Benefits and Compensation

Multiemployer Pension Plan Funding Nears Peak Since 2008 Crash, Study Says

Multiemployer retirement plans’ funding in the first half of 2017 neared its best position since the market collapse of 2008, according to a new study by the actuarial consulting firm Milliman. But despite an average funded percentage of 81%, these plans still face significant pressures, with many on track to require assistance in the future from the Pension Benefit Guaranty Corporation (PBGC), Milliman said.

Defined benefit retirement plan

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The interim update by Milliman compared changes in estimated funding levels at U.S. multiemployer defined benefit (DB) plans from December 31, 2016, to June 30, 2017. The aggregate funded percentage for all plans is estimated to have improved to 81% as of June 30 from 77% at the end of 2016, with a multiemployer plan system shortfall reduced by $21 billion.

The recent improvement in funded status is driven largely by favorable investment returns, Milliman said. The estimated investment return for Milliman’s simplified portfolio for the first half of 2017 was about 7.6%, far outpacing most plans’ investment return assumptions.

Multiemployer plans, also known as “Taft-Hartley plans,” usually cover unionized workers at unrelated, often small companies in sectors such as construction, retail, trucking, mining, and entertainment. The PBGC has estimated that about 10 million people are part of these plans.

Uncertain Future

For several years, the PBGC has said its projections show its multiemployer guarantee program is likely to run out of money in the next decade (see, Multiemployer Pension Plan Insurance Program Likely Insolvent by 2025), even after changes from federal legislation in recent years that boosted the plan premiums that partially fund it.

DB plans struggle to maintain required funding levels amid low interest rates. Plans with an asset ratio below 80% when compared with liabilities may have trouble meeting obligations to retirees and other beneficiaries, or face benefit restrictions established by the Pension Protection Act of 2006 (PPA).

Gap Continues to Widen

Milliman said the gap between the funded percentages of multiemployer plans in critical status versus plans not in critical condition has continued to widen considerably since the market crash in 2008. The aggregate funded percentage of critical plans remained around 60% at June 30, while the funded percentage of noncritical plans approached 90% after strong market performance in the first 6 months of 2017.

Substantially lower asset bases at critical plans require much better asset returns for these plans to see improvement in their funded percentages, Milliman said. But even the noncritical-status plans have obstacles ahead.

“Healthier plans face the risk of increased PBGC premiums, and trustees for these plans need to be vigilant in monitoring financial trends and looking for ways to reduce risk exposure as their plans continue to mature,” Milliman said in its report on the 6-month study.

The Milliman study of multiemployer plan funded status was based on Internal Revenue Service (IRS) Form 5500 data as of August 2017, drawing on data from between 1,200 and 1,300 plans.

Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.

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