Private Pensions: Multiemployer Plans Face Short- and Long-Term Challenges
Published: 2004-03-26T00:00:00

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 coverage to over 9.7 million of the 44 million participants insured by the Pension Benefit Guaranty Corporation (PBGC). The recent termination of several large single-employer plans--plans sponsored by individual firms--has led to millions of dollars in benefit losses for thousands of workers and left PBGC, their public insurer, an $11.2 billion deficit as of September 30, 2003. The serious difficulties experienced by these single-employer plans have prompted questions about the health of multiemployer plans. This report provides the following information on multiemployer pension plans: (1) trends in funding and worker participation, (2) PBGC's role regarding the plans' financial solvency, and (3) potential challenges to the plans' long-term prospects.
section_title: What GAO Found
paragraphs: Following 2 decades of relative financial stability, multiemployer plans as a group appear to have suffered recent and significant funding losses, while long-term declines in participation and new plan formation continue unabated. At the close of the 1990s, the majority of multiemployer plans reported assets exceeding 90 percent of total liabilities. Recently, however, stock market declines, coupled with low interest rates and poor economic conditions, appear to have reduced assets and increased liabilities for many plans. PBGC reported an accumulated net deficit of $261 million for its multiemployer program in 2003, the first since 1981. Meanwhile, since 1980, the number of plans has declined from over 2,200 to fewer than 1,700 plans, and there has been a long-term decline in the total number of active workers. PBGC monitors those multiemployer plans, which may, in PBGC's view, present a risk of financial insolvency. PBGC also provides technical and financial assistance to troubled plans and guarantees a minimum level of benefits to participants in insolvent plans. PBGC annually reviews the financial condition of plans to determine its potential insurance liability. Although the agency does not trustee the administration of insolvent multiemployer plans as it does with single-employer plans, it does offer them technical assistance and loans. PBGC loans have been rare, with loans to only 33 plans, totaling $167 million since 1980. Several factors pose challenges to the long-term prospects of the multiemployer system. Some are inherent to the multiemployer regulatory framework, such as the greater perceived financial risk and reduced flexibility for employers compared to other plan designs, and suggest that fewer employers will find such plans attractive. Also, the long-term decline of collective bargaining results in fewer new participants to expand or create new plans. Other factors threaten all defined benefit plans, including multiemployer plans: the growing trend among employers to choose defined contribution plans; the increasing life expectancy of workers, which raises the cost of plans; and continuing increases in employer health insurance costs, which compete with pensions for employer funding.

section_title: Letter
paragraphs: Multiemployer pension plans, which are created by collective bargaining  agreements covering more than one employer and generally operate under  the joint trusteeship of labor and management, comprise an important  segment of the nation’s private employer pension system. These defined  benefit (DB) pension plans—plans promising a benefit that is generally  based on an employee’s years of service and either a flat dollar amount or  the employee’s salary—cover over 9.7 million participants, representing  about 22 percent of all workers and retirees insured by the Pension  Benefit Guaranty Corporation (PBGC). The recent collapse and  termination of several large single-employer plans—where individual  employers are responsible for funding and administering the plan—have  resulted in millions of dollars in benefit losses for thousands of workers  and left PBGC, their public insurer, an $11.2 billion deficit as of September  30, 2003. The serious difficulties experienced by these single-employer  plans have prompted questions about the health of the nation’s  multiemployer-defined benefit plans.
Given the high financial stakes involved for both the employers and the  millions of workers and retirees participating in multiemployer pension  plans, you asked us to describe (1) trends in funding and worker  participation in these plans; (2) PBGC’s role regarding the plans’ financial  solvency; and (3) potential challenges to the plans’ long-term prospects.
To determine the trends in the funded status of multiemployer-defined  benefit plans, we analyzed Form 5500 disclosure statements and PBGC  data. The Form 5500, which plans must file with the U. S. Department of  Labor, is an important source of financial and other plan information on  private pension plans collected on a regular basis. Form 5500 provides  important pension information, such as the number of plan participants  and data on the financial condition of plans. However, the most recent  Form 5500 data are from 2001, making it difficult to accurately discern  recent trends. Although some data obtained from PBGC may be more  recent, much of it is based on the Form 5500. This lack of comprehensive  data makes it difficult to depict recent developments, particularly with  regard to plan funding.
