The Retirement Report, Summer 2019
Vol 2 | No. 3
A Deep Dive Into Multiemployer Pension Plans
RussellThe Academy hosted three Capitol Hill briefings in July and early August for federal policymakers’ staff, covering a range of issues related to multiemployer pension plans (see story, following). Jason Russell, chairperson of the Multiemployer Plans Committee, participated in two of the three panels, and did a Q&A with The Retirement Report about some of the actuarial issues surrounding multiemployer plans.
For those who have seen the headlines about the multiemployer crisis, can you provide some perspectives on what the crisis entails and how it may affect participants in multiemployer plans?
In total, there are almost 1,250 active, ongoing multiemployer pension plans in the United States, covering more than 10 million workers, retirees, and beneficiaries. These plans cover workers in various industries, including construction, service, retail, trucking, manufacturing, and entertainment. The multiemployer pension system is facing a solvency crisis, because approximately 130 plans covering more than 1 million participants are in “critical and declining” status, meaning they are projected to run out of money in the next 20 years. Many plans will run out of money much sooner than that.
When a multiemployer pension plan runs out of money—in other words, becomes insolvent—benefits are guaranteed up to a certain level by the Pension Benefit Guaranty Corporation (PBGC), the federal agency responsible for insuring private pension plans. The benefits guaranteed by the PBGC for multiemployer plans are modest. For example, the maximum benefit PBGC would guarantee for a multiemployer plan participant who worked for 30 years would be only about $1,000 per month, even if the benefit promised by their plan was much greater.
However, the current multiemployer solvency crisis will also bankrupt PBGC’s multiemployer program, most likely around 2025. Absent some legislative change, after its multiemployer program becomes insolvent, PBGC would only be able to pay a small fraction of its already-modest guarantee levels. In the end, retirees and beneficiaries of insolvent plans will be paid mere pennies on the dollar, relative to the benefits they thought they would receive, or are already receiving, in retirement.
The multiemployer pension solvency crisis is real. Absent legislative action, over a million workers, retirees, and beneficiaries stand to lose nearly all of their hard-earned pensions.
Generally, how did certain multiemployer plans come to be in “critical and declining” status? What did they do differently than other plans that are better funded?
In most cases, a plan that is in critical and declining status has a significantly weakened contribution base and is demographically mature. When the number of inactive and retired participants dwarfs the number of active participants, a plan sponsor has limited options to change the plan’s trajectory and improve funding levels. As a result, such plans are more susceptible to investment volatility and other adverse experience.
It’s important to note that sponsors of plans in critical and declining status didn’t necessarily “do” something differently from sponsors of healthier plans. Data on multiemployer plans shows no significant differences in investment performance between plans in declining status versus those that are not projected to become insolvent. There is also evidence that plans in all statuses have taken significant action—such as reducing benefit levels and increasing employer contribution rates—to improve funding levels or forestall insolvency.
When a multiemployer plan’s contribution base deteriorates—thus putting the plan more at risk to adverse experience—it is often due to reasons outside the plan sponsor’s control. Changes in industry (for example, manufacturing, mining, trucking, and retail) can drive significant declines in a plan’s contribution base. So can the bankruptcy of one or more significant employers that contribute to the plan.
How have the differences between corporate and multiemployer plans contributed to the current state of the multiemployer system?
Given the fact that about 10 percent of multiemployer pension plans are headed toward insolvency, it is easy to say that the multiemployer system is in a worse state than the single-employer (corporate) system. It is important to keep in mind, however, that high-profile bankruptcies in the corporate world over the past several years have led to failed pension plans being taken over by PBGC. (In some cases, volatile pension contribution requirements contributed to the bankruptcies of the sponsoring companies.)
It is also important to consider pension participation rates for current active employees. Many single-employer plans are either closed to new employees or completely frozen for future benefit accruals. On the other hand, the vast majority of multiemployer plans provide future benefit accruals to active participating employees.
By design, multiemployer pension plans are often more stable than single-employer plans, due to the pooling of risk across employers. When one employer leaves a plan, theoretically, another may take its place. If not, at least the remaining employers will continue to support the plan. This model can work well in thriving industries.
