A SURVEY OF ELECTRICAL WORKER PENSION PLANS 2014 EDITION

Transcription

1 A SURVEY OF ELECTRICAL WORKER PENSION PLANS 204 EDITION A summary and analysis of key trends in plan demographics, cash flows, investments, funding, costs, and expenses from for multiemployer defined benefit pension plans in the construction industry covering Electrical Workers

2 A SURVEY OF ELECTRICAL WORKER PENSION PLANS 204 EDITION Principal Author Jason Russell, F.S.A. Horizon Actuarial Services, LLC The National Electrical Contractors Association (NECA) and Horizon Actuarial Services, LLC (Horizon Actuarial) acknowledge the significant contributions made by the Mechanical Contractors Association of America, Inc. (MCAA) in developing the data and analysis used in this report. The information in this report draws heavily from the data and analysis in the original report by MCAA and Horizon Actuarial, which covers multiemployer plans in all construction industry trades. Thanks are also due to Cary Franklin, Stan Goldfarb, Lindey Loftin, and Michelle Wellen of Horizon Actuarial for their contributions to the analysis included in this report. NECA and Horizon Actuarial have made every effort to ensure that this publication is as complete and accurate as possible, but no warranty is implied. The information provided is on an as is basis. The authors of this publication, NECA and Horizon Actuarial, shall not have liability or responsibility for errors or omissions, nor is any liability assumed for damages resulting from the use of the information contained herein. The information contained herein should not be construed as legal or actuarial advice. The reader must consult with legal counsel to determine how laws discussed herein apply to the reader s specific circumstances. 203 and 204, National Electrical Contractors Association and Horizon Actuarial Services, LLC. All rights reserved. Published: March 205 National Electrical Contractors Association 3 Bethesda Metro Center, Suite 00 Bethesda, MD 2084 Phone: Horizon Actuarial Services, LLC 860 Georgia Avenue, Suite 700 Silver Spring, MD 2090 Phone: The material contained herein is owned by the National Electrical Contractors Association and Horizon Actuarial Services, LLC and is protected under the copyright laws of the United States of America (Title 7, United States Code) as well as the copyright laws of other jurisdictions. The duplication, reproduction, exhibition, dissemination, or transmission of this publication in any form by any means without the prior written consent of the NECA and Horizon Actuarial is strictly prohibited.

3 Table of Contents Introduction and Executive Summary Section VII: Plan Costs 20 Purpose Summary Highlights Section I: Methodology Form 5500 Data Data Quality Identifying Electrical Worker Plans Focus on Calendar Year Plans Snapshot Distribution Graphs Quartile Bar Graphs Section II: Plans in the Survey Plans by Asset Value Plans by Number of Participants Plans by Number of Employers Plans by Geographic Region Section III: Plan Demographics Annual Plan Costs Cost of Benefit Accruals Cost of Operating the Plan Cost of Unfunded Liabilities Adjustable Benefits Employer Contributions Contributions vs. Costs Section VIII: Plan Expenses Investment Fees PerParticipant Operating Expenses Total Operating Expenses Administrative and Other Expenses Professionals Fees Appendix : Plan Listing Electrical Worker Plans by State Plan Listing (Attachment) Types of Participants Number of Participants Participant Ratios Section IV: Plan Cash Flows 0 Types of Cash Flows Median Cash Flows Net Cash Flows as a Percentage of Assets 0 0 Section V: Plan Investments 2 YearbyYear Returns Annualized Returns Expected Returns Section VI: Plan Funding 5 Funded Percentages PPA Certification Status Correcting Funding Shortfalls under PPA Funding Relief: WRERA 2008 Funding Relief: Pension Relief Act of

4 Introduction and Executive Summary The National Electrical Contractors Association and Horizon Actuarial Services, LLC (Horizon Actuarial) have partnered to build this survey of historical data for multiemployer pension plans covering Electrical Workers in the construction industry. The data in this second edition of the inventory was built during the summer of 204. The data in the inventory is based on publicly available information from Form 5500 filings. Purpose The purpose of this report is to summarize and analyze key trends in demographics, cash flows, investments, funding, and costs for multiemployer pension plans covering Electrical Workers (members of the International Brotherhood of Electrical Workers, or IBEW ) in the construction industry over the tenyear period from 2003 through 202. By analyzing these trends, users of this report can better understand how these plans have evolved over the past decade and where they may be headed in the future. This report also examines investment fees and operating expenses. If you are a trustee of an Electrical Worker plan, you may find this section of the report useful as a comparison tool. Attached as an appendix to this report is a listing of the plans included in the survey. If you are an employer participating in one or more of these plans, the information in this listing may help you comply with the disclosure requirements for multiemployer plans required by the Financial Accounting Standards Board (FASB). Note that this survey does not include plans covering Electrical Workers that are outside of the construction industry (for example, in the manufacturing or entertainment industries). Summary The period from 2003 through 202 was turbulent for pension plans in general. Financial markets have been volatile, and 2008 saw the biggest market collapse since the Great Depression. Further, demographics have worsened, as the number of actively working participants has shrunk relative to the inactive and retired participants in these plans. This makes it more and more difficult for plan trustees to correct any funding shortfalls by looking only to increase contribution rates. It should come as little surprise that this report shows the same trends for Electrical Worker plans. However, Electrical Worker plans have shown great resilience in many cases, more so than for multiemployer plans in general, or for plans covering all trades in the construction industry. Highlights The following are highlights from the 204 edition of the Electrical Worker plan survey: Total number of plans: Based on the latest available Form 5500 data (in most cases, this is for plan years ending on or about December 3, 202), there were 22 multiemployer defined benefit pension plans in the construction industry covering Electrical Workers. Only plans with asset values greater than zero were included in the survey. Total assets and covered participants: These 22 plans have total assets of roughly $33 billion, and they cover over 800,000 participants and their beneficiaries. National Electrical Benefit Fund (NEBF): The NEBF provides supplemental retirement benefits to Electrical Workers, many of whom have accrued benefits under other plans. The NEBF has roughly $ billion in assets and covers over 500,000 participants and beneficiaries. Most of the participants and beneficiaries covered under the NEBF are also covered under regional or local Electrical Worker plans. Number of participating employers: The median Electrical Worker plan has 52 participating employers. The NEBF has nearly 0,000 participating employers. Maturing plan demographics: Over the past decade (2003 through 202), few Electrical Worker plans saw increases in the number of participants who are actively working and having contributions made on their behalf. In fact, most plans saw decreases in the number of active participants. At the same time, most plans saw increases in the number of participants who are not actively working, including those who have retired and who are receiving benefits. Increasingly negative cash flows: Similarly, over the past decade, most plans have seen greater

