Private Pensions: Multiemployer Plans and PBGC Face Urgent Challenges
Published: 2013-03-05T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Multiemployer pension plans--created by collective bargaining agreements including more than one employer--cover more than 10 million workers and retirees, and are insured by the PBGC. As a result of investment market declines, employers withdrawing from plans and demographic challenges in recent years, many multiemployer plans have had large funding shortfalls and face an uncertain future. Also, both PBGC's single-employer and multiemployer insurance programs have been on GAO's list of high-risk federal programs for a number of years.
This testimony provides information on (1) recent actions that multiemployer plans in the worst financial condition have taken to improve their funding levels; and (2) the extent to which plans have relied on PBGC assistance since 2009, and the financial condition of PBGC's multiemployer plan insurance program.
GAO analyzed government and industry data, interviewed representatives of selected pension plans, and a wide range of industry experts and stakeholders and reviewed relevant federal laws, regulations, and documentation from plans.
GAO is not making recommendations in this testimony. GAO will soon release a separate report on multiemployer pension issues.
section_title: What GAO Found
paragraphs: The most severely distressed multiemployer plans have taken significant steps to address their funding problems and, while most plans expected improved financial health, some did not. A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the majority of the most severely underfunded plans--those designated as being in critical status--developed plans to increase employer contributions or reduce certain participant benefits. In some cases, these measures will have significant effects on employers and participants. For example, one plan representative stated that contribution increases had damaged some firms' competitive position in the industry. Similarly, reductions or limitations on certain benefits--such as disability benefits--may create hardships for some older workers, such as those with physically demanding jobs. Most of the 107 surveyed plans expected to emerge from critical status, but about 26 percent did not and instead seek to delay eventual insolvency.
The Pension Benefit Guaranty Corporation's (PBGC) financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC's multiemployer insurance fund. As a result of current and anticipated financial assistance, the present value of PBGC's liability for plans that are insolvent or expected to become insolvent within 10 years increased from $1.8 to $7.0 billion between fiscal years 2008 and 2012. Yet PBGC's multiemployer insurance fund only had $1.8 billion in total assets in 2012. PBGC officials said that financial assistance to these plans would likely exhaust the fund in or about 2023. If the fund is exhausted, many retirees will see their pension benefits reduced to a small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the challenges facing  multiemployer plans and the Pension Benefit Guaranty Corporation’s  (PBGC) multiemployer insurance program. My testimony today is based  on a draft GAO report that is due to be released later this month and,  therefore, the findings should be regarded as preliminary. Multiemployer  defined benefit (DB) plans are established through collective bargaining  agreements including two or more employers and are generally operated  under the joint trusteeship of labor and management. These plans are a  vital source of retirement income for more than 10 million workers and  retirees.
Investment market declines, employers withdrawing from plans, and an  aging workforce leave many multiemployer plans facing challenges that  threaten their long-term financial outlook. As we reported in 2010, these  challenges contributed to large funding shortfalls for most plans. We  noted that some plans would likely be able to improve their funded status  with improvements to the economy, but plans in the worst financial  condition would likely be unable to fully address these challenges through  increasing employer contributions or reducing certain benefits. We found  that, without additional options to address plan underfunding or to attract  new contributing employers, plans may be more likely to require financial  assistance—further straining the PBGC multiemployer pension insurance  program. More recently, three federal agencies also noted the grave  condition of some plans and the insurance program.
We prepared this statement  at the request of this committee addressing  challenges facing both multiemployer plans and PBGC. Today, my  testimony will focus on (1) recent actions that the weakest multiemployer  plans have taken to improve their long-term financial position, and (2) the  extent to which plans have relied on PBGC assistance since 2009, and  the current financial condition of the PBGC multiemployer insurance  program.
To answer these questions, we analyzed government and industry data;  reviewed relevant federal laws, regulations, and documentation from  plans; and interviewed a wide range of industry experts and stakeholders.  In particular, to identify actions that multiemployer plans in the weakest  financial condition have taken to improve their long-term financial  position, we reviewed the survey methodology and analyzed plan survey  data from the Segal Company, a large actuarial and consulting firm with a  client base representing about 25 percent of multiemployer plans. This  was a unique, one-time survey Segal conducted to supplement its routine  surveys of client plans and provide more in depth information on specific  steps that multiemployer plans are taking to address their funding  shortfalls. To supplement the survey data, we conducted structured  interviews with 13 multiemployer plans across the country. We selected  these plans based on key characteristics, including industry, region,  funded status, and number of participants. To determine the extent to  which plans have taken advantage of PBGC assistance and to assess the  financial condition of PBGC’s insurance program, we obtained data on  various types of assistance to plans and data regarding plans that are  insolvent or expected to become so in the next 20 years. We conducted  our work from April 2012 through March 2013 in accordance with  generally accepted government auditing standards.
