New projections from the Pension Benefit Guaranty Corporation (PBGC) reveal a narrowing time frame for when its multi-employer insurance program is expected to become insolvent.
“The risk of the multiemployer program becoming insolvent prior to FY 2024 or remaining solvent after FY 2026 is now very small,” according to the PBGC’s 2017 Projections Report. The PBGC said it is “increasingly likely” that the multiemployer program will become insolvent in 2025, and that there remains “a significant chance” the program will run out of money in 2024.
The likelihood that the multi-employer insurance program will run out of money before the end of fiscal year 2025 has risen to more than 90%, and the PBGC said more and larger claims on the program will lead to its insolvency if Congress doesn’t come to its rescue.
And the projections don’t get any rosier, as approximately 130 multiemployer plans covering 1.3 million people are expected to become insolvent over the next 20 years.
If the multiemployer program does run out of money, the PBGC said it would be required by law to decrease guarantees to the amount that can be paid from premium income. This would mean reducing guarantees “to a fraction of current values.”
However, while the multiemployer program continues the struggle, the future is brighter for the PBGC’s single-employer insurance program.
The single-employer program covered 28 million participants in more than 22,000 plans in 2017, and the PBGC said its simulations show “significant improvement” in its projected net position over the next 10 years. The PBGC attributed the improvement to a general trend of improving plan solvency, and projected premiums exceeding projected claims.
However, the report also said there were some “sources of uncertainty” regarding the single-employer program.
“The uncertainty in the future of PBGC’s single-employer program arises from questions we cannot now answer,” said the report.
These include not knowing which plans will fail, or how much the PBGC will owe participants as a result of the failures; what returns it will realize on its assets, and how much PBGC will receive in premiums.
The PBGC based its projections on the financial health of the companies that sponsor pension plans, and the amount of underfunding in those plans. If companies with large, underfunded pension plans enter bankruptcy and are allowed to terminate their underfunded plans, new claims are created against PBGC, which increase the PBGC’s future obligations.
While the PBGC’s projections assume that plans are terminated only by companies in distress, it pointed out that some healthy companies choose to close their pension plans by purchasing annuities. Although the PBGC’s current obligations are not affected in these cases, those companies stop paying premiums altogether, and PBGC said it is analyzing the effect of this.
“The use of annuity buyouts and lump sums by companies seeking to transfer risk for significant portions of their liabilities is not currently modeled as a continuing or expanding trend in the future,” said the report. “In addition to reducing premium receipts, these transactions might affect future exposure to claims in some circumstances.”