Strong Multiemployer Pension Funding Mostly Due to SFA Grants, Asset Performance

Average funding levels for multiemployer pension plans improved by 10 percentage points in a year through 2023, due primarily to grants from the Pension Benefit Guaranty Corporation and improved investment performance, a study from Milliman shows.

Average funding for multiemployer plans stood at 89% at the end of 2023, compared to 79% at the end of 2022. The report estimates that Special Financial Assistance grants awarded by the PBGC made up five percentage points of the 10 points of growth, and asset performance accounted for the remaining five.

Milliman’s data is based on Form 5500 data from the previous year, which is then rolled forward using standard actuarial assumptions.

The aggregate shortfall in funding fell to $87 billion in 2023 from $166 billion in 2022, and the percentage of overfunded plans rose to 37% from 27%.

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A total of 69 plans have received $54 billion in grants from the PBGC to cover about 775,000 participants under the Special Financial Assistance program in order to ensure the pension funds’ solvency through 2051. According to Tim Connor, one of the authors of the report, as well as data from the PBGC, 35 received $9 billion grants in 2022 plus $2 billion in 2023 through supplemental filings and another 34 received $43 billion in 2023.

The PBGC median estimate is that 211 plans will require $80 billion in grants under the SFA program. According to the study, 110 plans remain less than 60% funding and many are expected to apply for grants in 2024 and 2025.

The study says that 30 out of 148 plans that are funded at 120% or more have received SFA money. Connor notes however, that this may not reflect unpaid loan and restored benefit liabilities that the grants are intended to cover. Such exclusions would inflate the plan’s estimated funding level.

Connor also explains that that the funding levels of SFA plans in general can be distorted by another factor. Many plans adjusted their actuarial assumptions to be in compliance with the assumptions used by the PBGC in order to obtain SFA. Those assumptions might not yet have been disclosed on available 5500 filings due to the lag in reporting. Upon receiving SFA, they may alter their allocation, especially if they had a more aggressive mix than the PBGC will allow with SFA money. No more than 1/3 of SFA grants can be invested in “return seeking investments.”

Lastly, Connor says that many pension funds that receive SFA grants have large outflows, which is how some became insolvent in the first place. This can “magnify the impacts of investment risk,” Connor says, because “the impact of a large investment loss can be devastating with little time or resources to recover.”

Tags: Multiemployer Pension Plans, PBGC, SFA

Chris Ailman

Long-term investors often talk about trends in urbanization, globalization and investing across all asset classes. Some of these are “megatrends” – referencing the early 1980s social forecasting book of the same name – which represent a lasting change from a past norm that can represent both opportunity and risk.

At the California State Teachers’ Retirement System, we’re responsible for sustaining the trust and securing the financial future of more than 1 million educators and their beneficiaries. So, we’re always proactively tracking megatrends on their behalf.

We’re now facing a megatrend so large that it will dominate the investment landscape for the next 15 to 20 years. This megatrend is the ongoing and massive global energy transition. This is a huge wave creating substantial risk and opportunity for institutional investors across geographies, sectors and asset classes.

Research and demographics tell us humanity will need more and more energy in the future – especially if we hope to lift more people out of poverty. The world will require energy of all types, including fossil fuels, and even more energy than we have the capacity to produce today. But we also know that we must reduce the amount of greenhouse gases we emit to create that energy. This will require innovation, new energy sources, and changes to our distribution, storage and energy production methods. Most of all, it will require enormous financial commitments across the risk-return spectrum.

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That’s why understanding and responding to the energy transition is integral to the investment decisions we’re making at CalSTRS.

We’re seeing venture capital opportunities in innovative, high-growth technologies, and infrastructure investments that will help expand and scale transmission and distribution of cleaner energy. We see opportunities up and down the capital stack, with different risk-return profiles that are attractive to a long-term investor like CalSTRS. We recognize that this likely won’t be an easy or smooth transition because a big chunk of the United States and other nations are fully invested in current energy sources and structures, but nevertheless, the transition is essential.

I’ve heard people say that we’ve always used fossil fuels and we have enough energy for our needs. But let’s back up and look at history. While civilization has used coal for more than 2,000 years, the steam engine was not invented until the late 17^th century and its use only expanded during the Industrial Revolution in the mid-18^th century. The internal combustion engine was created in the late 19^th century. So, no, we haven’t always used oil or gas. We’ve only used fossil fuels for the last 150 years, which has resulted in a massive environmental impact. To survive, we need to mitigate greenhouse gas emissions and find more ways to generate, store and distribute energy. If we don’t radically change the way we live and create all types of energy, especially renewables, we will destroy our investment markets and our way of life.

The clock is ticking, and time is fleeting.

This extraordinary change must happen within the next 15 years to protect humanity from the worst effects of climate change by 2050. While that might seem far away, it’s well within the 30-year horizon of most pension plans and endowments.

Simply put, this megatrend is the biggest wave any of us will see in our working careers. As surfers will tell you, with any massive wave, timing is key. First, you must get up to speed. If you time the wave too early, it will crush you. If you’re too late, you’ll miss it completely. At CalSTRS, we’ve anticipated this wave for a long time, and we plan to keep riding it successfully in the years to come.

For all global investors, now is the time to analyze and comprehend all the facets of this transition, which will show up in every industry, in every part of the world and in every asset class. At CalSTRS, our number-one priority is making money for our teachers. And part of that is addressing the risks of climate change so we all have a bright future with a livable planet. See you in the surf!

Christopher J. Ailman is the CIO of the California State Teachers’ Retirement System.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS Stoxx or its affiliates.

Tags: CalSTRS, Christopher Ailman, energy transition, opinion, Sustainability

Commentary: Energy Transition Wave to Dominate Investment Landscape