PBGC multiemployer pension plan reports raise alarms on underfunding

The Pension Benefit Guaranty Corp. raised alarms about the viability of the multiemployer defined benefit pension system in the U.S. when it sent three long-awaited reports to Congress on Jan. 29.

Those reports got the immediate attention of key legislators with jurisdiction over pension issues, who are now planning hearings on possible reforms. But multiemployer plan experts are raising the caution flag against a one-size-fits-all solution.

“(Multiemployer plans) are in all different shapes and sizes. The war (against underfunding) is going to be fought plan by plan,” said Eli Greenblum, senior vice president and actuary with The Segal Co., a multiemployer plan expert.

PBGC Director Joshua Gotbaum, whose reports came with no recommendations, agreed that the industry itself will meet the challenges. “The history of decision-making with regard to multiemployer pension systems is that it is best done at the initiative of the industry ... figuring out what they thought made sense.”

Given the combined news in the PBGC reports to Congress, they will have to get busy. Multiemployer plans had a 48% aggregate funding ratio, based on the PBGC's conservative interest rate assumptions. One of the most alarming statistics was the fact that only 39.3% of participants are active workers. Out of roughly 1,500 plans, 21% were in the “red zone” and facing significant, immediate funding problems.

It wasn't good news for the PBGC either. At current premium levels and economic conditions, the PBGC multiemployer pension insurance program has a 35% probability of being insolvent by 2022, and a 91% chance of insolvency by 2032, according to one of the PBGC reports. While the PBGC expects to collect $1.3 billion in the next decade in total premiums from multiemployer plan sponsors, potential new obligations of $37.6 billion could vastly eclipse that.

The National Coordinating Committee for Multiemployer Plans, Washington, which represents the plans, will soon unveil an ambitious set of proposals, ranging from minor legal changes to actions for deeply troubled plans to plan design innovations and ways to encourage greater participation. “Our proposal is really meant to be a look back to ERISA, and to get new ideas,” said Josh Shapiro, NCCMP deputy executive director for research and education. “The goal is to evolve.”

The Pension Protection Act of 2006 dictated that multiemployer plan trustees and their actuaries annually review and certify their funded status. If funding problems arise, they must classify their plan as either endangered, seriously endangered (yellow zone) or critical (red zone) — and take specific corrective action. The zones are determined by funding levels plus a series of other tests. For the critical red zone, the focus is on minimum funding requirements and plan solvency. In general, endangered are less than 80% funded and critical plans are less than 65% funded.

“In the absence of PPA, things would really be in a mess right now. You can't sit and hope to wait your way out of it,” said Segal's Mr. Greenblum.

With zone certification rules scheduled to end for plan years beginning after Dec. 31, 2014, Congress isn't going to wait either, said Phil Roe, R-Tenn., who chairs the House Education and the Workforce Subcommittee on Health, Employment, Labor and Pensions. “This affects a lot of people, and it also affects the taxpayers” if more plans default to the PBGC, he said in an interview. “I believe we have a real obligation to these folks. Both sides of the aisle are very committed to it, and we have to do it. We've got to change.”

According to The Segal Co.'s survey of 230 multiemployer clients with combined assets of $80 billion, 2012 saw a four-percentage-point dip from 2011, with 66% of plans in the healthy green zone, or at least 80% funded. That was significantly better than 2010 and 2009, when only 54% and 39% respectively, were deemed healthy but still not back to the pre-2008 level of 83%. Segal predicts that 13% of the green zone plans slip into yellow zone territory in the next few years. About 21% of the plans in Segal's survey are now funded at 100% or more.

NCCMP, which calculates funding differently than the PBGC does, estimates that the average multiemployer pension plan is approximately 75% funded currently. “And we believe that recent investment gains point to additional improvement in the funding levels,” Mr. Shapiro added.

“All things considering, it's been a pretty good three-year run,” agreed John DeMairo, president & CEO of Segal Rogerscasey, New York, noting that multiemployer plans had average returns in 2012 of 10% to 13%. “That is a pretty solid number. You're going to see double-digit returns, and that will continue to help.“

The more important indicator for multiemployer plans is funded status, he and others say. “You want to do asset allocation in view of how it is impacting the liabilities. If you're not tying it back to the funding level, you're missing half the story,” said Mr. DeMairo. “We're being very mindful of the zone status, and we help move them through the spectrum to fully funded status. They should be dynamic in their investment policy, which means a lot of different things in a lot of different places. “