(April 10, 2013) – The Pension Benefit Guaranty Corporation’s (PBGC) multiemployer safety net program will likely be insolvent within 10 or 15 years, according to a study by the US Government Accountability Office (GOA).
If either of two major multiemployer plans go under, the report said the insurance fund could be tapped out in just two orthree years.
A possible solution: Convert defined benefit (DB) plans to variable benefit plans, where retirees’ income above a certain floor level depends on fund returns. This is a key feature of “flexible defined benefit plan design”-one of three strategies the GOA’s report suggested for safeguarding the PBGC’s long-term health.
“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,” the report stated. “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.”
Under one of the potential models cited by the GOA for multiemployer plans-a design from the public benefit consultancy Cheiron-members receive the greater of a conservative minimum benefit or variable payout accrued when investment returns exceed a certain rate (5%, for instance). Returns above a cap rate (e.g. 10%) would bankroll a rainy day fund for very bad years or unfavorable demographic changes.
Such a model would use a more conservative assumed rate of return that many multiemployer plans currently depend on. According to the GOA report, the variable benefit model would defend plans against market downturns and demographic shifts, so the PBGC wouldn’t have to.
“By minimizing risks to employers, a flexible DB model may strengthen employers’ commitment to the plan and reduce incentives for them to leave,” the report stated. 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.”
To encourage the adoption of variable benefit structures, the report said the PBGC could host a conference on plan design, or incentivize the move by charging variable benefit plans reduced premiums.
While this model would, according to the GOA, reduce the number of multiemployer plans falling back on the PBGC in the future, it might not save plans already in critical funding situations. Transferring investment risk from plan sponsors to members is another drawback.
On balance, however, the GOA deemed variable benefit pensions a robust strategy for solving the looming crisis.
The report gave a considerably less enthusiastic presentation of another potential approach: revising the capital requirements for insolvent employers withdrawing from multiemployer pension plans. Raising these requirements could improve plan funding, but with the drawback of discouraging new employers from joining plans in the first place, the GOA said.
The GOA composed its recommendations based on actuarial data for multiemployer plans, as well as interviews with plan sponsors, PBGC officials, academics, actuaries, attorneys, plan trustees, union representatives, and other stakeholders.
Read the Government Accountability Office’s entire report, “Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies,” here.