Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies
Released: 2013-04-08T00:00:00


Highlights: section_title: Why GAO Did This Study
paragraphs: Multiemployer pension plans--created by collective bargaining agreements including more than one employer-- cover more than 10 million workers and retirees, and are insured by the PBGC. In recent years, as a result of investment market declines, employers withdrawing from plans, and demographic challenges, many multiemployer plans have had large funding shortfalls and face an uncertain future.

GAO examined (1) actions that multiemployer plans in the weakest financial condition have taken to improve their funding levels; (2) the extent to which plans have relied on PBGC assistance since 2009, and the financial condition of PBGC's multiemployer plan insurance program; and (3) options available to address PBGC's impending funding crisis and enhance the multiemployer insurance program's future financial stability.

GAO analyzed government and industry data and interviewed government officials, pension experts--including academics, actuaries, and attorneys, multiemployer plans' trustees and administrators, employers and trade associations, unions, advocacy organizations, and other relevant stakeholders.

section_title: What GAO Found
paragraphs: The most severely distressed multiemployer plans have taken significant steps to address their funding problems and, while most plans expected improved financial health, some did not. A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the large majority of the most severely underfunded plans--those designated as being in critical status--either have increased or will increase employer contributions or reduce participant benefits. In some cases, these measures will have significant effects on employers and participants. For example, several plan representatives stated that contribution increases had damaged some firms' competitive position in the industry, and, in some cases, threatened the viability of such firms. Similarly, reductions in certain benefits--such as early retirement subsidies--may create hardships for some older workers, such as those with physically demanding jobs. Most of the 107 surveyed plans expected to emerge from critical status, but about 25 percent did not and instead seek to delay eventual insolvency.

The Pension Benefit Guaranty Corporation's (PBGC) financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC's multiemployer insurance fund's ability to pay pension guarantees for retirees. Since 2009, PBGC's financial assistance to multiemployer plans has increased significantly, primarily due to a growing number of plan insolvencies. PBGC estimated that the insurance fund would be exhausted in about 2 to 3 years if projected insolvencies of either of two large plans occur in the next 10 to 20 years. More broadly, by 2017, PBGC expects the number of insolvencies to more than double, further stressing the insurance fund. PBGC officials said that financial assistance to plans that are insolvent or are likely to become insolvent in the next 10 years would likely exhaust the insurance fund within the next 10 to 15 years. If the insurance fund is exhausted, many retirees will see their benefits reduced to an extremely small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits.

Experts and stakeholders cited two policy options to avoid the insolvencies of severely underfunded plans and the PBGC multiemployer insurance fund, as well as other options for longer term reform. Experts and stakeholders said that, in limited circumstances, trustees should be allowed to reduce accrued benefits for plans headed toward insolvency. Also, some experts noted that, in their view, the large size of these reductions for some severely underfunded plans may warrant federal financial assistance to mitigate the impact on participants. Experts and stakeholders also noted tradeoffs, however. For example, reducing accrued benefits could impose significant hardships on some retirees, and any possible financial assistance must be considered in light of the existing federal debt. Options to improve long term financial stability include changes to withdrawal liability--payments assessed to an employer upon leaving the plan based on their share of unfunded vested benefits--to increase the amount of assets plans can recover or to encourage employers to remain in or join the plan. In addition, experts and stakeholders said an alternative plan design that permits adjustments in benefits tied to key factors, such as the funded status of the plan, would provide financial stability and lessen the risk to employers. These and other options also have important tradeoffs, however.

section_title: What GAO Recommends
paragraphs: Congress should consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system. PBGC generally agreed with our findings and analysis.

section_title: Letter
paragraphs: Multiemployer plans—defined benefit plans established through  collectively bargained pension agreements between labor unions and two  or more employers—are a vital source of retirement income for millions of  Americans. Multiemployer plans cover unionized workers in many  industries, such as trucking, retail food, construction, mining, and garment  making. There are about 1,500 multiemployer plans covering more than  10 million workers and retirees. The structure of multiemployer plans has  some advantages compared to single-employer plans. For example,  workers in multiemployer plans can continue to accrue pension benefits  when they change employers if their new employer is a contributing  employer in the same plan. Thus, these plans provide some portability of  benefits and can be particularly beneficial to workers who change  employers as long as their new employer participates on the same plan.  However, the structure of multiemployer plans can also pose challenges  in some cases. Unlike plans sponsored by a single-employer in which  plans do not share risk with other employers, a multiemployer plan  continues to operate if an individual employer leaves or goes out of  business, leaving the remaining employers to cover any unfunded  benefits of the vested workers of the departed employers. Many plans are  in declining industries that have witnessed numerous bankruptcies,  leaving a considerable share of participants with no contributing  employer. This effect, combined with an aging workforce and declining  unionization, leaves many plans facing demographic challenges that  threaten their long-term financial outlook.

In 2010, we reported that due to investment market declines and  demographic challenges, most multiemployer plans had large funding  shortfalls and faced an uncertain future. We noted that some plans would  likely be able to improve their funded status with improvements to the  economy, but plans in the worst condition may have been unable to fully  address these challenges through increasing employer contributions or  reducing certain benefits. We found that without additional options to  address plan underfunding or to attract new contributing employers, plans  may be more likely to require financial assistance from the Pension  Benefit Guaranty Corporation (PBGC). This would, in turn, further strain  the multiemployer pension insurance program that PBGC operates. More  recently, a January 2013 report published by three federal agencies noted  the grave condition of some multiemployer plans and PBGC’s  multiemployer insurance program. This tri-agency report further noted  that unless timely action is taken to provide additional tools for the  multiemployer plan trustees to stabilize the financial conditions of their  plans, more costly and intrusive intervention may ultimately be necessary.

Given the financial challenges that multiemployer plans continue to face,  we sought to answer the following questions:  1) What actions have multiemployer plans in the weakest financial  condition taken in recent years to improve their long-term financial  position?  2) To what extent have plans relied on PBGC assistance since 2009, and  what is known about the prospective financial condition of the  multiemployer plan insurance program?  3) What options are available to address PBGC’s impending funding  crisis and enhance the program’s future financial stability?

To answer these questions, we analyzed government and industry data;  reviewed relevant federal laws, regulations, and documentation from  plans; and interviewed a wide range of industry experts and stakeholders.  In particular, to identify actions that multiemployer plans in the weakest  financial condition have taken to improve their long-term financial  position, we reviewed the survey methodology and analyzed  multiemployer plan survey data from the Segal Company, a large  actuarial firm with a client base representing about 25 percent of  multiemployer plans. To supplement the survey data, we conducted  structured interviews with 13 multiemployer plans across the country. We  selected these plans in order to obtain a range of key characteristics,  including industry, region, funded status, and number of participants.  Among the 13 plans included in our review, 8 plans were in critical status,  2 plans were in endangered or seriously endangered status, and 3 plans  were in neither critical nor endangered status. To determine the extent to  which plans have taken advantage of PBGC financial assistance and to  assess the financial condition of PBGC’s insurance program, we obtained  PBGC data on various types of assistance to plans and data regarding  plans that are insolvent or expected to become so in the next 20 years.  To identify options available to address PBGC’s impending funding crisis  and enhance its future financial stability, we distinguished between  options that would address the more immediate funding crisis facing  plans headed toward insolvency and options that may enhance the long- term stability of the multiemployer system for plans that may not be  headed for insolvency, but, nevertheless, face financial challenges. In  addition, we assessed the tradeoffs of various options for current workers,  retirees, and employers, as well as the federal government. To identify  and assess available options, we interviewed government officials,  pension experts—including academics, actuaries, attorneys,  multiemployer plans’ trustees and administrators, employers and trade  associations, unions, advocacy organizations, and other relevant  stakeholders. We also reviewed relevant research and documentation,  including proposals by the National Coordinating Committee on  Multiemployer Plans (NCCMP) and a consortium of employer  representatives from the construction industry.

We conducted this performance audit from March 2012 through March  2013 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Multiemployer defined benefit (DB) pension plans are created by  collective bargaining agreements between labor unions and two or more  employers, and generally operate under the joint trusteeship of unions  and employers. Such plans typically exist in industries with many small  employers who may be unable to support an individual DB plan, or where  seasonal or irregular employment results in high labor mobility between  employers. Industries where multiemployer plans are prevalent include  trucking, construction, retail, and mining and manufacturing. Like single- employer DB plans, multiemployer DB plans pay retirees a defined  benefit after retirement.

Under the Employee Retirement Income Security Act of 1974 (ERISA), as  amended, the benefits of multiemployer plans are insured by PBGC. As  shown in table 1, PBGC’s multiemployer fund is financed by insurance  premiums paid by plans, with each multiemployer plan paying an annual  premium of $12 per participant to PBGC as of 2013. In return, PBGC  provides financial assistance in the form of loans to plans that become  insolvent, that is, plans that do not have sufficient assets to pay pension  benefits at the PBGC guaranteed level for a full plan year. Although such  financial assistance is referred to as a “loan,” and is by law required to be  repaid, in practice such loans have almost never been repaid, as plans  generally do not emerge from insolvency. Before PBGC will provide the  loans, participants’ retirement benefits must be reduced to a level  specified in law. Even after insolvency, the plan remains an independent  entity managed by its board of trustees. This contrasts with the agency’s  single-employer program under which PBGC does not provide assistance  to ongoing plans, but instead takes over terminated underfunded plans as  a trustee, and pays benefits directly to participants.

