Questionable Future for Multiemployer Pension Plans

The overall funding shortfall for all multiemployer plans in the Milliman Multiemployer Pension Funding Study – Fall 2016 analysis declined by about $1 billion for the six-month period ending June 30, 2016, while the aggregate funded percentage increased slightly from 75% to 76%.

The key assumption here is the discount rate used to measure liabilities, with each plan using its actuary’s assumed return on assets assumption. Assumed returns are generally between 6% and 8%, with a weighted average assumption for all plans of just below 7.5%. It is noteworthy that about 200 plans have decreased their assumed rate of return over the last several years, which contributes to an increase in the shortfall.

Since the end of 2013, multiemployer plans have not been able to make additional progress in the wake of less-than-favorable investment returns in 2014, 2015, and the first half of 2016. In general, the funded status of these plans continues to be driven largely by investment performance.

The aggregate funded percentage of critical plans remains less than 60% as of June 30, 2016, while the funded percentage of noncritical plans is in excess of 80%. Since 2015, the estimated funded percentage projection for critical plans has leveled off while the line for the non-critical projection plans has increased slightly.

Since Milliman’s first study as of December 31, 2013, the percentage of plans in critical status has remained consistent at about 25% of all plans. The number of plans that are less than 65% funded showed little change and continues to account for more than half of the aggregate deficit for all multiemployer plans of $150 billion. Starting with 2014 Internal Revenue Service (IRS) Form 5500 filings, new information is provided for critical plans. Milliman reviewed the new statistics for the 320 critical plans in its study for which this information is available. Of these, 40% are projected to become insolvent at some point, while the remainder are projected to emerge from critical status in the future.

Looking ahead, the $41 billion shortfall for plans headed toward insolvency is likely to increase, short of sustained excess returns, significant contributions increases, or benefit suspensions that may be adopted under the Multiemployer Pension Reform Act of 2014 (MPRA). While some plans may become eligible for suspensions and decide to pursue these changes, it is still too early to gauge the impact they might have on the health of those plans or whether they can gain approval from the U.S. Treasury Department first, and then their participants, Milliman says.

The firm notes that the Central States Teamster Fund application for suspensions was denied by the Treasury; therefore, the fund will not make another application. This fund alone represents almost $20 billion of underfunding, approximately half of the above $41 billion.

So what happens if market returns do not improve? Can funds survive without better asset performance? In the aggregate, the return for the rest of 2016 needs to be 3% to remain at the current 76% funded percentage level. A strong 9% return for the second half of the year would result in aggregate funding greater than 80%, while a poor -3% return would pull it down toward 70%. The return for Milliman’s sample portfolio for the third quarter of 2016 was more than 3%. That result has the potential to place the aggregate funded percentage on the middle prong at the end of 2016.

The future health of most multiemployer plans very much depends on investment performance, Milliman notes. For critical plans, persistent strong returns will likely be needed to recover. For critical and declining plans, prospects for MPRA benefit suspensions and/or partitions may offer some relief. Failing that, such plans may end up relying on assistance from the Pension Benefit Guaranty Corporation (PBGC), which is facing its own financial issues. 

Healthier plans face the risk of increased PBGC premiums and trustees for these plans need to be vigilant in monitoring the financial trends and risk exposures, Milliman suggests. Trustees may also want to explore potential plan design changes such as variable annuity plans (e.g., a Sustainable Income Plan), which could mitigate the negative impact of future market volatility.