Multiemployer Pension Program Risks Insolvency by 2026
The Multiemployer Insurance Program managed by the Pension Benefit Guaranty Corporation (PGGC) is projected to become insolvent by 2026, according to the PBGC’s recently released 2020 Annual Report.
At current levels, the multiemployer pension program is underfunded by $63.7 billion. This is a slight improvement from the previous year, but the PBGC cautions that legislative reform is required to change the outlook. The program’s liabilities total $66.9 billion as of September 30, 2020, with only $3.1 billion in assets.
The PBGC provided $173 million in financial assistance to 95 multiemployer plans in 2020, up from 2019 levels. Over 79,000 participants in insolvent multiemployer plans received benefits in 2020, an increase from 66,900 participants in 2019. Participants expected to receive future benefits from insolvent multiemployer plans total 27,600 in 2020.
The Multiemployer Insurance Program is one of two administered by the PBGC, with the other being the Single Employer Program. The two plans protect the pensions of 34 million participants covered by plans valued at more than $3 trillion. The multiemployer plan individually represents 10.9 million workers and retirees in approximately 1,400 private sector, defined benefit pension plans.
The Single Employer Insurance Program has a net positive financial position of $15.5 billion, although it does have future exposure to underfunded pension plans of weak companies.
Legislative Outlook for Multiemployer Funding Relief
Industry observers agree that Congressional action is needed to address the severe underfunding in the PBGC’s Multiemployer Insurance Program. While intensive talks took place in 2020, members of the U.S. House and Senate were unable to reach an agreement. Efforts to reform the multiemployer pension system are expected to continue in 2021.
The “Multiemployer Pension Recapitalization and Reform Plan” is a proposed solution that was introduced in November 2020 by Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Senate Health, Education, Labor and Pensions Committee Chairman Lamar Alexander (R-Tenn.). The proposal is based on five key goals: 1) stabilize plans in immediate danger of failure; 2) secure workers’ and retirees’ benefits; 3) strengthen the PBGC’s ability to backstop the multiemployer system; 4) put the system on a stable long-term path; and 5) ensure fiscal responsibility.
2020 Notices on Critical and Declining Multiemployer Plans
According to the Employee Benefits Security Administration, multiemployer pension plans that are determined by the fund’s actuary to have funding or liquidity problems must notify plan participants, beneficiaries, the PBGC, the Department of Labor, and bargaining parties.
In 2020 the following types of notices were issued by multiemployer plans:
• Critical and Declining notices were issued to 52 plans. This notice is issued when a plan is projected to become insolvent during the current plan year or any of the 14 or 19 succeeding plan years, depending on certain conditions.
• Endangered Status notices were sent to 44 plans, indicating that the funded percentage for such plan year is less than 80 percent.
• Critical Status notices were generated for 90 plans, indicating that the funded percentage of the plan is less than 65 percent.
The metrics to determine a multiemployer plan’s status as listed above are complex and the primary measure indicated is one of many.
Options for Multiemployer Plans in Financial Distress
Plans deemed to be “critical and declining” can apply to the Treasury Department for a suspension of benefits, with certain exceptions based on the age and disability benefits of qualifying participants.
Severely underfunded plans can also request “partition assistance” from the PBGC. Using this approach, a successor plan is created to provide monthly guaranteed benefits to a subset of the plan’s participants and beneficiaries.
It is possible for one or more employers to withdraw from a multiemployer plan, but they are then assessed a withdrawal liability for continuing obligations based on a formula of past contributions and their share of unfunded vested benefits.
The Multiemployer Pension Reform Act of 2014 (MPRA) allows severely underfunded plans to merge with a more financially sound plan. The first PBGC-facilitated merger under the MPRA took place in 2020 with the merger of the Laborers International Union of North America 1000 Pension Fund and the Laborers Local 235 Pension Fund.
The PBGC does not receive general tax revenue funds. Rather, it is funded by insurance premiums on defined benefit pension plans which are set by Congress, investment income, and related sources.
According to the PBGC, the multiemployer plan is projected to soon spend more in financial assistance than it receives in premium income. When multiemployer plans exhaust their current assets, there is presently no additional funding for benefits beyond existing insurance premiums.
Background on Multiemployer Pension Plans
The Multiemployer Pension Plan Amendments Act of 1980 (MPPAA) was passed by Congress to provide oversight and support for multiemployer plans. This legislation expanded and strengthened the PBGC’s insurance programs that were set up under the Employee Retirement Income Security Act (ERISA) in 1974.
The PBGC’s Multiemployer Program oversees defined benefit pension plans that are created through one or more collective bargaining agreements (CBA) between employers and one or more employee organizations or unions. Up to 10 million American workers participate in 1,400 multiemployer defined benefit pension plans. The plans are often jointly governed by a board of trustees consisting of both labor and management representatives.
Multiemployer plans are most common in labor-intensive, unionized industries where workers move from one employer to another over the course of their working career. Construction, transportation, hospitality, manufacturing, and entertainment are leading industries where multiemployer plans are often present.
The “multiemployer” plan is not to be confused with the “multiple employer pension plan” (MEPP). A "multiple employer" plan is defined as follows,
"a plan maintained by more than one employer allowing the pooling of plan assets for investment purposes and reduction in the cost of plan administration. A multiple employer plans maintains separate accounts for each employer so that contributions provide benefits only for the employees of the contributing employer. There are no collective bargaining agreements requiring contributions in a multiple employer plan."
“Multiple employer plans” are 401(k) plans, so there is no PBGC role or potential PBGC liability.
Mark Johnson, Ph.D., J.D., is an experienced pension and ERISA expert. As 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.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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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.