Congress included provisions directed at imposing greater financial  discipline on multiemployer plans in the Pension Protection Act of 2006  (PPA). Specifically, as outlined in table 2, this law includes new  provisions designed to compel multiemployer plans in poor financial  shape to take action to improve their financial condition over the long  term. The law established two categories of troubled plans—endangered  status (commonly referred to as “yellow zone,” and which includes an  additional subcategory of “seriously endangered”) and a more seriously  troubled critical status (commonly referred to as “red zone”). PPA further  requires plans in these categories to develop strategies that include  contribution increases, benefit reductions, or both, designed to improve  their financial condition in coming years. Multiemployer plans in  endangered status are to document these strategies in a funding  improvement plan, and multiemployer plans in critical status plans are to  do so in a rehabilitation plan. The plan trustees can offer the bargaining  parties multiple schedules from which to choose, but one of these must  be designated as the “default schedule,” which is to be imposed if the  bargaining parties do not select one of the schedules within a specified  timeframe. Once plan trustees have adopted a funding improvement or  rehabilitation plan, bargaining parties are to select one of the available  benefit and/or contribution schedules through the collective bargaining  process. The multiemployer plan is then required to report on progress  made in implementing its funding improvement or rehabilitation plan.

Because of the greater severity of critical status plans’ funding condition,  such plans have an important exception to ERISA’s anti-cutback rule in  that they may reduce or eliminate certain so-called “adjustable benefits”  such as early retirement benefits or subsidies, certain post-retirement  death benefits, and disability benefits for plan participants who have not  yet retired. For example, if a critical status plan were to adopt a  rehabilitation plan that proposed to eliminate an early retirement benefit,  appropriate notice was provided, and the reduction agreed to in collective  bargaining, then participants not yet retired would no longer be able to  receive that early retirement benefit.

PPA funding requirements took effect in 2008 just as the nation was  entering a severe economic crisis. The dramatic decline in the value of  stocks and other financial assets in 2008 and the accompanying  recession broadly weakened multiemployer plans’ financial health. In  response, Congress enacted the Worker, Retiree, and Employer  Recovery Act of 2008 (WRERA) which contained provisions designed to  help pension plans and participants by providing funding relief to help  them navigate the difficult economic environment. For example,  WRERA relief measures allowed multiemployer plans to temporarily  freeze their funding status at the prior year’s level, and extend the  timeframe for plans’ funding improvement or rehabilitation plans from 10  to 13 years. In addition, Congress enacted the Preservation of Access  to Care for Medicare Beneficiaries and Pension Relief Act of 2010 (PRA),  which provides additional funding relief measures for multiemployer plans  as long as a plan meets certain solvency requirements. Generally, PRA  allows a plan to amortize the investment losses from the 2008 market  collapse over 29 years rather than 15 years, and to recognize such losses  in the actuarial value of assets over 10 years instead of 5 years, so that  the negative effects of the market decline on asset values are spread out  over a longer period.

Overall, since 2009, multiemployer plans have experienced  improvements in funding status, but a sizeable portion of plans are still  critical or endangered. According to plan-reported data—current through  2011—from the IRS (see fig. 1), while the funding status of plans has not  returned to 2008 levels, the percentage of plans in critical status declined  from 34 percent in 2009 to 24 percent in 2011. Similarly, the percentage  of plans in endangered status also declined, and to a greater extent, from  34 percent in 2009 to 16 percent in 2011. However, based on the 2011  data from the IRS, despite these improvements, 40 percent of plans still  have not emerged from critical or endangered status.

section_title: Severely Underfunded Plans Have Cut Benefits to Current Employees and Increased Employer Contributions, but Financial Outlook for Some Plans Remains Bleak
paragraphs: The large majority of the most severely underfunded multiemployer  plans—those in critical status—have, according to a 2011 survey, both  increased required employer contributions and reduced participant  benefits in an effort to improve plans’ financial positions. Plan officials  explained that these changes have had or are expected to have a range  of effects, and in some cases may severely affect employers and  participants. While most critical status plans expect to recover from their  current funding difficulties, about 25 percent do not and instead seek to  delay eventual insolvency.
subsections: section_title: Critical Status Plans Have Established a Range of Contribution Increases and Benefit Cuts
paragraphs: A 2011 survey of 107 critical status multiemployer plans conducted by the  Segal Company shows that the large majority developed rehabilitation  plans that included a combination of both contribution increases and  benefit reductions to be implemented in the coming years. Further,  plans proposed to take these measures regardless of whether the  bargaining parties adopt the preferred schedule or the default schedule.  As figure 2 illustrates, of the preferred schedules of 107 critical plans  surveyed, 81 included both contribution increases and benefits cuts, while  14 proposed contribution increases only, and 7 included benefit  reductions only. Most default schedules also include both increased  contributions and reduced benefits, but compared to the preferred  schedules, a much larger percentage chose to reduce benefits only. The  reason for this difference is not clear, but Segal Company officials noted  that because prompt adoption of an acceptable schedule is desirable,  some plans may take special steps to make the default plan especially  unappealing.

Most plans—95 out of 107—developed preferred schedules that called for  contribution increases and, while the range of these increases varied  widely among plans, some were quite high. As figure 3 shows, most  plans proposed increases of 10 percent or more in the first year of the  collective bargaining agreement, and a little over a quarter of plans  proposed increases of 20 percent or more. The median first-year  contribution increase was 12.5 percent. Overall, the range of first-year  increases was quite broad however, ranging from less than 1 percent to  225 percent. These data tell only a partial story, however, because  rehabilitation plans may mandate a series of contribution increases in  subsequent years. Of the eight critical status plans we contacted, the  rehabilitation plans of seven increased contribution rates, and six of these  specified a series of contribution increases over subsequent years. For  example, one plan proposed contribution increases of 10 percent  compounded annually over 10 years, so that at the end of this period, a  contribution rate of $2.00 per hour, for example, would have been  increased to $5.25 per hour, or by 162 percent.

Thirty-two plans developed rehabilitation plans that reduced the rate of  future benefit accruals. As figure 4 illustrates, 15 of these plans reduced  future benefit accruals by 40 percent or more, and another 12 plans  reduced future benefit accruals 20-40 percent. The median reduction for  all 32 plans was 38 percent. As with contribution increases, the survey  data on reductions to benefit accrual rates paint only a partial picture.  Reductions in the benefit accrual rate are more common among troubled  multiemployer plans than these data show because such reductions were  often made prior to the rehabilitation plan. For example, findings from the  Segal Company’s survey show that, of the plans that expected to exit  critical status within the specified timeframes, about one-third had cut  future accrual rates before preparation of the rehabilitation plan, either  directly or by a plan amendment that excluded recent contribution  increases from the benefit formula.

Also, a large majority of plans—88 out of 107—reduced one or more  types of the adjustable benefits as outlined by the PPA. Typically, these  reductions applied to both vested but inactive and active participants, but  some plans applied them to only one or the other.

section_title: Plan Officials Indicated That Efforts to Improve Funding Will, in Some Cases, Require Significant Sacrifices by Employers and Active Participants
subsections: section_title: Impact of Contribution Increases
paragraphs: Officials of seven of the eight critical status plans we contacted increased  contributions rates, and several of these plans indicated that contribution  increases could be absorbed without undue stress to the plan. For  example, one plan representing maintenance workers proposed to  increase the weekly employer contribution rate for each worker from  $82.75 per employee in 2011 to $130.75 per employee in 2023, a 58  percent increase over 12 years. While this makes some significant  demands on employers, they are nonetheless in agreement, and the  reaction of both employers and participants to the rehabilitation plan has  been constructive. Similarly, officials of another plan covering sheet metal  workers said that the annual contribution increases ranging from 30  percent in 2009-2010 to 5.8 percent in 2015-2016 can be absorbed by  plan employers without great difficulty.

In contrast, officials of some plans and contributing employers we  contacted said that contribution increases would have very severe  negative effects on some employers and possibly the plan itself. For  example, officials of one plan told us that a proposed series of annual  increases of 10 percent (compounded) represents a significant increase  in labor costs. Plan officials said contributing employers are competing  against firms outside of the plan that do not have comparable pension or  health insurance costs, and contribution increases put them at a  competitive disadvantage. Similarly, an official of a long-distance trucking  firm said that the high contribution rates of underfunded multiemployer  plans have greatly affected this firm’s cost structure and damaged its  competitive position in the industry. In other cases, plans may have been  unable to increase contributions as much as necessary. For example, our  review of one plan’s rehabilitation plan revealed that the 15 percent  contribution increase resulted from a difficult balance between, among  other factors, adequately funding the plan and avoiding excessive strain  on employers. According to the plan administrator, plan trustees  determined that many contributing employers were in financial distress  and that a significant increase in contributions would likely lead to  business failures or numerous withdrawals. After the rehabilitation plan  was adopted, five employers withdrew from the plan.

