In “Private Sector Multiemployer Pension Plans – A Primer,” researchers note the construction industry, which supports the largest component of multiemployer participants, is highly cyclical; the lack of new entrants to multiemployer plans leads to a very high ratio of retirees to workers; and withdrawal liability–the payments required when an employer exits a plan–is often inadequate so that “orphaned” participants–those left behind when employers exit–create a burden for remaining employers.
According to the brief, the construction industry accounts for about 40% of the multiemployer participants and 55% of all plans. Construction employment always dips sharply during recessions. Data from the U.S. Census Bureau shows the most recent recession and ensuing slow recovery hit the construction trades particularly hard: employment dropped from 7.5 million at the economic peak in 2007 to 5.6 million by 2010 and has been recovering only slowly since then. This impacts multiemployer plans because less work means lower employer contributions.
The researchers point out that, for a fully funded plan, such a reduction in contributions would not be an issue, because less work also means less accrued benefits for plan participants. But, for a financially troubled plan, the contributions for each active worker exceed the costs of the worker’s future benefits as they also cover a portion of the unfunded liability.
Data from the Pension Benefit Guaranty Corporation (PBGC) shows the number of multiemployer plans has contracted over the last three decades due to mergers, and the number of participants has increased only slightly. According to the brief, this is because unions are prime movers behind multiemployer plans, and union membership in the private sector has declined from 22% of workers in 1980 to 8% in 2013, and also because many of the industries for which multiemployer plans exist, such as manufacturing, have declined.
The researchers contend these trends are unlikely to reverse. Employers negotiating collective bargaining agreements are now reluctant to enter multiemployer plans, because they effectively are assuming some portion of the plan’s unfunded liability. Even if the plan is currently fully funded, they expose themselves to future expense if market conditions deteriorate and the plan becomes underfunded as a result. In addition, some employers are strategically negotiating withdrawals, based on the conclusion that the plan will eventually become insolvent and it is better to withdraw now before liabilities increase.
As a result, multiemployer plans now have a large number of older participants, who have accumulated substantial benefits under the plan and are either retired or close to retired, and a much smaller number of younger workers. These mature plans are much more vulnerable to financial losses, the brief says.
Employers who participate in multiemployer plans are allowed to exit the plan at any time (subject to collective bargaining obligations). In this case, their orphan workers no longer accrue benefits, but are entitled to vested benefits earned to date. To ensure the payment of benefits to these workers, the law requires exiting employers to pay a withdrawal liability to cover their share of the plan’s underfunding (if any).
However, the researchers say the system has serious limitations and often leaves the remaining employers burdened. Up to 2000, when plans were typically fully funded, withdrawing employers did not face any liability when they left, even though financial markets collapsed shortly thereafter. In addition, in situations where unfunded liabilities did exist, collections could be minimal if exits were due to bankruptcies. And, even in the absence of bankruptcy, the calculation may not capture the employer’s full liabilities because it is based on past contributions rather than attributed liabilities.
The brief also notes that the law places a 20-year cap on employer liability payments, and special rules allow, under certain circumstances, employers in the construction and entertainment industries to avoid any withdrawal liability.
To the extent that withdrawing employers do not pay enough to cover the full cost of their workers who remain in the plan, the burden falls to the remaining employers.
According to the brief, orphan participants constitute a significant share of total multiemployer participants. In 2010, a group of 400 plans reported having 1.3 million orphan participants out of 6.7 million total participants–roughly 20%.
The brief, the first of four planned to be released, describes the evolution of multiemployer plans since the 1980s and the nature of the current problems. Subsequent briefs will probe more deeply into the nature of the problems facing underfunded plans, assess the potential for the PBGC to protect workers in multiemployer plans, and evaluate proposed solutions.
The full brief can be downloaded from here.