The PBGC Multiemployer Insurance Program Deficit Increases
The Pension Benefit Guaranty Corporation’s (PBGC) Fiscal Year 2019 Annual Report was released in November, 2019. The Report showed that from FY 2018 to FY 2019 the Multiemployer Insurance Program’s deficit went up $11.3 billion (FY 2018- $53.9 billion; FY 2019- $65.2 billion), while the Single-Employer Program saw a positive net position of $8.7 billion.
The PBGC Multiemployer Program insures the pensions of roughly 10.8 million Americans in 1,400 insured plans and is likely to become insolvent by FY 2025 and nearly certain to become insolvent by the end of 2026. Upon the program’s insolvency, PBGC will only have incoming multiemployer premium incomes to provide assistance to insolvent plans. Such a trajectory could leave participants and beneficiaries with much less of PBGC’s guaranteed level of benefits and could also leave them doubtful of their retirement security. As a result, PBGC is calling upon Congress so that they may come together and consider new legislation that could save the Multiemployer Program.
By way of background, the PBGC defines a multiemployer plan as a pension plan sponsored by two or more unrelated employers under collective bargaining agreements with one or more unions. They are most often found in industries where workers move around from one employer to another, like trucking, retail food, construction, mining, and the garment industries.
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's no PBGC role or potential PBGC liability.
Factors Causing the PBGC Deficit
As of September 30, 2019, the Multiemployer Program had liabilities of $68 billion with assets of $2.9 billion. These numbers equated to FY 2019’s deficit of $65.2 billion. Although assets increased modestly from FY 2018 to FY 2019, it was not enough to offset the program’s total liabilities which increased from $56.2 billion to $68 billion. This leads to the question of what is the cause of the program’s increase in liabilities?
The FY 2019 cites the increased deficit being primarily due to changes in interest factors, “which resulted from decreases in market interest rates, actuarial charges related to expected interest on benefit liability, and the addition of new plans added to the multiemployer probable insolvency inventory.” In this sense, “probable insolvency inventory” means plans that are beginning to struggle and that will likely need assistance from the PBGC.
The Multiemployer Program had losses of $11.7 billion from providing financial assistance to insolvent and probable plans. Among these losses included, “change[s] in interest factors of $10.6 billion for identified probable plans, charges from new probable plans of $1.9 billion, and charges due to expected interest on benefit liabilities of $1.5 billion.” Further, FY 2019 was met with 15 new plans with net claims of $2 billion, the program’s administrative expenses of $40 million as well as other aggravating factors. The program was able to offset some of these expenses with $442 million in investment gains and $310 million in net premium income.
Moreover, In FY 2019, PBGC paid $160 million in financial assistance to 89 insolvent multiemployer plans. By the year’s end, 85 of the 89 insolvent plans from FY 2019 are expected to continue to need financial assistance covering about 66,900 participants currently receiving guaranteed benefits. Moreover, an additional 27,300 people are entitled to benefits once they retire. The other four plans were closed out by annuity purchases.
The PBGC continues to follow the changes mandated by the Multiemployer Pension Reform Act of 2014 (MPRA); taking advantages of the partition, transfer, and merger options that are available to eligible critical and declining plans. Further, during FY 2019, the PBGC performed eight audits of multiemployer plans covering more than 10,000 people. These audits ensure that assets in terminated and insolvent plans are being used effectively and in compliance with laws and regulations. The PBGC also abides by their three main goals which are: preserving plans and protecting pensioners, paying timely and accurate benefits, and maintaining high standards of stewardship and accountability.
The Single-Employer Program’s FY 2019 net position improved by $6.2 billion which resulted in a positive net position of $8.7 billion. According to the FY 2019, the factors which contributed to the program’s improvement include the program’s “gain of $14.8 billion in investment income, $6.4 billion in net premium and other income, and $811 million in credits from actuarial adjustments.” The favorable factors were offset by “$12.3 billion in charges due to interest factors, which resulted from decreases in market interest rates, $3 billion in charges due to expected interest related to PBGC’s liabilities as of September 30, 2018, $502 million in administrative, investment, and other expenses, and $91 million in losses from completed and probable terminations.”
The PBGC did not include anything in the FY 2019 Report that suggested what they may do differently in the future to improve upon the Multiemployer Program, although the PBGC did call upon Congress to enact new legislation to save the Multiemployer Program.
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.