Study: Multiemployer Plans Considering Changes in Wake of Poor Funding Status

(June 23, 2010) — According to a recent survey by SEI Global Institutional Solutions, 49% of US multiemployer defined benefit pension plans face funding ratios of 80% or less in 2010, with 67% of respondents focusing on liabilities over returns when setting their investment strategies.

“Clearly, multiemployer pension funds and their trustees were negatively impacted by the 2008 market declines and what we’ve found is that these funds are focusing much more on new strategies like liability-driven investment to better manage these plans moving forward,” said Jon Waite, director of investment management advice and chief actuary of SEI’s Institutional Group, to ai5000.

The study showed 26% of respondents’ plans were below 65% funded, putting them in the 2006 Pension Protection Act’s “red zone” category, and 23% were 65% to 80% funded, placing them in the PPA’s “yellow zone” category. The remaining survey respondents’ pension plans were above 80% funded.

The study also highlighted a greater openness to alternatives among multiemployer trustees, who have traditionally been relatively conservative when it comes to pursuing the asset class. Eighty-seven percent are invested in alternatives; of those, 61% had allocations to alternatives of 15% or less. Real estate was the most popular alternative investment, with 84% of respondents invested in the asset class, followed by hedge funds at 48% and private equity at 42%.

“A lot of these funds have been increasing their allocation to alternatives over the past year, with a much greater focus on how they’re managing their portfolios via outsourcing, for example, for improved cost-savings and expertise,” said Waite. “Given that we’ve seen nearly 40% of plans increase their alt allocations over the past year, we’re expecting to see this trend continue as multiemployer funds seek to control volatility and improve their funded status,” he noted.

The survey was conducted in May through research by questioning a select group representing 31 unique multiemployer pension funds. Of those individuals questioned, 39% were union trustees, 19% were management trustees, and 42% filled other pension administrative roles.