Contribution increases could have a significant impact on participating  workers as well as employers because in some cases at least a portion of  the increases will be funded through reductions in pay or other benefits.  For example, officials of one large national plan with hundreds of  contributing employers in a variety of industries told us that employers will  pass a substantial part of the higher contributions to employees in the  form of lower wages. They noted that workers’ wages have been stagnant  for 10 years, so the need to return to full funding so quickly in accordance  with the Pension Protection Act of 2006 (PPA) requirements is hurting  workers in the short term. More broadly, a recent report developed by a  construction industry consortium notes that higher contributions make  less money available for wage increases and other benefits. The report  further notes that in some cases the additional contribution comes directly  from the existing wage package, so a worker’s take home pay may  remain stagnant or even be reduced. In other cases, the contribution  increases will not have an immediate impact on participants’ pay, but will  affect other portions of their benefit package. For example, one plan  opted to increase pension contributions by diverting 2 percent of  employers’ contributions from another benefit account. An official of  another plan explained that the plan funded increased pension  contributions by, for example, reducing contributions to a health benefit  plan. Instead of directly reducing current wages, these actions will likely  lead to higher health care costs or reduced benefits for employees.

Among plans we contacted that had reduced future benefit accruals in  recent years, the cumulative impact varied. For example, officials of one  plan covering sheet metal workers explained that since 2003 the plan had  reduced future benefit accruals by 75 percent per each dollar contributed  to the plan. Another plan covering mine industry workers completely  eliminated future benefit accruals for new, inexperienced miners hired on  or after January 1, 2012, even though a contribution of $5.50 per hour of  work will be made on their behalf. Another plan made no changes to  benefit accrual rates but made a series of changes to eligibility and  thresholds for retirement credits, with the result that some employees will  have to work longer to accrue the same benefit they would have before  adoption of the rehabilitation plan.

The reduction or elimination of adjustable benefits, such as those outlined  in table 3, were also significant and controversial in some cases. Officials  of several of the plans that we contacted told us that the reduction or  elimination of early retirement benefits for participants working in  physically demanding occupations would be particularly difficult for some  workers. As one official explained, working longer can be a grim scenario  for older workers who have a hard time bearing the physical demands of  labor, such as in a paper mill, for example. At the same time, some plans  also eliminated or imposed limitations on disability retirement, so that, as  officials of one plan noted, even workers who have developed physical  limitations will have to either continue to work, or retire on substantially  reduced benefits. Representatives of one plan said that there was  considerable resistance from workers to the cuts in early retirement  benefits. The officials explained, however, that these benefits had been  established in the early 1990s when the plan was very well funded and  that these promises had to be withdrawn in light of the plan’s current poor  financial picture.

Benefit reductions can affect employers as well as plan participants. For  example, representatives of one construction industry plan told us that the  reduced benefits outlined in the rehabilitation plan had reduced their  ability to recruit and train new apprentices. These representatives  explained that the prospect of earning only $50 of monthly retirement  benefit per year of work—which after a 30-year career would result in only  $1,500 payment per month in retirement—is not very appealing to  prospective employees. While this does present a barrier to recruitment, a  plan representative told us it is mitigated by an attractive hourly wage of  $31.40, and the fact that many of the younger workers today are thankful  for a paycheck in the current economic environment.

Some rehabilitation plans also included provisions designed to protect the  plan from employer withdrawals. For example, as table 4 outlines, two of  the eight critical status plans we contacted impose much more severe  benefit reductions on employees of firms that subsequently choose to  withdraw from the plan. According to one of the rehabilitation plans,  maintaining the contribution base of the pension plan is essential to the  success of the rehabilitation plans and hence for plan participants and  their families. Officials of this pension plan said that the pension plan  cannot survive if it continues to lose contributing employers, and  penalizing their employees is one way of discouraging withdrawals.

The Segal survey of critical status plans indicates that while most plans  aimed to eventually emerge from critical status, a significant number  reported that they do not and instead project eventual insolvency. As  figure 5 illustrates, of the 107 plans surveyed, about 67 expect to emerge  from critical status within the statutory time frames of either 10 to 13  years, and 12 others in an extended rehabilitation period. However, 28 of  the surveyed plans had determined, as the authors of the survey noted,  that no realistic combination of contribution increases and benefit  reductions would enable them to emerge from critical status, and that  their best approach is to forestall insolvency for as long as possible.  Among these plans, the average number of years to expected insolvency  was 12, with some expecting insolvency in less than 5 years and others  not for more than 30 years. The majority of these plans expected  insolvency in 15 or fewer years.

Among the plans we contacted, four expected to eventually become  insolvent. In general, officials of these plans told us that a combination of  massive investment losses and deterioration in contribution bases were  primary causes of their financial difficulties. For example, officials of one  plan cited the closure of paper mills from which the plan previously  derived a substantial share of contributions as a cause of the plan’s  financial distress. Officials of these plans explained that their analyses  concluded that no feasible combination of contribution increases or  benefit reductions could lead them back to a healthy level of funding.  Several officials indicated that an effort to do so would likely accelerate  the demise of the plan. For example, our review of plan documents  revealed that the actuary of one fund determined that mathematically the  fund would be able to emerge from critical status if contribution rates were  increased by 24 percent annually for each of the next 10 years, ultimately  increasing to a rate that would be about 859 percent of the then-current  contribution rate. The trustees of this plan determined that such a  proposal would be rejected by representatives of employers and workers,  and would likely lead to negotiated withdrawals by plan employers. This,  in turn, could result in insolvency of the plan, possibly as early as 2019.  Instead, this plan opted for measures that officials believed are most likely  to result in continued participation in the fund, yet which nonetheless are  projected to forestall insolvency until about 2029. Similarly, according to  officials of another plan, plan trustees concluded that the significant  contribution increases necessary to avoid insolvency were more than  employers in that geographic area could bear. In addition, the plan  considered the impact of funding the necessary contribution increases  through reductions to base pay. The plan determined that this also would  not be feasible because of the rising cost of living facing these employees  and their families. Consequently, the plan trustees adopted a  rehabilitation plan that forestalls insolvency until about 2025.

Officials of plans that we contacted expressed a number of concerns  about the future, including concerns about financial market returns, the  overall economy, and the stability of contributing employers. For example,  officials of one plan that expected to emerge from critical status within the  next 10 years said that this could be impeded if investment returns were  below expectations, and especially if another collapse in the financial  markets occurs. Officials of the seven other critical status plans we  contacted echoed this concern, and several mentioned that overall  economic conditions affect hours worked and hence overall contributions.  For example, officials of a plan covering construction industry workers  expressed concerns that because of the economic downturn, the  reduction in demand for infrastructure and construction maintenance work  has greatly reduced the number of active workers in the plan.

Finally, officials of several plans expressed concerns about attracting and  retaining contributing employers. An official of a safe status or “green- zone” plan, for example, said that it is essential that the plan continue to  attract new employers and that the ability to do so is a key basis for the  plan’s overall financial health. An official of a critical status plan that is  attempting to forestall insolvency told us that it is very concerned about  the financial well-being of its remaining contributing employers and that  plan insolvency could be hastened if one of these employers were to fail  or otherwise cease making contributions. As PBGC officials and a  construction industry organization noted, because the contribution base of  multiemployer plans can overlap, financial stress in one plan has the  potential to spill over to other plans. If, for example, the burden of  increased contributions in one plan causes a large employer economic  distress, it may impair its ability to remain competitive as well as make  sufficient contributions to other plans. As shown in figure 6, this contagion  effect could negatively affect the funded status of other plans.

