Private Pensions: Long-standing Challenges Remain for Multiemployer Pension Plans
Published: 2010-05-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Multiemployer defined benefit pension plans, which are created by collective bargaining agreements covering more than one employer and generally operated under the joint trusteeship of labor and management, provide pension coverage to over 10.4 million participants in the 1,500 multiemployer plans insured by the Pension Benefit Guaranty Corporation (PBGC). Changes to the structure of the multiemployer plan framework and to PBGC's role as insurer have sought to improve plan funding. Reports of declines in plan funding have prompted questions about the financial health of these plans. The committee asked GAO to provide information on (1) the unique characteristics of multiemployer plans and (2) the challenges that multiemployer plans face and how they may affect PBGC. GAO provided a draft of this testimony to PBGC for review and comment. PBGC provided technical comments, which were incorporated, as appropriate. To address these objectives, GAO relied primarily on its previously published reports on multiemployer plans ( GAO-04-423 and GAO-04-542T), and data publicly available from PBGC. GAO is not making new recommendations in this testimony.
section_title: What GAO Found
paragraphs: While the Employee Retirement Income Security Act of 1974 funding rules apply to most private sector pension plans, the nation's collectively bargained multiemployer plans have a unique structure intended to provide a certain level of plan stability and benefit portability while mitigating the risks to their insurer, PBGC. Multiemployer plans provide portable benefits to workers who change employers, distribute risk among participating employers and participants, and continue to operate long after an individual employer, or sponsor, goes out of business, because their framework makes remaining employers jointly liable for funding benefits for all vested participants. Multiemployer plans also pay a low insurance premium to PBGC because they typically do not require PBGC assistance. When needed, PBGC will provide loans to a plan that becomes insolvent and can no longer pay benefits at the level guaranteed by PBGC. Since the inception of the multiemployer insurance program in 1980, PBGC has paid $500 million in financial assistance to 62 insolvent plans. Multiemployer plans face ongoing funding and demographic challenges that potentially increase the financial burden on PBGC. According to PBGC, multiemployer plans have not been fully funded at the 100 percent or above level since 2000. Other challenges include continuing decreases in the number of these plans and an aging participant base. Further, a decline in collective bargaining in the United States has left few opportunities for plans to attract new employers and workers. As a result, the proportion of active participants paying into the fund to others who are no longer paying into the fund has decreased, thereby increasing plan liabilities and the likelihood that PBGC will have to provide financial assistance in the future.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the multiemployer pension system  and the challenges it faces. Multiemployer pension plans constitute an  important segment of the nation’s private employer pension system.  Multiemployer plans are defined benefit (DB) plans established through  collectively bargained pension agreements between labor unions and two  or more employers. In 2009, there were about 1,500 multiemployer plans  that cover more than 10.4 million workers and retirees—approximately 1  of every 4 workers and retirees in the United States covered by a private  sector DB plan. As we reported in 2004, the financial stakes are high for  workers, retirees, and employers participating in these plans, as well as for  the plans’ insurer, the Pension Benefit Guaranty Corporation (PBGC).
Multiemployer plans cover unionized workers in many industries,  including the trucking, retail food, construction, mining, and garment  industries and, importantly, provide some portability of benefits. Workers  can continue accruing pension benefits when they change jobs if their new  employer is a contributing employer in the same plan. Such arrangements  are particularly suited to workers in industries such as construction, in  which job changes are frequent over the course of a career.
Since 2000, many multiemployer plans have experienced significant  reductions in their funded status. Several factors contributed to this  underfunding, including stock market losses, which reduced the value of  plans’ holdings, and historically low interest rates, which increased plan  liabilities. The economic downturn also affected employers’ ability to  contribute to these plans. Many companies experienced slowdowns or  closed their doors. While recent reports point to a recovering economy,  some industries in which multiemployer plans are common have  experienced high unemployment, limiting the stream of contributions  coming into the plans.
In 2004, we reported that the multiemployer system, in comparison with  private single-employer plans, operates under a framework that  redistributes risk toward employers and participants and away from  government and potentially the taxpayer. In addition, we noted that this  framework can create important incentives for interested parties to  resolve financial difficulties. However, we also found that weak economic  conditions in the early 2000s and declines in interest rates and equities  markets increased the financial stress on the overall multiemployer plan  framework, and each of the key stakeholders. We also identified several  challenges to the long-term health of these plans, including the lack of  employer funding flexibility compared with single-employer plans and the  overall decline of collective bargaining. Today, 6 years later, the economic  climate within which multiemployer plans must operate is far worse. As  you know, we are conducting a study of multiemployer plans for another  committee and expect to publish a report on our work later this year.  Today I will discuss (1) some of the unique characteristics of  multiemployer plans that affect their stability and PBGC’s risk, and (2)  current challenges faced by multiemployer plans and by PBGC as their  insurer.