To determine PBGC’s role regarding the financial stability of  multiemployer plans, we reviewed the requirements under the Employee  Retirement Income Security Act (ERISA) and the Multiemployer Pension  Plan Amendments Act (MPPAA) of 1980. We reviewed PBGC procedures  for identifying at-risk plans and for taking action to assist plans, discussed  these actions with agency officials, and obtained statistics on PBGC  multiemployer activities since 1980. To identify the major challenges to the  future prospects of multiemployer plans, we reviewed pension literature  and interviewed representatives in government, industry, and labor  involved with such plans. We conducted our work from April 2003 through  January 2004 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: Multiemployer plans are established pursuant to collectively bargained  pension agreements negotiated between labor unions representing  employees and two or more employers and are generally jointly  administered by trustees from both labor and management.  Multiemployer plans typically cover groups of workers in such industries  as trucking, building and construction, and retail food sales. These plans  provide participants limited benefit portability in that they allow workers  the continued accrual of defined benefit pension rights when they change  jobs, if their new employer is also a sponsor of the same plan. This  arrangement can be particularly advantageous in industries like  construction, where job change within a single industry is frequent over  the course of a career. Multiemployer plans are distinct from single- employer plans, which are established and maintained by only one  employer and where the plans may or may not be collectively bargained.  Multiemployer plans also differ from so called multiple-employer plans  that are not generally established through collective bargaining  agreements and where many such plans have separate funding accounts  for each employer.
Since the enactment of the National Labor Relations Act (NLRA), in 1935,  collective bargaining has been the primary means by which workers can  negotiate, through unions, the terms of their pension plan. In 1935, NLRA  required employers to bargain with union representatives over wages and  other conditions of employment, and subsequent court decisions  established that employee benefit plans could be among those conditions.  The Taft Hartley Act amended NLRA to establish terms for negotiating  such employee benefits and placed certain restrictions on the operation of  any plan resulting from those negotiations. For example, employer  contributions cannot be made to a union or its representative but must be  made to a trust that has an equal balance of union and employer  representation.
Since its enactment in 1974, multiemployer defined benefit pensions have  been regulated by the Employee Retirement Income Security Act (ERISA),  which Congress passed 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 insure the  pensions of participants and beneficiaries in private sector-defined benefit  plans. In 1980, Congress enacted the Multiemployer Pension Plan  Amendments Act (MPPAA) of 1980 to protect the pensions of participants  in multiemployer plans by establishing a separate PBGC multiemployer  plan insurance program and by requiring any employer wanting to  withdraw from a multiemployer plan to be liable for its share of the plan’s  unfunded liability. This amount is based upon a proportional share of the  plans’ unfunded vested benefits.  Liabilities that cannot be collected from  a withdrawn employer are “rolled over” and must eventually be funded by  the plans remaining employers.
PBGC operates distinct insurance programs, for multiemployer plans and  single-employer plans, which have separate insurance funds, different  benefit guarantee rules, and different insurance coverage rules. The two  insurance programs and PBGC’s operations are financed through  premiums paid annually by plan sponsors, investment returns on PBGC  assets, assets acquired from terminated single employer plans, and by  recoveries from employers responsible for underfunded terminated single  employer plans. Premium revenue totaled about $973 million in 2003, of  which $948 million was paid into the single-employer program and   $25 million paid to the multiemployer program.
Over the last few years, the finances of PBGC’s single-employer insurance  program have taken a severe turn for the worse. Although the program  registered a $9.7 billion accumulated surplus as recently as 2000, it  reported a $11.2 billion accumulated deficit for fiscal year 2003, primarily  brought on by the termination of a number of large underfunded pension  plans. Several underlying factors contributed to the severity of the plans’  underfunded condition at termination, including a sharp decline in the  stock market, which reduced plan asset values, and a general decline in  interest rates, which increased the cost of terminating defined benefit  pension plans. Because of its accumulated deficit, the significant risk that  other large underfunded plans might terminate and other structural  factors, we designated PBGC’s single-employer pension insurance  program as a “high risk” program and added it to the list of agencies and  major programs that we believe need urgent attention.
In general, the same ERISA funding rules apply to both single and  multiemployer defined benefit pension plans. However, there are some  important differences. For example, while single-employer plan sponsors  can adjust their pension contributions to meet their needs, within the  overall set of ERISA and Internal Revenue Code (IRC) rules, individual  employers in multiemployer plans cannot as easily adjust their plan  contributions. For multiemployer plans, contribution levels are usually  negotiated through the collective bargaining process and are fixed for the  term of the collective bargaining agreement, typically 2 to 3 years. Benefit  levels are generally also fixed by the contract or by the plan trustees.  Employer contributions to multiemployer plans are typically made on a set  dollar amount per hour of covered work. For many multiemployer plans,  contributions are directly tied to the total number of hours worked, and  thus, to the number of active plan participants. With other things being  equal, the reduced employment of active participants will result in lower  contributions and reduced plan funding.
