Private Pensions: Changes Needed to Better Protect Multiemployer Pension Benefits
Released: 2010-11-16T00:00:00

Letter

Background

The Taft Hartley Act of 1947 established terms for negotiating employee benefits in collectively bargained multiemployer plans and placed certain restrictions on the operation of these plans, including the placement of plan assets in a trust. For example, the law required a collectively bargained plan and its assets to be managed by a joint board of trustees equally representative of management and labor. It further required plan assets to be placed in a trust fund, legally distinct from the union and the employers, for the sole and exclusive benefit of the plan beneficiaries. In 1974, Congress passed ERISA to protect the interests of participants and beneficiaries covered by private sector employee benefit plans. Title IV of ERISA created PBGC as a U. S. government corporation to provide plan termination insurance for certain defined benefit pension plans that are unable to pay promised benefits. PBGC operates two distinct pension insurance programs, one for multiemployer plans and one for single- employer plans. These programs have separate insurance funds as well as different insurance coverage rules and benefit guarantees. The multiemployer insurance program and PBGC’s day-to-day operations are financed by annual premiums paid by the plans and by investment returns on PBGC’s assets. In turn, PBGC guarantees benefits, within prescribed limits, when a multiemployer plan is insolvent and unable to pay the basic PBGC-guaranteed benefits when due for the plan year.

In 1980, Congress sought to protect worker pensions in multiemployer plans by enacting the Multiemployer Pension Plan Amendments Act (MPPAA). Among other things, MPPAA (1) strengthened funding requirements to help ensure plans accumulate enough assets to pay for promised benefits, and (2) made employers, unless relieved by special provisions, liable for their share of unfunded plan benefits when they withdraw from a multiemployer plan. The amount owed by a withdrawing employer is based upon a proportional share of a plan’s unfunded vested benefits. Liabilities that cannot be collected from a withdrawing employer, for example, one in bankruptcy, are to be “rolled over” and eventually funded by the plan’s remaining employers. These changes were made to discourage employer withdrawals from a plan.

The Pension Protection Act of 2006 (PPA) established new funding and disclosure requirements for multiemployer plans. (See table 1.)

PPA requires trustees of plans certified in endangered or critical status to take specific actions to improve the plans’ financial status, such as developing schedules to increase contributions or reduce benefits. Plans certified as endangered must adopt a funding improvement plan, which outlines steps the plan will take to increase the plan’s funded status over a 10-year period or, in some cases, longer. Plans certified as critical must adopt a rehabilitation plan, which outlines actions, to enable the plan to cease to be in critical status by the end of a 10-year rehabilitation period and may include reductions in plan expenditures (including plan mergers and consolidations), reductions in future benefit accruals or increases in contributions, if agreed to by the bargaining parties, or any combination of such actions. To assist plans in critical status, PPA amended ERISA to allow these plans to reduce or eliminate adjustable benefits, such as early retirement benefits, post-retirement death benefits, and disability benefits. In addition, critical status plans are generally exempt from the excise taxes that IRS can assess on plans with funding deficiencies.

The funding requirements of PPA took effect just as the nation entered a severe economic recession in December 2007. As a result, Congress enacted the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) to provide multiemployer plans with temporary relief from some PPA requirements by allowing multiemployer plans to temporarily freeze their funded status at the previous year’s level. The freeze allows plans to delay creation of, or updates to, an existing funding improvement plan or rehabilitation plan, or postpone other steps required under PPA. WRERA also requires plans to send a notice to all participants and beneficiaries, bargaining parties, PBGC, and the Department of Labor indicating that the election to freeze the status of a plan does not mean that the funded status of the plan has improved. WRERA also provided for a 3-year extension of a plan’s funding improvement or rehabilitation period.

Although both single-employer and multiemployer plans are subject to the rules outlined in Title IV of ERISA, there are several important differences between the plan types that affect the structure and stability of each type of plan. (See table 2.)

The overall number of multiemployer plans insured by PBGC has decreased steadily since the 1980s as a result of plan mergers and terminations. At the same time, the aggregate number of participants— including active and inactive—has continued to rise. (See fig. 1.)

The number of participants in multiemployer plans also varies by industry. While PBGC covers workers in all major industrial sectors, the construction trades consistently account for over one-third of all covered multiemployer plan participants, totaling 36 percent in 2008. Other industries, including transportation and manufacturing, account for a smaller portion of participants, roughly 15 percent in 2007. (See fig. 2.)

Multiemployer Plans Reported Large Funding Shortfalls and Face an Uncertain Future

Multiemployer Plans Have Experienced General Funding Declines Since 2000

Multiple data sources that we examined indicate that most multiemployer plans experienced steep declines in their funded status in recent years. According to PBGC, multiemployer plans in aggregate have not been fully funded—at 100 percent or above level—since 2000 and their net funded status has declined significantly through 2007, the last date for which PBGC data are available. While plans are considered “safe” if their funded status is at least 80 percent, the aggregate funded status—the percentage of benefits covered by plan assets—of multiemployer plans insured by PBGC declined from 105 percent in 2000 to 69 percent in 2007. (See fig. 3.)

