Private Pensions: Changes Needed to Better Protect Multiemployer Pension Benefits
Published: 2010-10-18T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Thirty years ago Congress enacted protections to ensure that participants in multiemployer pension plans received their promised benefits. These defined benefit plans are created by collective bargaining agreements covering more than one employer. Today, these plans provide pension coverage to over 10.4 million participants in approximately 1,500 multiemployer plans insured by the Pension Benefit Guaranty Corporation (PBGC). In this report, GAO examines (1) the current status of nation's multiemployer plans; (2) steps PBGC takes to monitor the health of these plans; (3) the structure of multiemployer plans in other countries; and (4) statutory and regulatory changes that could help plans provide participants with the benefits they are due. To address these questions, GAO analyzed government and industry data and interviewed government officials, pension experts and plan practitioners in the United States, the Netherlands, Denmark, United Kingdom, and Canada.
section_title: What GAO Found
paragraphs: Most multiemployer plans report large funding shortfalls and face an uncertain future. U.S. multiemployer plans have not been fully funded in aggregate since 2000 and the recent economic recession had a severely negative impact on the funded status of multiemployer plans. Annual data from the Internal Revenue Service (IRS) show that the proportion of multiemployer plans less than 80 percent funded rose from 23 percent of plans in 2008 to 68 percent of plans in 2009. While some plans may be able to improve their funded status as the economy improves, many plans will continue to face demographic challenges that threaten their long-term financial outlook--including an aging workforce and few opportunities to attract new employers and workers into plans. PBGC monitors the health of multiemployer plans, but can provide little assistance to troubled plans until they become insolvent, at which point PBGC provides loans to allow insolvent plans to continue paying participant benefits at the guaranteed level (currently $12,870 per year for 30 years of employment). PBGC receives more current information on plan status, but uses older plan data to determine which plans are at the greatest risk of insolvency, because these data are audited, comprehensive, and PBGC's monitoring system was designed for them. The private pension systems in the countries GAO studied face short-term and long-term challenges similar to those that U.S. multiemployer plans currently face, including plan funding deficiencies and an aging workforce. The plans in these countries are subject to a range of funding, reporting, and regulatory requirements that require plans to interact frequently with pension regulators. Multiemployer plans in these countries have a number of tools available to improve and maintain their funded status, such as increasing contributions and reducing the rate of benefit accruals. The statutory and regulatory framework for multiemployer plans is not structured to assist plans on an ongoing basis and promotes little interaction among the federal agencies responsible for monitoring and assisting plans and safeguarding participant benefits. The lack of timely and accurate information and interagency collaboration hampers efforts to monitor and assist plans, and to enforce plan requirements. The recent economic downturn revealed that these plans, like most pension plans, are vulnerable to rapid changes in their funded status. Plans in the worst condition may find that the options of increasing employer contributions or reducing benefits are insufficient to address their underfunding and demographic challenges. For these plans, the effects of the economic downturn, declines in collective bargaining, the withdrawal of contributing employers, and an aging workforce will likely increase their risk of insolvency. Without additional options to address plan underfunding or to attract new employers to contribute to plans, plans may be more likely to require financial assistance from PBGC. Additional claims would further strain PBGC's insurance program that, already in deficit, it can ill afford. GAO is asking Congress to consider ways to eliminate duplicative reporting requirements and establish a shared database. GAO is also recommending that PBGC, IRS, and Labor work together to improve data collection and monitoring efforts. In commenting on a draft of this report, the agencies generally agreed to improve their coordination efforts.

section_title: Letter
paragraphs: Thirty years ago Congress enacted new protections for multiemployer  pension plans to better ensure that they could fulfill their promise to pay  benefits to plan participants in retirement. Today, these plans continue to  constitute an important part of the nation’s private employer pension  system. For the purposes of this report, 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 covering 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.  Multiemployer plans are distinct from single-employer plans, which are  established and maintained by one employer, and multiple-employer plans,  many of which maintain separate funding accounts for each employer.  Multiemployer plans cover unionized workers in many industries,  including trucking, retail food, construction, mining, and garment, and  provide some portability of benefits. Workers in multiemployer plans 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 these industries, who change jobs  frequently over the course of a career.
The Employee Retirement Income Security Act of 1974 (ERISA) created  the Pension Benefit Guaranty Corporation (PBGC) as a U. S. government  corporation to provide plan termination insurance for certain single- and  multiemployer pension plans that become unable to provide pension  benefits. For multiemployer plans, PBGC guarantees, within prescribed  limits, participant benefits when a covered plan becomes insolvent and  cannot pay such benefits when due for a plan year. PBGC provides loans  to insolvent multiemployer plans to allow them to continue paying  benefits at the PBGC guarantee level, which in 2010, was $12,870 per year,  based on 30 years of employment.
In 2004, we reported that the multiemployer system, in contrast with  private single-employer plans, operates in a framework that redistributes  risk toward employers and participants and away from the government  and potentially the taxpayer. This framework, we noted, can create  important incentives for interested parties to resolve financial difficulties,  such as plan underfunding. However, we also found that weak economic  conditions in the early 2000s and declines in interest rates and equity  markets had increased the financial stress on the overall multiemployer  plan framework and each of its key stakeholders. We identified several  challenges to the long-term health of these plans, including a lack of  employer funding flexibility compared with single-employer plans and the  national decline of collective bargaining. Earlier this year we testified that  deterioration in economic conditions had increased stress on  multiemployer plans, which continue to face funding shortages and other  challenges.
Given these ongoing concerns about multiemployer plans, this report  addresses the following questions:  (1) What is the current status of the nation’s multiemployer pension plans?  (2) What steps does PBGC take to monitor the health of these plans?  (3) What is the structure of multiemployer plans in other countries?  (4) What statutory and regulatory changes, if any, could help plans to  continue to provide participants with the benefits due to them?