If the events of coming years are more favorable than the assumptions on  which rehabilitation plans are based, some plans may emerge from  critical status earlier than planned, and some may be able to avoid  insolvency. However, the opposite is true as well—if future events are  less favorable than assumed, contributing employers and plan  participants may have to make additional sacrifices or additional plans  could face insolvency. Our discussions with eight critical status and two  endangered status plans show that while some plans believed they had  flexibility to make further adjustments, others did not. For example,  officials of one plan trying to avoid insolvency said that even the  contribution increases included in the funding improvement plan will be  very difficult to bear for employers and workers, and further concessions  are not realistic. An official of a large national plan said that the ability of  employers and participants to absorb more sacrifices varied considerably  among the plan’s 900 participating groups, but that in general, additional  concessions would be very difficult to accept. They said that it would  almost certainly erode the plan’s contribution base, which would mean a  slow progression towards insolvency.

section_title: PBGC Provides Financial Assistance to a Greater Number of Plans Each Year, Endangering the Multiemployer Program and Guaranteed Retiree Benefits
paragraphs: PBGC’s financial assistance to multiemployer plans has increased  significantly in recent years, and projected plan insolvencies may exhaust  PBGC’s multiemployer insurance fund. In fact, PBGC expects that, under  current law, based on plans currently booked as liabilities (current and  future probable plan insolvencies), the multiemployer insurance program  is likely to become insolvent within the next 10 to 15 years, although the  exact timing is uncertain and depends on key factors, such as investment  returns and the timing of individual plan insolvencies. Additionally, PBGC  estimates that if the projected insolvencies of either of two large  multiemployer plans were to occur, the insurance fund would be  completely exhausted within 2 to 3 years. While retirees of insolvent plans  generally receive reduced monthly pension payments under the PBGC  pension guarantee, this amount would be further reduced to an extremely  small fraction of what PBGC guarantees, or nothing, if the multiemployer  insurance fund were to be exhausted.
subsections: section_title: Total PBGC Financial Assistance to Plans Increased More Rapidly in Recent Years, and Current and Projected Plan Insolvencies Will Exhaust the Insurance Fund
subsections: section_title: Increases in PBGC Loans and Other Financial Assistance
paragraphs: As more multiemployer plans have become insolvent, the total amount of  financial assistance PBGC has provided has increased markedly in  recent years. Overall, for fiscal year 2012, PBGC provided $95 million in  total financial assistance to help 49 insolvent plans cover pension benefits  for about 51,000 plan participants. Generally, since 2001, the number of  multiemployer plans needing financial assistance has steadily increased,  as has the total amount of assistance PBGC has provided each year,  slowing the increase in PBGC’s multiemployer insurance program funds.

Moreover, as figure 7 indicates, the number of plans needing PBGC’s  help has increased significantly in recent years, from 33 plans in fiscal  year 2006 to 49 plans in fiscal year 2012. Likewise, the amount of annual  PBGC assistance to plans has increased from about $70.1 million in fiscal  year 2006 to about $95 million in fiscal year 2012 (a decrease in  assistance, due to fewer plan closeouts, compared with about $115  million in fiscal year 2011). From fiscal years 2005 to 2006 alone, annual  PBGC assistance increased from about $13.8 million to more than $70  million.

Loans to insolvent plans comprise the majority of financial assistance that  PBGC has provided to multiemployer plans. As figure 8 illustrates,  based on available data from fiscal year 2011, loans to insolvent plans  totaled $85.5 million and accounted for nearly 75 percent of total PBGC  financial assistance. However, the loans are not likely to be repaid  because the plans are insolvent. To date, only one plan has ever repaid a  PBGC loan. In addition to providing loans to insolvent plans, PBGC  provided $13.7 million in fiscal year 2011 to help support two plan  partitions, which enabled those plans to carve out the benefit liabilities  attributable to “orphaned” employees whose employers filed for  bankruptcy, while keeping the remainders of the plans in operation.  Once a plan is partitioned, PBGC assumes the liability for paying benefits  to the orphaned participants. Additionally, PBGC provided $15.1 million in  fiscal year 2011 to help plan sponsors close out five plans, which occurs  when plans either merge with other multiemployer plans or purchase  annuities from private-sector insurers for their beneficiaries. Plans  considering a merger must provide notice to PBGC and may request a  compliance determination; PBGC officials said they carefully consider  each merger to ensure that the merger would not result in a weaker  combined plan than the separately constituted plans.

PBGC monitors the financial condition of multiemployer plans to identify  plans that are at risk of becoming insolvent and that may require its  financial assistance from the multiemployer insurance program. Based on  this monitoring, PBGC maintains a contingency list of plans that are likely  to become insolvent and make a claim to PBGC’s multiemployer  insurance program. PBGC classifies plans on its contingency list  according to the plans’ risk of insolvency. PBGC also assesses the  effect that insolvencies among the plans on the contingency list would  have on the multiemployer insurance fund. Table 5 outlines the various  classifications and definitions based on risk.

Both the number of multiemployer plans placed on PBGC’s contingency  list and the amount of PBGC’s potential financial assistance obligations to  those plans have increased steadily over time, with the greatest increases  recorded in recent years. According to PBGC data, the number of plans  where insolvency is classified as “probable”—plans that are already  insolvent or are projected to become insolvent within 10 years—increased  from 90 plans in fiscal year 2008 to 148 plans in fiscal year 2012.  Similarly, the number of plans where insolvency is classified as  “reasonably possible”—plans that are projected to become insolvent 10 to  20 years in the future—increased from 1 in fiscal year 2008 to 13 in fiscal  year 2012.

Although the increase in the number of multiemployer plans on PBGC’s  contingency list has risen sharply, the present value of PBGC’s potential  liability to those plans has increased by an even greater factor. For  example, as illustrated in figure 9, the present value of PBGC’s liability  associated with “probable” plans increased from $1.8 billion in fiscal year  2008 to $7.0 billion in fiscal year 2012. By contrast, for fiscal year 2012,  PBGC’s multiemployer insurance fund only had $1.8 billion in total assets,  resulting in net liability of $5.2 billion, as reported in PBGC’s 2012 annual  report.

Although PBGC’s cash flow is currently positive—because premiums and  investment returns on multiemployer insurance fund assets exceed  benefit payments and other assistance—PBGC expects plan insolvencies  to more than double by 2017, placing greater demands on the  multiemployer insurance fund and further weakening PBGC’s overall  financial position.

PBGC expects that the pension liabilities associated with current and  future plan insolvencies will exhaust the multiemployer insurance fund.  Under one projection using conservative (i.e., somewhat pessimistic)  assumptions for budgeting purposes, PBGC officials reported that the  agency’s projected financial assistance payments for plan insolvencies  that have already occurred or are considered probable in the next 10  years would exhaust the multiemployer insurance fund in or about 2023.  PBGC officials said that the precise timing of program insolvency is  difficult to predict due to uncertainty about key assumptions, such as  investment returns and the timing of individual plan insolvencies. Based  on a range of estimates provided by multiple projections, PBGC officials  said the multiemployer insurance program is likely to become insolvent  within the next 10 to 15 years. Furthermore, exhaustion of the insurance  fund may occur sooner because the financial health of two large  multiemployer plans has deteriorated. According to PBGC officials, the  two large plans for which insolvency is “reasonably possible,” have  projected insolvency 10 to 20 years in the future. PBGC estimates that,  for fiscal year 2012, the liability from these two plans accounted for $26  billion of the $27 billion in liability of plans in the “reasonably possible”  category. Taken in combination, the number of retirees and beneficiaries  of these two plans would represent about a six-fold increase in the  number of people receiving guarantee payments in 2012. PBGC officials  said that the insolvency of either of these two large plans would exhaust  the insurance fund in 2 to 3 years.

section_title: Benefits of Many Retirees Are Reduced under PBGC Guarantees, and May Be Further Reduced If PBGC Multiemployer Insurance Program Becomes Insolvent
paragraphs: Generally, retirees who are participants in insolvent plans receive  reduced pension benefits under PBGC’s statutory pension guarantee  formula. In most cases, PBGC’s pension guarantee (see fig. 10) does not  offer full coverage of the monthly pension benefits that a retiree of an  insolvent plan has actually earned. When a multiemployer plan becomes  insolvent and relies on PBGC loans to pay for benefit payments to plan  retirees, retirees will most likely see a reduction in their monthly pension  benefits. PBGC uses a formula that calculates the maximum PBGC  benefit guarantee based on the amount of a plan participant’s pension  benefit accrual rate and years of credit service earned. For example, if a  retiree has earned 30 years of credit service, the maximum coverage  under the PBGC guarantee is about $1,073 per month, which yields an  annual pension benefit of $12,870.

Generally, retirees receiving the highest pensions experience the  steepest cuts when their plans become insolvent and their benefits are  limited by the pension guarantees. According to PBGC, in 2009, the  average monthly pension benefit received by retirees in all multiemployer  plans was $821. However, as shown by PBGC in a hypothetical  illustration of benefit distributions (see fig. 11), the line that spans the bar  chart indicates that the range of pension benefits varies widely across  retirees, and, with $692 as the median pension, about half of the plan’s  retirees will experience 15 percent or greater reductions in their pensions  under the PBGC guarantee. Additionally, under this illustration, one out of  five retirees will experience 50 percent or greater reductions in their  pensions under the PBGC guarantee. Ultimately, regardless of how long  a retiree has worked and the amount of monthly benefits earned, any  reduction in pension benefits—no matter the amount—may have  significant effects on retirees’ living standards.

