Multiemployer Pension Plans Approach Pre-Crisis Funding Levels
Multiemployer pension plans in the aggregate have a funded ratio of 81 percent as of June 30, 2017, which represents an increase from a 77 percent funding ratio as of December 31, 2016. The improvement reduces the funding deficit by $21 billion.
This is the key finding in a recent report by actuarial firm Milliman, titled “Fall 2017 Multiemployer Pension Funding Study.” Results are based on an analysis of Form 5500 data filed by the 1,200 to 1,300 multiemployer plans required to file performance data with the Internal Revenue Service.
An estimated investment return of 7.6 percent applied to portfolio performance in the first six months of 2017, exceeding plan rate of return assumptions. A higher the rate of return is favorable, since current funding requirements decline as the assume rate of return increases.
The overall performance of multiemployer pension plans is approaching peak levels not seen since the 2008 financial crisis. While healthier, “noncritical” pension plans are recovering, multiemployer plans that are considered to be “critical” as calculated by insufficient funding levels continue to decline.
Results of the Milliman study are consistent with assessments issued by the Pension Benefit Guaranty Corporation (“PBGC”), the federal agency responsible to oversee a total of almost 24,000 private-sector defined benefit pension plans.
The PBGC was created by the Employee Retirement Income Security Act of 1974 (“ERISA”) to provide continuity in pension payments for both single-employer and multiemployer pension plans in the event of a plan failure.
More than 1 million plan participants are enrolled in approximately 100 multiemployer pension plans that the PBGC estimates will become insolvent over the next 20 years due to insufficient funding levels. The projected 2026 PBGC deficit for multiemployer plans is forecast to be $58.6 billion, an increase of $3.1 billion from earlier projections.
The Western Pennsylvania Teamsters and Employers Pension Fund is one multiemployer plan that is facing the likelihood of benefit cuts, according to an October 2017 article by the Pittsburgh Post-Gazette. The fund is 48 percent funded, meaning it has 48 cents available for every $1 in benefits promised to plan participants. The shortfall can be seen in this year’s cash flow projections, with $129 million being paid out in plan benefits while only $54 million is being collected in plan contributions.
Employees of delivery service UPS and Giant Eagle, a Pittsburgh-based supermarket chain with stores in Pennsylvania, Ohio, West Virginia, Indiana and Maryland, are among plan participants in the Western Pennsylvania fund.
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 PBGC, which is funded only by insurance premiums assessed on plans and is not taxpayer funded, charges $28 per participant for multiemployer plans. This represents a slight increase in recent years, following a more than doubling from $12 to $26 per participant between 2014 and 2015. The current administration has proposed various rate increases to shore up multiemployer plans, but additional increases would require Congressional approval.
Background on Multi-Employer Pension Plans
A multiemployer pension plan is established through a collective bargaining agreement between multiple employers and a labor union. These plans are also known as Taft-Hartley plans. The trucking, 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.
Up to 10 million workers and beneficiaries in approximately 1,400 pension plans are covered by the PBGC’s multiemployer program. While most of these plans are adequately funded, the PBGC estimates that 10 to 15 percent of plan participants are enrolled in multiemployer plans that are at risk of being depleted within 20 years.
ERISA expert Mark Johnson, Ph.D., J.D., is a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 firm, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert 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.
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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.