To identify the current status of the nation’s multiemployer pension plans,  we analyzed data from PBGC, the Department of Labor’s Employee  Benefits Security Administration (EBSA), and the Department of the  Treasury’s Internal Revenue Service (IRS) and reviewed relevant industry  studies. To determine the steps PBGC takes to monitor the health of these  plans, we interviewed PBGC officials and reviewed PBGC’s multiemployer  policies and procedures. We also reviewed relevant federal laws and  regulations. To understand the structure of multiemployer plans in other  countries, we conducted site visits to four countries—the Netherlands,  Denmark, United Kingdom, and Canada—and we worked with U.S. State  Department officials to identify and interview government officials and  various pension experts in these countries. We did not conduct an  independent legal analysis of foreign laws. To identify what changes, if  any, are needed to help plans continue to provide participants with the  benefits due them, we interviewed a diverse range of multiemployer plan  experts and practitioners in the United States and abroad. We assessed the  reliability of the data used in this report and determined that they were  reliable for our purposes.
We conducted this performance audit from September 2009 through  October 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. Appendix I provides more  detail on the scope and methodology used in developing this report.
subsections: section_title: Background
paragraphs: The Taft Hartley Act of 1947 established terms for negotiating employee  benefits in collectively bargained multiemployer plans and placed certain  restrictions on the operation of these plans, including the placement of  plan assets in a trust. For example, the law required a collectively  bargained plan and its assets to be managed by a joint board of trustees  equally representative of management and labor. It further required plan  assets to be placed in a trust fund, legally distinct from the union and the  employers, for the sole and exclusive benefit of the plan beneficiaries. In  1974, Congress passed 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 defined benefit pension plans that are  unable to pay promised benefits. PBGC operates two distinct pension  insurance programs, one for multiemployer plans and one for single- employer plans. These programs have separate insurance funds as well as  different insurance coverage rules and benefit guarantees. 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. In turn, PBGC guarantees benefits, within prescribed  limits, when a multiemployer plan is insolvent and unable to pay the 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 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  withdraw from a multiemployer plan. The amount owed by a withdrawing  employer is based upon a proportional share of a plan’s unfunded vested  benefits. Liabilities that cannot be collected from a withdrawing  employer, for example, one in bankruptcy, are to be “rolled over” and  eventually funded by the plan’s remaining employers. These changes were  made to discourage employer withdrawals from a plan.
The Pension Protection Act of 2006 (PPA) established new funding and  disclosure requirements for multiemployer plans. (See table 1.)
PPA requires trustees of plans certified in endangered or critical status to  take specific actions to improve the plans’ financial status, such as  developing schedules to increase contributions or reduce benefits. Plans  certified as endangered must adopt a funding improvement plan, which   outlines steps the plan will take to increase the plan’s funded status over a  10-year period or, in some cases, longer. Plans certified as critical must  adopt a rehabilitation plan, which outlines actions, to enable the plan to  cease to be in critical status by the end of a 10-year rehabilitation period  and may include reductions in plan expenditures (including plan mergers  and consolidations), reductions in future benefit accruals or increases in  contributions, if agreed to by the bargaining parties, or any combination of  such actions. To assist plans in critical status, PPA amended ERISA to  allow these plans to reduce or eliminate adjustable benefits, such as early  retirement benefits, post-retirement death benefits, and disability benefits.  In addition, critical status plans are generally exempt from the excise  taxes that IRS can assess on plans with funding deficiencies.
The funding requirements of PPA took effect just as the nation entered a  severe economic recession in December 2007. As a result, Congress  enacted the Worker, Retiree, and Employer Recovery Act of 2008  (WRERA) to provide multiemployer plans with temporary relief from  some PPA requirements by allowing multiemployer 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 or rehabilitation plan, or postpone 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 a 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.
Although both single-employer and multiemployer plans are subject to the  rules outlined in Title IV of ERISA, there are several important differences  between the plan types that affect the structure and stability of each type  of plan. (See table 2.)
The overall number of multiemployer plans insured by PBGC has  decreased steadily since the 1980s as a result of plan mergers and  terminations. At the same time, the aggregate number of participants— including active and inactive—has continued to rise. (See fig. 1.)
The number of participants in multiemployer plans also varies by industry.  While PBGC covers workers in all major industrial sectors, the  construction trades consistently account for over one-third of all covered  multiemployer plan participants, totaling 36 percent in 2008. Other  industries, including transportation and manufacturing, account for a  smaller portion of participants, roughly 15 percent in 2007. (See fig. 2.)
section_title: Multiemployer Plans Reported Large Funding Shortfalls and Face an Uncertain Future
subsections: section_title: Multiemployer Plans Have Experienced General Funding Declines Since 2000
paragraphs: Multiple data sources that we examined indicate that most multiemployer  plans experienced steep declines in their funded status in recent years.  According to PBGC, multiemployer plans in aggregate have not been fully  funded—at 100 percent or above level—since 2000 and their net funded  status has declined significantly through 2007, the last date for which  PBGC data are available. While plans are considered “safe” if their funded  status is at least 80 percent, the aggregate funded status—the percentage  of benefits covered by plan assets—of multiemployer plans insured by  PBGC declined from 105 percent in 2000 to 69 percent in 2007. (See fig. 3.)