According to PBGC, in the event that the multiemployer insurance fund is  exhausted, affected participants then relying on the PBGC pension  guarantee would receive an extremely small fraction of their already- reduced guarantees or, potentially, nothing. According to PBGC officials,  once the insurance fund’s cash balance is depleted, the agency would  have to rely solely on the annual insurance premium receipts, which  totaled $92 million for fiscal year 2012. The precise effect that the  insolvency of the multiemployer insurance fund would have on retirees  receiving the PBGC guaranteed benefit depends on a number of  factors—primarily the number of guaranteed benefit recipients and  PBGC’s annual premium income at that time. The impact would,  however, likely be severe. For example, if the insurance fund were to be  drained by the insolvency of one very large and troubled plan, under one  scenario, we estimate that the benefits paid by PBGC would be reduced  to less than 10 percent of the PBGC guarantee level. In this scenario, a  retiree who once received a monthly pension of $2,000 and whose  pension was reduced to $1,251 under the PBGC guarantee, would see  the monthly pension income further reduced to less than $125, or less  than $1,500 per year. Additional plan insolvencies would further depress  already drastically reduced income levels. Our contacts with plan officials  and other stakeholders also suggested that the exhaustion of the PBGC  multiemployer insurance fund would have effects well beyond direct  financial impacts. For example, officials of another plan said that the  exhaustion of the insurance fund could bring about the loss of public  confidence in the multiemployer plan system’s ability to provide retirement  security for plan participants and their beneficiaries.

section_title: Key Options to Reduce Liabilities and Change Plan Designs Could Help Improve Financial Stability, but Pose Trade-offs
paragraphs: Experts and stakeholders we interviewed cited two key policy options to  avoid the insolvencies of severely underfunded plans and the PBGC  multiemployer insurance fund, and a number of other options for longer  term reform of the multiemployer system (see fig. 12). To address the  impending insolvency crisis, they proposed allowing severely troubled  plans to reduce accrued benefits, including benefits of retirees, and  providing PBGC with additional resources to prevent insolvencies that  might otherwise threaten the fund. Longer term options would provide  plans with flexibilities and resources to help attain financial stability in the  future. These include encouraging the adoption of flexible benefit designs  and reforming withdrawal liability policies.

Various experts and plan representatives stressed the necessity of  modifying ERISA’s anti-cutback rule to allow severely distressed plans to  reduce the accrued benefits of active participants as well as retirees.  They noted that this flexibility is essential because 1) the most severely  distressed plans will be unable to avoid insolvency using traditional  methods—increasing employer contributions and/or reducing future  benefit accruals or adjustable benefits—and 2) benefit reductions will  occur in any case and will be more severe in the event of plan insolvency,  especially in the event of the insolvency of PBGC’s multiemployer  insurance fund. As described in the first section of this report, the most  severely distressed plans we contacted have already adjusted  contributions and benefits and several stated that further adjustments  would accelerate plan insolvency. In particular, the demographics of  many multiemployer plans limit their ability to reduce liabilities through  contribution increases or reductions in future benefit accruals because  they are typically based on hours worked. For example, the majority of  participants in one of the largest multiemployer plans have already retired  or are inactive and no longer contributing to the plan—as of 2012, the  plan had about 4.86 retired or otherwise inactive participants for every  active worker. In light of the sacrifices already made by active  participants—some of whom are absorbing the cost of significant  contributions to support benefit payments at a level they will likely never  see for themselves—some stakeholders noted that adjustments of retiree  benefits would be equitable. Moreover, experts, as well as employer and  plan representatives also noted that allowing plans to reduce accrued  benefits now could avoid more severe reductions in the future. For  example, representatives from an association of actuaries and from a  large plan noted that for some plans, the alternative to reductions in  accrued benefits is eventual plan insolvency, which would result in the  much lower benefit level guaranteed by PBGC compared to the current  benefits paid and, possibly, little to no benefit at all if PBGC’s  multiemployer insurance fund became insolvent. Finally, some experts  and a plan representative stressed the urgency of obtaining such  flexibility because the longer the delay, the greater the eventual required  benefit reductions.

Nonetheless, allowing plans the flexibility to reduce accrued benefits for  current workers and retirees would significantly compromise one of the  founding principles of ERISA and could impose significant hardship on  some retirees. While some plan representatives and other stakeholders  told us that a very modest benefit reduction would be sufficient to avoid  insolvency, others noted that reductions would be very painful for retirees  who worked for many years and planned their retirements around a  promised benefit. Representatives of one of these plans referred to  appeal letters to the plan that had been submitted by participants and/or  their spouses, noting that older workers or retirees can be in some  financially difficult situations, and cuts to accrued benefits would deepen  and increase the number of such hardships. Some also noted that while  younger retirees may be able to obtain employment to supplement  income, older retirees, especially in physically demanding industries like  mining and construction would likely not have that option. Finally, some  stakeholders indicated that the flexibility to reduce accrued benefits would  harm the multiemployer system by undermining the credibility of  multiemployer plans and diminishing their ability to attract and retain  employers and participants.

Plan representatives and experts we contacted proposed a number of  considerations and limitations that could mitigate some concerns with  allowing plans to reduce accrued benefits. As described in table 6, these  measures include eligibility criteria and options for oversight, along with  other key features. For example, given the sacrifice it would impose on  participants, several experts and plan representatives said that allowing  reductions in accrued benefits should only be considered as a last resort  for plans headed for insolvency.

Even with these protections and considerations, the flexibility to reduce  accrued benefits would not occur without considerable sacrifice, and may  not be sufficient to help some plans avoid insolvency. Several plan  representatives and experts said the suggested benchmark for reducing  accrued benefits—PBGC’s guarantee level of $12,870 on an annual basis  for 30 years of service—is relatively low and could result in steep benefit  cuts. For example, given the magnitude of financial challenges facing  some severely underfunded plans, accrued benefits may be reduced by  one-third or more of their original value. Moreover, in the case of at least  one plan, PBGC officials said that reductions to the maximum guaranteed  level may still not represent sufficient savings to avert insolvency. For  example, representatives of one large plan told us that while reducing  accrued benefits might be an option for some plans, it was not an option  for their plan because the benefits were already quite modest—average  retirement benefits in 2010 were about $600 per month. Further, plan  representatives said it would be unconscionable to reduce benefits for a  retiree with a work-related illness, such as a respiratory ailment, who may  be barely surviving on current benefit levels.

According to several experts, in an effort to save plans and conserve  PBGC assets in the long term, PBGC could provide financial assistance  to qualifying plans headed for insolvency through a partition. If a plan  qualifies and its application is approved by PBGC, the partition population  includes only orphaned participants—those whose employer left the plan  due to bankruptcy—and their benefits are reduced to the guaranteed  level. According to industry experts, partitions would allow plans with a  substantial share of orphaned liabilities to avoid further benefit reductions  for active participants and other beneficiaries. By removing the burden of  the legacy costs associated with orphaned participants, the plan would be  in a better position to adequately fund benefit obligations with ongoing  contributions. In addition, one expert said that partitions could reduce the  total liability for PBGC because extending the solvency of the plan means  that fewer participants would rely on benefit payments from the PBGC  than if the whole plan were to become insolvent.

While partitions may prevent qualifying plans from becoming insolvent,  neither PBGC’s current partitioning authority nor its financial resources  are sufficient to address the impending insolvency of large, severely  underfunded plans. In its entire history, PBGC has performed partitions  for only two plans. According to PBGC officials, plan representatives,  and experts, there are a number of reasons why partitions have not been  more widely used:

The magnitude of potential reductions for orphaned participants has  dissuaded some plans from applying for help. Payments for the  partitioned population will be reduced to the PBGC guarantee level,  which could be a sizable reduction in some cases.

PBGC does not have sufficient resources to cover orphaned liabilities  of large severely underfunded plans.

Plans may not meet the four statutory criteria to be eligible for a  partition. For example, a plan must demonstrate that it is headed for  insolvency due to a reduction in contributions due to employer  bankruptcies, which numerous plan representatives and experts said  may exclude plans in need of assistance. Some plan representatives  said that many of their contributing employers are small businesses  that do not have the wherewithal to go through formal bankruptcy  proceedings, but instead close without paying their full share of  liabilities. In other cases, contributing employers may have left when  the plan was adequately funded, but, as a result of the market crash  in 2008, the funded status deteriorated. Consequently, the plan is not  able to collect any ongoing contributions from those employers to  offset the poor investment returns, but the plan is still responsible for  paying the full amount of vested benefits for their workers.

While the reasons employers leave a plan may vary, their departure can  result in significant legacy costs that experts said impair the ability of the  plan to remain solvent or recover from funding shortfalls. For example,  according to officials from one of the largest plans, about 40 percent of  benefit payments go to orphaned participants and current employer  contributions amounted to only about 25 percent of total annual benefit  payments as of 2009. To address this issue, several experts said that  partitions should be made more widely available so that, for example,  orphaned liabilities could include any participants whose contributing  employer left the plan without paying their full share of unfunded vested  benefits. However, to cover the cost of these benefits, several experts  noted that PBGC would need additional funding—the agency does not  have nearly sufficient resources to pay even the reduced benefit levels for  potential partition populations from some large plans.