5 Introduction and Executive Summary increases in their cash outflow relative to cash inflow. The increase in net cash outflow is due primarily to shifting demographics, with more and more participants retiring and beginning to receive benefits. For most plans, increases in benefit payments have outpaced increases in contribution rates (which may have been adopted to make up for funding shortfalls), resulting in greater reliance on investment returns to grow or preserve asset values. Volatility with plan investments: Investment returns over the past decade were quite volatile and included the biggest collapse in the financial markets since the Great Depression. The median investment return for Electrical Worker plans for calendar year 2008 was 23.2%. The median annualized return over the tenyear period from January, 2003 through December 3, 202 was 6.3%. Comparison against other construction industry plans: As shown throughout the report, Electrical Worker plans tend to have more favorable trends with respect to demographics and cash flows, when compared to plans covering other trades in the construction industry. Differences are less significant when comparing investment returns. Improving plan funding: Plan trustees have taken significant action to improve their plans funding levels in the wake of the 2008 market collapse. At the end of 202, the median funded percentage was 78.5%. This is a significant improvement over the median funded percentage at the end of 2008, which was 69.0%, still far short of the 86.3% median funded percentage at the beginning of Improving PPA zone status: Similarly, in 2009 (immediately following the 2008 market collapse), 48.% of plans were in the green zone under the Pension Protection Act of 2006 (PPA); the remaining 5.9% of plans were in endangered status or critical status. For 202, the percentage of plans in the green zone increased to 66.0%, leaving 34.0% of plans in endangered status or critical status. While investment gains after 2008 were a major factor in this shift, actions by plan trustees to improve their plans funding levels were also significant. 2

6 Section I: Methodology This section of the report provides an overview of the methodology used in building the inventory and performing the analysis. It also describes how to read the graphs used throughout the report. Form 5500 Data Seven months after the close of its plan year (nine and a half months, with extension), every qualified pension plan must file a Form 5500 with the Internal Revenue Service (IRS) and the Department of Labor (DOL). The purpose of the form is to demonstrate that the plan has met the applicable requirements under the Internal Revenue Code and the Employee Retirement Income Security Act of 974 (ERISA). The inventory of construction industry pension plans is based on data from Forms 5500, which are available to the public. Judy Diamond Associates maintains a searchable database of Form 5500 data, which was used to construct the inventory. Data Quality The inventory is only as good as the Form 5500 data. If a plan sponsor filled out a portion of the Form 5500 incorrectly, the errors will likely carry through to the inventory, and perhaps to the analysis. However, since this report investigates general trends and averages, the effects of such errors should be minimal. Also, in certain cases, adjustments were made to correct for missing or questionable data. In other cases, plans with missing or questionable data were simply excluded from the analysis for that plan year. Please keep these considerations in mind when reviewing the results in this report. Identifying Electrical Worker Plans The first step in constructing the inventory was to identify the multiemployer defined benefit pension plans in the construction industry, and which of those plans cover Electrical Workers. Using Form 5500 data, it is relatively easy to identify which plans are defined benefit pension plans and which are multiemployer plans. However, it is more challenging to identify which plans are in the construction industry or cover Electrical Workers. Identifying the relevant plans was done largely using the names of the plans and their sponsors. The list of Electrical Worker plans developed based on Form 5500 data was reconciled against the list of known construction industry plans covering Electrical Workers held by NECA. Number of Plans in the Survey The 204 edition of the survey includes 22 construction industry plans covering Electrical Workers that have a recent Form 5500 filing (for the 20 or 202 plan years) and an asset value greater than zero. For comparison, the 203 edition of the survey included 23 plans. A merger of 3 plans covering members of the same local union resulted in a decrease in the total number of plans by 2. This decrease was partially offset by the addition of plan that was previously excluded due to missing data. The result was a net decrease of in the total number of plans. Focus on Calendar Year Plans Exhibit.0 below shows the distribution of plans by their plan years. Nearly half of the plans in the inventory with recent Form 5500 filings have calendar year plan years, in other words, plan years that begin in January and end in December. The rest have plan years that differ from the calendar year. Exhibit.0 Plan Year Beginning Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW September (3.3%) November (2.5%) December (.6%) Total Plans: 22 January (47.5%) February (.6%) March (0.8%) April (4.%) May (6.6%) June (.5%) July (5.6%) August (0.0%) October (4.9%) Not Specified Source: Form 5500 Data 3