The funded status of multiemployer plans insured by PBGC varies significantly by industry sector within which the plan operates. According to PBGC data, while all industries generally follow the same trend in funded status, plans in the transportation industry have since 2000 reported a consistently lower funded status than other industries. For example, in 2007, the aggregate funded status for plans in the transportation industry was 63 percent in contrast to the overall average of 69 percent. Furthermore, in 2000, the last year that the aggregate funded status of all multiemployer plans was over 100 percent, the funded status of multiemployer plans in the retail trade and services industries was about 30 percent higher than the funded status of plans in the transportation industry. (See fig. 4.) The extent of underfunding in multiemployer plans also varies by industry with the construction and transportation industries accounting for 71 percent of the underfunding of all PBGC-insured multiemployer plans in 2007.

Since 2007, the last year for which data are available, aggregate plan funded status has declined further as a result of investment market declines. While the rapid drop in funded status, like the economic conditions that caused it, was severe, experts said that its effect on plans was similar to what happened to plans during the market correction of 2000 to 2002. For example, experts said that some plans, learning from the downturn from 2000 to 2002, took remedial steps in the following years, such as increasing contributions, and likely fared better in the recent recession. In contrast, other plans did not change course after the 2000 to 2002 downturn in the hope that market returns would erase their deficits and are now the plans in the most critical financial condition.

Many Multiemployer Plans Reported Large Funding Shortfalls during the Recent Economic Downturn

Although funded status was in a general decline since 2000, the economic recession that began in December 2007 had a negative impact on the funded status of multiemployer plans, according to a number of data sources. Annual actuarial certification data from IRS show that the proportion of multiemployer plans reporting in endangered or critical zone status rose significantly, from 23 percent of plans in 2008 to 68 percent of plans in 2009. (See table 3.)

Data from PBGC, although incomplete, show a similar downward trend in plan funded status. According to the annual funding notices that PBGC received in the 2009 plan year, nearly all of the 484 plans that filed reported a decrease in funded status from 2008 to 2009. Similarly, PBGC received more notices of critical or endangered status from plans, from 266 plans in 2008 to 624 plans in 2009.

Recent industry surveys of multiemployer plans found similar declines in funded status. For example, two industry groups surveying their multiemployer plan membership in 2009 found the same result: 80 percent of plans reported being in critical or endangered zone status, a reversal from 2008 when 80 percent of plans reported being in safe status. Similarly, another industry survey of nearly 400 plans found that the proportion of plans in the endangered or critical zone status increased from 24 percent in 2008 to 80 percent in 2009. While these surveys are not comprehensive, they provide further evidence of the negative impact that the economic downturn had on multiemployer plans.

Although it did not affect their underlying funded status, many plans took advantage of the one-time freeze allowed under WRERA. According to IRS data, 745 plans elected to freeze their funded status in either 2008 or 2009, including 373 plans in critical status, 351 in endangered status, and 21 plans in safe status. According to experts, some plans took advantage of the freeze option for a variety of reasons. Plans wanted to give the markets a chance to rebound in order to recoup plan assets lost in the downturn. Others may have chosen the freeze due to timing of collective bargaining agreements, not wanting to take steps to address funding deficiencies until a new agreement was reached. Still other plans elected the freeze to avoid having to revisit or revise ongoing rehabilitation plans. However, experts also noted that the WRERA freeze option was not helpful for all plans. Specifically, some plans chose not to freeze in endangered status, preferring to go straight to critical status to give them more options to address their funding deficiencies.

Plans Face Long-standing Demographic Challenges and an Uncertain Future

Multiemployer plans continue to face demographic challenges that threaten their long-term financial outlook—including an aging workforce and few opportunities to attract new employers and workers into plans. While the number of total participants in multiemployer plans has slowly increased, the proportion of active participants to retirees and separated vested participants has decreased. (See fig. 5.) For example, multiemployer plans had about 1.6 million fewer active participants in 2007 than in 1980, according to PBGC. With fewer active participants, plans have more difficulty making up funding deficiencies by increasing employers’ funding contributions. Moreover, increases in life expectancy also put pressure on plans, increasing the amount of benefits that the plan will have to pay as retirees live longer.

The future growth of multiemployer plans is largely predicated on growth of collective bargaining. Yet collective bargaining has declined in the United States since the early 1950s. According to recent data from the Bureau of Labor Statistics (BLS), union membership—a proxy for collective bargaining coverage—accounted for 7.2 percent of the U.S. private-sector labor force in 2009. In contrast, in 1990, union membership in the private sector accounted for about 12 percent, and in 1980, about 20 percent. While union membership has trended downward in most industries, it has remained relatively high in the transportation sector. (See fig. 6.)

