Multiemployer DB Plans Show Signs of Recovery

Investment returns are the biggest factor in multiemployer plans’ funded status improvement, according to Milliman data.

Multiemployer defined benefit (DB) plan funding as of June 30, 2017, is nearing its best position since the market collapse of 2008, according to Milliman’s Fall 2017 Multiemployer Pension Funding Study.

The aggregate funded percentage for multiemployer plans is estimated to have improved to 81% as of June 30, compared with 77% as of December 31, 2016, reducing the system’s shortfall by $21 billion. The estimated investment return for our simplified portfolio for the first six months of 2017 was about 7.6%, outpacing plans’ investment return assumptions. Assumed returns are generally between 6% and 8%, with a weighted average interest rate assumption for all plans equal to 7.43%

The gap between the funded percentages of critical versus noncritical plans continues to widen. The aggregate funded percentage of critical plans remains around 60% as of June 30, while the funded percentage of noncritical plans is approaching 90% after a strong uptick in the first six months of 2017. The substantially lower asset base of critical plans (in relation to their liabilities) requires much stronger asset returns for these plans to see improvement in their funded percentages.

That fact, coupled with severe negative cash flow positions, has proven too difficult for critical plans to realize significant recovery in their funded percentages from their low points after the 2008 crash, according to Milliman.

While multiemployer pension plans continue to show signs of recovery, the universe continues to face significant pressures, with many of the most troubled plans on track to rely on assistance from the Pension Benefit Guaranty Corporation (PBGC), which is currently facing its own dire financial issues. Healthier plans face the risk of increased PBGC premiums, and Milliman says trustees for these plans need to be vigilant in monitoring financial trends and looking for ways to reduce risk exposure as their plans continue to mature.

The full Fall 2017 Multiemployer Pension Funding Study report may be downloaded from here.