The PBGC’s “FY 2013 Projections Report” finds the financial condition of agency’s insurance program for single-employer plans, which covers about 30 million participants, is likely to improve over the next decade. Under current estimates, the fiscal year 2013 deficit of $27.4 billion is projected to narrow to, on average, $7.6 billion by fiscal year 2023. The PBGC notes it is highly unlikely the single-employer program will run out of funds in the next 10 years.
“We ran approximately 5,000 scenarios for single-employer plans and not one of them indicated that they would run out of money,” said Christopher Bone, director of PBGC’s Policy, Research and Analysis Department, at a Washington, D.C.-based press event.
Multiemployer plans are another matter. “Until the last five years or so, multiemployer plans were relatively stable,” said Bone. However, the report finds that despite substantial economic and market gains, multiemployer plans covering about 1.5 million people are severely underfunded, threatening benefit cuts for current and future retirees.
Over the past year, economic conditions improved significantly and most multiemployer plans are projected to remain solvent. However, the report finds that despite the improving economy and strong asset returns in 2013, some already distressed plans remain critically underfunded and will not be able to further raise contributions or reduce benefits sufficiently to avoid insolvency.
Bone explains that two main drivers giving multiemployer plans problems are plans are unable to raise contributions as quickly as they need to, and plans are unable to make use of all the tools available to dig themselves out of trouble, such as making changes to plan design.
Using a new methodology that takes this into account, PBGC’s new projections show insolvencies affecting more than a million of the 10.4 million people in multiemployer plans are now both more likely and more imminent.
“If nothing is done to sustain multiemployer, the retirement security of more than 10 million people could be at risk,” said PBGC Director Josh Gotbaum during the press event. “Absent changes in the law and additional PBGC funding, plans will fail, retiree benefits will be cut and the PBGC itself will be insolvent and unable to prevent it.”
According to the report, the failures of these plans will drain PBGC’s multiemployer program of its assets, leaving PBGC unable to pay guaranteed benefits. PBGC estimates that, absent premium increases or changes in law, the program is more likely than not to run out of funds in eight years and highly likely to do so within 10 years.
“By 2023, there is approximately a 75% chance of insolvency for PBGC’s multiemployer program,” said Bone.
Reflecting these developments, the report projects that the multiemployer program’s fiscal year 2013 deficit of $8.3 billion will widen to, on average, $49.6 billion by fiscal year 2023. The projections in this report take into account both the improving economy and the new methodology. The improving economy has had a substantial effect. If the current methodology for projecting plan responses were applied to the economic circumstances a year ago, the average projected deficit for 2022 would have been $79.6 billion, rather than the $26.2 billion in last year’s report. The report measures the impact of the improving economy in several ways, and each measurement shows that the economy reduced the average deficit that would have otherwise applied by approximately one-third.
PBGC made changes in the projection methodology based on recommendations from an external peer review of PBGC’s Pension Insurance Modeling System. The changes reflect a more current understanding about the actual experience of multiemployer pension plans, particularly that many troubled plans have concluded some remedial measures, though legally available, are infeasible in practice, and raising sufficient additional contributions from active employers is also infeasible.
Participants in failed plans are likely to experience significant benefit reductions under PBGC’s current guarantee program, since PBGC multiemployer guarantees are much lower than those in its single-employer program, according to the report. If, as projected, PBGC itself becomes insolvent, then guarantees will be reduced much further.
More information, including where to download the report, can be found here.