To summarize, we found that while the most distressed multiemployer  plans have taken significant steps to address their funding problems, a  substantial percentage of these plans have determined that they will not  be able to return to a healthier funding status, and instead seek to  forestall insolvency. Further, existing and anticipated plan insolvencies  threaten to drive the PBGC’s multiemployer insurance fund into  insolvency in about 2023. If this occurs, retirees depending on the PBGC  multiemployer insurance fund would see their pension payments reduced  to a small fraction of their original value—or nothing at all.
subsections: section_title: Background
paragraphs: To address the need for improved funding, the Pension Protection Act of  2006 (PPA) included new provisions designed to compel multiemployer  plans in poor financial shape to take action to improve their long-term  financial condition. The law established two categories of troubled  plans—endangered status (commonly referred to as “yellow zone”, which  includes an additional subcategory of “seriously endangered”) and a more  serious critical status (commonly referred to as “red zone”). PPA further  requires plans in both categories to develop strategies that include  contribution increases, benefit reductions, or both, designed to improve  their financial condition. These strategies must generally be adopted  through the collective bargaining process, and plans are required to  periodically report on progress made in implementing them.
Because of the greater severity of critical status plans’ funding condition,  such plans have an exception to ERISA’s anti-cutback rule in that they  may reduce or eliminate certain so-called “adjustable benefits” such as  early retirement benefits, post-retirement death benefits, and disability  benefits for participants not yet retired. For example, if an approved  rehabilitation plan eliminated an early retirement benefit, appropriate  notice was provided, and the reduction is agreed to in collective  bargaining, then participants not yet retired would no longer be able to  receive early retirement benefits.
PPA funding requirements took effect in 2008, just as the nation was  entering a severe economic crisis. The dramatic decline in the value of  stocks and other financial assets in 2008 and the accompanying  recession broadly weakened multiemployer plans’ financial health. In  response, Congress enacted the Worker, Retiree, and Employer  Recovery Act of 2008 (WRERA) and, later, the Preservation of Access to  Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA) to  provide funding relief to help plans navigate the difficult economic  environment. For example, WRERA relief measures allowed  multiemployer plans to temporarily freeze their funding status, and  extended the timeframe for plans’ funding improvement or rehabilitation  plans from 10 to 13 years. Generally, PRA allows a plan that meets  certain solvency requirements to amortize investment losses from the  2008 market collapse over 29 years rather than 15 years, and to  recognize such losses in the actuarial value of assets over 10 years  instead of 5, so the negative effects of the market decline would be  spread out over a longer period.
Overall, since 2009, the funding status of multiemployer plans has  improved, but a sizeable number of plans are still critical or endangered.  According to plan-reported data, while the funding status of plans has not  returned to 2008 levels, the percentage of plans in critical status declined  from 34 percent in 2009 to 24 percent in 2011. The percentage of plans  in endangered status declined to a greater extent, from 34 percent in  2009 to 16 percent in 2011. However, despite these improvements, 40  percent of plans have not emerged from critical or endangered status.
In addition to the difficulties many multiemployer plans face, the  challenges that PBGC faces have led us to designate its insurance  programs as a “high-risk” federal program. As we noted earlier this year,  because of long term challenges related to PBGC’s funding structure, the  agency’s financial future is uncertain. We noted that weaknesses in its  revenue streams continue to undermine the agency’s long-term financial  stability.
section_title: Plans in Poor Funded Status Have Taken Steps to Cut Benefits to Current Employees and Increased Employer Contributions, and the Financial Outlook for Some Plans Remains Bleak
paragraphs: According to a 2011 survey of 107 critical status plans conducted by the  Segal Company, the large majority of critical status plans have developed  rehabilitation plans that both increase required employer contributions  and reduce participant benefits in an effort to improve plans’ financial  positions. Plan officials explained that these changes can have a range of  effects and, in some cases, may severely affect employers and  participants. While most critical status plans expect to recover from their  current funding difficulties, about 25 percent do not and instead seek to  delay eventual insolvency.
subsections: section_title: Critical Status Multiemployer Plans Have Developed Rehabilitation Plans Imposing a Range of Contribution Increases and Benefit Reductions
paragraphs: The 2011 survey showed the large majority of critical status plans  surveyed developed rehabilitation plans that included a combination of  both contribution increases and benefit reductions to be implemented in  the coming years. Of plans surveyed, 81 proposed increases in  employer contributions and reductions to participant benefits, while 14  proposed contribution increases only and 7 proposed benefit reductions  only.
