The financial crisis last decade walloped multiemployer retirement plans, most notably the Teamsters and United Mineworkers of America. The damage was supposedly so great that they have yet to recover, with Wharton economist Olivia Mitchell going so far as to argue multiemployer plans overall are in a “death spiral.
But are they?
A recent survey of multiemployer pension plan’s “zone status” shows that among more than 200 multiemployer clients, the majority are in the green zone, meaning well-funded and expanding.
Multiemployer plans, not to be confused with multiple employer plans, are those maintained by more than one company or employer within the same or similar industries, and usually involving a collective bargaining agreement with labor unions.
“The headlines that focus on financially troubled multiemployer pension plans miss the point that the majority are healthy,” said Diane Gleave, senior vice president and actuary for Segal Consulting, who conducted the survey. “However, this should not obscure the fact that about a quarter of participants in the survey are in critical and declining plans, and nearly one-third are in critical plans.”
She added that trustees are making plan design changes, recommending changes in contribution rates, revising investment policies and in many cases seeking relief under the Multiemployer Pension Reform Act to improve their funded status.
Under the Multiemployer Pension Reform Act, or MPRA, plans classified as in critical and declining status are generally those where the actuary projects the assets to be depleted within 20 years.
A plan is classified under critical status if the actuary determines it has a funding or liquidity problem, or both, generally within four to five years.
Other key findings from the survey include:
- Critical and declining status plans have a much higher percentage of inactive participants (87 percent) than all other plans (63 percent).
- Since the financial crisis of 2008 and 2009, the average funded percentage has been relatively stable, between 85 and 89 percent.
- A plan’s zone status can be fluid. Between 2016 and 2017, 11 calendar-year plans changed zones, with five improving their zone status and six experiencing a decline in zone status.
Industry Matters: More Inactive Participants Equals More Troubled Plans
There is some correlation between average funded percentage by industry and the inactive-to-active participant ratio. Industries with more active and fewer inactive participants tend to have better-funded percentages.
For example, plans in the manufacturing industry have an average of 5.8 inactive participants for each active participant, and an average funded percentage of 79 percent, well below the 87 percent overall multiemployer plan average.
Conversely, multiemployer plans in the entertainment industry, which, on average, have fewer than one inactive participant for each active participant, have a much higher average funded percentage of 92 percent.
Looking Ahead
“A plan’s direction is as important as its current zone status,” David Brenner, National Director of Multiemployer Consulting, concluded. “Trustees need to be proactive, paying careful attention to cash flow and contribution margins or deficits. They should also understand the plan’s vulnerability to all types of risk, including investment and employment risk, so they can take steps to mitigate such risks and are prepared if investment returns or employment levels come in lower than assumed.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
Author should have clarified whether the survey was measuring funded status on a “current (RPA 94)” basis or the looser “funding purposes” basis. Professionals know that discounting liabilities at the expected rate of return on assets is a fool’s bargain.