Multiemployer Plans See Wild Funding Swings in First Half

Increased market volatility has led to dramatic swings in the funded levels for most US multiemployer pension plans over the past six months, according to consulting firm Milliman.

As of the end of June, the aggregate funded shortfall for US multiemployer pension plans widened by an estimated $26 billion to lower their aggregate funded percentage to 82% from 85% at the end of 2019, according to Milliman’s Multiemployer Pension Funding Study (MPFS).

Milliman noted that although all pension plans absorb market gains and losses over time, extreme market movements just before a plan’s measurement date can have a significant impact on its funding position and annual Pension Protection Act (PPA) zone status.

“The past six months have demonstrated why measurement dates matter,” Nina Lantz, a principal and consulting actuary at Milliman and co-author of the MPFS, said in a statement. Lantz added that while the firm’s year-to-date loss on its simplified portfolio is now 1.3%, the loss was approximately 13.4% as of March 31.

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“So the 70 plans in the MPFS with that [March 31] year-end date will complete their annual valuations and zone certifications when 2020 asset values are at their lowest for the year so far,” Lantz said. “This will unfortunately affect their funding position and zone status, despite the current market recovery in Q2 2020.”

Milliman estimates that the plans’ funding shortfall as of March 31 was approximately $200 billion with a funded status of 72%. It also said that plans in critical and declining status continue to see their funded statuses erode over time despite the market’s recovery. The firm attributed this to shifts in policy to invest in safer, lower-returning assets to try to preserve capital for as long as possible. It also said the funded percentage of noncritical and declining plans continues to be “almost entirely driven by investment performance.”

With Congress passing stimulus legislation to help the economy and provide financial assistance to unemployed Americans, Milliman said “the plight of multiemployer plans” has not gone unnoticed, with the House passing the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act, which contains proposals to address the challenges for multiemployer plans.

“The market volatility associated with the COVID-19 pandemic and the slow and inconsistent nature of states reopening from the shutdown leaves the future of multiemployer plans in a tenuous position,” said Milliman in its June MPFS. “The last six months have been extremely turbulent and, while the market has recovered some, there remains considerable economic and political uncertainty ahead.”

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Tags: Funded Ratio, Funding, Milliman, MPFS, Multiemployer, Multiemployer Pension Funding Study, Nina Lantz, Pension Protection Act, PPA

They say the stock market climbs a wall of worry. A lot of sophisticated investors are modeling for risks up ahead, ranging from a long coronavirus siege to even worse economic news.

But Bank of America Securities has three more risks that aren’t getting much, if any attention—and are entirely plausible. To the unit’s research chief, Jared Woodard, and his team, these “are surprises that could have big impacts on the markets.”

And why not? This century has already hit us with two massive surprises: a housing boom that poisoned the entire world financial system and almost destroyed it, and a pandemic that has disrupted how people live, killed hundreds of thousands, and upended the system yet again.

Here’s what, according to their research note, may knock us off our feet next:

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A vaccine conquers the virus, and soon. That would bring back a form of the world we used to know. “Financial assets are not priced for a return to normal,” BofA said. OK, this is a problem we’d all love to have.

Right now, pharma firms from Moderna to Regeneron are feverishly working on vaccines and treatments for COVID-19. Of course, there are the Russians, who are rushing their vaccine into use, to the dismay of many medical experts who fear it hasn’t been adequately tested for safety and effectiveness.

What would this all mean for investors? Surely, it would boost the market even higher. Asset allocation would shift, too. To the BofA research folks, “the risk worth considering is that an early vaccine could spark a significant tactical rotation out of deflationary defensives and into cyclical sectors.”

Election stalemate leads to House-selected president. Today, talk abounds about how the election might end up contested in the courts amid recounts, a true nightmare. How might it end up if no candidate got the needed 270 electoral votes?

According to the Constitution, the House would select the winner, with the stipulation that each state’s delegation gets one vote. So California, with 53 House members would count as much as Montana, with one. Result: Donald Trump would likely get re-elected. You think partisanship in Washington is bad now? The market will not like that kind of environment.

No new stimulus gets passed. A lot of federal rescue programs, enacted in the spring, are expiring. The extra $600 in unemployment benefits is now history. And the two sides of the debate—the GOP-run Senate and the Democrat-controlled House—are in a stalemate. As we pass Labor Day and the election season heats up, getting anything done on Capitol Hill will be unlikely. This will bring a lot of financial pain to many American households, and will no doubt be a bad influence on the economy. Not to mention stocks.

As BofA put the matter, “Only a market correction would wake policymakers from their dogmatic slumber. While others are hedging the election, consider preparing for a Q3 buying opportunity.”