7 Section I: Methodology Many exhibits in this report include all plans in the inventory, regardless of their plan years. This gives the largest sample size. However, certain exhibits that examine historical trends focus only on plans with calendar year plan years. There are two reasons for doing this. One, not all plans have filed a Form 5500 for their 202 plan years at the time the data was gathered. Therefore, including only calendar year plans (again, about half of the plans in the inventory) gives a more consistent sample. If all plans were included, there might be odd changes in results from 20 to 202, due to the fact that many plans are not included in the 202 results. Two, focusing on calendar year plans may make it easier for the reader to make comparisons against his or her own plan(s) or the broader market. This is especially true when analyzing investment returns and funding results. Snapshot Distribution Graphs This report analyzes both historical trends for Electrical Worker plans, as well as distributions at a specific point in time. Snapshot distribution graphs are used to review the distribution of results at a specific point in time. See the sample snapshot distribution graph to the right, which shows the distribution of construction industry plans covering Electrical Workers (IBEW members) by asset value. This graph is also included later in the report as Exhibit 2.0. Note that beside each category, the graph lists the percentage of plans in the population that fall into that category. For example, in the sample graph at right, there are 7 plans that fall into the category of $500M to $999M, which represents 5.7% of the plans in the inventory. The percentages may not perfectly add to 00.0% due to rounding. $5.00B or more (0.8%) $2.00B to $4.99B (0.8%) $.00B to $.99B (.6%) $500M to $999M (5.7%) $200M to $499M (3.%) $00M to $99M (20.5%) $50M to $99M (2.3%) $25M to $49M (9.7%) $5M to $24M (4.8%) Less than $5M (.6%) Asset Values Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW Earlier in this section of the report, a snapshot distribution graph reviewed the number of plans by their plan years. Later in the report, snapshot distribution graphs will review plan size (such as asset value, number of participants, and number of employers), investment fees, and operating expenses. When reviewing the snapshot distribution graphs, note that the scale often widens as the plans get larger. This makes the exhibit easier to read, and keeps very large plans from skewing the scale. In general, snapshot distribution graphs will include all 22 Electrical Worker plans in the inventory that filed a Form 5500 for the 20 or 202 plan years. The graphs show the latest available data. Plans with missing data are excluded Asset Values: Median = $86M Average = $267M Total Plans: 22 Source: Form 5500 Data 4

8 Section I: Methodology Quartile Bar Graphs To analyze historical trends, this report will often use quartile bar graphs. This will allow us to examine the range of results over the last ten years for the plans in the survey. See the sample quartile bar graph below, which shows net investment returns over the last ten years. Note the following: The bars on the graph are divided into four sections. These represent the top (blue), second (purple), third (green), and bottom (red) quartile results. The gold line ( ) running between the second and third quartiles represents the median or 50th percentile results. Note that these results are also boxed in the table of numbers below the quartile bars. Most outliers are excluded by showing only results between the 95th and 5th percentiles. Therefore, the top quartile actually shows results from the 75th percentile to the 95th percentile, and the bottom quartile actually shows results from the 25th percentile down to the 5th percentile. The numbers corresponding to the quartiles are shown in the table below the graph. The median results are outlined in gold. The header will include a label indicating which plans are included in the exhibit (such as industry, plan size, or trade). In the bottom left corner, there will be a label if the exhibit includes only calendar year plans. The number of plans included is shown just below the years. A plan may be excluded from the sample in any given year due to missing or questionable data. That is a big reason why the number of plans changes year after year. To a lesser degree, plan terminations and mergers cause the counts to change. Because not every plan has filed a Form 5500 for its 202 plan year, the number of plans included in the 202 results will be lower, unless the graph considers only plans with calendar year plan years. For example, the quartile bar graph below shows historical net investment returns for construction industry plans covering Electrical Workers (IBEW members). Only results for plans with calendar year plan years are included. Even though results above the highest 5 percent or below the lowest 5 percent of results are not shown, sometimes outliers still exist. This is especially true in the upper end (when the blue bars are very long). This graph is also included later in the report as Exhibit 5.0. Net Investment Returns Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW 30.0% 20.0% 0.0% 0.0% 0.0% 20.0% 30.0% Plan Year Beginning Number of Plans th Percentile 23.9% 3.3% 8.% 4.8% 9.8% 4.4% 24.8% 4.8% 3.4% 3.9% 75th Percentile 9.% 0.5% 6.7% 2.8% 7.4% 2.4% 20.9% 3.4%.7% 2.9% 50th Percentile 7.6% 9.% 6.0%.3% 6.5% 23.2% 6.5%.9% 0.4%.5% 25th Percentile 5.3% 7.4% 4.7% 9.9% 5.8% 24.7% 3.8% 0.8%.0% 0.0% 5th Percentile.% 6.0% 3.2% 7.8% 4.4% 28.% 8.5% 8.2% 3.4% 7.8% Calendar Year Plans Only Source: Form 5500 Data 5