The funded status of multiemployer plans insured by PBGC varies  significantly by industry sector within which the plan operates. According  to PBGC data, while all industries generally follow the same trend in  funded status, plans in the transportation industry have since 2000  reported a consistently lower funded status than other industries. For  example, in 2007, the aggregate funded status for plans in the  transportation industry was 63 percent in contrast to the overall average of  69 percent. Furthermore, in 2000, the last year that the aggregate funded  status of all multiemployer plans was over 100 percent, the funded status  of multiemployer plans in the retail trade and services industries was  about 30 percent higher than the funded status of plans in the  transportation industry. (See fig. 4.) The extent of underfunding in  multiemployer plans also varies by industry with the construction and  transportation industries accounting for 71 percent of the underfunding of  all PBGC-insured multiemployer plans in 2007.
Since 2007, the last year for which data are available, aggregate plan  funded status has declined further as a result of investment market  declines. While the rapid drop in funded status, like the economic  conditions that caused it, was severe, experts said that its effect on plans  was similar to what happened to plans during the market correction of  2000 to 2002. For example, experts said that some plans, learning from the  downturn from 2000 to 2002, took remedial steps in the following years,  such as increasing contributions, and likely fared better in the recent  recession. In contrast, other plans did not change course after the 2000 to  2002 downturn in the hope that market returns would erase their deficits  and are now the plans in the most critical financial condition.
section_title: Many Multiemployer Plans Reported Large Funding Shortfalls during the Recent Economic Downturn
paragraphs: Although funded status was in a general decline since 2000, the economic  recession that began in December 2007 had a negative impact on the  funded status of multiemployer plans, according to a number of data  sources. Annual actuarial certification data from IRS show that the  proportion of multiemployer plans reporting in endangered or critical zone  status rose significantly, from 23 percent of plans in 2008 to 68 percent of  plans in 2009. (See table 3.)
Data from PBGC, although incomplete, show a similar downward trend in  plan funded status. According to the annual funding notices that PBGC  received in the 2009 plan year, nearly all of the 484 plans that filed  reported a decrease in funded status from 2008 to 2009. Similarly, PBGC  received more notices of critical or endangered status from plans, from  266 plans in 2008 to 624 plans in 2009.
Recent industry surveys of multiemployer plans found similar declines in  funded status. For example, two industry groups surveying their  multiemployer plan membership in 2009 found the same result: 80 percent  of plans reported being in critical or endangered zone status, a reversal  from 2008 when 80 percent of plans reported being in safe status.  Similarly, another industry survey of nearly 400 plans found that the  proportion of plans in the endangered or critical zone status increased  from 24 percent in 2008 to 80 percent in 2009. While these surveys are not  comprehensive, they provide further evidence of the negative impact that  the economic downturn had on multiemployer plans.
Although it did not affect their underlying funded status, many plans took  advantage of the one-time freeze allowed under WRERA. According to IRS  data, 745 plans elected to freeze their funded status in either 2008 or 2009,  including 373 plans in critical status, 351 in endangered status, and 21  plans in safe status. According to experts, some plans took advantage of  the freeze option for a variety of reasons. Plans wanted to give the markets  a chance to rebound in order to recoup plan assets lost in the downturn.  Others may have chosen the freeze due to timing of collective bargaining  agreements, not wanting to take steps to address funding deficiencies until  a new agreement was reached. Still other plans elected the freeze to avoid  having to revisit or revise ongoing rehabilitation plans. However, experts  also noted that the WRERA freeze option was not helpful for all plans.  Specifically, some plans chose not to freeze in endangered status,  preferring to go straight to critical status to give them more options to  address their funding deficiencies.
section_title: Plans Face Long-standing Demographic Challenges and an Uncertain Future
paragraphs: Multiemployer plans continue to face demographic challenges that  threaten their long-term financial outlook—including an aging workforce  and few opportunities to attract new employers and workers into plans.  While the number of total participants in multiemployer plans has slowly  increased, the proportion of active participants to retirees and separated  vested participants has decreased. (See fig. 5.) For example,  multiemployer plans had about 1.6 million fewer active participants in  2007 than in 1980, according to PBGC. With fewer active participants,  plans have more difficulty making up funding deficiencies by increasing  employers’ funding contributions. Moreover, increases in life expectancy  also put pressure on plans, increasing the amount of benefits that the plan  will have to pay as retirees live longer.
The 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 recent data from the  Bureau of Labor Statistics (BLS), 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. While union membership has trended downward in most  industries, it has remained relatively high in the transportation sector. (See  fig. 6.)
Some experts told us that some industries within which multiemployer  plans operate were already in decline—such as the printing and trucking  industries—and that their situation was likely exacerbated by the  economic downturn. They also noted that other plans, while facing short- term funding deficiencies, belonged to industries that remained strong— such as the construction and entertainment industries—and were likely to  improve their funded status as the economy improved.
PBGC’s ability to assist multiemployer plans is contingent upon its  insurance program having sufficient funds to do so. The net position of  PBGC’s multiemployer pension insurance program has steadily declined  since its highest point in 1998 as program liabilities outpaced asset growth.  (See fig. 7.) The program’s net position went negative in 2003 and by 2009  the multiemployer program reported an accumulated deficit of $869  million.
The demographic challenges that multiemployer plans face also affect  PBGC’s ability to assist them. Plans pay PBGC an annual flat rate premium  per participant. Similarly, contributions by employers in a multiemployer  plan are generally paid on a per work-hour basis. Consequently, declines in  the number of plan participants during periods of high unemployment and  long-standing reductions in collective bargaining can result in less  premium income to PBGC and an increased probability of PBGC-insured  multiemployer plans requiring financial assistance.
section_title: PBGC Monitors the Health of Multiemployer Plans, but Does Not Assist Troubled Plans on an Ongoing Basis
subsections: section_title: Data That PBGC Uses Are Outdated
paragraphs: While PBGC officials told us that they could benefit from having more  current data than are available on the Form 5500, they prefer using Form  5500 data on multiemployer plans because these older data are the most  comprehensive, the agency’s monitoring system is designed for it, the data  are audited, and most private plans are required by law to file the form on  an annual basis. Officials told us that, given the current Form 5500  reporting schedule, even with the data capture capabilities of the new  EFAST2 system, they cannot make up for the time lag in plan filing and, as  a result, its monitoring suffers. Officials told us that the time lag made it  difficult to detect when a plan was in trouble and what steps could be  taken to avert greater problems. PPA generally requires multiemployer  plans to provide more timely financial information to PBGC. (See table 5.)