Today’s testimony draws on our work on PBGC, our 2004 report, and  publicly available information. In developing our 2004 report, we  examined how multiemployer DB pension plans differ from single- employer plans, and reviewed relevant laws and regulations, Form 5500  reports that plans file with the Department of Labor, and prior GAO  reports and other pertinent literature. To identify recent and current  trends and potential challenges in funding and worker participation rates  for multiemployer plans, we reviewed PBGC reports and analyzed data  from PBGC, conducting this performance audit in May 2010, in accordance  with generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on our  audit objectives.
subsections: section_title: Background
paragraphs: In 1974, Congress passed the Employee Retirement Income Security Act  (ERISA) to protect the interests of participants and beneficiaries covered  by private sector employee benefit plans. Title IV of ERISA created PBGC  as a U. S. government corporation to provide plan termination insurance  for certain DB pension plans that become unable to provide pension  benefits. PBGC operates two distinct pension insurance programs, one for  multiemployer plans and one for single-employer plans. These plans have  separate insurance funds, as well as different benefit guarantees, and  insurance coverage rules. The multiemployer insurance program and  PBGC’s day-to-day operations are financed by annual premiums paid by  the plans and by investment returns on PBGC’s assets. For multiemployer  plans, PBGC guarantees, within prescribed limits, those participant  benefits that are not funded by plan assets when a covered plan is  insolvent and unable to pay basic PBGC-guaranteed benefits when due for  the plan year.
In 1980, Congress sought to protect worker pensions in multiemployer  plans by enacting the Multiemployer Pension Plan Amendments Act  (MPPAA). Among other things, MPPAA (1) strengthened funding  requirements to help ensure that plans accumulate enough assets to pay  for promised benefits, and (2) made employers, unless relieved by special  provisions, liable for their share of unfunded plan benefits when they  withdrew from a multiemployer plan. The amount is based upon a  proportional share of the plan’s unfunded vested benefits. Liabilities that  cannot be collected from a withdrawing employer, for example, one in  bankruptcy, were to be “rolled over” and eventually had to be funded by  the plan’s remaining employers. The changes were to discourage  withdrawals, which shift liabilities to PBGC’s insurance program.
The Pension Protection Act of 2006 (PPA) established new funding and  disclosure requirements for multiemployer plans. Under PPA, a plan’s  actuary must certify to the Secretary of the Treasury the funding status of  the plan within 90 days of the start of the plan year. For plans that certify  that they are in endangered status (less than 80 percent funded) or critical  status (less than 65 percent funded), PPA requires plan trustees to take  specific actions to improve the plan’s financial status, such as developing  schedules to increase contributions or reduce benefits. Plans certified as  endangered must adopt a funding improvement plan, and those certified as  critical must adopt a rehabilitation plan. To assist plans in critical status,  PPA amended ERISA to allow plans to reduce or eliminate some payment  and early retirement options for plan participants who had not yet retired.  In addition, PPA required trustees of plans in endangered or critical status  to provide notice of that status to participants and beneficiaries, the  bargaining parties, PBGC, and the Secretary of Labor within 30 days of  certification. If a plan is in critical status, the notice must also inform  employers of a possible contribution surcharge, and participants of a  potential reduction in benefits.
The funding requirements of PPA took effect just as the nation entered a  severe economic recession in the fall of 2007. As a result, Congress  enacted the Worker, Retiree, and Employer Recovery Act of 2008  (WRERA) to provide multiemployer plans with temporary relief from PPA  requirements by allowing plans to temporarily freeze their funded status at  the previous year’s level. The freeze allows plans to delay creation of or  updates to an existing funding improvement plan, rehabilitation plan, or  other steps required under PPA. WRERA also requires plans to send a  notice to all participants and beneficiaries, bargaining parties, PBGC, and  the Department of Labor indicating that the election to freeze the status of  the plan does not mean that the funded status of the plan has improved.  WRERA also provided for a 3-year extension of a plan’s funding  improvement or rehabilitation period.
section_title: Key Differences Exist Between Multiemployer and Single-Employer Pension Plans
paragraphs: While ERISA and PBGC funding rules apply to both single- and  multiemployer plans, there are several important differences that affect  the structure and stability of each type of plan. They include the following:    PBGC benefit guarantee levels: PBGC guarantees benefits for  multiemployer beneficiaries at up to $12,870 per year, based on 30 years of  employment. PBGC’s guarantee for single-employer beneficiaries is  considerably higher—up to $54,000 per year for a retiree at age 65.
