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

Letter

Background

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.

Severely Underfunded Plans Have Cut Benefits to Current Employees and Increased Employer Contributions, but Financial Outlook for Some Plans Remains Bleak

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.

Critical Status Plans Have Established a Range of Contribution Increases and Benefit Cuts

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.

Plan Officials Indicated That Efforts to Improve Funding Will, in Some Cases, Require Significant Sacrifices by Employers and Active Participants

Impact of Contribution Increases

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.

PBGC Provides Financial Assistance to a Greater Number of Plans Each Year, Endangering the Multiemployer Program and Guaranteed Retiree Benefits

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.

Total PBGC Financial Assistance to Plans Increased More Rapidly in Recent Years, and Current and Projected Plan Insolvencies Will Exhaust the Insurance Fund

Increases in PBGC Loans and Other Financial Assistance

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.

Benefits of Many Retirees Are Reduced under PBGC Guarantees, and May Be Further Reduced If PBGC Multiemployer Insurance Program Becomes Insolvent

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.

Key Options to Reduce Liabilities and Change Plan Designs Could Help Improve Financial Stability, but Pose Trade-offs

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.

Changes to Plan Design and Other Options Could Address Challenges of Withdrawal Liability and Improve Long-Term Financial Stability

Addressing the Problems Associated with Withdrawal Liability Policies

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.

Conclusions

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.

Matters for Congressional Consideration

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.

Agency Comments

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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: Comments from the Pension Benefit Guaranty Corporation

Appendix III: GAO Contacts and Acknowledgments

GAO Contact

Staff Acknowledgments

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.