Strong investment performance in 2021 led to an aggregate funded percentage for all multiemployer plans of 91% as of December 31, up from 88% at the end of 2020, according to Milliman’s “Multiemployer Pension Funding Study: December 2021.”
While news reports about multiemployer plans have been mostly negative, focusing on those plans in critical and declining status, Milliman finds 80% of plans are at least 80% funded, and 55% of all plans are 100% funded or better. Per the Pension Protection Act of 2006, plans that are 80% funded or better are considered “green zone” plans.
Ten percent of plans were less than 60% funded at the end of 2021 and may be headed toward insolvency, according to Milliman. While these plans may have exhausted all reasonable measures to improve, the Special Financial Assistance program established by the American Rescue Plan Act could provide help to many of them. However, Milliman points out, the application period for most eligible plans is scheduled to open on March 11, 2023, so the impact of the SFA will not be seen for a few years.
The Pension Benefit Guaranty Corporation has already accepted applications for some plans, and, to date, five plans in critical and declining status have received approval for a total of $992 million in SFA. Milliman expects the SFA will have a significant impact on funded percentages of eligible plans in the coming years.
Recovery Since the Great Recession
The aggregate funded percentage of plans that are in critical and declining status (i.e., less than 65% funded and projected to become insolvent within a short time frame) is less than half of what it was back in 2007. These plans have not been able to recover on their own, Milliman reports.
However, in aggregate, plans that are not in critical and declining status have recovered from the 2008 global financial crisis and are now better funded than they were in 2007. Milliman notes that many of these plans are also better funded based on lower discount rates today. The average discount rate is now below 7%. Nearly half of all plans have lowered their discount rates over the past five years.
Milliman warns that prospects for continued improvement for plans that are not in critical and declining status remain highly dependent on asset performance, which is influenced by economic uncertainty related to inflation and the pandemic. Also, increasing negative cash flows put even more pressure on plans to achieve their targeted returns.
In the aggregate, these plans can withstand a year in which investments underperform by 10%, as their aggregate funded status is still expected to improve. However, plans in critical and declining status continue to trend toward insolvency, even with a potential one-year outperformance of 10%. Milliman notes that its projections do not reflect any SFA for eligible plans in the coming years.
The COVID Effect
Milliman says some data has begun to emerge from plan filings on the effect the COVID-19 pandemic has had on multiemployer plans, but it is too early to draw definitive conclusions.
Its study analyzed 2020 contribution information for calendar year plans and found, when compared with 2019, that aggregate contributions for green and yellow zone (funded ratio between 65% and 79%) plans dropped about 5%, while contributions for red and deep red zone plans increased 2% to 3%. Plans in the red zone are less than 65% funded and are categorized as critical. Plans in critical and declining status are deep red zone plans.
Milliman speculates that contribution income in the aggregate was influenced by decreased workforce levels in some industries due to COVID-19. However, unhealthy plans may have seen an increase in contributions due to rehabilitation plan requirements and/or withdrawal liability income, despite the impact COVID-19 might have had on workforce levels.
“Future funding levels for multiemployer plans will depend on the resiliency of industries to restore and/or maintain work levels under changing conditions to avoid deteriorating contributions,” Milliman says.
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