PBGC premium structure: PBGC collects insurance premiums for each  plan it insures, but premium rates differ significantly, commensurate with  the benefit amounts being guaranteed. In 2010, multiemployer plans pay  PBGC an annual flat rate premium of $9 per participant, while single- employer plans pay PBGC $35 per participant. In addition, underfunded  single-employer plans generally pay PBGC an additional variable rate  premium based on the plan’s unfunded vested benefits, because of the  increased risk to PBGC because there are no other sponsors to cover the  unfunded liabilities. Multiemployer plans are not required to pay this  additional variable rate premium.
Insurable events: PBGC’s “insurable event” for its multiemployer  program—an event that triggers PBGC financial assistance—is plan  insolvency. A multiemployer plan is insolvent and may apply for financial  assistance when its available resources are not sufficient to pay benefits at  PBGC’s guaranteed level when due. In contrast, the insurable event for the  single-employer program is generally termination of a plan, after which  PBGC assumes responsibility and pays benefits directly to participants.
Provision of financial assistance: PBGC provides loans to  multiemployer plans when they become insolvent, and a multiemployer  plan need not be terminated to qualify for financial assistance. Insolvent  multiemployer plans also are required to reduce or suspend payment of  any portion of benefits to beneficiaries that exceed PBGC’s guarantee  level. If a plan recovers from insolvency, it must begin repaying the PBGC  loan. Since the inception of the multiemployer insurance program in 1980,  PBGC has provided $500 million in financial assistance to 62 plans. In  fiscal year 2009 alone, PBGC provided $86 million in financial assistance  to 43 insolvent plans. In 30 years, only one plan has paid back its loan.  PBGC provides no comparable assistance to single-employer plans  because PBGC takes over terminated unfunded plans.
Fiduciary and settlor function: An employer’s primary responsibility in  a multiemployer plan is to pay contributions to the plan in the amount set  in the collective bargaining agreement. Contribution requirements are  generally a settlor rather than fiduciary function, for both sponsors of  single-employer plans and participating sponsors in multiemployer plans.  Individual employers in multiemployer plans do not assume a fiduciary  role in plan management, which is instead handled by a board of trustees.  Single-employer plans, on the other hand, are administered by one  employer and may or may not be collectively bargained, so the employer  generally assumes fiduciary duty for the pension plan.
Risk distribution: The pooling of risk that is inherent in multiemployer  pension plans may buffer these plans from financial shocks because the  economic performance of any one employer has less impact.  Multiemployer pension plans typically continue to operate long after an  individual employer, or sponsor, goes out of business, because the plan’s  remaining employers are jointly liable for funding benefits for all vested  participants. Single-employer plans generally do not share the risk with  other employers.
Portability of benefits: Multiemployer plans provide participants some  benefit portability because they allow workers to keep and continue to  accrue pension benefits when they change jobs as long as their new  employer also participates in the same plan. Because single-employer  plans are established and maintained by only one employer, their benefits  are not normally portable.
Ability to adjust contribution and benefit levels: While minimum  funding rules set out in ERISA and the Internal Revenue Code permit plan  sponsors some flexibility in the timing of pension contributions, individual  employers in multiemployer plans cannot individually adjust their plan  contributions at will, and may be restricted in making changes until the  collective bargaining agreement comes up for renegotiation, typically once  every 2 or 3 years. Often, any changes in benefit levels must also be  renegotiated by the bargaining parties. In contrast, sponsors of single- employer plans, depending on their employees’ bargaining rights, may  make adjustments to future contributions and benefits according to the  company’s fiscal condition provided that minimum funding requirements  are met.
Employer terminations: If an employer withdraws from a multiemployer  plan, the accrued benefits for its workers stay in and are administered by  the plan. The plan terminates by mass withdrawal if all contributing  employers of a multiemployer plan leave. When the plan becomes  insolvent, PBGC begins providing financial assistance to the existing  trustees upon insolvency of the plan, after which those trustees continue  to administer the plan until all benefits are paid out. With respect to single- employer plans, PBGC assumes trusteeship and administers payment of  participant benefits when an underfunded single-employer plan  terminates.