In addition to Form 5500 data, PBGC-insured multiemployer plans are  required to submit annual funding notices (AFN) to PBGC. The AFN must  include, among other things, the plans’ identifying information and funded  percentage for the plan year, a statement of the market value of the plan’s  assets as of the end of the year, a statement of the number of retired,  separated vested, and active participants under the plan, and whether any  plan amendment, or scheduled benefit increase or reduction has a material  effect on plan liabilities. PBGC officials told us they do not use the AFNs  they receive to determine the overall health of the universe of  multiemployer plans, but may look at the market valuation of assets on the  AFN of a specific plan once it has been identified through Form 5500 data  as a potential candidate for the watch list. PBGC officials also told us they  do not use the AFN in developing data for model simulation, annual  reports, or data books. PBGC also receives annual notices of critical or  endangered status from plans within 30 days of plans certifying their  funding zone status with IRS, as required by PPA. PBGC officials said they  compare the information in the notices—which alert recipients of the  plan’s funding zone status and the reasons for it—with the plan’s Form  5500 filings to determine whether to place a plan on its contingency list.  Plans on the list are asked to provide their current actuarial valuations so  PBGC can monitor plans going forward. PBGC officials stated that, while  plans are not required to provide this information, they are typically  willing to cooperate with the requests.
section_title: PBGC Provides Non- Financial Assistance to Troubled Plans on an Ad Hoc Basis
paragraphs: In addition to providing financial assistance, PBGC can assist troubled  plans with technical assistance, facilitate mergers, and partition the  benefits of participants orphaned by employers who filed for bankruptcy.  Generally, it is up to plans to request these kinds of assistance.  Occasionally, PBGC is asked to serve as a facilitator and work with all the  parties to a troubled plan to improve a plan’s financial status. Plan  administrators can request PBGC’s help to improve funding status of plans  or provide assistance on other issues. They may contact PBGC’s customer  service representatives to obtain assistance on premiums, plan  terminations, and general legal questions related to PBGC programs.  PBGC has also assisted in the orderly shutdown of plans. The plans  involved in these actions either merged with other multiemployer plans or  purchased annuities from private-sector insurers for their beneficiaries.  For example, PBGC facilitated the closeout of seven small multiemployer  plans in 2010 that were receiving or expected to receive future financial  assistance payments from PBGC and identified two additional plans for  closeout in the future. According to PBGC, these small plan closeouts are  part of an ongoing effort to reduce plan administrative costs borne by  PBGC’s multiemployer program.
PBGC can also facilitate mergers between two or more multiemployer  plans. According to PBGC officials, PBGC has received notice of 303  mergers since 2000, 5 of which PBGC facilitated by paying $8.5 million  from the multiemployer insurance program to the merged plans. Plans  considering a merger must request approval from PBGC and typically  involve merging a plan with a low funding level with a plan having a more  favorable asset-to-liability ratio. PBGC officials told us that they carefully  consider each merger request to ensure that the merger creates a stronger  plan that will sustain operations indefinitely. They further noted that  PBGC wanted to be sure that plans that received funds in a facilitated  merger did not end up accepting the money only to become a liability to  PBGC in the near future, in effect causing PBGC to make loans twice to  poorly managed plans.
PBGC can also partition the benefits of certain participants from a  financially weak multiemployer plan under certain circumstances.  Partition is a statutory mechanism that permits financially healthy  employers to maintain a plan by carving out the plan liabilities attributable  to participants “orphaned” by employers who filed for bankruptcy. Under  ERISA, PBGC has the authority to order the partition of a plan’s orphaned  participants either upon its own motion or upon application by the plan  sponsor. Once a plan is partitioned, PBGC assumes the liability for paying  benefits to the orphaned participants. ERISA specifies four criteria that  dictate when PBGC can utilize its partitioning authority. PBGC may order  a partition if:  the plan experiences a substantial reduction in the amount of  contributions that has resulted or will result from a case or proceeding  under Chapter 11 bankruptcy with respect to an employer;  the plan is likely to become insolvent;    contributions will have to be increased significantly in reorganization to  meet the minimum contribution requirement and prevent insolvency; and   partition would significantly reduce the likelihood that the partitioned plan  will become insolvent.
Like all multiemployer plans, the partitioned participants are subjected to  ERISA’s multiemployer guaranteed benefit limits.
PBGC may order the partition of a plan after notifying plan sponsors and  participants, whose vested benefits will be affected by the partition. Since  the implementation of MPPAA in 1980, PBGC has partitioned two plans.  In the most recent partition in July 2010, PBGC said it approved the move  because, by removing 1,500 orphaned participants from the plan, PBGC  was able to delay plan insolvency for at least 6 additional years and  preserve full benefits for the approximately 3,700 workers and retirees of  firms still contributing to the plan. Without partition, the plan would have  become insolvent sooner and the federal benefit limits would have applied  to all its retirees.
