Multi-Employer Pensions Divided Between Haves, Have Nots

Reports take half-empty, half-full view of pension funding.

Two recent reports that studied the funding levels of multi-employer pension plans alternately offer a half-empty, half-full view of the current health of defined benefit plans. Together, they depict a landscape where many pension funds are struggling, yet most of them are doing fine.

Financial analysis and actuarial consulting firm Cheiron recently released a study that found that as many as 114 multiemployer pension plans covering nearly 1.3 million workers are underfunded by $36.4 billion, and are expected to become insolvent within the next 20 years.

At the same time, Segal Consulting’s most recent survey of multiemployer pension plans’ funded status shows that the majority (65%) of more than 200 multiemployer pension plans are more than 80% funded. The report also found that for all plans in the survey, which have a total of $100 billion in assets and cover 2.3 million participants, the average funded level is 87% percent.

“The headlines that focus on financially troubled multiemployer pension plans miss the point that the majority are healthy,” said Diane Gleave, senior vice president and actuary for Segal.

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The Segal survey reported that since the financial crisis of 2008, the average funded percentage has been relatively stable, at between 85% and 89%. It also found that industries with a higher ratio of active to inactive participants tend to have better funding percentages. For example, it said that the entertainment industry, which on average has fewer than one inactive participant for each active participant, has an average funded level of 92%. However, the manufacturing industry, which has an average of 5.8 inactive participants for each active participant, has an average funded percentage of 79%.

On the other hand, the Cheiron report didn’t have quite as rosy a view of the health of multiemployer pension plans. It said that the multiemployer plans that reported that they are in “critical and declining” status have total assets of $43.5 billion against liabilities of $79.9 billion. And this doesn’t include plans that have already failed, or those that shut down because the employers withdrew from its pension.

The report also pointed out that the Pension Benefit Guaranty Corporation (PBGC) recently announced that it expects its insurance program for multiemployer pension plans will run out of money by the end of 2025. The PBGC covers 1,400 multiemployer pension plans with approximately 10 million unionized workers.

Cheiron said the underfunding of the troubled pension plans is due to the downturn of the stock market during the Great Recession, declining industries creating more retirees than workers, and employers exiting the plans either through bankruptcy or by withdrawing from the plans. It also found that just three of the pension plans account for $22.8 billion, or more than 62.5%, of the unfunded liability of the failing plans, and cover 603,000 participants, or more than 47% of the total workers and retirees covered by all of the declining multiemployer pension plans.

“Traditionally, participants in healthy multiemployer pension plans have been forced to pay for the guaranteed benefits of retirees and their families in failed plans,” said Joshua Davis, a principal consulting actuary at Cheiron. “If this happens again, it will push other plans into insolvency with terrible consequences for communities across the country.”

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Norway’s Sovereign Wealth Fund Returns 2.6% in Q2

Fund reports best half-year return in Norwegian kroner in its history.

Norway’s $977.4 billion Government Pension Fund Global returned 2.6%, or 202 billion kroner ($25.53 billion), in Q2 of 2017.

The fund had a market value of 8.020 trillion kroner as of June 30, of which 65.1% was invested in equities, 32.4% in fixed income, and 2.5% in unlisted real estate. Equity investments returned 3.4%, while fixed-income investments returned 1.1% for the quarter. Investments in unlisted real estate returned 2.1%, and the total return on investments was 0.3% higher than the return on the benchmark index.

“The stock markets have performed particularly well so far this year, and the fund’s return in the two first quarters was 6.5[%]. This gives a total return of 499 billion kroner, which is the best half-year return measured in Norwegian kroner in the history of the fund,” said Trond Grande, deputy CEO of Norges Bank Investment Management.

However, Grande added that “we cannot expect such returns in the future. The record-high return is primarily due to the fact that the fund has become so large.”

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The returns would have been even higher, however, the kroner appreciated against the main currencies during the quarter, which decreased the value of the fund by 32 billion kroner. In the second quarter, 16 billion kroner was withdrawn from the fund by the government.

While the fund said that the returns were driven by continued healthy growth in the global economy, it added that some macroeconomic data, especially for the US economy, were weaker than the market had anticipated. Growth expectations for emerging markets were mainly unchanged from the previous quarter, while those for developed markets improved, which was due to greater optimism in the euro area.

The strongest returns came from European equities, which returned 6.3%, and accounted for 36.6% of the fund’s equities at the end of Q2. The UK, which was the fund’s largest market in Europe with 9.7% of its equity investments, returned 3.3%, or 1.5% in local currency. North American stocks returned 0.7%, and comprised 38.6% of the equity portfolio. US stocks, which were the fund’s single-largest market with 36.4% of its equity investments, returned 0.8%, or 2.9% in local currency.

The health-care sector delivered the best return for the fund during the quarter, as health-care stocks returned 5.7%, spurred on by market expectations of stronger earnings in the sector. The fund said that the inability of the US Congress to significantly alter its health-care system’s regulatory framework was interpreted by the market as a continuation of stable operating conditions.

Industrials returned 4.9%, driven by an improved outlook for economic growth, particularly in Europe and emerging markets. Returns were strong in the industrial machinery sector, which was attributed to increased demand for construction machinery, and more stable demand for capital goods in the commodity industry. 

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