A new report published by the Society of Actuaries (SOA) throws into
sharp detail the challenges faced by the U.S. multiemployer pension system.
Speaking about the report, Lisa Schilling, retirement research actuary
for the SOA, quickly pointed out that there are many multiemployer pensions
that are healthy and more or less entirely financially fit. In fact, there are
more than 1,200 multiemployer pension plans in the United States today,
covering about 10 million participants, including roughly 4 million retirees.
However, while most multiemployer plans are financially stable, a
growing number have been identified under federal law as “critical and declining.”
“Our study identifies more than 100 such plans that are meant to be
representative of the larger problem, excluding plans receiving Pension Benefit
Guaranty Corporation [PBGC] financial assistance or that have received approval
for benefit suspensions under the Kline-Miller Multiemployer Pension Reform Act
of 2014,” Schilling explains. “These plans cover roughly 1.4 million
participants—about 719,000 of them retired and receiving annual benefits totaling
more than $7.4 billion.”
As the SOA’s report shows, approximately 11,600 employers contribute to
these financially stressed multiemployer pension plans. Broadly speaking, many
of these plans are at risk of becoming insolvent within fewer than 10 years, the
research warns. Such insolvencies will obviously be harmful to the participants
and beneficiaries of the plans in question, but the loss of the significant economic momentum provided by
retirees spending their pension plan assets could also harm the wider economy
and, by extension, employers that otherwise have little affiliation with the
troubled multiemployer pension industry.
“The estimated unfunded liability of these plans is $107.4 billion when
measured at a 2.90% discount rate,” Schilling observes. “In our sample, there
are 21 plans with approximately 95,000 participants that are projected to
become insolvent by 2023, and 48 plans with approximately 545,000 participants
are projected to become insolvent by 2028. On average, only about two-thirds of
the pension benefits are estimated to be guaranteed by the Pension Benefit
Guaranty Corporation.”
Overall, the authors anticipate that some 107 plans will run out of assets
over the next 20 years, affecting over 11,000 contributing employers and
roughly 875,000 participants.
“These projections assume future annual investment returns of 6%,”
Schilling notes. This assumption was developed from several recently published capital
market outlook reports and surveys of various investment advisers, and
therefore differs from the long-term expected rates of return typically used
for minimum funding purposes. Projections that use more detailed plan-specific
data may render somewhat different results, although the general outcomes would
likely be similar.
SOA’s data suggests the estimated 2018 unfunded liability for these 115
plans, as measured on a minimum funding basis, is $57 billion. (When measured
at 2.90%, it is $108 billion. The discount rate of 2.90% represents a
liability-weighted average of Treasury rates in April 2018.)
“When Treasury rates are used to discount only the plan’s unreduced
benefit obligations after the point of projected plan insolvency, and the
minimum funding basis discount rate is used otherwise, these plans’ total
unfunded liability is $76 billion,” the report states. “Note that these
liabilities reflect full plan benefits without regard to PBGC guarantee
limits.”
Some of the conclusions in the report suggest many of these plans are
not likely to be able to effect a course correction without outside influence:
“Even with extraordinarily optimistic investment returns of 10% per year for 20
years, 68 of the 115 plans would be projected to become insolvent within 20
years.”
“Optimistic investment returns have limited impact on insolvency among
these plans primarily because their net cash flow positions tend to be severely
negative,” Schilling explains. “In 2018, 81 of the plans have annual negative
net cash flow that is 10% or more of their assets. In other words, unless these
plans’ assets earn at least 10% per year, the assets will decline. Twenty-seven
of the plans have negative net cash flow that is 20% or more of their assets.”
Schilling further warns this set of plans includes a number that are
large enough such that, if and when they run out of money, “they could
individually end up sinking the PBGC’s multiemployer insurance program
outright.”
“What that means is that the PBGC wound no longer be able to pay out
even its very modest benefits to the sizable number of multiemployer pension
plans that have already gone insolvent in the past,” Schilling explains. “That
would represent an even greater economic blow for everyone involved. You could
have folks retiring after 30 years of service literally getting a few thousand
dollars a year from a pension that should have been worth far, far more. You
have to ask, what will happen to food stamps and all the other social programs
that are out there to help prop people up when their income falls short? It’s
not encouraging.”
Thinking about where these issues may lead, Schilling says it seems
clear that Congress must act soon and with gusto, or else no real solution will
likely be possible. To this end, she is optimistic that U.S. Senators Orrin
Hatch and Sherrod Brown are seeking public and industry input on ways to improve the
solvency of multiemployer pension plans and the Pension Benefit Guarantee
Corporation. However, like many others, she is skeptical that legislative
action will be taken prior to the mid-term election.
“This is a particular shame because many of these plans are already past
the point of no return, and the sooner we can act, the better the outcome is
going to be for everyone,” she concludes.
Click here for the original article from Plan Sponsor.