9 Section II: Plans in the Survey There are 22 construction industry plans covering Electrical Workers that filed a Form 5500 for the 20 plan year or later. This section shows the distributions of those 22 plans by geographic region, asset value, number of participants, and number of employers. In total, these 22 plans have roughly $33 billion in assets, and they cover over 800,000 participants and their beneficiaries. These totals are for plan years ending on or about December 3, 202. Plans by Asset Value Exhibit 2.0 below shows the distribution of Electrical Worker plans by asset value. The assets are market values of assets as of the end of the latest plan year for which a Form 5500 was filed. For example, for a plan year beginning on January, the latest Form 5500 was filed for the plan year beginning January, 202 (the 202 plan year), and the asset value would be as of December 3, 202. For a plan year beginning on October, the latest Form 5500 was probably filed for the plan year beginning October, 20 (20 plan year), and so the asset value would be as of September 30, 202. Exhibit 2.0 $5.00B or more (0.8%) $2.00B to $4.99B (0.8%) $.00B to $.99B (.6%) $500M to $999M (5.7%) $200M to $499M (3.%) $00M to $99M (20.5%) $50M to $99M (2.3%) $25M to $49M (9.7%) $5M to $24M (4.8%) Less than $5M (.6%) Asset Values Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW The 22 plans in the inventory had a median asset value of $86 million. The average asset value was $267 million, skewed by very large plans in the inventory, in particular the National Electrical Asset Values: Median = $86M Average = $267M Total Plans: 22 Source: Form 5500 Data Benefit Fund (NEBF). The NEBF is discussed in more detail later in this section. There were plans with asset values of at least $500 million. There were 4 plans with asset values of at least $ billion. There were 4 plans with asset values of at least $00 million but less than $500 million. There were 70 plans with assets less than $00 million. There were only 2 plans with assets less than $5 million. Plans by Number of Participants Exhibit 2.02 shows the distribution of plans by total number of participants as of the end of the latest plan year for which a Form 5500 was filed. Participant counts include active participants, inactive participants with vested benefits, retired participants, and beneficiaries. See Section III for definitions of the different types of participants. Exhibit 2.02 Number of Participants Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW 50,000 or more (0.8%) 25,000 to 49,999 (0.8%) 0,000 to 24,999 (2.5%) 5,000 to 9,999 (6.6%) 4,000 to 4,999 (4.%) 3,000 to 3,999 (9.%) 2,000 to 2,999 (9.%),500 to,999 (9.9%),000 to,499 (8.2%) 500 to 999 (27.3%) 00 to 499 (.6%) Less than 00 (0.0%) Not Reported The median number of participants and beneficiaries covered under Electrical Worker plans is,294. The average number of participants (again, skewed by the NEBF and other larger plans) is 6,769. Over half of the plans, 69 in total, cover fewer than,500 participants. There were 5 plans covering at least 0,000 participants. There were zero plans covering fewer than 00 participants Participant Counts: Median =,294 Average = 6,769 Total Plans: 22 Source: Form 5500 Data 6

10 Section II: Plans in the Survey Plans by Number of Employers Exhibit 2.03 shows the distribution of construction industry plans by number of participating employers. Exhibit 2.03 Number of Employers Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW 2,000 or More (0.8%),000 to,999 (0.0%) 500 to 999 (3.3%) 300 to 499 (2.5%) 200 to 299 (8.2%) 50 to 99 (7.4%) 00 to 49 (9.0%) 75 to 99 (9.0%) 50 to 74 (2.3%) 25 to 49 (36.9%) 0 to 24 (8.2%) 2 to 9 Employers (.6%) Employer (0.8%) Not Reported The median number of participating employers in Electrical Worker plans is 52. The average (skewed by the NEBF and other larger plans) is 83. Nearly half of plans, 58 of 22, have fewer than 50 participating employers. There were only 3 plans with fewer than 0 employers; plan had only participating employer. Only one plan, the NEBF, has at least,000 participating employers. In fact, the NEBF has nearly 0,000 participating employers. Plans by Geographic Region Exhibit 2.04 shows the number of Electrical Worker plans by geographic region. In addition to the number of plans, this exhibit shows the aggregate asset values (in millions of dollars) and number of covered participants and beneficiaries. Note that figures for the National Electrical Benefit Fund (NEBF) are shown separately Employer Count: Median = 52 Average = 83 Total Plans: 22 Source: Form 5500 Data Exhibit 2.04 Number Total Number of Region of Plans Assets ($M) Participants New England 9 $,050 4,63 MidAtlantic 37 6,246 96,396 Midwest 38 6,565 93,5 South ,232 West 24 7,409 90,229 Subtotal 2 $ 2,79 3,62 NEBF 0,833 54,60 Grand Toal 22 $ 32, ,78 Technical Note: National Electrical Benefit Fund The NEBF provides supplemental retirement benefits to Electrical Workers and their beneficiaries across the nation. As shown above, the 2 plans other than the NEBF have total assets of almost $22 billion and cover about 32,000 participants and their beneficiaries. The NEBF itself has assets of roughly $ billion and covers 54,000 participants. Many of the participants and beneficiaries covered under regional or local Electrical Worker plans are also covered under the NEBF, and vice versa. Unfortunately, the data does not indicate which participants and beneficiaries are covered only under a regional or local plan, and which are covered only under the NEBF. However, it can be deduced that in total, Electrical Worker plans cover at least 54,000 participants and beneficiaries. For reference, the following table shows the postal codes of the states (as well as the District of Columbia) included within each region. Region New England MidAtlantic Midwest South West States Included CT, ME, MA, NH, RI, VT DE, DC, MD, NJ, NY, PA, RI, VA, WV IA, IL, IN, KS, MI, MN, MO, ND, NE, OH, SD, WI AL, AR, FL, GA, KY, LA, MS, NC, NM, OK, SC, TN, TX AZ, AK, CA, CO, HI, ID, MT, NV, OR, UT, WA, WY See the appendix to the report for a listing of Electrical Worker plans by state, as well as a summary of plans, total asset values, and covered participants by state. 7