section_title: Pension Structures in Other Countries Provide Multiemployer Plans with Options to Improve Funding
paragraphs: The private pension systems in the countries we studied—the Netherlands,  Denmark, the United Kingdom, and Canada—support industrywide,  employer-based pension plans that share some common attributes with  U.S. multiemployer plan structure. Each of the countries is a member of  the Organisation of Economic Co-operation and Development (OECD) and  supports a three-pillar pension system that consists of a basic state  pension (e.g., similar to Social Security), private employer-based pensions  (e.g., single- or multiemployer), and individual retirement savings (e.g.,  independent retirement accounts). While each of the countries we studied  had a pension system with some unique characteristics, pension officials  in some countries told us they faced common short-term and long-term  challenges in securing pension benefits for participants, including plan  underfunding and an aging workforce.
subsections: section_title: Other Countries’ Plans Are Subject to a Range of Funding, Reporting, and Regulatory Requirements
subsections: section_title: Minimum Funding Requirements
paragraphs: Three of the four countries that we studied reported they had recently  implemented some form of minimum funding requirements for  multiemployer plans, but the levels varied by country. Officials we spoke  with told us that plans that fell below these funding thresholds were  required to submit recovery plans to bring the funding levels back above  the minimum level. Canada, Denmark, and the Netherlands required plans  to be funded at a level of 100 percent or above. The United Kingdom  recently suspended its minimum funding requirements in favor of plan- specific funding levels, and officials told us regulators still sought to  maintain an aggregate funding level of 110 percent. Also, plans in the  Netherlands are required to build funding reserves, or buffers,  commensurate to the risk associated with their investment policies.  Officials at the Dutch Central Bank told us plans must develop buffers for  interest rate risk, private equity exposure, and hedge fund exposure.
section_title: Reporting Requirements
paragraphs: While the reporting requirements in these countries are not so different  from those in the United States, multiemployer plans in some countries  submit more frequent plan funding and actuarial reports to regulators. For  example, in the Netherlands and Denmark, all plans are required to submit  data on a quarterly and annual basis and plans in recovery status had, in  some countries, additional reporting requirements. (See table 8.)
Some countries require plans to submit plan data electronically, which  officials said allowed for real-time monitoring and transparency. For  example, Danish plans are required to report market valuations of their  assets and liabilities, which regulators said allowed them to identify plans  at risk through market surveillance with minimal up-to-date information.  The regulators told us they can take action as soon as a plan is in trouble  and proactively notify plans of impending financial problems. In the  United Kingdom, plan trustees are required to update their financial  information electronically and can do so in real-time on the regulator’s  information system. In the Netherlands, the Dutch Central Bank updates  the aggregate funded status of plans on a quarterly basis and makes this  information available on its public Web site.
section_title: Monitoring
paragraphs: These countries all monitored multiemployer plans for compliance and to  determine plan funding and solvency risk. While the Netherlands and  Denmark monitored the solvency risks of all plans, officials in both  countries told us they also plan to develop a risk-based monitoring  strategy, such as that used in the United Kingdom and Canada, which  would target monitoring to plans that represented the greatest risk.  Officials in these countries also had varying degrees of authority to  intervene in the operations of multiemployer plans. (See table 9.)
section_title: Plans in Other Countries Have Options to Improve Funded Status
paragraphs: Multiemployer plans in the countries we studied have a number of options  to improve and maintain their funded status, and a specific length of time  allotted to recovery. (See table 10.) Some of the countries allow plans to  increase contributions and reduce the rate of benefit accruals. In  Denmark, regulators told us that plans that fail stress tests must adjust  investments to resolve funding deficiencies within 6 months. The  Netherlands, United Kingdom, and Canada have longer recovery periods  and the Netherlands and Canada allow plans to reduce accrued benefits,  including the benefits of retirees, although this step is seen as a measure of  last resort.
Plans may also seek out mergers to reduce administrative costs and  indirectly help preserve their funded status. Most of the countries we  studied allow plan mergers, but some officials told us that they were  infrequent. Canadian officials told us mergers of multiemployer plans  would be difficult because plan membership is based on profession and  multiemployer plans do not want to lose control of plan policy and  governance, even if the plan would be financially better off after a merger.  In Canada, when full mergers do occur, they said, they tend to result from  a merger of unions. In the Netherlands, mergers occur, but the industry  identification of multiemployer plans limits merger activity to plans in the  same industry. In Denmark, single-employer plans can choose to merge  with multiemployer plans even if the participants are not affiliated with  the plan’s employer organization to take advantage of lower administrative  fees. In the United Kingdom, there is a large trust that combines many  single-employer and several multiemployer plans, benefiting all  participating plans with lower costs and better investment opportunities.
section_title: Changes to U.S. Multiemployer Plan Framework Could Help to Protect Pension Benefits
subsections: section_title: Lack of Timely, Complete, and Accurate Information Hinders Ongoing Assessments of Multiemployer Plans
paragraphs: PPA requires multiemployer plans to file numerous notices with EBSA,  IRS, and PBGC regarding their funded status. Our review of filings  received by the three agencies found that plans are not all complying with  these requirements. Moreover, we found that plans that did comply filed  notices that varied in form and content. While current reporting  requirements, if followed, would provide federal agencies with the data  needed to monitor plan health, the current multiemployer plan framework  requires plans to submit these data in a fractured format to three different  agencies that do not share the information they receive. As a result, federal  officials told us that their agencies are limited in their ability to assess the  current and recent health of multiemployer plans.
Plans are required to certify their funding zone status each year with IRS,  but they are not required to include their current funded percentage in this  report, which would be helpful to officials determining the gravity of  plans’ funding deficiencies. Also, IRS officials told us that some plans  provided a brief letter identifying the zone status, while other plan’s  submitted lengthy reports that detailed the assumptions and calculations  used to determine the plan’s zone status. IRS officials told us that, while  some plans provided their funded percentage in the certification notice,  the agency did not track this information nor share the list of certifying  plans with any other federal agency.