Plan withdrawal: To protect the pensions of participants in  multiemployer plans, MPPAA holds an employer seeking to withdraw from  a plan liable to the plan for its share of the plan’s unfunded liability. The  law contains formulas for determining the amount, known as withdrawal  liability, based on the employer’s proportional share of the plan’s  unfunded vested benefits for all employees covered by the plan. In cases  of bankruptcy, MPPAA requires the remaining employers in the plan to  assume responsibility for funding benefits to the bankrupt employer’s  participants. This unfunded amount is often referred to as an orphaned  liability. There is no comparable withdrawal liability for sponsors of  single-employer plans, as the employer is liable for the unfunded benefits  of the plan. According to PBGC, this greater financial risk on employers  and lower guaranteed benefit level for participants in multiemployer plans,  in practice, create incentives for employers, participants, and their  collective bargaining representatives to avoid insolvency and to  collaborate in trying to find solutions to the plan’s financial difficulties.
section_title: Multiemployer Plans Continue to Face Funding and Demographic Challenges That Could Significantly Affect PBGC
paragraphs: Multiemployer plans face ongoing funding and demographic challenges  that have the potential to place an additional financial burden on PBGC.  According to PBGC, multiemployer plans have not been fully funded at the  100 percent or above level since 2000 and their net funding has declined  significantly since that time. The aggregate funded status—the percentage  of benefits covered by plan assets—in multiemployer plans insured by  PBGC declined from 105 percent in 2000 to 66 percent in 2006, the last  date for which PBGC data are available. (See fig. 1.) The aggregate  position of these plans has further diminished because of investment  market declines and the recession beginning in 2007.
Multiemployer plans also face demographic challenges: reductions in the  number of plans, an aging workforce, and few opportunities to attract new  employers and workers into plans. The number of plans has decreased  fairly steadily since the 1980s, likely reflecting plan mergers. (See fig. 2.)
Meanwhile, although the number of total participants in multiemployer  plans has slowly increased, the proportion of active participants to retirees  and separated vested participants has decreased, largely because of an  aging workforce. (See fig. 3.) For example, multiemployer plans had 1.6  million fewer active participants in 2006 than in 1980, according to PBGC.
Future growth of multiemployer plans is largely predicated on growth of  collective bargaining. Yet collective bargaining has declined in the United  States since the early 1950s. According to the Bureau of Labor Statistics,  union membership—a proxy for collective bargaining coverage— accounted for 7.2 percent of the U.S. private sector labor force in 2009. In  contrast, in 1990, union membership in the private sector accounted for  about 12 percent, and in 1980, about 20 percent.
Without a new stream of contributions, plans will increasingly have to tap  into assets to meet benefit obligations and, everything else being equal,  and this will generally lower the plans’ funded status. The conditions that  plans currently face increase the risk of insolvency and the likelihood  PBGC will be forced to provide financial assistance. PBGC’s ability to  assist multiemployer plans is contingent upon its insurance program  having sufficient funds to do so. PBGC’s net position for its multiemployer  pension insurance program has steadily declined since its highest point in  1998 as program liabilities outpaced asset growth. (See fig. 4.) In fiscal  year 2009, the multiemployer program reported an accumulated deficit of  $869 million.
By promoting risk sharing among participating employers and workers,  the framework for multiemployer plans under ERISA and MPPAA is  intended to limit PBGC’s exposure to future losses from underfunded  plans. However, in fiscal year 2009, PBGC’s estimates of exposure to  future losses from underfunded multiemployer plans rose to $326 million  (up from $30 million in 2008 and $73 million in 2007). PBGC reported that  most plans considered at risk were in manufacturing, transportation,  services, and wholesale and retail trade. PBGC’s estimate of the exposure  to future losses from underfunded multiemployer plans could reach $5.5  billion over the next 10 years.
section_title: Concluding Observations
paragraphs: Multiemployer plans continue to provide an important source of  retirement income for millions of American workers. These plans provide  a useful means for these workers—workers who change jobs frequently  within the same industry—to accrue retirement benefits over the course of  their careers. But, similar to their single-employer cousins, multiemployer  plans are suffering some serious short-term financial stresses within the  larger context of a longer-term structural decline. Congress has given  PBGC tools to monitor the overall financial health of multiemployer plans  and a means to provide financial assistance to help these plans weather  difficult financial times. Given recent financial events, however, it will take  more time to determine whether the PPA requirements will achieve their  intended purpose.
This concludes my prepared statement. I am happy to answer any  questions that the committee may have.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: For further questions on this testimony, please contact me at (202) 512- 7215. Individuals making key contributions to this testimony include  Joseph Applebaum, Susan Aschoff, Robert Campbell, David Lehrer, Thanh  Lu, Jonathan S. McMurray, and Roger J. Thomas.
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