March 5, 2013 (PLANSPONSOR.com) – During a hearing before the U.S. Senate Subcommittee on Health, Employment, Labor and Pensions, lawmakers heard the challenges facing multiemployer pension plans.
In his testimony, Pension Benefit Guaranty Corporation (PBGC) Director Joshua Gotbaum noted that multiemployer plans suffered significant market losses during the 2000s, causing the value of plan assets to plummet. Multiemployer plans that had been nearly fully-funded often dropped to less than 50% funded. The average funded ratios of these plans (which the agency defines as the market value of assets divided by liabilities discounted using a standardized PBGC interest factor) exceeded 90% in the 1990s, hovered in the mid-60% range in the mid-2000s, and fell below 50% after the 2008 market crisis.
In addition, tightened Pension Protection Act (PPA) funding requirements had taken effect, requiring plans for the first time to publicly certify their funding status. Employers and unions—which had come to depend on relatively stable contribution rates—were now asked to accept huge contribution rate increases, and plan trustees recommended benefit reductions.
Gotbaum said most plans have taken advantage of PPA funding rules and flexibility, and most plans can recover from the market collapses of the past decade on their own, but without changes, some severely distressed plans will not. While in the minority, a significant number of multiemployer plans are severely distressed. These are plans in declining or highly competitive industries, often characterized by high rates of employer bankruptcies and high ratios of nonsponsored or “orphan” participants, according to Gotbaum. He added that some large plans have lost thousands of contributing employers over the last two to three decades. These plans remain liable for the benefits of participants whose employers have withdrawn or gone out of business. In many cases, these orphan participants’ benefits were nearly fully funded in 1999 and 2000, but are now substantially underfunded due to market losses.