Some experts told us that some industries within which multiemployer plans operate were already in decline—such as the printing and trucking industries—and that their situation was likely exacerbated by the economic downturn. They also noted that other plans, while facing short- term funding deficiencies, belonged to industries that remained strong— such as the construction and entertainment industries—and were likely to improve their funded status as the economy improved.

PBGC’s ability to assist multiemployer plans is contingent upon its insurance program having sufficient funds to do so. The net position of PBGC’s multiemployer pension insurance program has steadily declined since its highest point in 1998 as program liabilities outpaced asset growth. (See fig. 7.) The program’s net position went negative in 2003 and by 2009 the multiemployer program reported an accumulated deficit of $869 million.

The demographic challenges that multiemployer plans face also affect PBGC’s ability to assist them. Plans pay PBGC an annual flat rate premium per participant. Similarly, contributions by employers in a multiemployer plan are generally paid on a per work-hour basis. Consequently, declines in the number of plan participants during periods of high unemployment and long-standing reductions in collective bargaining can result in less premium income to PBGC and an increased probability of PBGC-insured multiemployer plans requiring financial assistance.

PBGC Monitors the Health of Multiemployer Plans, but Does Not Assist Troubled Plans on an Ongoing Basis

Data That PBGC Uses Are Outdated

While PBGC officials told us that they could benefit from having more current data than are available on the Form 5500, they prefer using Form 5500 data on multiemployer plans because these older data are the most comprehensive, the agency’s monitoring system is designed for it, the data are audited, and most private plans are required by law to file the form on an annual basis. Officials told us that, given the current Form 5500 reporting schedule, even with the data capture capabilities of the new EFAST2 system, they cannot make up for the time lag in plan filing and, as a result, its monitoring suffers. Officials told us that the time lag made it difficult to detect when a plan was in trouble and what steps could be taken to avert greater problems. PPA generally requires multiemployer plans to provide more timely financial information to PBGC. (See table 5.)

In addition to Form 5500 data, PBGC-insured multiemployer plans are required to submit annual funding notices (AFN) to PBGC. The AFN must include, among other things, the plans’ identifying information and funded percentage for the plan year, a statement of the market value of the plan’s assets as of the end of the year, a statement of the number of retired, separated vested, and active participants under the plan, and whether any plan amendment, or scheduled benefit increase or reduction has a material effect on plan liabilities. PBGC officials told us they do not use the AFNs they receive to determine the overall health of the universe of multiemployer plans, but may look at the market valuation of assets on the AFN of a specific plan once it has been identified through Form 5500 data as a potential candidate for the watch list. PBGC officials also told us they do not use the AFN in developing data for model simulation, annual reports, or data books. PBGC also receives annual notices of critical or endangered status from plans within 30 days of plans certifying their funding zone status with IRS, as required by PPA. PBGC officials said they compare the information in the notices—which alert recipients of the plan’s funding zone status and the reasons for it—with the plan’s Form 5500 filings to determine whether to place a plan on its contingency list. Plans on the list are asked to provide their current actuarial valuations so PBGC can monitor plans going forward. PBGC officials stated that, while plans are not required to provide this information, they are typically willing to cooperate with the requests.

PBGC Provides Non- Financial Assistance to Troubled Plans on an Ad Hoc Basis

In addition to providing financial assistance, PBGC can assist troubled plans with technical assistance, facilitate mergers, and partition the benefits of participants orphaned by employers who filed for bankruptcy. Generally, it is up to plans to request these kinds of assistance. Occasionally, PBGC is asked to serve as a facilitator and work with all the parties to a troubled plan to improve a plan’s financial status. Plan administrators can request PBGC’s help to improve funding status of plans or provide assistance on other issues. They may contact PBGC’s customer service representatives to obtain assistance on premiums, plan terminations, and general legal questions related to PBGC programs. PBGC has also assisted in the orderly shutdown of plans. The plans involved in these actions either merged with other multiemployer plans or purchased annuities from private-sector insurers for their beneficiaries. For example, PBGC facilitated the closeout of seven small multiemployer plans in 2010 that were receiving or expected to receive future financial assistance payments from PBGC and identified two additional plans for closeout in the future. According to PBGC, these small plan closeouts are part of an ongoing effort to reduce plan administrative costs borne by PBGC’s multiemployer program.

PBGC can also facilitate mergers between two or more multiemployer plans. According to PBGC officials, PBGC has received notice of 303 mergers since 2000, 5 of which PBGC facilitated by paying $8.5 million from the multiemployer insurance program to the merged plans. Plans considering a merger must request approval from PBGC and typically involve merging a plan with a low funding level with a plan having a more favorable asset-to-liability ratio. PBGC officials told us that they carefully consider each merger request to ensure that the merger creates a stronger plan that will sustain operations indefinitely. They further noted that PBGC wanted to be sure that plans that received funds in a facilitated merger did not end up accepting the money only to become a liability to PBGC in the near future, in effect causing PBGC to make loans twice to poorly managed plans.