The magnitude of contribution increases and benefit reductions varied  widely among plans. As Figure 1 illustrates, the rehabilitation plans of 7  critical status plans proposed no contribution increases, while those of 28  plans proposed first year increases of 20 percent or more. It is important  to note that these data tell only a part of the story because some  rehabilitation plans call for additional contribution increases in subsequent  years.
The vast majority of multiemployer plans surveyed developed  rehabilitation plans that reduced benefit accruals and/or adjustable  benefits in an effort to improve the financial condition of the plan. Thirty- two of the 107 multiemployer plans surveyed proposed, in their  rehabilitation plans, to reduce accrual rates, and of these, the large  majority proposed to cut accruals by more than 20 percent. Fifteen plans  proposed to cut accruals by 40 percent or more. This doesn’t reflect all  the changes plans made, because some plans reduced accrual rates  prior to development of the rehabilitation plans. Furthermore, a majority of  plans—88 out of 107—proposed to reduce one or more adjustable  benefits. Typically, these reductions will apply to both active and vested  inactive participants, but some plans applied them to only one participant  group.
section_title: Funding Improvement Efforts Sometimes Require Significant Sacrifices by Employers and Participants
paragraphs: While the data are informative, they do not get to the heart of the issue— what impact will these changes have on employers, participants, and  plans themselves? As might be expected, the impacts on employers and  participants will vary among plans. In some cases, employers and  participants will be able to bear these changes without undue hardship. In  other cases, the impacts were expected to be significant. For example,  plan officials said employers outside the plan generally do not offer  comparable pension or health insurance benefits, and increases in  contributions puts contributing employers at a significant competitive  disadvantage. Similarly, an official of a long-distance trucking firm said  high contribution rates have greatly affected the firm’s cost structure and  damaged its competitive position. In other cases, plans may have been  unable to increase employer contribution rates as much as needed. For  example, our review of one rehabilitation plan revealed that a 15 percent  contribution increase resulted from a difficult balance between, among  other factors, adequately funding the plan and avoiding excessive strain  on contributing employers. According to the plan administrator, plan  trustees determined many employers were in financial distress and a  significant increase in contributions would likely lead to business failures  or numerous withdrawals. Subsequently, five employers withdrew from  the plan after the rehabilitation plan was adopted.
Similarly, the reduction or elimination of adjustable benefits were  significant and controversial for participants in some cases. Officials of  several plans stated the reduction or elimination of early retirement  benefits for participants working in physically demanding occupations  would be particularly difficult for some workers. At the same time, some  plans also eliminated or imposed limitations on disability retirement so  workers who have developed physical limitations will have to either  continue to work or retire on substantially reduced benefits.
Importantly, while most plans expected to emerge from critical status  eventually, a significant number did not and instead project eventual  insolvency. According to the Segal survey, of 107 critical status plans, 67  expect to emerge from critical status within the statutory timeframes of 10  to 13 years, and 12 others in an extended rehabilitation period (See figure  2). However, 28 of the plans had determined that no realistic  combination of contribution increases and benefit reductions would  enable them to emerge from critical status, and their best approach is to  forestall insolvency for as long as possible. Among these plans, the  average number of years to expected insolvency was 12, with some  expecting insolvency in less than 5 years and others not for more than 30  years. The majority of these plans expected insolvency in 15 or fewer  years.