The U. S. employer-sponsored pension system has historically been an  important component of total retirement income, providing roughly   18 percent of aggregate retirement income in 2000. However, millions of  workers continue to face the prospect of retirement with no income from  an employer-sponsored pension. The percentage of the workforce with  pension coverage has been near 50 percent since the 1970s. Lower-income  workers, part-time employees, employees of small businesses, and  younger workers typically have lower rates of pension coverage. Retirees  with pension incomes are more likely to avoid poverty. For example,   21 percent of retired persons without pension incomes had incomes below  the federal poverty level, compared with 3 percent with pension incomes.  Of those workers covered by a pension, such coverage is increasingly  being provided by defined contribution pension plans. Surveys have  reported a worker preference for defined contribution plans, with  employers citing worker preference for transparency of plan value and  improved benefit portability. As of 1998, the most recent published data  available, 27 percent of the private sector labor force was covered by a DC  plan, as their primary pension plan, up from 7 percent in 1979.
section_title: The Financial Stability of Multiemployer Plans Has Likely Weakened Recently, While Long- term Declines in the Number of Plans and Participants Continue
paragraphs: While multiemployer plan funding has exhibited considerable stability  over the past 2 decades, available data suggest that many plans have  recently experienced significant funding declines. Since 1980, aggregate  multiemployer plan funding has been stable, with the majority of plans  funded above 90 percent of total liabilities and average funding at   105 percent by 2000. Recently, however, it appears that a combination of  stock market declines coupled with low interest rates and poor economic  conditions have reduced the assets and increased the liabilities of many  multiemployer plans. In PBGC’s 2003 Annual Report, the agency estimated  that total underfunding of underfunded multiemployer plans reached   $100 billion by year-end, from $21 billion in 2000, and that its  multiemployer program had recorded a year-end 2003 deficit of   $261 million, the first deficit in more than 20 years. While most  multiemployer plans continue to provide benefits to retirees at unreduced  levels, the agency has also increased its forecast of the number of plans  that will likely need financial assistance, from 56 plans in 2001 to 62 plans  in 2003. Private survey data are consistent with this trend, with one survey  by an actuarial consulting firm showing the percentage of fully funded  client plans declining from 83 percent in 2001 to 67 percent in 2002. In  addition, long-standing declines in the number of plans and worker  participation continue. The number of insured multiemployer plans has  dropped by a quarter since 1980 to fewer than 1,700 plans in 2003, the  latest data available. Although in 2001, multiemployer plans in the  aggregate covered 4.7 million active participants, representing about a fifth  of all defined benefit plan participants, this number has dropped by   1.4 million since 1980.
subsections: section_title: Multiemployer Plan Funding Remained Stable during the 1980s and 1990s
paragraphs: Aggregate funding for multiemployer pension plans remained stable  during the 1980s and 1990s. By 2000, the majority of multiemployer plans  reported assets exceeding 90 percent of total liabilities, with the average  plan funded at 105 percent of liabilities. As shown in figure 1, the  aggregate net funding of multiemployer plans grew from a deficit of about  $12 billion in 1980 to a surplus of nearly $17 billion in 2000. From 1980 to  2000, multiemployer plan assets grew at an annual average rate of   11.7 percent, to about $330 billion, exceeding the average 10.5 percent  annual percentage growth rate of single-employer plan assets. During the  same time period, liabilities for multiemployer and single-employer  pensions grew at an average annual rate of about 10.2 percent and   9.9 percent, respectively.
A number of factors appear to have contributed to the funding stability of  multiemployer plans, including:  Investment Strategy—Historically, multiemployer plans appear to have  invested more conservatively than their single-employer counterparts.  Although comprehensive data are not available, some pension experts  have suggested that defined benefit plans in the aggregate are more than  60 percent invested in equities, which are associated with greater risk and  volatility than many fixed-income securities. Experts have stated that, in  contrast, equity holdings generally comprise 55 percent or less of the  assets of most multiemployer plans.