PBGC can also partition the benefits of certain participants from a financially weak multiemployer plan under certain circumstances. Partition is a statutory mechanism that permits financially healthy employers to maintain a plan by carving out the plan liabilities attributable to participants “orphaned” by employers who filed for bankruptcy. Under ERISA, PBGC has the authority to order the partition of a plan’s orphaned participants either upon its own motion or upon application by the plan sponsor. Once a plan is partitioned, PBGC assumes the liability for paying benefits to the orphaned participants. ERISA specifies four criteria that dictate when PBGC can utilize its partitioning authority. PBGC may order a partition if: the plan experiences a substantial reduction in the amount of contributions that has resulted or will result from a case or proceeding under Chapter 11 bankruptcy with respect to an employer; the plan is likely to become insolvent; contributions will have to be increased significantly in reorganization to meet the minimum contribution requirement and prevent insolvency; and partition would significantly reduce the likelihood that the partitioned plan will become insolvent.

Like all multiemployer plans, the partitioned participants are subjected to ERISA’s multiemployer guaranteed benefit limits.

PBGC may order the partition of a plan after notifying plan sponsors and participants, whose vested benefits will be affected by the partition. Since the implementation of MPPAA in 1980, PBGC has partitioned two plans. In the most recent partition in July 2010, PBGC said it approved the move because, by removing 1,500 orphaned participants from the plan, PBGC was able to delay plan insolvency for at least 6 additional years and preserve full benefits for the approximately 3,700 workers and retirees of firms still contributing to the plan. Without partition, the plan would have become insolvent sooner and the federal benefit limits would have applied to all its retirees.

Pension Structures in Other Countries Provide Multiemployer Plans with Options to Improve Funding

The private pension systems in the countries we studied—the Netherlands, Denmark, the United Kingdom, and Canada—support industrywide, employer-based pension plans that share some common attributes with U.S. multiemployer plan structure. Each of the countries is a member of the Organisation of Economic Co-operation and Development (OECD) and supports a three-pillar pension system that consists of a basic state pension (e.g., similar to Social Security), private employer-based pensions (e.g., single- or multiemployer), and individual retirement savings (e.g., independent retirement accounts). While each of the countries we studied had a pension system with some unique characteristics, pension officials in some countries told us they faced common short-term and long-term challenges in securing pension benefits for participants, including plan underfunding and an aging workforce.

Other Countries’ Plans Are Subject to a Range of Funding, Reporting, and Regulatory Requirements

Minimum Funding Requirements

Three of the four countries that we studied reported they had recently implemented some form of minimum funding requirements for multiemployer plans, but the levels varied by country. Officials we spoke with told us that plans that fell below these funding thresholds were required to submit recovery plans to bring the funding levels back above the minimum level. Canada, Denmark, and the Netherlands required plans to be funded at a level of 100 percent or above. The United Kingdom recently suspended its minimum funding requirements in favor of plan- specific funding levels, and officials told us regulators still sought to maintain an aggregate funding level of 110 percent. Also, plans in the Netherlands are required to build funding reserves, or buffers, commensurate to the risk associated with their investment policies. Officials at the Dutch Central Bank told us plans must develop buffers for interest rate risk, private equity exposure, and hedge fund exposure.

Reporting Requirements

While the reporting requirements in these countries are not so different from those in the United States, multiemployer plans in some countries submit more frequent plan funding and actuarial reports to regulators. For example, in the Netherlands and Denmark, all plans are required to submit data on a quarterly and annual basis and plans in recovery status had, in some countries, additional reporting requirements. (See table 8.)

Some countries require plans to submit plan data electronically, which officials said allowed for real-time monitoring and transparency. For example, Danish plans are required to report market valuations of their assets and liabilities, which regulators said allowed them to identify plans at risk through market surveillance with minimal up-to-date information. The regulators told us they can take action as soon as a plan is in trouble and proactively notify plans of impending financial problems. In the United Kingdom, plan trustees are required to update their financial information electronically and can do so in real-time on the regulator’s information system. In the Netherlands, the Dutch Central Bank updates the aggregate funded status of plans on a quarterly basis and makes this information available on its public Web site.

Monitoring

These countries all monitored multiemployer plans for compliance and to determine plan funding and solvency risk. While the Netherlands and Denmark monitored the solvency risks of all plans, officials in both countries told us they also plan to develop a risk-based monitoring strategy, such as that used in the United Kingdom and Canada, which would target monitoring to plans that represented the greatest risk. Officials in these countries also had varying degrees of authority to intervene in the operations of multiemployer plans. (See table 9.)