Within 30 days of certifying their funding zone status with IRS, PPA  requires plans in critical or endangered status to submit a notice of their  status to PBGC and EBSA, among others. In our review of data from 2008  and 2009 obtained from the three agencies, we found large discrepancies  in the number of plans certifying with IRS and the number of plans  submitting notices of critical or endangered status to PBGC and EBSA.  For example, IRS data show that 461 of the 1,331 plans certified in critical  status in 2009, but only 132 plans provided notices of their certified status  to EBSA. Similarly, some plans that elected to freeze their current funding  status did not file notices of this election with PBGC and EBSA, as  required. (See table 11.)
In addition, for plan years beginning after December 31, 2007, all defined  benefit plans are required to provide an additional notice—an annual  funding notice—to PBGC, plan participants and beneficiaries, labor  organizations, and, in the case of multiemployer plans, also to each  participating employer. Like the notice of critical or endangered status,  this notice must be provided within 120 days following the end of each  plan year. EBSA can assess a civil penalty of $110 per day per participant  against the plan administrator for failure to submit the plan’s annual  funding notice to participants and beneficiaries. Among other things, the  AFN provides recent information on a plan’s funded status, actuarial  valuations of assets and liabilities, market valuations of assets, and a  plan’s asset allocation. According to PBGC officials, only half of  multiemployer plans filed these notices in the 2008 plan year and many  plans had failed to file notices for the 2009 plan year within the 120-day  statutory timeline. PBGC officials could not explain why plans failed to file  the notices with PBGC. But while EBSA can assess a civil penalty for  failure to submit an annual funding notice, PBGC officials did not share  any information on plans’ annual funding notices with EBSA, making it  unlikely that EBSA would have the information necessary to assess such a  penalty.
Industry experts told us that the reporting requirements for multiemployer  plans are confusing and duplicative, and that further consolidation of  notices is needed. They noted that plan reporting requirements have  increased significantly and become burdensome for plans to administer  with each notice having a different recipient and due date. Even if  participant notices were more clearly written, one expert said, there is  nothing that an individual can do to address the critical or endangered  status because benefits are collectively bargained. Moreover, participants  do not need multiple notices each time an event occurs to change the long- term projections of their plan’s standing.
section_title: Current Multiemployer Framework Faces Challenges in Assisting Plans in Need
paragraphs: The statutory and regulatory framework guiding multiemployer plans is  not structured to assist troubled plans, limits the actions agencies can  take, and promotes little interaction among federal agencies that bear joint  responsibility for monitoring and assisting these plans and their  participants. We found that EBSA, IRS, and PBGC do not work together to  share information received from plans and cannot determine whether all  multiemployer plans are meeting applicable legal requirements.
First, PBGC’s involvement with multiemployer plans is mostly limited to  the plans on its contingency list that are already insolvent and receiving  financial assistance or pose a potential risk for future claims against  PBGC. PBGC has authority to interact with plans on an ongoing basis, but  has done so infrequently to date. For example, at a recent testimony  before Congress, an EBSA official stated that one large multiemployer  plan, the Central States Southeast and Southwest Pension Fund, did not  meet the criteria for partition, despite having $2.1 billion in unfunded  liabilities in 2009 and reportedly paying over 40 cents on every dollar to  beneficiaries whose employers left the plan without covering their  obligations. In fact, PBGC has only used its partition authority twice in its  history and facilitated five plan mergers since 2000. Experts told us that  plans could benefit from a greater level of PBGC interaction and a more  flexible application of the tools available to PBGC. (See table 12.)
Second, the Employee Plans Compliance Unit (EPCU) at IRS, which is  responsible for verifying that all multiemployer plans file annual actuarial  certifications of funded status and confirming that the certifications are  filed in a complete and timely manner, does not have the capacity to  identify plans that fail to file or verify that all plans submitting  certifications are indeed multiemployer plans. IRS officials told us they  could not determine whether all multiemployer plans filed their actuarial  certifications because they did not know the universe of multiemployer  plans. Specifically, they said they did not have a complete list of all  multiemployer plans in part because the data they use is taken from the  plans’ Form 5500 filings, which included plans that had identified  themselves as multiemployer plans but, judging from the plan name, were  not (e.g., dental offices or 401(k) plans). Officials told us they hoped to get  a more accurate data set in the future, but it would take several years  before this would happen.
EPCU officials told us plan filings vary widely in scope and length. For  example, some plans send a brief memo indicating their funding zone  status; others send a long report detailing each of the actuarial  assumptions used to determine the zone status. IRS officials told us some  plans provided funded status as a percentage while others reported only  zone status. IRS currently collects paper copies of the annual  certifications. Officials said the annual certification notices required the  same kind of information as the WRERA notices, which can be filled out  and filed electronically on the IRS Web site. In March 2008, IRS proposed  guidance to plans on the preferred format or content for the annual  certification notices, but this guidance has not been finalized.
EPCU officials told us that they did not interact with either EBSA or PBGC  with regard to the filing of certification notices. They said in the past they  sent a few short summaries about the funding zone status certifications to  IRS headquarters, but did not interact directly with EBSA or PBGC  officials regarding the annual certifications. Moreover, IRS did not make  certification data available to either EBSA or PBGC so they could  reconcile the critical or endangered status notices with the number of  certifications to determine if plans were complying with the law. EPCU  officials said it would be beneficial for them to have direct contact with  other federal agencies to share information on multiemployer plans.