11 Section III: Plan Demographics Having favorable demographics is a key factor in the longterm sustainability of a pension plan. In general, it s better for a plan s overall population to have a higher proportion of younger, working participants than older, inactive or retired participants. This section of the report reviews plan demographics and how they have changed over the past decade. Types of Participants The following are definitions of the different types of participants shown in the exhibits in this section. Active participants are those individuals who were working enough, as of the end of the plan year, to earn service under their plan. Inactive participants are those individuals who were not working as of the end of the plan year, but who are entitled to vested benefits due to their prior service under the plan. Inactive participants include: o o o Deferred Vested participants, who are entitled to vested benefits that are deferred to a future retirement date. Retired participants, who are currently receiving benefits from their plan. Beneficiaries, who are either receiving survivor benefits earned by a deceased participant, or who are entitled to future survivor benefits. Exhibit 3.0 Number of Participants Exhibit 3.0 below shows the median participant counts for Electrical Worker plans over the tenyear period from 2003 through 202. Participant counts are those reported on the Form 5500 and are as of the end of the plan year. The median number of participants stayed essentially level over the past decade, decreasing slightly from,23 at the end of 2003 to,88 at the end of 202. However, note that there was a decrease in active participants that was offset by an increase in inactive participants. Specifically, the median number of inactive participants with deferred vested benefits increased from 47 to 25 over the period from 2003 to 202. The number of retired participants increased from 259 to 324, and the number of beneficiaries of deceased participants increased as well, from 59 to 75. There was a large spike in counts for deferred vested and retired participants from 2008 to 2009, likely due to a drop in available work and an increase in retirements among those who were eligible. While the median number of inactive participants increased over the past decade, the median number of active participants decreased from 748 to 538, with some fluctuations from year to year. Observation: Number of Participants The number of active participants is declining or remaining steady, while the number of inactive participants is getting larger. This is not a favorable trend for the long term. Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW,400,200, Plan Year Beginning Number of Plans Active Deferred Vested Retired Beneficiaries Total Participants Median Participant Counts (End of Plan Year) ,23,62,92,69,7,48,284,239,244,88 8 Source: Form 5500 Data

12 Section III: Plan Demographics Participant Ratios Another way to analyze plan demographics is to look at the ratio of active participants to inactive participants. In general, the higher the ratio of active participants to inactive participants, the easier it is for a plan to correct any funding shortfall by increasing contribution rates or decreasing future benefit accruals. On the other hand, a lower ratio usually means that it is more difficult for a plan to improve funding through these means. As a pension plan matures, the ratio of active participants to inactive participants will naturally decline. Such changes can be manageable if they occur gradually. However, sudden shifts in demographics due to sharp declines in employment levels are very difficult to manage. Nearly every construction industry pension plan took a hit to its demographics following the 2008 market collapse. This was made much worse by the severe losses to plan assets. Observation: Participant Ratios Pension plan demographics have steadily worsened over the past decade, with a sharp decline after With inactive participants outnumbering active participants more every year, most trustees will find it increasingly difficult to improve their plan s funded status only by increasing contribution rates or decreasing future benefit accruals. Exhibit Plan Year Beginning Number of Plans 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile Exhibit 3.02 below shows the distribution of these participant ratios for Electrical Worker plans from 2003 through 202. Focusing on the median results: Participant Ratios: Actives to Inactives (End of Plan Year) Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW At the end of 2003, the median ratio of active participants to inactive participants was.5. In other words, there were.5 participants who were actively working and having contributions made on their behalf for each participant who was not working. There was a sharp decline in the median ratio from 2008 to 2009, from.6 to.0. By the end of 202, the median ratio had declined further, to In other words, for the median Electrical Worker plan at the end of 202, there were about 9 active participants for every 0 inactive participants. It is important to note that participant ratios can vary significantly from plan to plan. For example, by December 3, 202, 5% of Electrical Worker plans have participant ratios of.53 or greater, and 5% of plans have ratios of 0.39 or lower. Comparison Against Other Plans Electrical Worker plans have generally more favorable demographics than other construction industry plans. For example, at the end of 202, the median participant ratio for Electrical Worker plans is 0.86, compared with a median participant ratio of 0.69 for all construction industry plans Source: Form 5500 Data 9

