The aggregate funded ratio of multiemployer plans dropped to 74% from 81% during the second half of 2018, mainly due to poor investment returns, according to consulting and actuarial firm Milliman.
According to Milliman’s 2019 Multiemployer Pension Funding Study, which includes 1,251 plans covering 10.5 million participants, multiemployer plan portfolios lost approximately 5% in 2018—well below the investment return assumptions of 6% to 8%. That led to asset losses that were 11% to 13% below expectations, and the overall funding shortfall for the plans increased by $51 billion during the last six months of 2018.
The study did provide some positive news for multiemployer plans. Despite the double-digit asset losses, the majority of US multiemployer plans are much healthier than they were at the market’s low point 10 years ago. Nearly one-third, or 383, of the plans in the study, are at least 90% funded, and another 288 plans are funded between 80% and90%. However, there were at least 123 “critical and declining” plans that cover roughly 1.3 million participants, many of which are likely headed for insolvency without Congressional intervention, according to Milliman.
“Despite 2018’s investment losses, it appears that the majority of multiemployer plans are positioned to absorb that experience and improve in the future,” says Ladd Preppernau, a principal and consulting actuary at Milliman. “However, for about 10% of plans, even stellar asset performance is unlikely to right the ship. Most of these plans will need outside help from lawmakers or others in order to prevent insolvency.”
The study also found that assumed discount rates are generally between 6% and 8%, with a weighted average assumption of 7.26%, compared to 7.34% during last year’s study. The reduction was primarily attributed to the Central States, Southeast and Southwest Areas Pension Plan, which lowered its assumption to 5.50% from 6.25%.
“It is not uncommon to see critical and declining plans utilizing a lower investment return assumption than other plans,” said the study. “Short-term capital market assumptions from most financial experts predict markedly lower returns in the near future than what might be expected for longer time horizons. Thus, some critical and declining plans have set their assumptions accordingly, putting less weight on long-term expectations.”
Milliman said that while asset performance continues to be the primary driver of financial health of multiemployer pension plans, more tools are needed for many critical and declining plans to recover.
“While the JSC [Joint Select Committee on the Solvency of Multiemployer Pension Plans] was unable to provide any legislative solutions during 2018, discussions have continued at the committee level during 2019,” said the study. “Bills related to low-interest long-term loans for financially distressed plans have been reintroduced in the House and Senate,” it added. “All stakeholders should continue to monitor the issues and be prepared to act upon any developments that unfold.”