PensionsFebruary 27, 2020

Multiemployer Pension Funding Reaches Pre-Financial Crisis Levels

Double-digit asset gains boost aggregate funded ratio to 85% in 2019.

Reported by Michael Katz

Thanks to double-digit asset returns, the aggregate funded percentage of US multiemployer pension plans increased to 85% in 2019, up from 74% in 2018, and returning to pre-financial crisis levels of 2007, according to actuarial and consulting firm Milliman.

Milliman also reported that there is now a larger percentage of plans over 100% funded compared with 2007; however, struggling multiemployer pensions have not participated in the rebound due to plummeting discount rates as 104 plans are now below 50% funded, compared with just 28 in 2007.

Over the past decade, the weighted average discount rate has dropped approximately 50 basis points, and the aggregate funded percentage of the 130 plans in critical and declining status has been cut in half to 37% at the end of 2019 from 74% at the end of 2007.

“While about 130 plans continue on a path toward insolvency, the majority of non-critical plans have improved since 2007 and are at higher funding levels today,” Nina Lantz, a principal and consulting actuary at Milliman, said in a statement. “In addition to investment performance, many plans are seeing funding levels increase due to benefit and/or contribution adjustments made during the past decade.”

Milliman reported that the overall funding shortfall for all plans declined by approximately $69 billion to a total of $107 billion during 2019. The improvement of the aggregate funded percentage to 85% from 74% was attributed primarily to asset returns in 2019 exceeding expectations.

According to Milliman’s December 2019 Multiemployer Pension Funding Study, many plans are also improving because of benefit and contributions adjustments made over the years, and are currently using excess contribution income over operating costs to pay down their shortfalls.

However, despite these changes, it said that many plans continue to operate with negative cash flow as benefit payments plus expenses exceed contributions and therefore remain vulnerable to investment volatility. Milliman said plans that have already reduced benefits and/or increased contributions may not be able to weather another market downturn because there is less room for additional adjustments.

Actuarial consulting firm Cheiron reported in December that as many as 117 multiemployer pension plans covering 1.4 million participants are underfunded by $56.5 billion, and could become insolvent within the next 20 years. And to make matters worse, the Pension Benefit Guaranty Corporation (PBGC), the government lifeboat for struggling pensions, has reported that its multiemployer program is likely to become insolvent within five years.

“The 2008 market shock exposed the growing maturity of many multiemployer plans,” the Milliman study said. “Over the past 12 years, the plans that have been able to make the adjustments necessary to improve funding have separated themselves from the plans that could not, resulting in a wider disparity of plans.”

As a result, the rich have gotten richer while the poor have become poorer as the gap between the non-critical plans and critical and declining plans continues to widen. Although the aggregate funded percentage of the multiemployer plans is now the same as it was in 2007, the percentage of plans above 100% funded has increased to 39% from 26% while the percentage of plans below 50% funded has quadrupled to 8% from 2%.

“Non-critical plans have largely recovered from the global financial crisis,” the study said. “Critical plans are not quite back to the funding level they were at prior to the 2008 crash, and prospects for recovery remain tenuous.” Milliman said that part of the problem for lower funded plans is that excess investment returns have had a smaller impact as asset values fall.