Our contacts with individual plans provide insight into the stark choices  faced by these plans. Four of the eight critical status plans we contacted  expected to eventually become insolvent, and officials explained that their  analyses concluded that no feasible combination of contribution increases  or benefit reductions could lead them back to a healthy level of funding.  Several indicated that efforts to do so would likely accelerate the demise  of the plan. For example, plan documents noted that the actuary of one  plan determined the plan would be able to emerge from critical status if  contribution rates were increased by 24 percent annually for each of the  next 10 years—a total increase of more than 850 percent. The trustees of  this plan determined such a proposal would be rejected by both  employers and workers, and would likely lead to negotiated withdrawals  by employers. This, in turn, could result in insolvency of the plan, possibly  as early as 2019. Instead, this plan opted for measures that officials  believed are most likely to result in continued participation in the plan,  which nonetheless are projected to forestall insolvency until about 2029.  Similarly, according to officials of another plan, plan trustees concluded  that the contribution increases necessary to avoid insolvency were more  than employers in that geographic area could bear. In addition, the plan  considered the impact of funding the necessary contribution increases  through reductions to base pay. The plan found this infeasible because of  the rising cost of living facing employees and their families. Consequently,  the plan trustees adopted a rehabilitation plan forestalling insolvency until  about 2025.
section_title: Total Financial Assistance Increased More Rapidly in Recent Years, and Current and Projected Insolvencies Will Exhaust Multiemployer Insurance Fund
subsections: section_title: Total PBGC Financial Assistance to Plans Increased More Rapidly in Recent Years, and Current and Projected Plan Insolvencies Will Exhaust Insurance Fund
subsections: section_title: Increases in PBGC Loans and Other Financial Assistance
paragraphs: In recent years, the total amount of financial assistance PBGC has  provided to insolvent plans has increased markedly. From fiscal years  2006 to 2012, the number of plans needing PBGC’s help has increased  significantly, from 33 plans to 49 plans. For fiscal year 2012 alone, PBGC  provided $95 million in total financial assistance to help 49 insolvent plans  provide benefits to about 51,000 retirees.
Loans comprise the majority of financial assistance that PBGC has  provided to insolvent multiemployer plans. Based on available data from  fiscal year 2011, loans totaled $85.5 million and accounted for nearly 75  percent of total financial assistance. However, the loans are not likely to  be repaid because most plans never return to solvency. To date, only one  plan has ever repaid a loan.
PBGC monitors the financial condition of multiemployer plans to identify  plans that are at risk of becoming insolvent—possibly requiring financial  assistance. Based on this monitoring, PBGC maintains a contingency list  of plans likely to make an insolvency claim, and classifies plans according  to the plans’ risk of insolvency. PBGC also assesses the potential effect  on the multiemployer insurance fund that insolvencies among the plans  on the contingency list would have. Table 1 outlines the various  classifications and definitions based on risk and shows the liability  associated with such plans.
Both the number of plans placed on the contingency list and the amount  of potential financial assistance have increased steadily over time, with  the greatest increases recorded in recent years. According to PBGC data,  the number of plans where insolvency is classified as “probable”—plans  that are already insolvent or are projected to become insolvent generally  within 10 years—increased from 90 plans in fiscal year 2008 to 148 plans  in fiscal year 2012. Similarly, the number of plans where insolvency is  classified as “reasonably possible”—plans that are projected to become  insolvent generally between 10 and 20 years in the future—increased  from 1 in fiscal year 2008 to 13 in fiscal year 2012.
Although the increase in the number of multiemployer plans on the  contingency list has risen sharply, the present value of PBGC’s potential  liability to those plans has increased by an even greater factor. For  example, the present value of PBGC’s liability associated with “probable”  plans increased from $1.8 billion in fiscal year 2008 to $7.0 billion in fiscal  year 2012 (see fig. 3). By contrast, for fiscal year 2012, PBGC’s  multiemployer insurance fund only had $1.8 billion in total assets,  resulting in net liability of $5.2 billion, as reported in PBGC’s 2012 annual  report.
Although PBGC’s cash flow is currently positive—because premiums and  investment returns on the multiemployer insurance fund assets exceed  benefit payments and other assistance—PBGC expects plan insolvencies  to more than double by 2017, placing greater demands on the insurance  fund and further weakening PBGC’s overall financial position.
PBGC expects the liabilities associated with current and future plan  insolvencies that are likely to occur in the next 10 years to exhaust the  insurance fund by about 2023. Further, insolvency may be hastened by  the projected insolvencies of two very large multiemployer plans whose  financial condition has greatly deteriorated in recent years. According to  PBGC officials, the two large plans for which insolvency is “reasonably  possible” have projected insolvency between 10 to 20 years in the future.  Importantly, the PBGC’s projection of program insolvency by 2023 does  not account for the impact of these two plans because their projected  insolvency is more than 10 years in the future. PBGC estimates that, for  fiscal year 2012, the liability from these plans accounted for about $26  billion of the $27 billion in liability of plans in the “Reasonably Possible”  category. Taken in combination, the number of retirees and beneficiaries  of these two plans would represent about a six-fold increase in the  number of people receiving guarantee payments in 2012. PBGC  estimates that the insolvency of either of these two large plans would  exhaust the insurance fund in 2 to 3 years.