When industries are declining, however, the story is quite different. Employers that leave due to bankruptcy are not able to pay their share of any underfunding, and new employers rarely come to take their place. The result is increasing financial strain on the employers remaining in the plan, with very little (if any) actions the plan sponsor can take to keep the plan solvent.
The Academy’s July 15 briefing provided background on the multiemployer pension system, including the changes in demographics and industry that have pushed some plans toward insolvency.
The U.S. House of Representatives passed legislation in late July (read the Academy alert) that would provide loans to troubled plans. Are there other approaches that could help these plans that are closest to failing, and how should options be evaluated?
The bill the House just passed is the “Rehabilitation for Multiemployer Pensions Act.” The Senate’s version of the legislation is called the “Butch Lewis Act,” which was originally introduced in late 2017. In early 2018, the Academy released an issue brief on providing loans to troubled multiemployer plans to enable them to remain solvent. The concepts that are addressed in that issue brief are still relevant today.
Also in early 2018, Congress formed the Joint Select Committee on Solvency of Multiemployer Pension Plans. In June of that year, Academy representatives met with committee staffers to discuss loan programs and also other measures that could enable the most troubled plans to remain solvent. In particular, removing plan liabilities—for example, through a portion by the PBGC—could enable the remaining plan to achieve projected solvency. A summary of the topics discussed at the meeting is published on the Academy website.
The Academy’s July 22 briefing discussed possible measures to enable troubled plans to remain solvent as well.
What type of measures/changes could provide long-term sustainability for the system?
As Congress looks to implement changes that will strengthen the multiemployer pension system, there should two goals: securing past benefit promises and keeping the system open and viable for future generations. These two goals are closely related, in that they both will be achieved only by keeping current employers and active employees in the system. If changes in statutory funding rules for multiemployer plans cause employers or employees to want to leave the system, it will not only shift future employees away from defined benefit pensions, but it will also weaken funding for past benefit promises.
The Academy’s Aug. 2 briefing discussed various components of possible reforms to strengthen the multiemployer system going forward. Funding rules that encourage (or require) earlier corrective action, provide additional tools for plan sponsors, and allow alternative plan designs could all be part of a balanced solution.
The Academy’s Pension Practice Council (PPC) hosted three standing-room-only pension briefings on Capitol Hill in July and early August featuring expert panelists from the PPC’s Multiemployer Plans Committee. The series of briefings provided essential background on the multiemployer pension crisis and its current state.
The briefings were part of the Academy’s “Multiemployer Pension Crisis: A 360-Degree Look at the Issue and Potential Reforms” series intended to give attendees—including congressional staff members, as Congress considers related legislation—a solid foundation of the past, present, and potential future of multiemployer pension plans.
Russell (second from right) makes a point at the July 15 briefing
Senior Pension Fellow Linda K. Stone moderated the first two sessions. The first, on July 15, gave attendees background information on the current state of multiemployer plans. It featured Multiemployer Plans Committee Chairperson Jason Russell and committee members Joseph Hicks and David Pazamickas.
The second briefing, on July 22, covered “Possible Approaches for Addressing Failing Plans,” and the panelists were committee members Mariah Becker and Christian Benjaminson, and Josh Shapiro, the Academy’s vice president, pension.
A capacity crowd of more than 100 at that session heard analysis of the present state of the crisis just as Congress was set to consider related legislation, including The Rehabilitation for Multiemployer Pensions Act of 2019, which passed the House two days later by a 264-169 vote before being moved to the Senate for consideration. (Read the Academy alert.)
Russell (left), Benjaminson, and Shapiro (at podium) at the Aug. 2 briefing
The third briefing, held on Friday, Aug. 2, was on “Strengthening the System for the Future.” The briefing, which drew a full room of congressional staff and policymakers, featured Russell and Benjaminson as panelists, and was moderated by Shapiro.