13 Section IV: Plan Cash Flows A plan s cash flows are very closely tied to its demographics. As retired participants begin to outnumber active participants, benefit payments to retirees exceed contributions being made on behalf of the active participants. If contributions paid into the plan fall short of cash paid out of the plan, the difference must be made up by investment income, or else the plan s assets will shrink over time. Types of Cash Flows The following are definitions of the different types of cash flows shown in the exhibits in this section. Contributions are made by employers on behalf of the participants in the plan who are actively working. In most cases, this is the sole source of cash in for the plan. Benefit Payments are made by the plan to retired participants and beneficiaries of deceased participants. This is the main source of disbursements, or cash out for the plan. Operating Expenses include the cost of administration, professionals fees (such as for attorneys, auditors, actuaries, and consultants), and insurance and PBGC premiums. They exclude investment fees. Operating expenses are another source of cash out for the plan. If contributions to the plan exceed benefit payments and operating expenses, then the plan has a positive cash flow. On the other hand, if contributions to the plan do not cover benefit payments and operating Exhibit 4.0 expenses, then the plan has a negative cash flow. As plans mature, their cash flows tend to become increasingly negative. Median Cash Flows Exhibit 4.0 below shows the median cash flows for Electrical Worker plans over the tenyear period from 2003 through 202. The median employer contributions increased over the past decade, from $2.72 million in 2003 to $4.37 million in 202. This trend is likely driven by increases in employer contribution rates rather than increases in work hours. At the same time, plan disbursements also increased over the past decade, from $4.49 million in 2003 to $6.59 million in 202. Net cash flows have become increasingly more negative, with the shortfall growing from $.76 million in 2003 to $2.23 million in 202. Note, however, that the shortfall decreased from 20 to 202. The decrease was driven by an increase in employer contributions, which could be due to increases in work levels as well as contribution rates. Technical Note: Cash Flow Data Some of the fluctuations in cash flows year after year are attributable to changes in the number of plans in the study and not necessarily to actual trends. For example, note that the number of plans excluded due to missing or questionable data increased from 2007 to 2008, which was a big cause for the drop in benefit payments between those years. Median Cash Flows ($Millions) Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW Net Cash Flow (%) % % % % % % % % Plan Year Beginning Number of Plans Contributions Disbursements Net Cash Flow ($) (.76) (.59) (.3) (.39) (.32) (.54) (2.20) (2.25) (2.48) (2.23) Net Cash Flow (%) 2.% 2.0% 2.0%.9%.4%.5% 2.7% 2.7% 2.2% 2.5% Source: Form 5500 Data 0

14 Section IV: Plan Cash Flows Cash Flows as a Percentage of Assets Another way to analyze the effects of positive or negative cash flows on a plan is to express the net cash flow as a percentage of plan assets. For a plan with a negative cash flow, this percentage represents the return on investments that is needed to keep the plan s asset value from declining. For example, a plan with a negative cash flow of 3.0% of assets must have an investment return of at least 3.0% in order to avoid a decline in its asset value. Exhibit 4.02 shows the distribution of net cash flows as a percentage of plan assets for Electrical Worker plans from 2003 through 202. Focusing on the median results, the negative cash flow increased from 2.% of plan assets to 2.7% of plan assets from 2003 to 200, with a spike from 2008 to The median negative cash flow improved to 2.2% of assets by 20, likely as a result of actions taken by plan trustees to improve funding, such as increases to employer contributions and reductions in participant benefits. As a result of relatively flat investment returns during 20, the median net negative cash flow worsened to 2.5% for 202. There is a wide range of results. For example, at the 95th percentile, there are plans that have annual positive cash flow that is almost 4% of plan assets. At the 5th percentile, there are plans that have annual negative cash flow that exceeds 8% of plan assets. Plans with such negative cash flows are likely to have asset values that decline over time. Comparison Against Other Plans Electrical Worker plans have generally more favorable cash flows than other construction industry plans. For example, at the end of 202, the median negative cash flow for Electrical Worker plans is 2.5% of assets, whereas the median negative cash flow for all construction industry plans is 3.2% of assets. Observation: Cash Flows Benefit payments (cash out) will exceed contributions (cash in) more and more as plans mature. This creates an increasingly negative cash flow, meaning that most plans have to rely more on investment returns to remain solvent. Exhibit % 4.0% 2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 0.0% 2.0% Plan Year Beginning Number of Plans 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile Net Cash Flow as a Percentage of Assets Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW % 2.4% 3.4% 3.9% 3.3% 3.6% 4.% 3.7% 3.4% 3.8% 0.3% 0.5% 0.5% 0.2% 0.3% 0.4% 0.4% 0.6% 0.6% 0.3% 2.% 2.0% 2.0%.9%.4%.5% 2.7% 2.7% 2.2% 2.5% 3.6% 3.8% 3.3% 3.4% 3.0% 3.2% 5.2% 4.7% 4.4% 4.% 6.3% 6.2% 5.7% 6.7% 5.4% 5.6% 8.3% 7.6% 7.0% 8.% Source: Form 5500 Data