As an example, representatives of one of the largest plans for which  insolvency is reasonably possible in the mining industry indicated they  may not be eligible for assistance through a partition because the plan  was sufficiently funded until the 2008 financial crisis. In the absence of a  partition, some members of Congress have proposed financial assistance  using an existing separate source of funds established from reclamation  fees paid by coal companies for abandoned coal mines. According to  plan representatives, this fund currently provides money to pay for health  benefits of three related plans, which have not used the full amount of  those funds. The proposal would transfer any remaining funds that are  not needed for health benefits to improve the solvency of the pension  plan. The representatives also noted that this financial assistance is  essential and the only way the plan can avoid insolvency. Pension  benefits for this plan are relatively low—retirees received an average  pension of about $600 a month in 2010, which limits the plan’s ability to  improve its funded status even if reductions to accrued benefits were  allowed.

Numerous industry experts and plan representatives emphasized the  importance of providing timely assistance to severely underfunded plans,  but some experts also cited drawbacks of providing additional financial  assistance beyond PBGC’s multiemployer insurance fund. Regarding  advantages, several experts and plan representatives said providing  additional financial assistance sooner rather than later could prevent  entire plans from going insolvent and reduce the number of participants  relying on guaranteed payments from PBGC in the long term. Beyond the  scope of an individual plan, representatives from a construction industry  group said additional financial assistance could also prevent more  widespread negative effects. Because employers across various  industries contribute to some of the large severely underfunded  multiemployer plans, as well as other plans, the continued decline of such  a plan could trigger a contagion effect. Contributing employers may face  large liabilities (e.g., increased contributions, increased withdrawal  liability) that could prevent them from fulfilling obligations to other  currently well-funded plans and some employers may be forced out of  business. Moreover, a plan representative and an expert said additional  financial assistance is necessary to prevent the insolvency of the  multiemployer insurance program, which, as described in the previous  section, would leave thousands of participants with a small fraction of  their vested pension benefits. However, other experts cited drawbacks for  providing additional financial assistance. In particular, some experts said  that a partition may not be a permanent fix for the plan. For example, if  the on-going portion of the plan continues to lose employers, it may still  become insolvent and require financial assistance from PBGC. In  addition, some experts expressed concern about the size of the burden  federal financial assistance could potentially place on taxpayers.

Considering the resources that may be needed to provide financial  assistance to troubled plans, PBGC and others have identified increased  premiums as a potential source of additional revenue for PBGC.  According to projections in a recent PBGC report, doubling the insurance  premium from the current level of $12 per participant to $24 per  participant would reduce the likelihood of PBGC insurance fund  insolvency in 2022 from about 37 percent to about 22 percent. The  analysis also found that a tenfold increase to $120 per participant would  virtually eliminate the likelihood of multiemployer insurance fund  insolvency by 2022, although the analysis did not look beyond that  timeframe.

However, some stakeholders we spoke with noted that increased  premiums also have limitations and drawbacks. Some stakeholders said  further premium increases alone were not a feasible solution because  they would be insufficient to solve PBGC’s long-term funding shortfall and  would further stress employers in severely underfunded plans who have  already borne considerable contribution increases. According to a PBGC  analysis, even a ten-fold increase in the current premium would not  prevent significant growth in the agency’s deficit. Under this analysis,  PBGC estimates that the FY2012 deficit of $5.2 billion would still nearly  triple, amounting to about $15 billion in 2022. Moreover, it is unclear what  impact such premium increases would have on plans of varying financial  health, especially plans seeking to delay eventual insolvency. PBGC  officials acknowledged that, although premiums are generally not a  significant percentage of plan costs, the most severely underfunded plans  may not be able to afford any increases. PBGC officials also said that,  given the range of financial circumstances across plans, a premium  structure that would ensure affordable and appropriate premiums for all  plans could help address this concern. In prior work, we assessed  changing the premium structure for PBGC’s single-employer program to  allow premiums to vary based on risk. However, we have not assessed  the implications or implementation of increased premiums or a risk-based  premium structure for PBGC’s multiemployer program. Given the  distinctive features of the multiemployer plan design and program  described earlier in this report, the development of a risk-based premium  structure for multiemployer plans would entail unique considerations and  require further analysis.
subsections: section_title: Changes to Plan Design and Other Options Could Address Challenges of Withdrawal Liability and Improve Long-Term Financial Stability
subsections: section_title: Addressing the Problems Associated with Withdrawal Liability Policies
paragraphs: ERISA requires that employers wishing to withdraw from a multiemployer  plan pay for their share of the plan’s unfunded liabilities. As explained in  the following text box, this requirement for withdrawal liability payments is  intended to prevent employers from walking away from liabilities they  have created, and, thus, help protect plan participants and other  employers. However, despite the necessity of such a safeguard, plan  representatives and other industry experts said changes are needed to  address key challenges related to current provisions regarding withdrawal  liability.

In the event an employer seeks to leave a multiemployer plan and the plan has a funding shortfall, the employer is liable  for its share of unfunded plan benefits, known as withdrawal liability. A plan can choose from several formulas  established in the law for determining the amount of unfunded vested benefits allocable to a withdrawing employer and  the employer’s share of that liability. Under three of these formulas, the employer’s proportional share is based on the  employer’s share of contributions over a specified period. In addition, the plan can apply for approval from PBGC to use  variations on these methods. 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—frequently referred to as  orphaned liabilities. As we previously reported, this means that an employer’s pension liabilities can become a function  of 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. However, while the total amount of withdrawal liability is  based on the unfunded vested benefits for the plan as a whole, a particular employer’s annual payments are strictly  based on its own contributions and are generally subject to a 20-year cap.

Current federal withdrawal liability policies give rise to three main  problems, according to stakeholders and experts. First, plans often collect  far less than the full value of liabilities owed to the plan. In the event of an  employer bankruptcy, several experts said plan sponsors often collect  little or no withdrawal liability payments. For example, several experts  explained that in the recent Hostess Brands bankruptcy, the firm—a  contributing employer to many plans—is likely to pay very little of its  withdrawal liability obligations. One service provider said this bankruptcy  doubled the unfunded liabilities attributable to remaining employers in  some plans. Separately, the method of calculating withdrawal liability  payments may not capture an employer’s full share of unfunded liabilities  because a plan’s withdrawal liability obligation is based on its prior  contributions rather than on attributed liabilities, and is also subject to a  20-year cap. In particular, some stakeholders said the 20-year cap on  withdrawal liability payments limits the amount of money collected by  plans. If the amount of the employer’s prior contributions is small relative  to the size of their total withdrawal liability, the annual payments may not  be sufficient to pay off their total withdrawal liability over the 20-year  period.

Second, existing withdrawal liability rules deter new employers from  joining a plan with existing unfunded liabilities. Plan representatives said  attracting new employers is essential to the long-term health of the plan,  but an employer group said the existence of potential withdrawal liability  strongly deters prospective employers who may otherwise want to join.  Moreover, fear of greater withdrawal liability in the future may encourage  current contributing employers to leave the plan. For example, in late  2007, UPS paid about $6 billion to withdraw from one of the largest  multiemployer plans.

Third, the presence of withdrawal liability can negatively affect an  employer’s credit rating and ability to obtain loans for their business. For  example, representatives from one large employer said their total  withdrawal liability exceeds the net worth of their company and this has  made it difficult for them to obtain loans and other financing, which might  help revitalize their business. Table 7 describes options to address these  problems identified through our contacts with various stakeholders,  including plan and employer representatives.

A comprehensive remedy to the problems arising from withdrawal liability  is particularly elusive because a solution to one issue can exacerbate  another. For example, eliminating the current 20-year cap may help allow  plans to collect withdrawal liability payments until the full amount has  been paid. However, increasing the amount of withdrawal liability that  plans can collect may also discourage new employers from participating  in a plan because it increases the potential withdrawal liability they could  be required to pay. On the other hand, options that could reduce the  deterrent effect on new employers—such as the proposal to omit  contributions required by funding improvement or rehabilitation plans from  withdrawal liability calculations—could reduce a plan’s ability to collect  sufficient withdrawal liability.

Numerous plan representatives, experts, and the NCCMP Commission  recommend the adoption of a more flexible DB model to avoid a repetition  of the current challenges facing multiemployer plans. While the specific  plan design can vary, in general, this model allows trustees to adjust  benefits based on key factors—such as the plan’s funded status,  investment returns, or plan demographics—to keep the plan well-funded.  Importantly, it reduces the risk that contributing employers would face  contribution increases if the plan experiences poor investment returns or  other adverse events. Investment risk is thus primarily shared by  participants and the plan is designed to avoid incurring any withdrawal  liability. Overall, the trustees of the plan would have greater flexibility than  under a traditional DB plan to adjust benefits to keep the plan well- funded. See table 8 for a comparison of two alternative flexible DB plan  designs, although other models could also be used. In addition, the  NCCMP Commission’s proposal would also give more flexibility for  traditional DB plans by allowing these plans to adjust the normal  retirement age to harmonize with Social Security’s normal retirement  age.