Plans in Other Countries Have Options to Improve Funded Status

Multiemployer plans in the countries we studied have a number of options to improve and maintain their funded status, and a specific length of time allotted to recovery. (See table 10.) Some of the countries allow plans to increase contributions and reduce the rate of benefit accruals. In Denmark, regulators told us that plans that fail stress tests must adjust investments to resolve funding deficiencies within 6 months. The Netherlands, United Kingdom, and Canada have longer recovery periods and the Netherlands and Canada allow plans to reduce accrued benefits, including the benefits of retirees, although this step is seen as a measure of last resort.

Plans may also seek out mergers to reduce administrative costs and indirectly help preserve their funded status. Most of the countries we studied allow plan mergers, but some officials told us that they were infrequent. Canadian officials told us mergers of multiemployer plans would be difficult because plan membership is based on profession and multiemployer plans do not want to lose control of plan policy and governance, even if the plan would be financially better off after a merger. In Canada, when full mergers do occur, they said, they tend to result from a merger of unions. In the Netherlands, mergers occur, but the industry identification of multiemployer plans limits merger activity to plans in the same industry. In Denmark, single-employer plans can choose to merge with multiemployer plans even if the participants are not affiliated with the plan’s employer organization to take advantage of lower administrative fees. In the United Kingdom, there is a large trust that combines many single-employer and several multiemployer plans, benefiting all participating plans with lower costs and better investment opportunities.

Changes to U.S. Multiemployer Plan Framework Could Help to Protect Pension Benefits

Lack of Timely, Complete, and Accurate Information Hinders Ongoing Assessments of Multiemployer Plans

PPA requires multiemployer plans to file numerous notices with EBSA, IRS, and PBGC regarding their funded status. Our review of filings received by the three agencies found that plans are not all complying with these requirements. Moreover, we found that plans that did comply filed notices that varied in form and content. While current reporting requirements, if followed, would provide federal agencies with the data needed to monitor plan health, the current multiemployer plan framework requires plans to submit these data in a fractured format to three different agencies that do not share the information they receive. As a result, federal officials told us that their agencies are limited in their ability to assess the current and recent health of multiemployer plans.

Plans are required to certify their funding zone status each year with IRS, but they are not required to include their current funded percentage in this report, which would be helpful to officials determining the gravity of plans’ funding deficiencies. Also, IRS officials told us that some plans provided a brief letter identifying the zone status, while other plan’s submitted lengthy reports that detailed the assumptions and calculations used to determine the plan’s zone status. IRS officials told us that, while some plans provided their funded percentage in the certification notice, the agency did not track this information nor share the list of certifying plans with any other federal agency.

Within 30 days of certifying their funding zone status with IRS, PPA requires plans in critical or endangered status to submit a notice of their status to PBGC and EBSA, among others. In our review of data from 2008 and 2009 obtained from the three agencies, we found large discrepancies in the number of plans certifying with IRS and the number of plans submitting notices of critical or endangered status to PBGC and EBSA. For example, IRS data show that 461 of the 1,331 plans certified in critical status in 2009, but only 132 plans provided notices of their certified status to EBSA. Similarly, some plans that elected to freeze their current funding status did not file notices of this election with PBGC and EBSA, as required. (See table 11.)

In addition, for plan years beginning after December 31, 2007, all defined benefit plans are required to provide an additional notice—an annual funding notice—to PBGC, plan participants and beneficiaries, labor organizations, and, in the case of multiemployer plans, also to each participating employer. Like the notice of critical or endangered status, this notice must be provided within 120 days following the end of each plan year. EBSA can assess a civil penalty of $110 per day per participant against the plan administrator for failure to submit the plan’s annual funding notice to participants and beneficiaries. Among other things, the AFN provides recent information on a plan’s funded status, actuarial valuations of assets and liabilities, market valuations of assets, and a plan’s asset allocation. According to PBGC officials, only half of multiemployer plans filed these notices in the 2008 plan year and many plans had failed to file notices for the 2009 plan year within the 120-day statutory timeline. PBGC officials could not explain why plans failed to file the notices with PBGC. But while EBSA can assess a civil penalty for failure to submit an annual funding notice, PBGC officials did not share any information on plans’ annual funding notices with EBSA, making it unlikely that EBSA would have the information necessary to assess such a penalty.

Industry experts told us that the reporting requirements for multiemployer plans are confusing and duplicative, and that further consolidation of notices is needed. They noted that plan reporting requirements have increased significantly and become burdensome for plans to administer with each notice having a different recipient and due date. Even if participant notices were more clearly written, one expert said, there is nothing that an individual can do to address the critical or endangered status because benefits are collectively bargained. Moreover, participants do not need multiple notices each time an event occurs to change the long- term projections of their plan’s standing.

