RETIREMENT SECURITY. The Role of Multiemployer Pension Plans

Transcription

1 RETIREMENT SECURITY The Role of Multiemployer Pension Plans

2 Introduction Multiemployer pension plans play an important role in the retirement security of millions of union workers. While the financial crisis greatly impacted the funded status of these plans, they have recovered significantly. At the end of 2014, many significant aspects of the Pension Protection Act of 2006 (PPA) governing the funding and disclosure requirements of multiemployer plans will expire. Any new rules with respect to the funding of these plans should take into account the long-term nature of plan liabilities, recognize the role these plans play, and encourage the plans continued existence. Multiemployer pension plans are an important part of the retirement landscape in the United States For over 60 years, multiemployer defined benefit (DB) pension plans have been providing retirement income security to covered participants. With nearly $500 billion in assets, these plans account for approximately 20% of total private DB pension assets in the U.S. Further, while multiemployer pension plans represent less than 5% of all private DB plans, they cover 25% of all private DB plan participants. 1 U.S. Private DB Pension Plans Multiemployer Single Employer Total Multiemployer Single Employer Total Assets ($ millions) 466,131 1,982,230 2,448,361 19% 81% Number of Plans 1,471 45,072 46,543 3% 97% Number of Participants (millions) % 74% Source: U.S. Department of Labor Employee Benefits Security Administration, Private Pension Plan Bulletin - Abstract of Form 5500 Annual Reports, November Over 10 million Americans in many diverse industries from trucking and construction to agricultural and office professional services rely on multiemployer defined benefit pension plans for guaranteed income in retirement. In a world where the responsibility for generating retirement income has largely shifted from the employer to the employee, the promises made by these pension plans are invaluable. The benefits provided by a multiemployer plan provide lifetime security in the way they are distributed. A plan participant typically receives a monthly benefit for the remainder of his or her life that replaces a portion of his or her pre-retirement income. 1

3 Multiemployer plans are uniquely structured to provide retirement security to union workers Multiemployer pension plans are collectively bargained, typically cover employees in several companies, and provide portability of pension benefits. They are uniquely designed to provide retirement income security to employees of companies that typically would be too small to provide such benefits. The collective bargaining process defines the benefit promise and contribution obligations of each participating employer. The plans are generally governed by a board of trustees that comprises equal numbers of employer and union representatives. The trustees of multiemployer pension plans are fiduciaries that are obligated to act in the best interests of plan participants. Plan contributions are made to a trust fund; in the absence of having the skill and knowledge to make the trust fund investment decisions, the trustees must retain investment professionals to act in a prudent manner on behalf of the plan participants. Multiemployer pension plan assets are managed to meet long-term obligations The benefits provided by multiemployer plans are long-term in nature; the pension trust fund must therefore have an investment policy with a similarly long-term view, so that assets are invested to adequately secure the promised benefits. In general, many multiemployer plans are mature, which means a significant portion of the participants are currently collecting their retirement income from the plan. Therefore, plan fiduciaries must balance the need for liquidity to pay current benefits with the need for sufficient investment returns to help secure benefits promised to future retirees. To that end, pension plans typically invest in balanced portfolios that include equity, fixed income, real estate, and cash 2. Average Asset Allocation of Multiemployer Plans % 50% 40% 30% 20% 10% 0% Equities Fixed Income Real Estate Cash Private Equity Hedge Funds Other Source: The Road to Recovery: The 2010 Update to the NCCMP Survey of the Funded Status of Multiemployer Defined Benefit Plans, by Randy G. DeFrehn and Joshua Shapiro. 2