Notably, the Cheiron proposal would also use more conservative  approaches to investment and funding policy because it uses a relatively  lower assumed rate of return and a contingency reserve fund. The  Cheiron proposal calls for a more conservative asset allocation and, in  addition to sharing some of the investment risk with participants through  the flexible benefit design, would also reduce the overall amount of  investment risk through the more conservative asset allocation. In  addition, the Cheiron model would use a contingency reserve fund that  could provide a cushion against unfavorable investment or demographic  experience.

The design of a flexible DB plan offers several key benefits, which some  stakeholders said are essential to the long-term survival of the  multiemployer system. In particular, several stakeholders cited limiting  employer liability as a key benefit. Representatives of several employers  said it is imperative to limit their liability to enable them to be competitive  against competitors. By minimizing risks to employers, a flexible DB  model may strengthen employers’ commitment to the plan and reduce  incentives for them to leave. Similarly, reducing risk may also help attract  new employers to these plans, which may improve a plan’s demographics  and help it stay well-funded and viable in the long term. Additionally, a  group of employer representatives said that a flexible DB plan, such as  the one developed by Cheiron, in conjunction with the United Food and  Commercial Workers (UFCW) International Union, provides trustees more  tools to prudently manage the plan to keep it well-funded and able to pay  promised benefits even when faced with adverse events, such as poor  investment returns or demographic shifts. Moreover, some stakeholders  said that a flexible DB plan reduces risk while also avoiding challenges  associated with defined contribution (DC) plans. Specifically,  representatives of a construction industry group said a flexible DB plan  would still offer pooled and professionally managed investments, along  with risk sharing among participants, which can mitigate some of the  individual risks faced by participants in DC plans, such as investment risk  and longevity risk. Given the potential long-term benefits of a flexible DB  model, some experts said regulatory agencies could do more to help  plans adopt a design with these features. For example, one expert said  that PBGC could hold a conference on best practices in plan design. In  addition, this expert said that PBGC could charge such plans lower  premiums commensurate with their lower risk to encourage adoption of  these plan design features; however, PBGC lacks the legal authority to do  so.

Some plan representatives and experts also noted that a flexible DB  model entails tradeoffs. In particular, representatives from an actuarial  firm and from an industry group said that while this approach shows  promise for addressing prospective challenges, it does not help resolve  problems for plans that already have financial shortfalls. Union and  employer representatives said that plans may first need to address  existing shortfalls before they could adopt a flexible DB model. Thus, new  design options are unlikely to help large plans that are already severely  underfunded. Further, in the flexible benefit models described in table 8,  investment risk is primarily borne by participants. Representatives from  an actuarial firm also said that this model may be relatively expensive  when comparing the amount of contributions needed to attain a certain  level of accrued benefits. For example, in order to minimize the risk of  underfunding, a flexible DB plan may use a relatively low assumed rate of  return—and, correspondingly, a more conservative investment strategy— than is more commonly used by multiemployer plans. Over the long term,  this may result in a lower level of accrued benefit. However,  representatives of one actuarial firm said that higher assumed rates of  return used by some multiemployer plans may be too high and could  entail a greater risk of the plan becoming underfunded. And, as recent  events show, participants already assume a lot of risk in the event a plan  becomes severely underfunded. As a result, a flexible benefit model that  reduces risk might provide a somewhat lower promised benefit, but one  that is more secure.

Facilitating more plan mergers or allowing plans to form alliances may  also help address financial challenges facing multiemployer plans,  according to some plan representatives and industry experts. In a merger,  two or more plans are combined into a single plan, including both plan  assets and administration. Several stakeholders said that this  consolidation helps plans—especially smaller plans—achieve more  favorable economies of scale to reduce costs. For example, in a merger,  plans can reduce costs by consolidating administrative services, such as  annual audits and legal services. In some cases, PBGC provides financial  assistance to facilitate a merger by paying a plan that is insolvent or  nearing insolvency a portion of the present value of PBGC’s net liability  for that plan, which serves as an incentive for a well-funded plan to take  on the assets and liabilities of a less well-funded plan. PBGC officials said  that they are careful to provide financial assistance only in the case of  mergers expected to be successful and, thus, avoid paying financial  assistance twice to the same plan. While PBGC has helped to facilitate  some mergers, several plan representatives and a representative from an  actuarial firm said more plans could merge if PBGC provided additional  financial assistance. Alternatively, other stakeholders said similar cost- saving benefits from consolidation could be achieved by allowing plans to  form alliances. In contrast to a merger, alliances allow plans to combine  administrative and investment management services, but retain separate  liabilities and funding accounts. Consequently, in an alliance, each plan  would retain its own liabilities and withdrawal liability obligations would not  be shared across plans.

Along with cost savings from consolidating administrative services, plan  representatives and industry experts said mergers and alliances can offer  other important benefits. In particular, a merger or alliance would provide  plans a larger asset pool that can also help plans reduce investment  management fees. According to a representative from an actuarial firm,  combined with administrative cost savings, consolidating investment  management services can significantly reduce costs for small plans and  may save some from insolvency. For example, some of their small plan  clients pay between 30 and 40 percent of contributions towards  administrative and investment management expenses while a larger plan  would pay closer to 5 percent. However, another expert said cost savings  for some plans may be negligible depending on the plan’s circumstances.  For example, if a plan is already sufficiently large and efficiently  managed, cost savings from merging with another plan may be relatively  small. In addition, several stakeholders said that by helping plans avoid  insolvency, PBGC may also benefit from plan mergers or alliances  because the participants of these plans would continue to receive benefits  from the plan rather than becoming insolvent and relying on benefit  payments from PBGC. Consequently, the cost PBGC incurs to facilitate  such arrangements may be more than offset by preventing the plan from  becoming insolvent.

While mergers can provide cost-savings and other benefits, plans face  barriers to implementing them. For example, representatives from one of  the largest plans said that due to the relatively large size of their plan and  the amount of their funding shortfall, a merger is not an option for them.  Several stakeholders said a merger between a plan that is relatively well- funded and a financially weaker plan poses concerns for plan trustees  who have a fiduciary duty to act in the best interests of their plan’s  participants. One employer representative said that a merger poses risks  to the healthier plan and may not be in the best interests of those  participants. To address potential risks to the healthier plan, some  stakeholders said PBGC should be given greater resources to facilitate  more mergers. In addition, some employer representatives said plans that  undertake mergers could be afforded legal protection under a safe harbor  to further alleviate concerns over fiduciary responsibility. While alliances  may avoid some of these concerns—they would not require plans to  harmonize their funding status as each plan retains its own liabilities— such arrangements are not currently permitted and would therefore  require a change in law according to NCCMP.

section_title: Conclusions
paragraphs: Despite unfavorable economic conditions, most multiemployer plans are  currently in adequate financial condition and may remain so for many  years. However, a number of plans, including some very large plans, are  facing very severe financial difficulties. Many of these plans reported that  no realistic combination of contribution increases or allowable benefit  reductions—options available under current law to address their financial  condition—will enable them to emerge from critical status. As a result,  without Congressional action, the plans face the likelihood of eventual  insolvency. While the multiemployer system was designed to limit  PBGC’s exposure by having employers serve as principal guarantors,  PBGC remains the guarantor of last resort. However, given their current  financial challenges, neither the troubled multiemployer plans nor PBGC  currently have the flexibility or financial resources to fully mitigate the  effects of anticipated insolvencies. Should a critical mass of plan  insolvencies drain the PBGC multiemployer insurance fund, PBGC will  not be able to pay either current or future retirees more than a very small  fraction of the benefit they were promised. Consequently, a substantial,  and in some cases catastrophic, loss of income in old age looms as a real  possibility for the hundreds of thousands of workers and retirees  depending on these plans.

Congressional action is needed to avoid this scenario, and stakeholders  suggested a number of key policy options. For example, various  stakeholders suggested that, as a last resort to avert insolvency,  Congress could enact legislation permitting plans—subject to certain  limitations, protections, and oversight—to reduce accrued benefits of both  working participants and retirees. In addition, some stakeholders  suggested that Congress could give PBGC the authority and resources to  assist the most severely underfunded plans. Stakeholders acknowledged  that each of these options poses tradeoffs. Providing PBGC with  additional resources, as well as other more direct financial assistance to  plans, would create yet another demand on an already strained federal  budget. Similarly, reducing accrued benefits for active workers, and  especially for those already in retirement, could result in significant  reductions in income for a group that may have limited income  alternatives and may be too infirm to return to the labor force. Such an  option would also significantly compromise one of the key founding  principles of ERISA—that accrued benefits cannot be reduced— essentially rupturing a promise to workers and retirees who have labored  for many years, often in dangerous occupations, and in some of the  nation’s most vital industries.