section_title: Retiree Benefits are Reduced under Guarantees, and May Be Further Reduced if Multiemployer Insurance Program Becomes Insolvent
paragraphs: Generally, retirees who are participants in insolvent plans receive  reduced benefits under PBGC’s statutory guarantee. When a  multiemployer plan becomes insolvent and relies on PBGC loans to make  benefit payments to plan retirees, retirees will most likely see a reduction  in their monthly benefits. PBGC calculates the maximum benefit  guarantee based on the amount of a participant’s benefit accrual rate and  years of credit service earned (see figure 4). For example, if a retiree has  earned 30 years of credit service, the maximum coverage under the  guarantee is about $1,073 per month, yielding an annual benefit of  $12,870.
Generally, retirees receiving the highest benefits experience the steepest  cuts when their plans become insolvent and their benefits are limited by  the pension guarantees. According to PBGC, the average monthly benefit  received in all multiemployer plans in 2009 was $821. However,  according to a PBGC analysis of benefit distributions among retirees of  an undisclosed large plan, the range of benefits varies widely across  retirees. About half of this plan’s retirees will experience 15 percent or  greater reductions in their benefits under the guarantee. Additionally,  according to PBGC, one out of five retirees of this plan will experience 50  percent or greater reductions in their benefits under the guarantee.  Ultimately, regardless of how long a retiree has worked and the amount of  monthly benefits earned, any reduction in benefits—no matter the  amount—may have significant effects on retirees’ living standards.
In the event that the multiemployer insurance fund is exhausted,  participants relying on the guarantee would receive a small fraction of  their already-reduced benefit. Because PBGC does not have statutory  authority to raise revenue from any other source, officials said that, once  the fund is depleted, the agency would have to rely solely on annual  insurance premium receipts from multiemployer plans (which totaled $92  million for fiscal year 2012). The precise effect that the insolvency of the  insurance fund would have on retirees receiving the guaranteed benefit  depends on a number of factors—primarily the number of guaranteed  benefit recipients and PBGC’s annual premium income at that time.  However, the impact would likely be severe. For example, if the fund were  to be drained by the insolvency of a very large and troubled plan, we  estimate the benefits paid by PBGC would be reduced to less than 10  percent of the guarantee level. In this scenario, a retiree who once  received monthly benefit of $2,000 and whose benefit was reduced to  $1,251 under the guarantee would see monthly income further reduced to  less than $125, or less than $1,500 per year. Additional plan insolvencies  would further depress already drastically reduced income levels.
section_title: Concluding Observations
paragraphs: Despite unfavorable economic conditions, most multiemployer plans are  currently in adequate financial condition and may remain so for many  years. However, a substantial number of plans, including some very large  plans, are facing very severe financial difficulties. Many of these plans  reported that no realistic combination of contribution increases or  allowable benefit reductions—options available under current law to  address their financial condition—will enable them to emerge from critical  status. While the multiemployer system was designed to have employers  serve as principal guarantors against plan insolvency, PBGC remains the  guarantor of last resort. However, given their current financial challenges,  neither the troubled multiemployer plans nor PBGC currently have the  flexibility or financial resources to mitigate the effects of anticipated  insolvencies. Should a critical mass of plan insolvencies drain the  multiemployer insurance fund, PBGC will not be able to pay current and  future retirees more than a very small fraction of the benefit they were  promised. Consequently, a substantial loss of income in old age looms as  a real possibility for the hundreds of thousands of workers and retirees  depending on these plans.
In a matter of weeks, we will be releasing a report that goes into greater  detail about the issues I have discussed in this testimony, and includes  possible actions Congress can take to prevent a catastrophic loss of  retirement income for hundreds of thousands of retirees who have spent  years often in dangerous occupations and in some of the nation’s most  vital industries.
This concludes my prepared statement. I would be happy to answer any  questions the committee may have.
section_title: GAO Contact
paragraphs: Charles Jeszeck, 202-512-7215.
section_title: Staff Acknowledgements
paragraphs: In addition to the above, Michael Hartnett, Sharon Hermes, Kun-Fang  Lee, David Lehrer, Sheila McCoy, and Frank Todisco made key  contributions to this testimony.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.