Toward a U.S. National Retirement Policy—A Dialogue on Key Elements for Success,” which looked at key issues involving U.S. retirement security and the increasing need for the establishment of a comprehensive national retirement policy that articulates guiding principles for the U.S. retirement system.
Eric Keener, chairperson of the Retirement System Assessment and Policy Committee, moderated. The presenters were Romina Boccia, director of the Grover M. Hermann Center for the Federal Budget at the Heritage Foundation; Teresa Ghilarducci, economics professor and director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research; and James B. Lockhart III, senior fellow and co-chair at the Bipartisan Policy Center’s Commission on Retirement Security and Personal Savings.
While the panelists respectfully disagreed on the scope of the problem and any exact solutions to remedy it, there was agreement that actions should be taken—in particular, that Congress should act soon to address a looming Social Security shortfall predicted to occur by 2034. Slides and audio are available for logged-in Academy members.
Related, the Academy released an issue brief in mid-July. “National Retirement Policy & Principles” explores what a cohesive national policy framework for the U.S. retirement system could look like.
“A national retirement policy framework would aim to provide a more coordinated and inclusive system that helps more people better prepare financially for retirement, as opposed to the piecemeal approach that exists today,” said Keener, whose committee’s members authored the issue brief.
“If policymakers decide to pursue a national framework, they’d need to address familiar challenges to retirement security, as well as weigh the benefits, complexities, and costs of establishing a new framework,” he said.
Read the Academy news release.
The Academy also released a new Essential Elements paper, “Creating a National Retirement Policy,” outlining the ways in which a comprehensive national retirement policy could potentially address concerns about retirement security in the United States. The Essential Elements series is designed to make actuarial analyses of public policy issues clearer to general audiences.
The Pension Practice Council (PPC) hosted a July 30 webinar, “Developing Return Expectations in Today’s Capital Markets—What Methods Work Now?” The webinar was intended to support actuaries directly responsible for assumption recommendations, or in assessing recommendations provided by other parties—a pension plan’s outside investment adviser, their own firm’s investment practice, or publicly available data and surveys.
The panelists were Evan Inglis, a member of the Public Plans Committee who worked on the PPC practice note released earlier this year, Forecasting Investment Returns and Expected Return Assumptions for Pension Actuaries; and Jerry Mingione, a member of the Social Security Committee. Academy Senior Pension Fellow Linda K. Stone moderated.
The webinar covered:
- Approaches for projecting returns under varying market conditions;
- Current and (recent) historical capital market conditions;
- Current return projections from capital market models; and
- Insights into how capital market models work.
“This topic is something that actuaries’ education, experience, and skills set us up well for,” Inglis said, adding that “current market data provides significant information about future returns.” Methods for forecasting future returns have evolved over the past 20 years and now make use of the high correlation found between current prices and future returns—e.g., high prices are a signal that future returns will be lower, Inglis said.
This is important for pension plans because plans’ maturity has increased substantially, which shortens the investment horizon. Because of that, the current market indicators used in newer forecasting methods are especially important. “These two factors make the evolution in methodology for determining expected returns significant for us in the pension world,” he said. As actuaries, “I think we’re perfectly suited and set up to be experts in this area.”
Mingione covered aspects of the current environment, noting attributes such as low inflation and other macroeconomic factors of the past 25 years. After eight years of near-zero short-term rates, short-maturity yields have risen over the last two years, as the Federal Reserve has begun to tighten monetary policy. Longer bond yields, however, have not increased in sync, and actually have fallen, flattening the yield curve. While long yields remain at or near historic low levels, stock market values have reached and remained near historic highs—powered by a favorable combination of low interest rates, stable/positive economic growth, and the high profit levels resulting from an increasing share of GDP going to capital.
He noted that in developing return projections from the array of available capital market models, “I personally like to look at averages [by multiple sources] because I trust averages more than I trust any one prognostication.” Actuaries are looking for more long-term, sustainable return expectations as opposed to the more opinionated tactical outlooks baked into some capital market models, he said.
The two finished by taking questions from attendees on a range of issues including the use of historical data, prices, and stock buybacks. Slides and audio are available free for Academy members via your member login.