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 These plans remain liable for the benefits of participants whose employers have withdrawn or gone out of business.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.
Severely distressed plans generally have many more retirees than active participants—active participants may constitute only 10% to 15% of all participants, while 50% or more participants may be retirees drawing benefits.
Gotbaum said the challenges faced by these plans are often plan-specific issues that the employers and employees in each industry and each plan must tackle individually. They will need added flexibility to manage their finances and extend their solvency. He suggested discussions for further reforms should start with consideration of proposals now being developed jointly by multiemployer plans and their constituencies—including proposals to help distressed plans avoid or forestall insolvency.
Many of these proposals emphasize additional flexibility in plan design, cost-sharing, as well as funding. Gotbaum noted that the Administration has not taken a position on these proposals; it is too early to do that in advance of the specifics. However, as in PPA, government should allow plans the flexibility to solve their own problems.According to Gotbaum, this is not just an issue for the distressed multiemployer plans. Because many plans have common employers—particularly large employers—the failure of one plan and resulting imposition of withdrawal liability on its contributing employers can have a ripple effect on many other plans. Furthermore, the failure of plans in one industry can affect the participation of other employers in other industries. Thus a failure in one plan could be devastating for thousands of employers and participants in many plans.
PBGC’s program and finances also should be re-examined, Gotbaum recommended. The multiemployer insurance program that was established under ERISA in 1974 was revamped in 1980. However, it has been more than 30 years since the fundamental structure of the program has been re-examined.
He noted that unlike with single-employer plans, in most cases PBGC cannot step in until a multiemployer plan has collapsed and run out of money. When all contributing employers withdraw from a plan and the plan’s assets are exhausted, PBGC provides the plan financial assistance to pay participants a statutorily guaranteed benefit for the rest of their retirement lifetimes.
Gotbaum told the hearing attendees the PBGC does not have the financial resources to help distressed plans directly. "For example, plans frequently request our financial help to facilitate the merger of a weaker plan into a stronger one. While PBGC has been able to assist in a few cases—where the weaker plan is near-insolvent and the financial assistance involved is generally small—the agency has neither the authority nor the money to help plans achieve these goals more broadly," he said.
Some plans have proposed that they be partitioned so that active employers can support their own employees, rather than the employees of companies that withdrew or went out of business long ago. “While we continue to explore use of this tool (under statutory requirements that are difficult to meet), we do not have the resources to assist plans and employers, even in circumstances where a plan could be preserved if released from the unfunded liabilities of nonsponsored participants,” Gotbaum stated.A webcast of the hearing and testimony can be viewed here.