The overall funding shortfall for all U.S. multiemployer plans increased by $5 billion for the year ending December 31, 2014, while the aggregate funded percentage decreased slightly, from 81% to 80%.
The Spring 2015 Milliman Multiemployer Pension Funding Study report says the key assumption 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 about 7.5%.
Milliman notes that multiemployer plans were more than 85% funded prior to the 2008 financial crash, and the significant improvement in aggregate funded status since early 2009 reflects not only favorable investment returns but also contribution increases (including withdrawal liability collections) and benefit reductions enacted by plans as they responded to the financial crisis. However, there is a common misconception that plans should be back on their feet because the stock market has surpassed its levels from before the financial crisis. Milliman points out that liabilities have been growing at 7.5% per year on average, so market prices would need to be significantly higher today than they were prior to the financial crisis to have kept pace with liability growth.
The study finds 285 multiemployer plans are more than 100% funded as of December 31, 2014, with an aggregate surplus of about $6 billion. The $60 billion shortfall for the 201 multiemployer plans that are less than 65% funded, about 15% of all plans, accounts for more than half of the aggregate deficit for all multiemployer plans of $117 billion.
Only 7% of multiemployer plans with positive cash flow are in critical status, while 72% of multiemployer plans with a negative 9% or more cash flow are in critical status. Cash flows are defined to be contributions less benefit payments and expenses, as a percentage of the market value of assets. While cash flow tends to correlate with zone status, Milliman says it does see plans with positive cash flow that are not in the green zone and plans with negative cash flow that are in the green zone.
To quantify the level of asset performance that plans will need, Milliman calculated an illustrative “recovery return” for each plan, which approximates the constant rate of return needed over the next 10 years for a plan to reach 100% funding. More than half of all plans would still need to earn 8% or more over the next 10 years to reach 100% funding within that time frame, assuming no changes to current cash flows. For all plans in aggregate, returns of 9.05% per year are needed over the next 10 years to reach 100% funding. Even if a plan recovers to 100% funding, the assumed return (7.5% on average) is still needed to stay fully funded.
The Milliman Multiemployer Pension Funding Study – Spring 2015 report may be viewed here.