The rich are getting richer, and the poor and getting poorer among multiemployer pension plans, according to a new report from consulting and actuarial firm Milliman, Inc.
The report, which analyzed the funded status of all multiemployer pension plans, found that, the aggregate funded percentage of critical plans at the end of 2016 was less than 60%, while the funded percentage of noncritical plans was nearly 85%.
“The substantially lower asset base of critical plans (in relation to their liabilities) requires much stronger asset returns for these plans to see improvement in their funded percentages,” said the report. “That fact, coupled with severe negative cash flow positions, has proven too difficult for critical plans to realize significant recovery in their funded percentages from their low points after the 2008 crash.”
Milliman found that multiemployer pension plans with severe funding deficiencies only spend $0.38 of each contribution dollar on new benefit accruals, while $0.50 of every dollar goes to pay down funding shortfalls. However, plans that are healthier spend $0.56 per contribution dollar on benefit accruals, and $0.32 on funding shortfalls. The remaining $0.12 in both scenarios is spent on expenses.
“The gap continues to widen between critical and non-critical plans,” says Kevin Campe, consulting actuary and co-author of the 2017 Multiemployer Pension Funding Study. “While the funding percentage of healthier plans has increased slightly, critical plans have seen no appreciable increase. Persistent strong returns would be needed to see any appreciable improvement in funded status.”
The report also said that plans facing more severe funding challenges are not able to provide as large of a benefit accrual as they once did. In addition, these plans may be contributing much higher amounts than they previously have.
“The multiemployer pension plan universe continues to face significant pressure, with many of the most troubled plans on track to rely on assistance from the PBGC [Pension Benefit Guaranty Corporation], which is currently facing its own dire financial issues,” said the report. “Healthier plans face the risk of increased PBGC premiums, and trustees for these plans need to be vigilant in monitoring financial trends and risk exposure.”
Underfunded plans are currently struggling to pay down shortfalls, said the report, and the shortfalls likely will grow. This means the plans will need unrealistic investment returns, or have a combination of higher contributions and/or lower benefits just to be able to maintain the current levels of funding.
“Healthier plans are improving their funded status as long as asset returns meet or exceed expectations,” said the report. “However, critical plans show declines if expectations are met. For critical plans to see noticeable improvement in their funded status, even more excess returns would be needed.”
The report suggested that plan trustees may want to explore potential plan design changes, such as variable annuity plans, which could mitigate the negative impact of future market volatility.