The scope and severity of the challenges outlined by stakeholders  suggest that a broad, comprehensive response is needed and Congress  faces difficult choices in responding to these challenges. However, as the  recent tri-agency federal report on multiemployer plans noted, unless  timely action is taken to provide additional tools for the multiemployer plan  trustees to stabilize the financial conditions of their plans, more costly and  intrusive measures may later be necessary. Nevertheless, this situation  can also be viewed as an opportunity both to protect the benefits of  hundreds of thousands of older Americans and stabilize a pension system  that has worked fairly well for decades. Without a comprehensive  approach, efforts to improve the long-term financial condition of the  multiemployer system may not be effective.

section_title: Matters for Congressional Consideration
paragraphs: Given the serious challenges facing PBGC’s multiemployer insurance  fund and critically underfunded multiemployer plans, and to prevent the  significant adverse effects of PBGC insolvency on workers and retirees,  Congress should consider comprehensive and balanced structural  reforms to reinforce and stabilize the multiemployer system. In doing so,  Congress should consider the relative burdens, as identified by key  stakeholders, that each reform option would impose on the competing  interests of employers, plans, workers and retirees, PBGC, and  taxpayers.

section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of Labor, the  Department of the Treasury, and the PBGC for review and comment. We  received formal written comments from the PBGC, which generally  agreed with our findings and analysis. During the review period, PBGC  officials raised the potential role that increased multiemployer insurance  program premiums could play in strengthening the program, and hence in  helping to ensure that participants in insolvent plans received some  financial protection in the long term. In addition, the issue of PBGC  premiums was raised repeatedly during a March 5, 2013 hearing held by  the House Subcommittee on Health, Employment, Labor and Pensions,  Committee on Education and the Workforce. In light of the level of interest  on this issue, we included a brief discussion of the matter of premiums in  the final version of our report. PBGC, Labor, and Treasury also provided  technical comments which we incorporated as appropriate. PBGC’s  formal comments are reproduced in appendix II.

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 have any questions about this report, please contact Charles  Jeszeck at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are found in  appendix III.

section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to answer the following research questions:  1) What actions have multiemployer plans in the weakest financial  condition taken in recent years to improve their long-term financial  position?  2) To what extent have plans relied on PBGC assistance since 2009, and  what is known about the prospective financial condition of the  multiemployer plan insurance program?  3) What options are available to address PBGC’s impending funding  crisis and enhance the program’s future financial stability?

We sought to answer the first question in two primary steps. First, we  obtained data on the results of a survey of critical status plans performed  by The Segal Company, a large actuarial firm that has a client base  consisting of about 25 percent of all multiemployer plans, representing  about 30 percent of all multiemployer plan participants. As figure 13  below illustrates, the industry distribution of Segal’s client base  substantially parallels that of the broader multiemployer universe.  Included as an addendum to Segal’s annual survey of plan funded status,  the survey instrument requested information about the nature and size of  contribution increases and benefit reductions, whether plans expected to  emerge from the critical zone within statutory time frames, and the  estimated number of years until emergence from the critical zone or, for  plans not expecting to emerge, the number of years to plan insolvency.  The information pertaining to each of the 107 critical plans in the survey  was completed by Segal’s professional actuaries responsible for those  clients. The survey was initiated in December 2010, and responses were  received through February 2011. Through a review of the methodology  underlying the survey, and discussions with a Segal representative  knowledgeable about the survey, we determined that the results were  reliable and useful for our research. Second, we supplemented this data  with in-depth interviews with representatives of 13 multiemployer plans— 8 were in critical status, 2 in endangered or seriously endangered status,  and 3 in neither critical nor endangered status. We selected the plans to  ensure that we included a range of plan sizes, industries, geographical  areas, and funding status. Plans selected ranged in size from about 2,000  participants to more than 531,000 participants and represented a variety  of industries including those featuring some of the largest concentrations  of multiemployer plans—construction, manufacturing, and transportation.  Before speaking with plan officials, we reviewed available data, including  rehabilitation or funding improvement plans, and other relevant  documents. Our in-depth discussions with plan representatives covered  various issues, including plans’ use of and views regarding funding relief,  the nature and size of the contribution increases and benefit reductions,  and the probable impact of contribution increases and benefit reductions  on employers and plan participants.

To answer the second question, we interviewed officials and analyzed  data from PBGC, including recent PBGC annual reports and data books.  We also developed several data requests for PBGC that were tailored to  this objective, and reviewed information provided by PBGC in response.  For example, we obtained data on the amount of PBGC’s annual  assistance to plans due to plan insolvencies, plan partitions, and  assistance granted for other reasons, such as plan mergers or closures.  We also obtained and analyzed updated data regarding PBGC’s overall  financial position and the size of its long-term deficits. Specifically, we  obtained data on the liabilities attributable to plans on PBGC’s list of plans  that are insolvent or considered likely to become insolvent in the next 10  years, as well as those thought likely to become insolvent in the next 10  to 20 years. To better understand the consequences of plan insolvency  on retirees, we interviewed relevant PBGC officials and requested data  regarding the impact of insolvency on retirees of various wage levels and  tenures. Finally, we discussed the impact of potential PBGC insolvency in  our discussions with multiemployer plan officials.

To answer the third objective, we distinguished between options that  would address the more immediate funding crisis facing plans headed  toward insolvency and options that may enhance the long-run stability of  the multiemployer system for plans that may not be headed for  insolvency, but, nevertheless, face financial challenges. We assessed the  tradeoffs of various options for current workers, retirees, and employers,  as well as the federal government. To identify and assess available  options, we interviewed a wide range of pension experts—including  academics, actuaries, attorneys, plan trustees and administrators,  employers and trade associations, unions, advocacy organizations,  government officials, and other relevant stakeholders. We also reviewed  relevant research and documentation, including a proposal by the  National Coordinating Committee for Multiemployer Plans (NCCMP) and  research by other industry experts.

As appropriate for each of our objectives, we reviewed existing literature  and relevant federal laws and regulations.

We conducted this performance audit from March 2012 through March  2013 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 Pension Benefit Guaranty Corporation

section_title: Appendix III: GAO Contacts and Acknowledgments
subsections: section_title: GAO Contact

section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, David Lehrer (Assistant Director),  Michael Hartnett, Sharon Hermes, and Kun-Fang Lee made key  contributions to this report.

In addition, support was provided by Frank Todisco, GAO Chief Actuary,  James Bennett, David Chrisinger, Julianne Cutts, Jessica Gray, Theresa  Lo, Ashley McCall, Sheila McCoy, and Walter Vance.


Question-summary annotations: questions: question: What steps have distressed multiemployer plans taken?
answer: The most severely distressed multiemployer plans have taken significant steps to address their funding problems and, while most plans expected improved financial health, some did not.
child_questions: question: What specifically have these plans done?
answer: A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the large majority of the most severely underfunded plans--those designated as being in critical status--either have increased or will increase employer contributions or reduce participant benefits.

question: How can contribution increases be harmful?
answer: For example, several plan representatives stated that contribution increases had damaged some firms' competitive position in the industry, and, in some cases, threatened the viability of such firms.

question: How can reductions in benefits be harmful?
answer: Similarly, reductions in certain benefits--such as early retirement subsidies--may create hardships for some older workers, such as those with physically demanding jobs.

questions: question: What is the problem with plan insolvencies?
answer: The Pension Benefit Guaranty Corporation's (PBGC) financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC's multiemployer insurance fund's ability to pay pension guarantees for retirees.

question: How has PBGC's financial assistance to multiemployer plans changed?
answer: Since 2009, PBGC's financial assistance to multiemployer plans has increased significantly, primarily due to a growing number of plan insolvencies.

question: What does PBGC estimate?
answer: PBGC estimated that the insurance fund would be exhausted in about 2 to 3 years if projected insolvencies of either of two large plans occur in the next 10 to 20 years. More broadly, by 2017, PBGC expects the number of insolvencies to more than double, further stressing the insurance fund. PBGC officials said that financial assistance to plans that are insolvent or are likely to become insolvent in the next 10 years would likely exhaust the insurance fund within the next 10 to 15 years.
child_questions: question: What will occur if these estimates are true?
answer: If the insurance fund is exhausted, many retirees will see their benefits reduced to an extremely small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits.

questions: question: What policy options did experts and stakeholders cite to avoid insolvencies?
answer: Experts and stakeholders said that, in limited circumstances, trustees should be allowed to reduce accrued benefits for plans headed toward insolvency. Also, some experts noted that, in their view, the large size of these reductions for some severely underfunded plans may warrant federal financial assistance to mitigate the impact on participants.
child_questions: question: What is a problem with these options?
answer: For example, reducing accrued benefits could impose significant hardships on some retirees, and any possible financial assistance must be considered in light of the existing federal debt.

question: How can long term financial stability be improved?
answer: Options to improve long term financial stability include changes to withdrawal liability--payments assessed to an employer upon leaving the plan based on their share of unfunded vested benefits--to increase the amount of assets plans can recover or to encourage employers to remain in or join the plan.

question: What is a key part of the alternative plan experts and stakeholders recommend?
answer: In addition, experts and stakeholders said an alternative plan design that permits adjustments in benefits tied to key factors, such as the funded status of the plan, would provide financial stability and lessen the risk to employers.