Current Multiemployer Framework Faces Challenges in Assisting Plans in Need

The statutory and regulatory framework guiding multiemployer plans is not structured to assist troubled plans, limits the actions agencies can take, and promotes little interaction among federal agencies that bear joint responsibility for monitoring and assisting these plans and their participants. We found that EBSA, IRS, and PBGC do not work together to share information received from plans and cannot determine whether all multiemployer plans are meeting applicable legal requirements.

First, PBGC’s involvement with multiemployer plans is mostly limited to the plans on its contingency list that are already insolvent and receiving financial assistance or pose a potential risk for future claims against PBGC. PBGC has authority to interact with plans on an ongoing basis, but has done so infrequently to date. For example, at a recent testimony before Congress, an EBSA official stated that one large multiemployer plan, the Central States Southeast and Southwest Pension Fund, did not meet the criteria for partition, despite having $2.1 billion in unfunded liabilities in 2009 and reportedly paying over 40 cents on every dollar to beneficiaries whose employers left the plan without covering their obligations. In fact, PBGC has only used its partition authority twice in its history and facilitated five plan mergers since 2000. Experts told us that plans could benefit from a greater level of PBGC interaction and a more flexible application of the tools available to PBGC. (See table 12.)

Second, the Employee Plans Compliance Unit (EPCU) at IRS, which is responsible for verifying that all multiemployer plans file annual actuarial certifications of funded status and confirming that the certifications are filed in a complete and timely manner, does not have the capacity to identify plans that fail to file or verify that all plans submitting certifications are indeed multiemployer plans. IRS officials told us they could not determine whether all multiemployer plans filed their actuarial certifications because they did not know the universe of multiemployer plans. Specifically, they said they did not have a complete list of all multiemployer plans in part because the data they use is taken from the plans’ Form 5500 filings, which included plans that had identified themselves as multiemployer plans but, judging from the plan name, were not (e.g., dental offices or 401(k) plans). Officials told us they hoped to get a more accurate data set in the future, but it would take several years before this would happen.

EPCU officials told us plan filings vary widely in scope and length. For example, some plans send a brief memo indicating their funding zone status; others send a long report detailing each of the actuarial assumptions used to determine the zone status. IRS officials told us some plans provided funded status as a percentage while others reported only zone status. IRS currently collects paper copies of the annual certifications. Officials said the annual certification notices required the same kind of information as the WRERA notices, which can be filled out and filed electronically on the IRS Web site. In March 2008, IRS proposed guidance to plans on the preferred format or content for the annual certification notices, but this guidance has not been finalized.

EPCU officials told us that they did not interact with either EBSA or PBGC with regard to the filing of certification notices. They said in the past they sent a few short summaries about the funding zone status certifications to IRS headquarters, but did not interact directly with EBSA or PBGC officials regarding the annual certifications. Moreover, IRS did not make certification data available to either EBSA or PBGC so they could reconcile the critical or endangered status notices with the number of certifications to determine if plans were complying with the law. EPCU officials said it would be beneficial for them to have direct contact with other federal agencies to share information on multiemployer plans.

Third, EBSA, which is responsible for assessing civil penalties for reporting violations against plans that do not file annual actuarial certifications of funded zone status, does not receive or actively seek out information from PBGC and IRS to enforce this penalty. PPA also requires plans that certify their funding zone status as either critical or endangered to send notices of endangered and critical funding status to EBSA, among others, but, unlike the annual certification of a plan’s status, there are no penalties associated with the failure to furnish endangered or critical status notices. EBSA’s Office of Participant Assistance scans the notices it receives and posts them on its Web site. Officials from EBSA’s Office of Regulations and Interpretation and the Office of Enforcement said they make no attempt to reconcile the status notices with the certifications filed with IRS. They said they had no interaction with IRS officials on these matters and noted some utility if IRS were to share certification data with EBSA.

Elements of Multiemployer Framework May Limit Protection of Benefits

The pension experts and plan practitioners that we interviewed identified several elements of the multiemployer framework that were restrictive and had the potential to affect plans’ ability to keep the pension promise to beneficiaries. These experts noted that each of these elements had unintended consequences made evident by the recent economic downturn. (See table 13.)

Conclusions

For decades, multiemployer plans have secured and provided an uninterrupted stream of pension benefits to millions of U.S. workers and retirees. Through collective bargaining, employers and employees worked to maintain their pension benefits despite changing economic climates and financial challenges. As a result, the vast majority of plans have remained solvent and relatively few plans have made claims for financial assistance from PBGC’s insurance program since its inception in 1980.

