PBGC Presages Solvency Trouble for Multiemployer Plans

There’s consternation about the future solvency of multiemployer plans and concerns about whether plan sponsors should expect higher insurance premiums as a result of three new reports from the Pension Benefit Guaranty Corp.

On Jan. 29, PBGC sent to Congress reports on the status of multiemployer pension plans it insures, the current effects of pension legislation on these plans and the financial positions of the single-employer and multiemployer plans to which it is exposed as an insurer.

One report indicated that current PBGC insurance premiums will be inadequate to maintain current levels of guaranteed financial protection for participants in multiemployer plans. These types of plans usually cover unionized workers at unrelated, often-small companies in sectors such as construction, retail, trucking, mining and entertainment. PBGC estimates on its website that about 10 million people currently participate in 1,510 multiemployer retirement plans. This report is mandated under ERISA, which requires an evaluation, called “PBGC Insurance of Multiemployer Pension Plans,” every five years to determine whether current PBGC insurance premiums support the agency’s ability to guarantee multiemployer benefits in case of a plan failure or bankruptcy.

As mandated by the Pension Protection Act of 2006, the other report, titled “Multiemployer Pension Plans,” disclosed the effects of that law on multiemployer plans, including the impact on small employers. Unlike with single-employer plans, PBGC cannot intervene in multiemployer plans before insolvency, and such plans continue to pay full benefits until they run out of assets.

The final report, the Annual Exposure Report for Fiscal Year 2012, examined the future solvency of PBGC insurance programs using projection models to forecast their financial health for the next decade and beyond.

Key Observations

• PBGC projects a 36-percent probability its multiemployer pension insurance program will be insolvent by 2022 and a 91-percent chance of insolvency by 2032, with existing premium levels and economic conditions. These high levels of potential insolvency are attributed to the deterioration of a few large multiemployer plans.

• PBGC is expected to collect $1.3 billion in premiums from multiemployer plans over the next decade. However, the agency estimates its potential new obligations could increase by $37.6 billion.

• Plans have reported $757 billion in benefit liabilities and unfunded obligations of $391 billion, representing a 48-percent funding ratio using PBGC’s interest rate assumptions.

• Only 39 percent of participants in the pension plans were active employees, while 61 percent are retired or vested participants separated from employment.

One way that PBGC can reduce its net deficit would be through increased premiums charged to solvent companies, although the ERISA-mandated report did not say it could determine a future increase at this time. The Moving Ahead for Progress in the 21st Century Act, or MAP-21, in mid-2012 increased the premium owed by employers to $12 per participant in 2013; it will be indexed thereafter.

Finding out More

To read the complete story on Thompson’s HR Compliance Expert, click here.

For more information on the PBGC and its reporting requirements, see Section 841 in the Pension Plan Fix-it Handbook.

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