PBGC Deficit on Multiemployer Plans Reaches $5.2 Billion
Underfunding of multiemployer pension plans is now at unprecedented levels, according to recent reports submitted to Congress by the Pension Benefit Guaranty Corporation (“PBGC”). As of fiscal year (FY) 2012, the PBGC multiemployer program held assets of $1.8 billion against liabilities of $7.0 billion for a net financial deficit of $5.2 billion.
Three reports were submitted to Congress by the PBGC in January of 2013:
• Multiemployer Pension Plans, Report to Congress
• PBGC Insurance of Multiemployer Pension Plans
• FY 2012 PBGC Exposure Report
The reports do not include recommendations, but when taken together provide an in-depth analysis of the financial challenges facing multiemployer plans. All reports are available on the agency website at PBGC.gov.
Outlook for Multiemployer Pension Plans Includes High Insolvency Risks
Actuarial projections for the PBGC’s multiemployer program reveal a 36 percent chance of insolvency by FY 2022 and a 91 percent chance of insolvency by FY 2032.
Several factors play a role in the deteriorating condition of multiemployer pension plans, including:
• Decline in active employees. Active participants, now representing only 39% of all multiemployer participants, are increasingly being asked to fund accrued benefits for the 61% of retired or separated participants. This situation becomes less sustainable with every passing year.
• Employer withdrawals. Over time the number of active employers contributing to multiemployer funds tends to decline. Some employers who depart voluntarily make an exit payment, such as when UPS paid $6.1 billion to leave the Central States Pension Fund in 2007. Often, however, employers in bankruptcy leave a pension plan with unfunded liabilities that they are not able to cover.
PBGC Guarantee Levels Vary Considerably Between Single and Multiemployer Plans
The PBGC charges multiemployer plan sponsors an annual premium of $9 per active or retired participant, increasing to $12 per participant for plan years beginning in 2013. Total multiemployer premiums during the fiscal year ended September 30, 2012 were $92 million.
Single-employer plans, by contrast, pay a significantly higher PBGC annual premium of $42 per participant. Underfunded single-employer plans also pay a variable-rate premium, but there is no variable-rate premium for underfunded multiemployer plans.
Multiemployer plan participants are guaranteed benefits of only $1,072.50 per month, translating to $12,870.00 per year, assuming 30 years of service. Benefits are statutorily set on a percentage scale tied to years of service.
Higher premium funding levels of single employer plans allow the PBGC to guarantee more generous payments. Monthly benefits are capped at $4,789.77 for single-employer plan participants in 2013, or $57,477.24 per year at age 65. (It should be noted that qualification requirements are strictly determined, with payments for the average plan participant being much lower than the maximum quoted.)
Background on Multiemployer Pension Plans
A multiemployer pension plan is defined under the Employee Retirement Income Security Act (ERISA) as a collectively bargained plan maintained by more than one employer, usually within the same or related industries, and a labor union. These plans are often referred to as "Taft-Hartley” plans.
Multiemployer pension plans are common in industries dominated by small businesses with fewer than 50 employees. Construction, trucking, retail food, garment manufacturing, entertainment (film, television and theater), and mining are the industries representing the largest number of multiemployer plans.
Leading U.S. Multiemployer Pension Funds
There are approximately 1,510 active multiemployer defined benefit pension plans covering 10.1 million participants, according to the Pension Benefit Guaranty Corporation (PBGC). Some of the largest multiemployer plans include:
• 1199SEIU Health Care Employees Pension Fund
• Western Conference of Teamsters Pension Plan
• Central States, Southeast and Southwest Areas Pension Funds
• Central Pension Fund of the IUOE & Participating Employers
• National Electrical Benefit Fund
• I.A.M. National Pension Plan
The ballooning deficits of multiemployer plans are likely to challenge Congress and the PBGC for years to come. Solutions to manage the rapidly growing unfunded liabilities will present difficult budget constraints for legislators and taxpayers. ERISA litigation is one likely outcome.
Mark Johnson, Ph.D., J.D., is a highly experienced 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.
Copyright ERISA Benefits Consulting, Inc.
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.