U.S. Multiemployer Pension Plan Pending Insolvencies
When a multiemployer pension plan fails, the Pension Benefit Guaranty Corporation (PBGC) provides financial assistance to the plan so that it can pay retirees’ benefits up to a maximum level defined by federal law. 1However, the PBGC projects that its multiemployer insurance program “is more likely than not to use up all of its assets by the end of fiscal year (FY) 2025.” 2
This study explores the projected impact of pending insolvency on 115 “Critical and Declining” multiemployer pension plans, their participants and contributing employers. The estimates result from publicly available plan-level information and a model developed by the authors, with the advice of several deeply experienced multiemployer actuaries.
Here are a few key highlights of the analysis:
- The authors project that 107 plans will run out of assets over the next 20 years, affecting over 11,000 contributing employers and roughly 875,000 participants. These projections assume future annual investment returns of 6%; this assumption was developed from several recently published capital market outlook reports and surveys of various investment advisors, and therefore differs from the long-term expected rates of return typically used for minimum funding purposes. Projections that use more detailed plan-specific data may render somewhat different results, although the general outcomes would likely be similar.
- The estimated 2018 unfunded liability for these 115 plans, as measured on a minimum funding basis, is $57 billion. When measured at 2.90%, it is $108 billion. The discount rate of 2.90% represents a liability-weighted average of Treasury rates in April 2018. When Treasury rates are used to discount only the plan’s unreduced benefit obligations after the point of projected plan insolvency, and the minimum funding basis discount rate is used otherwise, these plans’ total unfunded liability is $76 billion. Note that these liabilities reflect full plan benefits without regard to PBGC guarantee limits.
- The timing of solvency can be sensitive to investment returns. In general, plans that are closer to insolvency are less sensitive to investment returns than plans that have more time for investment returns to compound, either in their favor or against it. Even with extraordinarily optimistic investment returns of 10% per year for 20 years, 68 of the 115 plans would be projected to become insolvent within 20 years.
- Optimistic investment returns have limited impact on insolvency among these plans primarily because their net cash flow positions tend to be severely negative. In 2018, 81 of the plans have annual negative net cash flow that is 10% or more of their assets. In other words, unless these plans’ assets earn at least 10% per year, the assets will decline. Twenty-seven (27) of the plans have negative net cash flow that is 20% or more of their assets.
- Pending insolvencies are largely a function of existing liabilities for benefits that have already been accrued. While freezing or reducing benefit accruals would limit the growth of new unfunded liabilities, it would have little effect on the timing of insolvency among these plans over the next 10 years. However, when there are fewer active employees on whose behalf contributions are made, contributions may fall, hence hastening insolvency.
The authors extend thanks and deep gratitude to the following volunteers for their wisdom, advice and arm’s-length review of this study prior to publication. Each of these individuals shared their wealth of experience and expertise, from which this study benefited tremendously. Any opinions expressed may not reflect their opinions nor those of their employers. Any errors belong to the authors alone.
Christian E. Benjaminson, FSA, EA, FCA, MAAA
James B. Dexter, FSA, EA, FCA, MAAA
Cary D. Franklin, FSA, EA, MAAA
Eli Greenblum, FSA, FCA, EA, MAAA
Ellen L. Kleinstuber, FSA, EA, FCA, FSPA, MAAA
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1Sections 4022A and 4022B of the Employee Retirement Security Act (ERISA) govern multiemployer benefit guarantees.
2Pension Benefit Guaranty Corporation, FY 2016 PBGC Projections Report, p. 1.