15 Section V: Plan Investments The beginning of the 2st Century has been turbulent for the financial markets, which in turn made for challenging times for pension plans. This section of the report analyzes the net investment returns for construction industry plans covering Electrical Workers over the tenyear period from 2003 to 202. Returns are examined on a yearbyyear basis, as well as annualized over the tenyear period. This section also reviews the assumed rates of investment return for the plans in the survey. YearbyYear Returns Exhibit 5.0 shows net investment returns for Electrical Worker plans over the past ten years. In this section, exhibits include results for plans with calendar year plan years (January to December), for the sake of consistency and comparability. Investment returns were very volatile over the past decade. The median returns for Electrical Worker plans were doubledigit positive in five years: 7.6% in 2003,.3% in 2006, 6.5% in 2009,.9% in 200, and.5% in 202. However, they were also negative in one year, 23.2% in 2008, and essentially flat in 20. It is important to note that all investment returns shown in this section are net of fees. It is also important to keep in mind that a plan s investment allocation is a key driver of its investment returns. Observation: Investment Horizons The exhibits in this report show results over a tenyear period in large part because complete data was not available prior to the year In this section of the report, however, it is important to keep in mind that pension obligations are very longterm in nature, and ten years is too short a period from which to draw conclusions about investment policies. Exhibit 5.0 Net Investment Returns Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW 30.0% 20.0% 0.0% 0.0% 0.0% 20.0% 30.0% Plan Year Beginning Number of Plans th Percentile 23.9% 3.3% 8.% 4.8% 9.8% 4.4% 24.8% 4.8% 3.4% 3.9% 75th Percentile 9.% 0.5% 6.7% 2.8% 7.4% 2.4% 20.9% 3.4%.7% 2.9% 50th Percentile 7.6% 9.% 6.0%.3% 6.5% 23.2% 6.5%.9% 0.4%.5% 25th Percentile 5.3% 7.4% 4.7% 9.9% 5.8% 24.7% 3.8% 0.8%.0% 0.0% 5th Percentile.% 6.0% 3.2% 7.8% 4.4% 28.% 8.5% 8.2% 3.4% 7.8% Calendar Year Plans Only Source: Form 5500 Data 2

16 Section V: Plan Investments Annualized Returns Not only were investment returns volatile over the past decade, they fell short of most plans expectations. The previous exhibits showed net investment returns, year by year, for the tenyear period from 2003 through 202. The following exhibits show the annualized returns for that tenyear period. This allows for better comparisons of investment performance for the entire past decade. Technical Note: Methodology Only calendar year plans are included when analyzing annualized investment returns, and only plans which have complete Form 5500 data for all ten years in the period from 2003 through 202 were included in developing annualized returns. There are 48 such plans in the survey, which are included in the following exhibits. Exhibit 5.02 Annualized Returns: Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW 9.0% or Higher (2.%) 8.5% to 8.9% (0.0%) 8.0% to 8.4% (2.%) 7.5% to 7.9% (4.2%) 7.0% to 7.4% (6.3%) 6.5% to 6.9% (25.0%) 6.0% to 6.4% (8.8%) 5.5% to 5.9% (0.4%) 5.0% to 5.4% (6.7%) 4.5% to 4.9% (6.3%) 4.0% to 4.4% (4.2%) 3.5% to 3.9% (4.2%) 3.0% to 3.4% (0.0%) 2.5% to 2.9% (0.0%) 2.0% to 2.4% (0.0%) Lower than 2.0% (0.0%) Median Annualized Return: 6.3% per Year Subset of 48 Calendar Year Plans Source: Form 5500 Data As shown in Exhibit 5.02: The median annualized return for the 48 plans in the sample was about 6.3% per year. Over 90% of plans in the sample had annualized net investment returns of at least 4.0% but less than 8.0% for the ten years from 2003 through 202. Over 70% of plans had annualized returns of at least 5.0% but less than 7.0%. Over 40% of plans had annualized returns of at least 6.0% but less than 7.0%. Observation: Endpoint Sensitivity As noted earlier, ten years is too short a period from which to draw conclusions about investment policies. It is also important to keep in mind that the annualized returns analyzed here are very sensitive to the period endpoints. That is, shifting the tenyear period by a year could result in significantly different annualized returns. For example, the median annualized return for the period 2003 to 202 is 6.3%. This is a noticeable increase over the annualized return of 4.0% for the tenyear period from 2002 to 20, as returns for 202 were much greater than they were for Comparison Against Other Plans In general, investment returns for multiemployer pension plans do not vary as significantly from industry to industry or trade to trade as other results, such as demographics or cash flows. As shown in Exhibit 5.02, the median annualized investment return from 2003 through 202 for Electrical Worker plans was 6.3%. This was slightly higher than the median annualized investment return for that period for all construction industry plans, which was 5.9%. When comparing these results, it is important to note the relatively small sample size of 48 Electrical Worker plans. 3

