Multi-Employer Pension Funds May Run out of Money by 2025
More than 10 million workers who rely on pension programs from multiemployer plans may lose pension benefits in only seven years, according to a recent report from the Pension Benefit Guarantee Corporation (PBGC).
The PBGC predicts there is a 90 percent likelihood that its Multiemployer Insurance Program will run out of money to fund promised pension benefits by fiscal year 2025, and possibly as early as 2024.
Approximately 1,385 total private sector multiemployer pension plans are insured by the PBGC. Of these, the agency predicts that as many as 130 multiemployer plans covering 1.3 million participants will become insolvent in the next 20 years due to a current underfunding level of $36.4 billion.
Large distressed plans such as the Central States, Southeast and Southwest Areas Pension Fund (Central States) andthe United Mine Workers of America 1974 Pension Plan (UMWA Plan), among others, are being closely monitored by regulators.
By 2027, the PBGC multiemployer plan is expected to be insolvent with a deficit of $89.5 billion adjusted for inflation. The projected level of underfunding increased by $11.7 billion in just the past year.
The PBGC would be forced to cut benefit payments to a level supported by premium income if the multiemployer fund runs out of money. Significant cuts in multiemployer pension benefit payouts are expected under current projections.
Several efforts are underway to improve the financial outlook for the PBGC Multiemployer Insurance Program. For example, the President’s 2019 FY budget includes a proposal to adjust premium rates in a way that could generate an additional $16 billion in premium revenue by 2029.
The Multiemployer Pension Reform Act of 2014 (“MPRA”), enacted on December 16, 2014, gave the PBGC flexibility to approve multiemployer pension plan benefit cuts. Trustees of funds seeking to trim benefits must file an application with the Treasury Department to demonstrate that benefit reductions are required to extend the time it can pay benefits while forestalling an insolvency event.The MPRA also allows plan mergers, plan partitioning, and benefit suspensions under certain circumstances.
Current law does allow the PBGC to ask Congress for higher premium levels. The agency is limited to paying multiemployer benefits only from multiemployer premiums, so plan participants are at risk of significant PBGC benefit reductions if additional funding is not approved.
Apart from the multiemployer program, the PBGC also manages a much healthier single-employer program with 22,000 pension plans covering 28 million participants. The single-employer plan has been experiencing an improvement in its funding status over the past 10 years.
PBGC FUNDING LEVELS AND COMMITMENTS FOR MULTIEMPLOYER PENSION PLANS
Multiemployer plans pay the PBGC a flat rate premium of $28 per participant in 2018 for participation in the agency’s Multiemployer Insurance Program. This compares to a per-participant premium of $74 for single-employer plans. The multiemployer premium was only $12 per participant as recently as 2014, but the PBGC has increased rates substantially in recent years as part of its effort to shore up the troubled fund.
Multiemployer plans that are distressed and/or undergo an involuntary termination must pay the PBGC a special termination premium of $1,250 per participant for three years, with some exceptions for certain airline-related plans.
In turn, the PBGC uses this cumulative stream of premium funding as well as its current reserves as an insurance fund to protect the pensions of participants in insolvent or terminated multiemployer pension plans. The PBGC's current maximum monthly guarantee for a multiemployer plan participant is $35.75 per month, multiplied by the participant's years of credited service. This amount is not adjusted for inflation or cost-of-living.
Looked at another way, the PBGC has a maximum annual payout for multiemployer plan participants, based on years of service. The current maximum payment levels are listed below.
• 10 years of service = $4,290 per year
• 20 years of service = $8,580 per year
• 30 years of service = $12,870 per year
• 40 years of service = $17,160 per year
In each instance, the amount indicated above is a maximum payout and the actual amount paid may be less.
BACKGROUND ON MULTIEMPLOYER PENSION PLANS
The PBGC's insurance programs date back to the enactment of the Employee Retirement Income Security Act of 1974 (ERISA). The Multiemployer Pension Plan Amendments Act (MPPAA) was subsequently passed by Congress in 1980 to increase benefit protections for multiemployer plans.
A multiemployer pension plan is established through a collective bargaining agreement between two or more employers and a labor union. These plans are also known as Taft-Hartley plans. Each plan is managed by a board of trustees, which contains an equal number of employer and union trustees.
The transportation, construction, retail, manufacturing, hospitality, and entertainment industries—which rely on a large base of employees who tend to move from one employer to another within the industry—represent the largest number of multiemployer plans.
Multiemployer defined benefit plans operating in the private sector are protected by the PBGC’s Multiemployer Insurance Program. A defined benefit plan refers to a pension plan where an employee’s pension payments are determined by their past salary levels, length of service, and related considerations. A “defined benefit” plan differs from a “defined contribution” plan, with benefit payments in the latter based primarily on the employee’s contributions to their own 401(k)-type plans.
The PBGC is funded only by insurance premiums assessed on participating plans and is not taxpayer funded.
Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert, including matters relating to multiemployer pension plans. He is a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.