Fears over Future of US Multi-Employer Pensions

(July 2, 2013) — More than a third of people running multi-employer defined benefit pension plans in the US believe the system will not outlive the current financial strife, a survey has shown.

Some 37% of respondents to an annual survey by Fidelity affiliate Pyramis Global Investors said Taft-Hartley multi-employer plans had been buffeted by various pressures, including low interest rates and investment volatility. In addition to economic circumstances, respondents cited declining union membership, rising benefit obligations, legislative challenges, and the departure of sponsoring companies from the system as significant challenges.

“Our survey reflects many of the concerns Taft-Hartley plans have about the sustainability of the multi-employer model,” said Mike Jones, president and CEO of Pyramis. “Over the long term, however, respondents tell us they see a future of different models with changes in the responsibilities of different parties involved in the process.”

The plans with the worst funding levels, maybe unsurprisingly, showed the greatest concern for the survival of the system. Some 53% of plans with an 80% funded level or worse said the system was not sustainable, while, 55% of all respondents to the survey said their plan was financially strong.

The whole group expected changes to occur across the system as a whole-if not in their particular plan-which included raising retirement ages or shifting from a defined benefit plan to another structure. Some ventured that a type of hybrid scheme could be created to ease pressure on funding levels.

In the short term though, these pension plans are changing the way they invest to try and keep afloat, the survey revealed.  More than half of the Pyramis survey respondents said they would diversify further into alternative asset classes to make up funding shortfalls and manage volatility. Taft-Hartley plans already have one of the largest allocations to alternatives in the institutional investment sector.

Almost a quarter said they would invest in liquid assets, such as hedge funds, with just over a fifth opting for more illiquid investments.

A striking change for the sector has come with almost three-quarters of respondents reporting an adoption of outside assistance for its investment strategies. Some 41% of respondents said they had taken on a partial fiduciary management option.

Full results of the survey, which interviewed plans holding $150 billion, or a third of the sector’s assets, can be found here.