PBGC warns of swelling deficit in multiemployer plansNews added by Benefits Pro on July 1, 2014

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By Nick Thornton

The Pension Benefit Guarantee Corp. issued new projections Monday on the state of the nation’s defined benefit plans that were in part promising and in part disturbing.

The good news is that the financial condition of single-employer plans is greatly improved over last year’s projections.

According to the latest figures, the fiscal 2013 deficit of $27.4 billion is projected to narrow to $7.6 billion by fiscal 2023. Last year, the PBGC estimated a deficit of $32.5 billion for fiscal 2022.

Better market conditions, premium increases and a rise in interest rates account for the dramatically improved projections.

PBGC’s single-employer program insures the defined benefits of 32 million Americans. “It is highly unlikely that the single-employer program will run out of funds in the next 10 years,” the agency said in issuing Monday’s report.

On the other hand, the news for multiemployer plans wasn’t nearly as good.

While most multiemployer plans -- in which many companies join with a union to provide benefits -- are projected to remain solvent, the pension benefits of more than 10 percent of MEP participants are at serious risk, the PBGC said.

Two recessions, industry consolidation prompted by deregulation and an aging workforce have all been a drain on multiemployer plans.

The most distressed plans remain critically underfunded and are unable to raise contributions or reduce benefits enough to avoid insolvency, it said.

The PBGC is now projecting that insolvencies affecting more than 1 million of the 10.4 million beneficiaries in multiemployer plans are “more likely and more imminent.”

The failure of those distressed plans will drain the PBGC’s assets, ultimately threatening to leave remaining benefits uninsured, it said.

Absent premium increases or changes in law, the multiemployer program is “more likely than not to run out of funds in eight years, and highly likely to do so in 10 years,” the PBGC said.

Specifically, the report estimates a 59 percent chance of insolvency in the multiemployer program by 2022. Last year, the estimate was a 36 percent chance by the same time.
Much of that difference is explained by new methodologies the PBGC uses to estimate liabilities.

The PBGC commissioned Buck Consultants to assess the agency’s older evaluation model and to suggest changes, if necessary.

The consultancy recommended several revisions to the assumptions previous modeling had made.

Among them: The number of active plan participants should be assumed to decline in the future; participant and plan contributions should be assumed to increase at lower rates than previously assumed; projected outcomes should account for the fact that many plan trustees have decided not to adopt the full range of contribution increases and benefit adjustment allowed under current law.

Based on these considerations, and others embraced by the PBGC, “virtually all of our projections show a significant worsening of PBGC’s financial position over the next 10 years,” according to the report.

The multiemployer program’s deficit is expected to increase from the $8.3 billion projected for 2013 to $47 billion by fiscal 2023.

The PBGC charges companies in multiemployer plans an annual insurance premium of $12 per plan participant, less than one-fourth of what other pension plans pay.

As a consequence, PBGC multiemployer guarantees also are much lower than those in its single-employer program; typically, participants in a failed multiemployer program receive about $13,000 a year. If the PBGC’s multiemployer plan were to become insolvent, those guarantees would no doubt be cut even further.

The PBGC is hoping Congress will give it the authority to raise premiums. But a group of trade associations, professional organizations and companies released a study last month saying the premium increases would represent a hit of billions of dollars to the economy and cost an average of 42,000 jobs a year.

Originally published on BenefitsPro.com
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