Contribution Rates—Unlike single-employer plans, multiemployer plan  funds receive steady contributions from employers because those amounts  generally have been set through multiyear collective bargaining contracts.  Participating employers, therefore, have less flexibility to vary their  contributions in response to changes in firm performance, economic  conditions, and other factors. This regular contribution income is in  addition to any investment return and helps multiemployer plans offset  any declines in investment returns.
Risk Pooling—The pooling of risk inherent in multiemployer pension  plans may also have buffered them against financial shocks and recessions  since the contributions to the plans are less immediately affected by the  economic performance of individual employer plan sponsors.  Multiemployer pension plans typically continue to operate long after any  individual employer goes out of business because the remaining employers  in the plan are jointly liable for funding the benefits of all vested  participants.
Greater Average Plan Size—The stability of multiemployer plans may also  be due in part to their size. Large plans (1,000 or more participants)  constitute a greater proportion of multiemployer plans than of single- employer plans. (See figs. 2 and 3.) While 55 percent of multiemployer  plans are large, only 13 percent of single-employer plans are large and   73 percent of single-employer plans have had fewer than 250 participants,  as shown in figure 2. However, distribution of participants by plan size for  multiemployer and single-employer plans is more comparable, with over  90 percent of both multiemployer and single-employer participants in large  plans, as shown in figure 3.
section_title: Limited Data Suggest the Funded Status of Multiemployer Plans Has Declined Since 2000
paragraphs: Although data limitations preclude any comprehensive assessment,  available evidence suggests that since 2000, many multiemployer plans  have recently experienced significant reductions in their funded status.  PBGC estimated in its 2003 Annual Report that the aggregate deficit of  underfunded multiemployer plans had reached $100 billion by year-end, up  from a $21 billion deficit at the start of 2000. In addition, PBGC reported  its own multiemployer insurance program deficit of $261 million for fiscal  year 2003, the first deficit since 1981 and its largest ever. (See fig. 4.) While  most multiemployer plans continue to provide benefits to retirees at  unreduced levels, PBGC has also reported that the deficit was primarily  caused by new and substantial probable losses, increasing the number of  plans it classifies as likely requiring financial assistance in the near future  from 58 plans with expected liabilities of $775 million in 2002 to 62 plans  with expected liabilities of $1.25 billion in 2003.
Private survey data and anecdotal evidence are consistent with this  assessment of multiemployer funding losses. One survey by an actuarial  consulting firm showed that the percentage of its multiemployer client  plans that were fully funded declined from 83 percent in 2001 to 67 percent  in 2002. Other, more anecdotal evidence suggests increased difficulties  for multiemployer plans. Discussions with plan administrators have  indicated that there has been an increase in the number of plans with  financial difficulties in recent years, with some plans reducing or  temporarily freezing the future accruals of participants. In addition, IRS  officials recently reported an increase in the small number of  multiemployer plans (less than 1 percent of all multiemployer plans)  requesting tax-specific waivers that would provide plans relief from  current funding shortfall requirements.
As with single-employer plans, falling interest rates coincident with stock  market declines and generally weak economic conditions have  contributed to the funding difficulties of many multiemployer plans. The  decline in interest rates in recent years has increased pension plan  liabilities for DB plans in general, because their liability for future  promised benefits increases when computed using a lower interest rate. At  the same time, declining stock markets decreased the value of any equities  held in multiemployer plan portfolios to meet those obligations. Finally,  because multiemployer plan contributions are usually based on the  number of hours worked by active participants, any reduction in their  employment will reduce employer contributions to the plan.
section_title: Multiemployer Plans Are Experiencing Long-term Declines in Plan Formation and Worker Participation
paragraphs: Over the past 2 decades, the multiemployer system has experienced a  steady decline in the number of plans and in the number of active  participants. In 1980, there were 2,244 plans and by 2003 the number had  fallen to 1,631, a decline of about 27 percent. While a portion of the decline  in the number of plans can be explained by consolidations through  mergers, few new plans have been formed, only 5, in fact, since 1992.  Meanwhile, the number of active multiemployer plan participants has  declined both in relative and absolute terms. By 2001, only about   4.1 percent of the private sector workforce was comprised of active  participants in multiemployer pension plans, down from 7.7 percent in  1980 (see fig. 5), with the total number of active participants decreasing  from about 6.1 million to about 4.7 million.