However, the recent economic downturn revealed that multiemployer plans, like most pension plans, were vulnerable to sudden economic changes and had few options to respond to the funding challenges highlighted by these economic conditions. The result was a steep decline in the funded status of most multiemployer plans—now below 70 percent in aggregate. In the short term, the majority of plans will have to make difficult decisions to improve their funding and protect against future declines. The multiemployer plan universe represents diverse groups of employers, participants and industries some of which may be better prepared to meet their future funding obligations. While some plans may be able to improve their funded status as the economy improves, plans in the worst condition may find that the current options of increasing employer contributions or reducing benefit accruals are insufficient to overcome the funding and demographic challenges they face. For these plans, the combination of the effects of the economic downturn, the decline in collective bargaining, the withdrawal of contributing employers, and an aging workforce has likely accelerated their path to insolvency. Without additional options to address their underfunding, or new employers joining the plans to replenish the contributions, many plans may find themselves at greater risk of insolvency and more likely to need PBGC financial assistance sooner rather than later. Such a situation would put additional stress on PBGC’s insurance program that, already in deficit, it can ill afford.

The current statutory and regulatory framework for multiemployer plans is not structured to assist troubled plans on an ongoing basis. PBGC, Labor and IRS are all required by law to collect various funding data from plans, and these data are often duplicative. Moreover, these agencies are not making full use of these data to mitigate the risks to participants or to enforce plan discipline. While PBGC monitors plans on an ongoing basis, it focuses on the short-term risks to the trust funds rather than outward on the long-term risks to participants or the impact on their benefits if their plans cannot pay the benefits they promised.

There are other approaches to consider. While some practices in the countries we studied, such as mandatory employer participation, would not be feasible in the U.S. context; others may have more ready application for addressing some challenges that U.S. multiemployer plans face. For example, the countries that we studied had pension regulators that interacted with plans on a frequent basis, collected timely and detailed plan information, provided a range of tools to plans to address plan underfunding and made information on the funded status of plans available to the public. Yet, there is no one-size-fits-all solution. For example, some plans’ greatest challenges may be their aging workforce or vulnerability to economic volatility, while others may face challenges inherent to the industries and geographical regions they serve.

Without more timely and accurate information on plan health, PBGC and other federal agencies can do little to help plans to respond to circumstances like the ones they experienced in the recent economic downturn. But collecting this information is not enough. The agencies must also incorporate this information into their monitoring and oversight efforts and use the most current data to inform their policies and risk assessments. To do this, the agencies responsible for multiemployer plans must work together to provide greater security for multiemployer plans, which for decades have limited the exposure to PBGC and the taxpayer.

Matters for Congressional Consideration

To provide greater transparency of the current status of multiemployer plans, assist federal monitoring efforts, and help plans address their funding deficiencies, Congress should consider: consolidating the annual funding notices and the PPA notices of critical or endangered status to eliminate duplicative reporting requirements; and requiring IRS, EBSA, and PBGC to establish a shared database containing all information received from multiemployer plans.

Recommendations for Executive Action

1. To improve the quality of information and oversight of multiemployer plans, we recommend that EBSA, IRS, and PBGC amend existing interagency memoranda of understanding to address, among other things, the agencies’ plans for sharing information they collect on multiemployer plans on an ongoing basis. Specifically, the agencies should address how they will share data: To identify the universe of multiemployer plans.

To reconcile similar information received by each agency.

To identify possible reporting compliance issues and take appropriate enforcement action.

The agencies should revisit this agreement periodically to determine whether modifications are required to ensure that each agency is able to carry out its responsibilities. 2. To collect more useful information from plans, the Secretary of the Treasury should direct the IRS to develop a standardized electronic form for annual certifications that requires plans to submit their funded percentage. 3. To implement better and more effective oversight practices, the Director of the PBGC should develop a more proactive approach to monitoring multiemployer plans, such as assigning case managers to work with the plans that pose the greatest risk to the agency and provide non-financial assistance to troubled plans on an ongoing basis.

Agency Comments and Our Evaluation

We provided a draft of this report to the Secretary of Labor, the Secretary of the Treasury, and the Director of PBGC for review and comment. Each agency provided us with written comments, which we reprinted in appendixes II, III, and IV of this report. In responding to the draft report, the agencies acknowledged the vital role of these plans in providing retirement security to millions of U.S. workers and retirees. PBGC further noted that the agency has limited information to analyze the health of multiemployer plans, and that additional information is needed to monitor plan health.

The three agencies also generally agreed with our recommendations to improve interagency information sharing and to take steps to acquire more current and accurate data on the status of multiemployer plans. The agencies noted, however, that in their view a new interagency MOU was unnecessary. The Department of the Treasury highlighted actions that the agency currently takes to coordinate with the other agencies. The Department of Labor provided an updated status of the actions that the agency has taken with regard to multiemployer plans. For example, EBSA said it recently initiated contact with IRS to begin work on reconciling certain multiemployer data. IRS and PBGC further stated that memoranda were already in place that could be amended to allow for better information sharing. While we are encouraged by these developments, we do not believe that separate arrangements among agencies will produce the kind of interagency cooperation needed to facilitate information sharing and effective ongoing monitoring of the health of multiemployer plans. Therefore, we continue to believe that, in order to foster meaningful interagency coordination, the agencies should either amend existing agreements or enter into new ones, as we are recommending. EBSA and PBGC also provided technical comments, which we incorporated in this report, as appropriate.

