-suspension benefit. 

In dividing participants' benefits in this way, the Plan interpreted the statutory category 

governing a suspension of benefits directly attributable to a participant's service with UPS to 

include only those benefits directly attributable to service with UPS that are covered by the 

make-whole agreement (rather than all benefits directly attributable to service with UPS). This 

approach can be reconciled with the special provision of Kline-Miller described above because, 

in accordance with the regulations, no benefits attributable to service with UPS would be 

reduced more than any other benefits. 18 However, the different treatment of two groups of 

participants with benefits attributable to service with UPS- a 40% cap for participants with 

benefits that are covered by the UPS make-whole agreement and a less protective 50% cap for 

participants with benefits that are not covered by the make-whole agreement- violates the 

requirement that the suspension of benefits be equitably distributed. 

16 26 C.F.R. § 1.432(c)(9)-1 (d)(S)(ii)(B). 17 The Application also includes a category of benefits referred to as "Tier I" benefits, but that category is not 

relevant to this analysis. 18 See 26 C.F.R. § 1.432(c)(9)-l (d)(8)(ii). 

8 
As noted above, to satisfy the equitable distribution requirement, an application that treats two 

groups of participants differently must identify the relevant factor(s) that were selected as the 

basis for the different treatment and must explain how the differences in treatment are based on a 

reasonable application of the factors selected. In this case, the only factor identified to explain 

the different treatment between the two groups of UPS participants is whether a participant is 

covered by the make-whole agreement. While that factor may be relevant to the different 

treatment of participants, it was not reasonably applied by the Plan. 

Specifically, Treasury has concluded that it is not reasonable to justify larger benefit suspensions 

for one group of UPS participants based on the fact that those participants are not covered by a 

make-whole agreement (and therefore are less protected from benefit cuts) than for another 

group ofUPS participants who are covered by a make-whole agreement (and thus are more 

protected from benefit cuts). Applying a factor in a marmer that justifies larger cuts for 

participants who are otherwise less protected (and therefore stand to receive smaller benefits) is 

not a reasonable application of the factor. 19 

Based on the foregoing, Treasury has determined that the benefit reductions proposed by 

the Plan are not equitably distributed across the participant and beneficiary population 

with respect to these separate groups of participants and beneficiaries. As a result, the 

Application does not satisfy the statutory requirement that benefit reductions be equitably 

distributed. 

III. Notices Must Be Written So As to Be Understood by the Average Plan Participant 

Kline-Miller provides that 

[n]o suspension of benefits may be made . . . unless notice of such proposed 

suspension has been given by the plan sponsor ... to . . . plan patticipants and 

beneficiaries ... [and that the notice] shall be written in a manner so as to be 

understood by the average plan participant . . .. 20 

The regulations likewise provide that the notice given must be written in a matmer so as to be 

understood by the average plan participant? ' However, Treasury has found that the notices 

provided to participants in cotmection with the Application fail to meet this standard because 

they are, in important respects, not written in a manner so as to be understood by the average 

plan participant. This is because: 

• the notices extensively use teclmicallanguage without adequate explanation; 

• critical terms used in the notices are not defined in the notices but only by cross-reference 

to other documents (e.g., the Plan document and the rehabilitation plan document); and 

• the cross-referenced definitions in those other documents are not understandable to the 

average plan participant. 

19 See 26 C.F.R. § 1.432( e )(9)-1 ( d)(6)(iii). 2

° Code§ 432(e)(9)(F) (emphasis added). 2 1 26 C.F.R. § 1.432(e)(9)- 1 (t)(2)(iii). 

9 
The least understandable sections in the notices are copied verbatim from the Application. These 

sections of the notices are essential to fully understanding the proposed reductions of benefits, 

yet repeatedly use teclm.ical terms that are not defined in the notices, but only in other documents 

that the notices cross-reference but do not attach. For example, one section in the notices 

describes the rules regarding when a participant can return to work after the suspension is 

implemented. That section contains a 98-word sentence that includes four critical terms (the 

definitions of which are not contained in the notices, but rather in cross-referenced documents 

that are not attached) while describing three general conditions for when the reemployment 

provision applies and two sets of multi-part conditions that must first be satisfied. 

Although pension plan provisions and the terms of proposed benefit reductions may be very 

complex, Kline-Miller nonetheless requires applicants to take the time and care to explain those 

proposed reductions in a manner that can be understood by an average plan participant. 

Based on the foregoing, Treasury has determined that the notices provided to Plan 

participants arc not sufficient to satisfy the Kline-Miller requirement that notices be 

written so as to be understood by the average plan participant. 

IV. Conclusion 

The Application fails to meet the requirements of Kline-Miller for the reasons described above. 

Tlus notification letter will be made public in order to inform plan participants of the outcome of 

Treasury's review. 

:e1!~~{1 Sj~ial Master 

10