4 Multiemployer plans have recovered significantly from the financial crisis Historically, multiemployer plans have been well funded. However, prior to the passage of the PPA in 2006, the federal tax code prevented multiemployer plans from being over funded if the plans wanted to maintain the tax deductibility of contributions and avoid excise taxes. This limitation prevented multiemployer plans from taking advantage of favorable market conditions in the late 1990s, and meant that the plans did not have a funding cushion to buffer the losses they suffered in the 2000s. Multiemployer plans were dealt a severe blow by the financial crisis: equity market declines negatively impacted the performance of plan assets, and rising unemployment levels impaired plans ability to offset the asset losses with additional contributions. 3 Despite these challenges, the health of multiemployer plans has recovered significantly. A provision of the PPA created the concept of zones to identify multiemployer pension plans as healthy, endangered, or critical. A recent survey of multiemployer plans showed that in 2009, only 38% of multiemployer plans were deemed to be in a healthy zone; by 2012, this percentage increased to 60%. 4 The Pension Benefit Guaranty Corporation s (PBGC) 2012 annual report states that the PBGC currently provides financial assistance to 49 plans out of a universe of 1,450 plans, or about 3% of the total number of covered multiemployer plans. 5 Future changes must consider the nature and important role of multiemployer plans Recently, there have been some questions regarding the ability of multiemployer plans to deliver on their benefit promises, as well as commentary suggesting that multiemployer plans use a current interest rate approach to valuing plan liabilities. The rapid improvement in the health of multiemployer plans since the financial crisis suggests that these proposals are not justified or reasonable for the vast majority of multiemployer plans. Further, since the PPA was enacted, there have been two significant pieces of legislative relief (the Pension Relief Act of 2010 and the Moving Ahead for Progress in the 21st Century Act) that demonstrate the need to consider the practicality and effectiveness of a current interest rate approach to valuing plan liabilities. Since the advent of pension legislation in the U.S., the unique characteristics and advantages of multiemployer pension plans have been recognized through public policy approaches that differ for multiemployer versus single employer pension plans. The PPA requires that the present value of future benefits be measured each year; depending on how the value of plan assets compares to this present value of liabilities, a multiemployer plan might have to take specific actions to accelerate funding, reduce future benefit accruals, or both. The current multiemployer funding rules under the PPA use a long-term approach in valuing plan liabilities. In contrast, single employer plans are required to value plan liabilities based on current interest rates. However, at the end of 2014, many significant aspects of the PPA governing the funding and disclosure requirements of multiemployer plans will expire. Because multiemployer plans are not dependent on the economic health of a single employer, it would seem reasonable that a longer-term approach should continue to be used for these plans. A requirement to compare the value of plan assets to a present value of liabilities that is based on 3

5 today s interest rates would not be consistent with the true long-term nature of the benefits provided by multiemployer pension plans. Conceptually, using current interest rates to value multiemployer plan liabilities assumes the plan will terminate under current market conditions in effect, that every employer supporting the plan will either fail or withdraw from the plan at the same time, thereby forcing a plan termination. For multiemployer plans that are not classified as critical or endangered by the PPA, it is reasonable and more realistic to assume they will continue to exist as a going concern, paying out their obligations over time as their participants retire. Trustees of such plans should be allowed to adjust their asset liability management strategy over time to meet their long-term goal of providing retirement security. Multiemployer plans have been providing benefits to covered workers for decades, since the passage of The Taft Hartley Act of 1947 that established the terms for negotiating employee benefits in collectively bargained multiemployer plans. 6 Congress should ensure that any new rules for multiemployer plans recognize the unique nature of these plans, and allow them to thrive as important contributors to the retirement security of organized labor. A long-term view that encourages employer support for these plans is imperative to preserve the multiemployer pension plan model. Endnotes 1 U.S. Department of Labor Employee Benefits Security Administration, Private Pension Plan Bulletin - Abstract of Form 5500 Annual Reports, November The Road to Recovery: The 2010 Update to the NCCMP Survey of the Funded Status of Multiemployer Defined Benefit Plans, by Randy G. DeFrehn and Joshua Shapiro. 3 Ibid. 4 Segal Company, Survey of Plans 2012 Zone Status, Winter Pension Benefit Guaranty Corporation, Annual Report, U.S. Government Accountability Office, Private Pensions - Changes Needed to Better Protect Multiemployer Pension Benefits, October

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