As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to relevant congressional committees, PBGC, the Secretary of Labor, the Secretary of the Treasury, and other interested parties. In addition, the report will be made available at no charge on the GAO Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-7215 or bovbjergb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

We were asked to answer the following research questions: (1) What is the current status of the nation’s multiemployer pension plans? (2) What steps does PBGC take to monitor the health of these plans? (3) What is the structure of multiemployer plans in other countries? (4) What statutory and regulatory changes, if any, are needed to help plans to continue to provide participants with the benefits due to them?

To identify the current status of the nation’s multiemployer pension plans, we interviewed officials and analyzed data and documents from PBGC, the Department of Labor’s Employee Benefits Security Administration (EBSA) and the Department of the Treasury’s Internal Revenue Service (IRS), and reviewed relevant industry studies and literature on multiemployer plans. To determine the recent funding status of multiemployer plans, we analyzed historical summary data published in PBGC’s annual data books and summary data from IRS on the annual notices of funding status certification submitted in 2008 and 2009. To corroborate these data, we analyzed notices of critical and endangered status and WRERA notices sent to PBGC and EBSA and published on EBSA’s Web site. To identify the demographics of multiemployer plans, including the number of plans, number of participants, and industry concentration of plans, we analyzed data published in PBGC’s annual reports and data books. To determine private-sector union affiliation, we analyzed data from the Bureau of Labor Statistics. We assessed the reliability of the selected data that we used from these sources by comparing the number of plans filing reports to federal agencies. We determined that, although the data were incomplete and had certain limitations, which we present in our report, they were sufficiently reliable for the purpose of making clear which federal agencies collect data and showing how these data are similar and how they differ. To supplement this quantitative analysis, we interviewed EBSA, IRS, and PBGC officials; and a diverse range of pension experts and multiemployer plan practitioners. We selected experts based on those who had published on multiemployer plans or whose names were referred to us by other interviewees, and we spoke to 48 experts. We analyzed their responses on the current status of plans, the impact of the recent recession, and the future outlook of multiemployer plans. As appropriate, we reviewed relevant federal laws and regulations that pertain to multiemployer plans.

To determine the steps PBGC takes to monitor the health of multiemployer plans, we interviewed PBGC officials and reviewed documentation on PBGC’s multiemployer plan monitoring, modeling, and assistance policies and procedures. We also reviewed relevant statutory and PBGC regulatory requirements with regard to multiemployer plans.

To understand the structure of multiemployer plans in other countries, we reviewed four countries selected because of their comparable multiemployer plan frameworks—the Netherlands, Denmark, United Kingdom, and Canada—and interviewed government officials, plan administrators and trustees, employer and union representatives, and other pension experts. We selected these countries after completing an initial review of employer-sponsored pension plan designs in Organisation for Economic Co-operation and Development (OECD) countries. We focused on OECD countries in order to increase our opportunity to identify practices used in countries with well-developed capital markets and regulatory regimes comparable, if not always similar, to the United States. We acknowledge that there may be relevant plan design features from a non-OECD country that we did not address in this report. Although we did not independently analyze each country’s laws and regulations, we collected information about each country’s multiemployer plan structure and interviewed government officials and pension experts and in each country. We relied on the expertise of staff in the U.S. State Department to identify potential interviewees in these countries and to schedule the interviews. We did not review the laws or requirements of those foreign countries mentioned in this report. Rather, we relied upon the descriptions and materials furnished by officials and experts of these countries.

To identify what statutory and regulatory changes, if any, are needed to help plans continue to provide participants with the benefits due to them, we reviewed pension literature and interviewed a variety of experts on multiemployer plans, including officials from EBSA, IRS, and PBGC; pension experts; and practitioners representing a range of industries and plan sizes. We selected experts based on those who had published on multiemployer plans or whose names were referred to us by other interviewees, and we spoke to 48 experts.

We conducted this performance audit from September 2009 through October 2010, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Appendix II: Comments from the Department of Labor

Appendix III: Comments from the Department of the Treasury

Appendix IV: Comments from the Pension Benefit Guaranty Corporation

Appendix V: GAO Contact and Staff Acknowledgments

Staff Acknowledgments

Individuals making key contributions to this report include David R. Lehrer, Assistant Director; Jonathan S. McMurray, Analyst-in-Charge; Robert Campbell; and Thanh Lu. Joseph Applebaum, Susan Aschoff, and Roger J. Thomas also provided valuable assistance.