Data and Research September 3, 2019
Orphan Participants Affecting Multiemployer Plan Funding
Plans with a higher ratio of inactive to active participants also report being in critical or critical and declining zone status with a higher frequency than other plans in the system, the PBGC found.
Reported by Lee Barney
In “Orphan and Inactive Participants in Multiemployer Plans, 2015 Plan Year Reporting,” the Pension Benefit Guaranty Corporation (PBGC) estimates that there are between 1.6 million and 2.5 million participants in orphan multiemployer plans, i.e. plans whose employer has withdrawn from the plan.
Orphan participants in ongoing plans that reported plausible non-zero values for orphans total 1.6 million, which accounts for 24% of participants in those plans and 16% of the 10.3 million participants in all multiemployer plans.
PBGC notes that employers are permitted to withdraw from a multiemployer pan, typically by paying withdrawal liability to the plan based on the plan’s funding level at the time of the employer’s withdrawal. The participants in the withdrawing employer’s plan are still entitled to receive their accrued vested benefit from the plan. The remaining contributing employers become financially responsible for funding the benefits of these “orphan” participants.
PBGC says it is possible for an orphan-heavy plan to be appropriately funded. However, the potential for future funding problems may still exist.
If an employer withdraws from a fully funded plan, it may owe no withdrawal liability payments. However, the orphaned participants no longer have an employer to backstop any changes in funded status, and if the plan experiences an unforeseen shock, the remaining employers and their workers must fund the benefits. On average, funding for multiemployer plans fell by more than 50% between 2000 and 2010. Plans that had employers withdraw before this period now face large funding shortfalls with fewer contributing employers.
In the case where a withdrawing employer pays its full withdrawal liability, the risks are similar to the scenario above—if the withdrawal is calculated on a market basis. Should it not incorporate the full market price, there is additional risk.
In the case where the withdrawing employer is unable to pay its withdrawal liability, the plan will seek to fund the gap by taking on riskier investment strategies or by requiring the other participating employers to make up the difference. Requiring higher contributions can affect the remaining employers’ ability to compete both in terms of attracting and retaining employees and in terms of cost structure and profitability.
In conclusion, PBGC says multiemployer plans are seriously underfunded, with 130 projected to become insolvent in the next 15 to 20 years. The concentration of orphan participants varies by industry, with five industries reporting that 25% or more of participants are orphans. Those are: agriculture, mining, manufacturing, transportation/utilities and leisure/hospitality. The orphan burden is significantly higher, when measured as the ratio of the number of orphans to the number of active participants, for plans in agriculture and mining (ratios of 6.6 and 4.8, respectively).
Plans reporting a zone status of critical or critical and declining have a much higher concentration of orphans than plans in the green zone. Plans with a higher ratio of inactive to active participants report being in critical or critical and declining zone status with a higher frequency than other plans in the system.
The worse the zone status, the higher the concentration of orphans and the higher the ratio of inactive to active participants. Both orphaned participants and inactive participants are concentrated in plans experiencing financial distress.
Legislation has been introduced that would provide funds for 30-year loans and new financial assistance, in the form of grants, to financially troubled multiemployer pension plans.
Orphan participants in ongoing plans that reported plausible non-zero values for orphans total 1.6 million, which accounts for 24% of participants in those plans and 16% of the 10.3 million participants in all multiemployer plans.
PBGC notes that employers are permitted to withdraw from a multiemployer pan, typically by paying withdrawal liability to the plan based on the plan’s funding level at the time of the employer’s withdrawal. The participants in the withdrawing employer’s plan are still entitled to receive their accrued vested benefit from the plan. The remaining contributing employers become financially responsible for funding the benefits of these “orphan” participants.
PBGC says it is possible for an orphan-heavy plan to be appropriately funded. However, the potential for future funding problems may still exist.
If an employer withdraws from a fully funded plan, it may owe no withdrawal liability payments. However, the orphaned participants no longer have an employer to backstop any changes in funded status, and if the plan experiences an unforeseen shock, the remaining employers and their workers must fund the benefits. On average, funding for multiemployer plans fell by more than 50% between 2000 and 2010. Plans that had employers withdraw before this period now face large funding shortfalls with fewer contributing employers.
In the case where a withdrawing employer pays its full withdrawal liability, the risks are similar to the scenario above—if the withdrawal is calculated on a market basis. Should it not incorporate the full market price, there is additional risk.
In the case where the withdrawing employer is unable to pay its withdrawal liability, the plan will seek to fund the gap by taking on riskier investment strategies or by requiring the other participating employers to make up the difference. Requiring higher contributions can affect the remaining employers’ ability to compete both in terms of attracting and retaining employees and in terms of cost structure and profitability.
In conclusion, PBGC says multiemployer plans are seriously underfunded, with 130 projected to become insolvent in the next 15 to 20 years. The concentration of orphan participants varies by industry, with five industries reporting that 25% or more of participants are orphans. Those are: agriculture, mining, manufacturing, transportation/utilities and leisure/hospitality. The orphan burden is significantly higher, when measured as the ratio of the number of orphans to the number of active participants, for plans in agriculture and mining (ratios of 6.6 and 4.8, respectively).
Plans reporting a zone status of critical or critical and declining have a much higher concentration of orphans than plans in the green zone. Plans with a higher ratio of inactive to active participants report being in critical or critical and declining zone status with a higher frequency than other plans in the system.
The worse the zone status, the higher the concentration of orphans and the higher the ratio of inactive to active participants. Both orphaned participants and inactive participants are concentrated in plans experiencing financial distress.
Legislation has been introduced that would provide funds for 30-year loans and new financial assistance, in the form of grants, to financially troubled multiemployer pension plans.