Third, EBSA, which is responsible for assessing civil penalties for  reporting violations against plans that do not file annual actuarial  certifications of funded zone status, does not receive or actively seek out  information from PBGC and IRS to enforce this penalty. PPA also requires  plans that certify their funding zone status as either critical or endangered  to send notices of endangered and critical funding status to EBSA, among  others, but, unlike the annual certification of a plan’s status, there are no  penalties associated with the failure to furnish endangered or critical  status notices. EBSA’s Office of Participant Assistance scans the notices it  receives and posts them on its Web site. Officials from EBSA’s Office of  Regulations and Interpretation and the Office of Enforcement said they  make no attempt to reconcile the status notices with the certifications  filed with IRS. They said they had no interaction with IRS officials on  these matters and noted some utility if IRS were to share certification data  with EBSA.
section_title: Elements of Multiemployer Framework May Limit Protection of Benefits
paragraphs: The pension experts and plan practitioners that we interviewed identified  several elements of the multiemployer framework that were restrictive  and had the potential to affect plans’ ability to keep the pension promise to  beneficiaries. These experts noted that each of these elements had  unintended consequences made evident by the recent economic downturn.  (See table 13.)
section_title: Conclusions
paragraphs: For decades, multiemployer plans have secured and provided an  uninterrupted stream of pension benefits to millions of U.S. workers and  retirees. Through collective bargaining, employers and employees worked  to maintain their pension benefits despite changing economic climates and  financial challenges. As a result, the vast majority of plans have remained  solvent and relatively few plans have made claims for financial assistance  from PBGC’s insurance program since its inception in 1980.
However, the recent economic downturn revealed that multiemployer  plans, like most pension plans, were vulnerable to sudden economic  changes and had few options to respond to the funding challenges  highlighted by these economic conditions. The result was a steep decline  in the funded status of most multiemployer plans—now below 70 percent  in aggregate. In the short term, the majority of plans will have to make  difficult decisions to improve their funding and protect against future  declines. The multiemployer plan universe represents diverse groups of  employers, participants and industries some of which may be better  prepared to meet their future funding obligations. While some plans may  be able to improve their funded status as the economy improves, plans in  the worst condition may find that the current options of increasing  employer contributions or reducing benefit accruals are insufficient to  overcome the funding and demographic challenges they face. For these  plans, the combination of the effects of the economic downturn, the  decline in collective bargaining, the withdrawal of contributing employers,  and an aging workforce has likely accelerated their path to insolvency.  Without additional options to address their underfunding, or new  employers joining the plans to replenish the contributions, many plans  may find themselves at greater risk of insolvency and more likely to need  PBGC financial assistance sooner rather than later. Such a situation would  put additional stress on PBGC’s insurance program that, already in deficit,  it can ill afford.
The current statutory and regulatory framework for multiemployer plans  is not structured to assist troubled plans on an ongoing basis. PBGC,  Labor and IRS are all required by law to collect various funding data from  plans, and these data are often duplicative. Moreover, these agencies are  not making full use of these data to mitigate the risks to participants or to  enforce plan discipline. While PBGC monitors plans on an ongoing basis, it  focuses on the short-term risks to the trust funds rather than outward on  the long-term risks to participants or the impact on their benefits if their  plans cannot pay the benefits they promised.
There are other approaches to consider. While some practices in the  countries we studied, such as mandatory employer participation, would  not be feasible in the U.S. context; others may have more ready  application for addressing some challenges that U.S. multiemployer plans  face. For example, the countries that we studied had pension regulators  that interacted with plans on a frequent basis, collected timely and  detailed plan information, provided a range of tools to plans to address  plan underfunding and made information on the funded status of plans  available to the public. Yet, there is no one-size-fits-all solution. For  example, some plans’ greatest challenges may be their aging workforce or  vulnerability to economic volatility, while others may face challenges  inherent to the industries and geographical regions they serve.
Without more timely and accurate information on plan health, PBGC and  other federal agencies can do little to help plans to respond to  circumstances like the ones they experienced in the recent economic  downturn. But collecting this information is not enough. The agencies  must also incorporate this information into their monitoring and oversight  efforts and use the most current data to inform their policies and risk  assessments. To do this, the agencies responsible for multiemployer plans  must work together to provide greater security for multiemployer plans,  which for decades have limited the exposure to PBGC and the taxpayer.
section_title: Matters for Congressional Consideration
paragraphs: To provide greater transparency of the current status of multiemployer  plans, assist federal monitoring efforts, and help plans address their  funding deficiencies, Congress should consider:    consolidating the annual funding notices and the PPA notices of critical or  endangered status to eliminate duplicative reporting requirements; and  requiring IRS, EBSA, and PBGC to establish a shared database containing  all information received from multiemployer plans.
section_title: Recommendations for Executive Action
paragraphs: 1.  To improve the quality of information and oversight of multiemployer  plans, we recommend that EBSA, IRS, and PBGC amend existing  interagency memoranda of understanding to address, among other  things, the agencies’ plans for sharing information they collect on  multiemployer plans on an ongoing basis. Specifically, the agencies  should address how they will share data:    To identify the universe of multiemployer plans.
To reconcile similar information received by each agency.
To identify possible reporting compliance issues and take appropriate  enforcement action.
The agencies should revisit this agreement periodically to determine  whether modifications are required to ensure that each agency is able to  carry out its responsibilities.  2.  To collect more useful information from plans, the Secretary of the  Treasury should direct the IRS to develop a standardized electronic  form for annual certifications that requires plans to submit their funded  percentage. 3.  To implement better and more effective oversight practices, the  Director of the PBGC should develop a more proactive approach to  monitoring multiemployer plans, such as assigning case managers to  work with the plans that pose the greatest risk to the agency and  provide non-financial assistance to troubled plans on an ongoing basis.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Secretary of Labor, the Secretary  of the Treasury, and the Director of PBGC for review and comment. Each  agency provided us with written comments, which we reprinted in  appendixes II, III, and IV of this report. In responding to the draft report,  the agencies acknowledged the vital role of these plans in providing  retirement security to millions of U.S. workers and retirees. PBGC further  noted that the agency has limited information to analyze the health of  multiemployer plans, and that additional information is needed to monitor  plan health.