Finally, as the number of active participants has declined, the number of  retirees increased—from about 1.4 million to 2.8 million, and this increase  had led to a decline in the ratio of active (working) participants to retirees  in multiemployer plans. By 2001, there were about 1.7 active participants  for every retiree, compared with 4.3 in 1980. (See fig. 6.) While the trend is  also evident among single-employer plans, the decline in the ratio of active  workers to retirees affects multiemployer funding more directly because  employer contributions are tied to active employment.
section_title: PBGC Monitors Multiemployer Plans for Financial Problems, Provides Technical and Financial Assistance, and Guarantees a Minimum Level of Benefits
paragraphs: PBGC’s role regarding multiemployer plans includes monitoring plans for  financial problems, providing technical and financial assistance to  troubled plans, and guaranteeing a minimum level of benefits to  participants in insolvent plans. For example, PBGC annually reviews the  financial condition of multiemployer plans to identify those that may have  potential financial problems in the near future. Agency officials told us  that troubled plans often solicit their technical assistance since under the  multiemployer framework, affected parties have a vested interest in a  plan’s survival. Occasionally, PBGC is asked to serve as a facilitator where  the agency works with all the parties associated with the troubled plan to  improve its financial status. Examples of such assistance by PBGC include  facilitating the merger of troubled plans into one stronger plan and the  “orderly shutdown” of plans, allowing the affected employers to continue  to operate and pay benefits until all liabilities are paid. Unlike its role in  the single-employer program where PBGC trustees weak plans and pays  benefits directly to participants, PBGC does not take over the  administration of multiemployer plans, but instead, upon application,  provides financial assistance in the form of loans when plans become  insolvent and are unable to pay benefits at PBGC-guaranteed levels. Such  financial assistance is infrequent; for example, PBGC has made loans  totaling $167 million to 33 multiemployer plans since 1980 compared with  296 trusteed terminations of single-employer plans and PBGC benefit  payments of over $4 billion in 2002-2003 alone. PBGC officials believe that  the low frequency of PBGC financial assistance to multiemployer plans is  likely due to specific features of the multiemployer insurance regulatory  framework: (1) the employers sponsoring the plan share the risk for  providing benefits to all participants in the plan and (2) benefit guarantees  are set at a lower level for the multiemployer insurance program  compared with the guarantees provided by the single-employer program.  Agency officials say that together these features encourage the affected  parties to collaborate on their own to address the plan’s financial  difficulties.
subsections: section_title: PBGC’s Role of Monitoring Plans and Identifying Those at Risk Is Similar for Its Single-Employer and Multiemployer Programs
paragraphs: Several of PBGC’s functions regarding its multiemployer program and its  single-employer program are similar. For example, under both programs  PBGC monitors the financial condition of all plans to identify those that  are at-risk of requiring financial assistance. The agency maintains a  database of financial information about such plans that draws its data  from both PBGC premium filings and the Form 5500. Using an automated  screening process that measures each plan against funding and financial  standards, the agency determines which plans may be at risk of  termination or insolvency. For both, PBGC also annually identifies plans  that it considers probable or reasonably possible liabilities and  enumerates their aggregate unfunded liabilities in the agency’s annual  financial statements for each program.
section_title: PBGC Provides Technical Assistance to Troubled Plans and Loans to Insolvent Ones
paragraphs: The type of assistance PBGC provides to troubled plans through its  multiemployer program is shaped to a degree by the program’s definition  of the “insurable event.” PBGC insures against multiemployer plan  insolvency. A multiemployer plan is insolvent when its available resources  are not sufficient to pay the level of benefits at PBGC’s multiemployer  guaranteed level for 1 year. In such cases, PBGC will provide the needed  financial assistance in the form of a loan. If the plan recovers from  insolvency, it must begin repaying the loan on a commercially reasonable  schedule in accordance with regulations. Under MPPAA, unlike its  authority towards single-employer plans, PBGC does not takeover or  otherwise assume responsibility for the liabilities of a financially troubled  multiemployer plan.
PBGC sometimes provides technical assistance to help multiemployer plan  administrators improve their funding status or for help on other issues.  Plan administrators may contact PBGC’s customer service representatives  at designated offices to obtain assistance on such matters as premiums,  plan terminations, and general legal questions related to PBGC. Agency  officials told us that on a few occasions PBGC has worked with plan  administrators to facilitate plan mergers, “orderly shutdowns,” and other  arrangements to protect plan participants’ benefits. For example, in 1997,  PBGC worked with the failing Local 675 Operating Engineers Pension  Fund and the Operating Engineers Central Pension Fund to effect a  merger of the two plans. However, PBGC officials also told us that the  majority of mergers are crafted by private sector parties and have no  substantial PBGC involvement.
