A greater number of multiemployer retirement plans may be at risk of falling into insolvency than previously thought, raising the specter of benefit cuts and fueling fears of a possible taxpayer bailout unless Congress acts.
The Center for Retirement Research at Boston College, having reviewed the state of MEPs after the one-two punch of the dot-com crash and the 2008-09 financial meltdown, estimates that about 35% of MEPs will exhaust their assets over the next 30 years.
That’s a considerably higher estimate than the 25% figure put out by the Government Accountability Office.
The state of multiemployer plans – in which many companies join with a union to provide benefits – drew a good deal of attention this summer, after the Pension Benefit Guarantee Corp. released a grim projection forecasting swelling multibillion-dollar deficits in its MEP insurance fund.
According to the agency’s figures, its MEP program deficit could rise to a staggering $47 billion by fiscal 2023. The PBGC now has just $1.8 billion in its MEP insurance fund.
There are about 1,400 MEPs with about 10.4 million participants nationally. Unless Congress agrees to raise MEP premiums paid to the PBGC, some 1.5 million beneficiaries in 175 MEPs could be left without benefits, the PBGC said.
That number may, in fact, be understated, according to the Center for Retirement Research.
Under the Pension Protection Act of 2006, critically underfunded plans – those least able to meet their pension obligations – are considered red-zone plans. Endangered plans fall into a yellow zone and all others are in a green zone.
There are several ways a plan can end up in the red zone. One way is for its funding levels to fall to 65% or lower, with insolvency projected within seven years or less. Plans with funding levels at or below 80% fall into the yellow zone. Red-zone plans can take a number of steps to move back into the yellow or even green zone, including making benefit cuts, increasing contributions, or halting lump-sum payouts and ending early retiree buyouts.
According to a new CRR paper, in 2008, “data for a sample of one-quarter of multiemployer plans show that 80% of plans were in the green zone, 11% in the yellow zone, and 9% in the red zone.”
However, once the financial crisis hit, the number of plans in the red and yellow zones zoomed up, while those in the green zone shrank alarmingly. At present, said the paper, “roughly 60% of plans are in the green zone, 14% in the yellow zone and 27% in the red zone.”
In other words, three times as many plans are in the red zone today as there were before the Great Recession.
Economic downturns aside, another trend contributing to the growing underfunded status of multiemployer plans, according to the CRR research, is “the relative size of the population of active workers (in multiemployer plans) and its impact on cash flow.”
In other words, these troubled plans don’t have enough workers contributing to cover benefits, much less grow the balance of the plan to provide benefits when they’re ready to retire. Their cash flow is simply negative.
Randy DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans, thinks that the numbers in the CRR paper might be a bit overstated.
It’s difficult, DeFrehn said, to know exactly how many plans are in trouble because there’s “a lot of commonality, especially in the same industry … four or five [firms within the industry] may be dominant players in a plan that may not be well funded. [One] employer will get hit, and the impact isn’t limited to that plan, but will also spread across all the other plans. So not knowing the extent to which we have cross-pollination of employers, that’s part of [the difficulty].”
On the other hand, he said that PBGC’s lower estimates might be on the conservative side, because “they are the agency that has to find resources to meet those obligations.”
The fact that multiemployer plans are funded differently from single-employer plans also accounts for some of the problems. Single-employer plans are funded by the employer, who can suspend contributions if the plan’s assets are registering adequate returns. Employers in multiemployer plans, however, may not suspend contributions.
While the economy was thriving, that wasn’t a problem.
When the dot-com bubble burst, plans lost 15-25% of their funded value. Then, as plans struggled to recover from what were suddenly underfunded balances, the PPA was passed. When it became effective in 2008, said DeFrehn, plans were determined not to end up in either the red or yellow zone, “so they increased contributions and reduced benefit accruals so they wouldn’t have to worry about getting into [the red or yellow zones] in case of a once-in-a-lifetime event. Then we had two [once-in-a-lifetime events] within six years.”
Naturally, things went from worse to worst.
Markets plunged and some plans found themselves with negative funding levels approaching 30%.
In addition, the 2008 crisis put so many people out of work that some plans had more inactive participants drawing benefits than they had active participants making contributions. Businesses were hit hard and some folded, further reducing the pool of incoming employer contributions.
Looking ahead, DeFrehn said real remedies will require more drastic action. His group, he said, has been working with Congress for the past year on legislative reforms.
The hope, he said, is to provide retirement security and a regulatory framework that will “not just enable the plans to endure, but must also respect the delicate balance between adequate pension funding and the economic viability of the contributing employers.”
DeFrehn’s organization has included its best thinking in a report issued last year titled, “Solutions not Bailouts: A Comprehensive Plan from Business and Labor to Safeguard Multiemployer Retirement Security, Protect Taxpayers and Spur Economic Growth.” In it, he and colleague Joshua Shapiro offer a series of recommendations to strengthen the existing system and to help deeply troubled plans.
Among those recommendations: making it easier for a troubled plan to enter critical status earlier and remain in that status longer if necessary to resolve its issues. It also recommends allowing plan mergers and alliances, as well as potential benefit suspensions, although under limited circumstances and only with PBGC approval. The organization also suggests the possibility of creating variable annuity plans.
DeFrehn said the group’s recommendations were conceived with the hope of providing greater stability and surety on both sides of the bargaining table. So far, however, Congress has failed to act.
“Every day of inaction (by Congress) results in fewer plans that can be rescued by these common-sense solutions,” DeFrehn wrote in a Huffington Post commentary this summer.
Members of Congress returned this week to Capitol Hill after a five-week summer break. Whether the lawmakers respond any time soon appeared unlikely.
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