The three agencies also generally agreed with our recommendations to  improve interagency information sharing and to take steps to acquire more  current and accurate data on the status of multiemployer plans. The  agencies noted, however, that in their view a new interagency MOU was  unnecessary. The Department of the Treasury highlighted actions that the  agency currently takes to coordinate with the other agencies. The  Department of Labor provided an updated status of the actions that the  agency has taken with regard to multiemployer plans. For example, EBSA  said it recently initiated contact with IRS to begin work on reconciling  certain multiemployer data. IRS and PBGC further stated that memoranda  were already in place that could be amended to allow for better  information sharing. While we are encouraged by these developments, we  do not believe that separate arrangements among agencies will produce  the kind of interagency cooperation needed to facilitate information  sharing and effective ongoing monitoring of the health of multiemployer  plans. Therefore, we continue to believe that, in order to foster meaningful  interagency coordination, the agencies should either amend existing  agreements or enter into new ones, as we are recommending. EBSA and  PBGC also provided technical comments, which we incorporated in this  report, as appropriate.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  issue date. At that time, we will send copies of this report to relevant  congressional committees, PBGC, the Secretary of Labor, the Secretary of  the Treasury, and other interested parties. In addition, the report will be  made available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made contributions to this report are listed  in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: We were asked to answer the following research questions: (1) What is the  current status of the nation’s multiemployer pension plans? (2) What steps  does PBGC take to monitor the health of these plans? (3) What is the  structure of multiemployer plans in other countries? (4) What statutory  and regulatory changes, if any, are needed to help plans to continue to  provide participants with the benefits due to them?
To identify the current status of the nation’s multiemployer pension plans,  we interviewed officials and analyzed data and documents from PBGC, the  Department of Labor’s Employee Benefits Security Administration (EBSA)  and the Department of the Treasury’s Internal Revenue Service (IRS), and  reviewed relevant industry studies and literature on multiemployer plans.  To determine the recent funding status of multiemployer plans, we  analyzed historical summary data published in PBGC’s annual data books  and summary data from IRS on the annual notices of funding status  certification submitted in 2008 and 2009. To corroborate these data, we  analyzed notices of critical and endangered status and WRERA notices  sent to PBGC and EBSA and published on EBSA’s Web site. To identify the  demographics of multiemployer plans, including the number of plans,  number of participants, and industry concentration of plans, we analyzed  data published in PBGC’s annual reports and data books. To determine  private-sector union affiliation, we analyzed data from the Bureau of Labor  Statistics. We assessed the reliability of the selected data that we used  from these sources by comparing the number of plans filing reports to  federal agencies. We determined that, although the data were incomplete  and had certain limitations, which we present in our report, they were  sufficiently reliable for the purpose of making clear which federal agencies  collect data and showing how these data are similar and how they differ.  To supplement this quantitative analysis, we interviewed EBSA, IRS, and  PBGC officials; and a diverse range of pension experts and multiemployer  plan practitioners. We selected experts based on those who had published  on multiemployer plans or whose names were referred to us by other  interviewees, and we spoke to 48 experts. We analyzed their responses on  the current status of plans, the impact of the recent recession, and the  future outlook of multiemployer plans. As appropriate, we reviewed  relevant federal laws and regulations that pertain to multiemployer plans.
To determine the steps PBGC takes to monitor the health of  multiemployer plans, we interviewed PBGC officials and reviewed  documentation on PBGC’s multiemployer plan monitoring, modeling, and  assistance policies and procedures. We also reviewed relevant statutory  and PBGC regulatory requirements with regard to multiemployer plans.
To understand the structure of multiemployer plans in other countries, we  reviewed four countries selected because of their comparable  multiemployer plan frameworks—the Netherlands, Denmark, United  Kingdom, and Canada—and interviewed government officials, plan  administrators and trustees, employer and union representatives, and  other pension experts. We selected these countries after completing an  initial review of employer-sponsored pension plan designs in Organisation  for Economic Co-operation and Development (OECD) countries. We  focused on OECD countries in order to increase our opportunity to  identify practices used in countries with well-developed capital markets  and regulatory regimes comparable, if not always similar, to the United  States. We acknowledge that there may be relevant plan design features  from a non-OECD country that we did not address in this report. Although  we did not independently analyze each country’s laws and regulations, we  collected information about each country’s multiemployer plan structure  and interviewed government officials and pension experts and in each  country. We relied on the expertise of staff in the U.S. State Department to  identify potential interviewees in these countries and to schedule the  interviews. We did not review the laws or requirements of those foreign  countries mentioned in this report. Rather, we relied upon the descriptions  and materials furnished by officials and experts of these countries.
To identify what statutory and regulatory changes, if any, are needed to  help plans continue to provide participants with the benefits due to them,  we reviewed pension literature and interviewed a variety of experts on  multiemployer plans, including officials from EBSA, IRS, and PBGC;  pension experts; and practitioners representing a range of industries and  plan sizes. We selected experts based on those who had published on  multiemployer plans or whose names were referred to us by other  interviewees, and we spoke to 48 experts.
We conducted this performance audit from September 2009 through  October 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.
section_title: Appendix II: Comments from the Department of Labor
section_title: Appendix III: Comments from the Department of the Treasury
section_title: Appendix IV: Comments from the Pension Benefit Guaranty Corporation
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: Individuals making key contributions to this report include David R.  Lehrer, Assistant Director; Jonathan S. McMurray, Analyst-in-Charge;  Robert Campbell; and Thanh Lu. Joseph Applebaum, Susan Aschoff, and  Roger J. Thomas also provided valuable assistance.