PBGC has also on occasion assisted in the orderly shutdown of plans. For  example, agency officials told us that, in 2001, they helped facilitate the  shutdown of the severely underfunded Buffalo Carpenters’ Pension Fund.  PBGC has the authority to approve certain plan rules governing  withdrawal liability payments  and did so in this case approving the plan’s  request to lower its annual payments, which made it possible for the  employers to remain in business and pay benefits until all liabilities were  paid.
In those cases where a multiemployer plan cannot pay guaranteed  benefits, PBGC provides financial assistance in the form of a loan to allow  the plan to continue to pay benefits at the level guaranteed by PBGC. A  multiemployer plan need not be terminated to qualify for PBGC loans, but  must be insolvent and is allowed to reduce or suspend payment of that  portion of the benefit that exceeds the PBGC guarantee level. The number  of loans and amount of financial assistance from PBGC to multiemployer  plans has been small in comparison to the benefits paid out under its  single-employer program. Since 1980, the agency has provided loans to   33 plans totaling $167 million. In 2003, PBGC provided $5 million in loans  to 24 multiemployer plans. This compares with 296 trusteed terminations  of single-employer plans and PBGC benefit payments of over $4 billion to  single-employer plan beneficiaries in 2002 and 2003 alone.
PBGC officials say that this lower frequency of financial assistance is  primarily due to key features of the multiemployer regulatory framework.  First, in comparison to that governing the single-employer program, the  regulatory framework governing multiemployer plans places greater  financial risks on employers and workers and relatively less on PBGC. For  example, in the event of the bankruptcy of an employer in a multiemployer  plan, the remaining employers in the plan remain responsible for funding  all plan benefits. Under the single-employer program, a comparable  employer bankruptcy could leave PBGC responsible for any plan liabilities  up to the PBGC-guaranteed level. In addition, the law provides a  disincentive for employers seeking to withdraw from an underfunded plan  by imposing a withdrawal liability based on its share of the plan’s  unfunded vested benefits. Another key feature is that multiemployer plan  participants also bear greater risk than their single-employer counterparts  because PBGC guarantees benefits for multiemployer pensioners at a  much lower dollar amount than for single-employer pensioners: about  $13,000 for 30 years of service for the former compared with about $44,000  annually per retiree at age 65 for the latter. PBGC officials explained that  this greater financial risk on employers and lower guaranteed benefit level  for participants in practice creates 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.
The smaller size of PBGC’s multiemployer program might also contribute  to the lower frequency of assistance. The multiemployer program’s   $1 billion in assets and $1.3 billion in liabilities accounts for a relatively  small portion of PBGC’s total assets and liabilities, representing less than   3 percent of the total. Further, the multiemployer program covers just   22 percent of all defined benefit plan participants. There are also many  fewer plans in the multiemployer program, about 1,700, as compared with  about 30,000 single-employer plans. Other things equal, there are fewer  opportunities for potential PBGC assistance to multiemployer plans than  to single-employer plans.
section_title: A Number of Factors Challenge the Long- term Prospects of the Multiemployer Defined Benefit System
paragraphs: A number of factors pose challenges to the long-term prospects of the  multiemployer pension plan system. Some of these factors are specific to  the features and nature of multiemployer plans, including a regulatory  framework that some employers may perceive as financially riskier and  less flexible than those covering other types of pension plans. For  example, compared with a single-employer plan, an employer covered by a  multiemployer plan cannot easily adjust annual plan contributions in  response to the firm’s own financial circumstances.  Collective bargaining  itself, a necessary aspect of the multiemployer plan model and another  factor affecting plans’ prospects, has also been in long-term decline,  suggesting fewer future opportunities for new plans to be created or  existing ones to expand. As of 2003, union membership, a proxy for  collective bargaining coverage, accounted for less than 9 percent of the  private sector labor force and has been steadily declining since 1953.  Experts have identified other challenges to the future prospects of defined  benefit plans generally, including multiemployer plans. These include the  growing trend among employers to choose defined contribution plans over  DB plans, including multiemployer plans, the continued growing life  expectancy of American workers, resulting in participants spending more  years in retirement, thus increasing benefit costs, and increases in  employer-provided health insurance costs, which are increasing  employers’ total compensation costs generally, making them less willing or  able to increase elements of compensation, like wages or pensions.