17 Section V: Plan Investments Expected Returns When analyzing the actual investment returns (as done earlier in this section), it is important to keep in mind the returns the plan expected to earn. Multiemployer pension plans are usually invested in a welldiversified mix of stocks, bonds, and alternative investments structured to maximize returns over the long term while minimizing return volatility. The actuary to a multiemployer plan must evaluate its asset mix and, based on expectations of future returns, develop an assumption for what plan assets are projected to earn over the long term. As shown in Exhibit 5.03 below, 96.6% of Electrical Worker plans were using an investment return assumption between 7.00% and 8.00% per year. About half of the plans were using an assumption of 7.50%. Exhibit 5.03 Investment Return Assumptions Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW 8.50% or Higher (0.0%) 8.25% per year (0.0%) 8.00% per year (9.5%) 7.75% per year (6.9%) 7.50% per year (5.7%) 7.25% per year (3.8%) 7.00% per year (4.7%) 6.75% per year (0.9%) 6.50% per year (0.9%) 6.25% per year (0.0%) 6.00% per year (.7%) 5.75% per year (0.0%) 5.50% per year (0.0%) Lower than 5.50% (0.0%) Not Specified Median Investment Return Assumption: 7.50% Total Plans: 22 Source: Form 5500 Data Technical Note: Investment Return Assumption The investment return assumption is also known as the valuation interest rate. This assumption is used to discount future plan benefit payments in determining the actuarial accrued liability. In these exhibits, investment return assumptions are rounded to the nearest 0.25%. Actuaries to 6 of the 22 plans in the survey provided the expected return assumption on the plans most recent Form 5500 filings; 6 plan actuaries did not specify the assumption. Observation: Actual Returns vs. Expected Returns Most Electrical Worker pension plans expect to earn 7.5% per year on their investments. However, from 2003 through 202, the median plan earned only 6.3% per year, over that period. Without regard to cash flows, that produced a cumulative underperformance of about % at the end of the tenyear period. In other words, as of the end of 202, the median Electrical Worker plan had an asset value that was % lower than the plan would have expected at the beginning of the tenyear period. (For comparison, the investment return shortfall for the ten years from 2002 through 20 was significantly higher: 28%.) For most plans, this shortfall will have to be made up through higher employer contributions and reduced employee benefits, in the absence of greaterthanexpected investment returns in the future. Comparison Against Other Plans As with actual investment returns, there are usually no significant differences in expected investment returns from industry to industry or trade to trade. For example, 52% of Electrical Worker plan actuaries use an investment return assumption of 7.50%. That compares with 5% for all construction industry plans. Similarly, about 97% of Electrical Worker plan actuaries use an investment return assumption that is between 7.00% and 8.00%. That compares with about 92% for all construction industry plans. 4

18 Section VI: Plan Funding This section of the report analyzes plan funding levels over the past decade, as well as the PPA certification status in recent years. Funded Percentages Before reviewing any funded percentages from the inventory, it is important to note that there are many different ways to calculate funded percentages. For one, under the Pension Protection Act of 2006 (PPA), the funded percentage is calculated as the ratio of the actuarial value of assets over the actuarial accrued liability. The actuarial value of assets usually smoothes prior investment gains and losses over a fiveyear period. The actuarial accrued liability is the value of the accrued benefits under the plan, measured at a discount rate that reflects the expected return on plan assets over the long term (usually between 7.00% and 8.00% per year). Under PPA, a plan that is less than 80% funded based on this measure will be in endangered status, or perhaps even critical status. On the other hand, the 202 Credit Suisse report on multiemployer plans calculates funded percentages differently. Credit Suisse s socalled fair value funded percentage is the ratio of the market value of assets over the current liability. A plan s current liability is measured based on a conservative interest rate, which assumes that the plan is invested entirely in Treasuries. The Credit Suisse approach is inappropriate because it disregards the plan s actual investment allocation, which usually includes stocks, bonds, and alternative investments. Most plans have investment allocations that will earn 2% to 4% per year more than an allbond portfolio. In Exhibit 6.0 below, the funded percentage is the ratio of the market value of assets over the actuarial accrued liability. This provides the plan s funded percentage at each point in time, without smoothing prior asset gains and losses. This provides a consistent comparison from plan to plan. (Note, however, that it is appropriate to use the smoothed, actuarial value of assets for purposes of making funding decisions and calculating contribution requirements under PPA.) The funded percentages shown below are measured as of the end of the plan year, and only plans with calendar year plan years are included. For example, funded percentages for 202 are as of December 3, 202. As shown in Exhibit 6.0, the median funded percentage for Electrical Worker plans was 8.2% at December 3, The historic investment losses during 2008 brought the median funded percentage down to 69.0% at December 3, Positive investment returns during 2009 and 200 brought the median funded percentage back up to 80.0% at December 3, 200. Exhibit % 20% 0% 00% 90% 80% 70% 60% 50% 40% Plan Year Beginning Number of Plans 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile Calendar Year Plans Only Market Value Funded Percentages (End of Year) Multiemployer Defined Benefit Pension Plans: Construction Industry IBEW % 40.3% 0.2% 29.4% 30.0% 94.% 0.3% 07.6% 06.6% 0.2% 93.3% 97.7% 94.3% 98.4% 98.4% 75.6% 83.% 87.4% 82.7% 86.4% 8.2% 83.6% 82.7% 86.0% 86.3% 69.0% 76.% 80.0% 73.9% 78.5% 7.7% 74.% 72.8% 76.% 77.8% 63.9% 69.4% 7.9% 66.6% 69.7% 64.3% 63.5% 63.6% 64.4% 6.% 42.2% 46.% 4.% 40.2% 48.7% Source: Form 5500 Data 5