Society of Actuaries: 115 multiemployer pensions in ‘critical condition’

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Most multiemployer pension plans are in fairly good shape, but there is a large group of plans that fall into the dark red category, meaning they are critical and declining plans that are expected to become insolvent in the next 20 years.

The Society of Actuaries this week identified 115 plans that are in trouble, with 107 of them projected to run out of funds in the next 20 years, and the other eight projected to run out shortly thereafter. The troubled plans cover 1.5 million participants and hold $41 billion in assets. They have $57 billion to $108 billion in unfunded liability, depending on which discount rate is used to determine liability, according to Lisa Schilling, retirement research actuary at the Society of Actuaries.

The good news is that most multiemployer plans are at least stable, says Schilling. They might have unfunded liabilities but they are getting them funded and chugging along.

But the bad news is that 115 plans the Society of Actuaries identified are in a difficult financial situation. And because some of them are very big, they will have an impact not only on the U.S. population but the Pension Benefit Guaranty Corporation as well, she says.

“The PBGC is already struggling in two ways: They have been spending down the asset reserves they had built up on the multiemployer side. That is not a good trend,” she says. Secondly, “when they put out big flags that say we are looking at running out of money in 10 years, 2025, they are looking at these plans, including critical and declining plans, including that expectation they will have to provide support for those plans.”

There isn’t much that can be done for the plans that are likely to go insolvent in the next five years, she adds.

“They are in such dire straits it would take a lot of money, really fast, to get money into those plans and let them use it,” Schilling says. “But the plans that are in that 10- to 20-year range in terms of their projected insolvency base, there is an opportunity to do something to help them. The things to be done are not fun things — find money or cut benefits.”

The difference between the single-employer program and the multiemployer program at the PBGC is that the PBGC won’t take over administration of a multiemployer plan if it becomes insolvent. Instead, it provides financial assistance to the plan so that it can keep running and paying the guaranteed amounts as set forth in the law.

When multiemployer plans were first founded, they seemed like a very good idea, explains Elliot Dinkin, president and CEO of Cowden Associates in Pittsburgh. A lot of smaller and mid-sized employers who were in the same industry decided to band together to offer a centralized benefits plan for their employees. All the employers had to do is send in a check to fund the benefits.

Of course things happen overtime, he says. There are reductions in the workforce so “the amount of people leaving the plan for retirement was outpacing the number of people coming in,” Dinkin explains. “Over time, what happened to those plans is that all the assumptions about their future didn’t hold true.”

All multiemployer pension plans are placed in groups — red, green or yellow — to show how funded or underfunded they are. Green plans are on track, yellow plans must explain how they are going to get their plans to green and red and dark red are plans that are in critical condition.

“The PBGC is the ultimate backup for these plans,” Dinkin says. The country still has a large number of plans faced with a looming crisis. Many have cut benefits for future recipients and those who leave for disability or early retirement reasons. The IRS also said that if a multiemployer pension plan is severely underfunded, it will allow the plan sponsor to reduce benefits for current retirees provided they meet certain conditions.

“This already has started happening,” Dinkin says. “Several plans have been approved.”

As part of the tax law that was passed in December, a joint committee was created to come up with legislation or other solutions to this problem, he says. The report on multiemployer plans has to be presented by November 2018.

“I have not been able to hear about their deliberations or if they created the committee,” he adds. “It is supposed to be a bipartisan committee on multiemployer plans.”

The problem with multiemployer plans is that participating members aren’t required to show their unfunded liability on their financial statements; it’s a footnote mention. The other problem is that some MEPs have so many participating companies that they can’t all be represented on the governing committee, so many of them have a difficult time figuring out what their own liability will be as part of the overall plan’s unfunded status, industry insiders say.

Many of these plans were negotiated by unions so there are representatives of the companies and representatives from the worker unions negotiating what the contribution level from each company will be as part of a collective bargaining agreement. Unfortunately, if the industry is declining, like coal mining for instance, and the number of people working in the industry is declining, it means that there is a lot less money coming into the pension plans than was expected at the time of the negotiations, Schilling explains. Companies are still expected to keep up with their monthly contributions, even though conditions have changed.

“It’s a precarious set of situations,” she adds. “As long as the economy is doing well and the industry plan is doing well, it all works well.”
If any part of the equation starts to go south, then these plans have a problem.

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Retirement planning Retirement benefits Pension reform