subsections: section_title: Certain Features of the Current Regulatory Framework and the Decline of Collective Bargaining May Discourage Future Plan Growth
paragraphs: Some factors that raise questions about the long-term viability of  multiemployer plans are specific to certain features of multiemployer  plans themselves, including features of the regulatory framework that  some employers may well perceive as less flexible and financially riskier  than the features of other types of pension plans. For example, an  employer covered by a multiemployer pension plan typically does not have  the funding flexibility of a comparable employer sponsoring a single- employer plan. In many instances, the employer covered by the  multiemployer plan cannot as easily adjust annual plan contributions in  response to the firm’s own financial circumstances. This is because  contribution rates are often fixed for periods of time by the provisions of  the collective bargaining agreement. Employers that value such flexibility  might be less inclined to participate in a multiemployer plan. Employers in  multiemployer plans may also face greater financial risks than those in  other forms of pension plans. For example, an employer sponsor of a  multiemployer plan that wishes to withdraw from the plan is liable for its  share of pension plan benefits not covered by plan assets upon withdrawal  from the plan, rather than when the plan terminates. Employers in plans  with unfunded vested benefits face an immediate withdrawal liability that  can be costly, while employers in fully funded plans face the potential of  costly withdrawal liability if the plan becomes underfunded in the future.  Thus, an employer’s pension liabilities become a function not only of the  employer’s own performance but also the financial health of other  employer plan sponsors. These additional sources of potential liability can  be difficult to predict, increasing employers’ level of uncertainty and risk.  Some employers may hesitate to accept such risks if they can sponsor  other plans that do not have them, such as 401(k) type defined  contribution plans.
The future growth of multiemployer plans is also predicated on the future  growth prospects of collective bargaining. Collective bargaining is an  inherent feature of the multiemployer plan model. Collective bargaining,  however, has been declining in the United States since the early 1950s.
Currently, union membership, a proxy for collective bargaining coverage,  accounts for less than 9 percent of the private sector labor force. In 1980,  union membership accounted for about 19 percent of the civilian  workforce and about 27 percent of the civilian workforce in 1953.
section_title: Multiemployer Plans Are Limited by the Same Factors Affecting All Defined Benefit Plans
paragraphs: Pension experts have suggested a variety of challenges faced by today’s  defined benefit pension plans, including multiemployer plans. These  include the continued general shift away from DB plans to defined  contribution plans, and the increased longevity of the U.S. population,  which translates into a lengthier and more costly retirement. In addition,  the continued escalation of employer health insurance costs has placed  pressure on the compensation costs of employers, including pensions.
Employers have tended to move away from DB plans and towards DC  plans since the mid 1980s. The number of PBGC-insured defined benefit  plans declined from 97,683 in 1980 to 31,135 in 2002. (See fig. 7.) The  number of defined contribution plans sponsored by private employers  nearly doubled from 340,805 in 1980 to 673,626 in 1998. Along with this  continuing trend to sponsoring DC plans, there has also been a shift in the  mix of plans that private sector workers participate. Labor reports that the  percentage of private sector workers who participated in a primary DB  plan has decreased from 38 percent in 1980 to 21 percent by 1998, while  the percentage of such workers who participated in a primary DC plan has  increased from 8 to 27 percent during this same period. Moreover, these  same data show that, by 1998, the majority of active participants (workers  participating in their employer’s plan) were in DC plans, whereas nearly   20 years earlier the majority of participants were in DB plans. Experts  have suggested a variety of explanations for this shift, including the  greater risk borne by employers with DB plans, greater administrative  costs and more onerous regulatory requirements, and that employees  more easily understand and favor DC plans. These experts have also noted  considerable employee demand for plans that state benefits in the form of  an account balance and emphasize portability of benefits, such as is  offered by 401(k) type defined contribution pension plans.
The increased life expectancy of workers also has important implications  for defined benefit plan funding, including multiemployer plans. The  average life expectancy of males at birth has increased from 66.6 in 1960 to  74.3 in 2000, with females at birth experiencing a rise of 6.6 years from   73.1 to 79.7 over the same period. As general life expectancy has increased  in the United States, there has also been an increase in the number of  years spent in retirement. PBGC has noted that improvements in life  expectancy have extended the average amount of time spent by workers in  retirement from 11.5 years in 1950 to 18 years for the average male worker  as of 2003. This increased duration of retirement has placed pressure on  employers with defined benefit plans to increase their contributions to  match this increase in benefit liabilities. This problem can be further  exacerbated for those multiemployer plans with a shrinking pool of active  workers because plan contributions are generally paid on a per work-hour  basis, and thus employers may have to increase contributions for each  hour worked by the remaining active participants to fund any liability  increase.
Increasing health insurance costs are another factor affecting the long- term prospects of pensions, including multiemployer pensions. Recent  increases in employer provided health insurance costs are accounting for  a rising share of total compensation, increasing pressure on employers’  ability to maintain wages and other benefits, including pensions. Bureau of  Labor Statistics data show that the cost of employer provided health  insurance has risen steadily in recent years, rising from 5.4 percent of total  compensation in 1999 to 6.5 percent as of the third quarter of 2003. A  private survey of employers found that employer-sponsored health  insurance costs rose about 14 percent between the spring of 2002 and the  spring of 2003, the third consecutive year of double digit acceleration and  the highest premium increase since 1990. Plan administrators and  employer and union representatives that we talked with identified the  rising costs of employer provided health insurance as a key problem facing  plans, as employers are increasingly forced to choose between  maintaining current levels of pension or medical benefits.
section_title: Concluding Observations
paragraphs: Although available evidence suggests that multiemployer plans are not  experiencing anywhere near the magnitude of the problems that have  recently afflicted the single-employer plans, there is cause for concern.  Most significant is PBGC’s estimate of $100 billion in unfunded  multiemployer plan liabilities that are being borne collectively by  employer sponsors and plan participants. Compared to the single- employer program, PBGC does not face the same level of exposure from  this liability at this time. This is because, as PBGC officials have noted, the  current regulatory framework governing multiemployer plans redistributes  financial risk towards employers and workers and away from the  government and potentially the taxpayer. Employers face withdrawal and  other liabilities that can be significant, while workers face the prospect of  receiving guaranteed benefits far lower and with benefit reduction at  levels well below the guaranteed limits than those provided by PBGC’s  single-employer program, should their plan become insolvent. Together,  not only do these features limit the exposure to PBGC and the taxpayer,  they create important incentives for all interested parties to resolve  difficult financial situations that could otherwise result in plan  termination.
However, the declines in interest rates and equities markets, and weak  economic conditions in the early 2000s, have increased the financial stress  on both individual multiemployer plans and the multiemployer framework  generally. Proposals to address this stress should be carefully designed  and considered for their longer-term consequences. For example,  proposals to shift plan liabilities to PBGC by making it easier for  employers to exit multiemployer plans could help a few employers or  participants but erode the existing incentives that encourage interested  parties to independently face up to their financial challenges. In particular,  placing additional liabilities on PBGC could ultimately have serious  potential consequences for the taxpayer, given that with only about   $25 million in annual income, a trust fund of less than $1 billion, and a  current deficit of $261 million, PBGC’s multiemployer program has very  limited resources to handle a major plan insolvency that could run into  billions of dollars.
The current congressional efforts to provide funding relief are at least in  part in response to the difficult conditions experienced by many plans in  recent years. However, these efforts are also occurring in the context of  the broader, long-term decline in private sector defined benefit plans,  including multiemployer plans, and the attendant rise of defined  contribution plans, with their emphasis on greater individual responsibility  for providing for a secure retirement. Such a transition could lead to  greater individual control and reward for prudent investment and  planning. However, if managed poorly, it could lead to adverse  distributional effects for some workers and retirees, including a greater  risk of a poverty level income in retirement. Under this transition view, the  more fundamental issues concern how to minimize the potentially serious,  negative effects of the transition, while balancing risks and costs for  employers, workers, and retirees, and the public. These important policy  concerns make Congress’s current focus on pension reform both timely  and appropriate.
section_title: Agency Comments
paragraphs: We provided a draft of this report to Labor, Treasury, and PBGC. The  agencies provided technical comments, which we incorporated as  appropriate.
We are sending copies of this report to the Secretary of Labor, the  Secretary of the Treasury, and the Executive Director of the Pension  Benefit Guaranty Corporation; appropriate congressional committees; and  other interested parties. We will also make copies available to others on  request. In addition, the report will be available at no charge on GAO’s  Web site at http://www.gao.gov.
If you have any questions concerning this report, please contact me at  (202) 512-5932. Other major contributors include Joseph Applebaum,   Orin B. Atwater, Susan Bernstein, Kenneth J. Bombara, Tim Fairbanks,  Charles Jeszeck, Gene Kuehneman, Raun Lazier, and Roger J. Thomas.