Underfunded multiemployer pension plans poised for financial crisisReprints
The insolvency of dozens of massively underfunded multiemployer pension plans and the loss of billions of dollars in participant benefits is looming, but whether Congress will defuse the little-publicized crisis is not clear.
The Pension Benefit Guaranty Corp. has said it expects 173 multiemployer plans will run out of assets and need money from the agency to pay participants' guaranteed benefits.
The PBGC tab for that financial assistance is nearly $10 billion, up $3 billion in just one year. It also is more than five times the $1.8 billion the PBGC has in its multiemployer insurance fund and about 100 times greater than the multiemployer plans paid the agency last year in insurance premiums.
There are about 1,400 multiemployer pension plans with about 10.4 million participants.
“The problem is very significant. A hole is being dug with no easy way of getting out,” said Jack Abraham, a principal at PricewaterhouseCoopers L.L.P. in Chicago.
“The path we're on will destroy the retirement security of families across the country,” Rep. John Kline, R-Minn., chairman of the House Education and Workforce Committee, said during an event earlier this month sponsored by Bloomberg Government.
Still, some federal officials are optimistic a legislative solution can be achieved.
“A set of compromises can be fashioned to enable the system not just to survive, but to grow,” said PBGC Director Joshua Gotbaum who also spoke during the event.
“We are making progress,” Rep. Kline said.
Others believe lawmakers will act, but they also warn it will be difficult to craft a fix.
“Most members of Congress are not aware of the issue. We are going to have to work hard to educate members” said Rep. Phil Roe, R-Tenn.
Despite the PBGC's warning last year about 173 plans, “the majority of plans are in good shape,” Vince Sandusky, CEO of the Sheet Metal and Air Conditioning Contractors National Association in Chantilly, Virginia, said in an interview
Still, just one multiemployer plan — the giant Central States, Southeast and Southwest Areas Pension Fund in Chicago — has $17 billion in unfunded benefits, Thomas Nyhan, the plan's executive director and general counsel, told a congressional committee last year.
The Central States plan, which covers employers in a variety of industries, especially trucking, “has reached a point where it requires legislative action to avoid insolvency,” he said.
Even without the failure of the Central States plan, the PBGC's insurance program could run out of money in 10 to 15 years because of the cost of providing financial assistance to insolvent plans, according to a 2013 Government Accountability Office report.
If the PBGC insurance fund goes broke, “many retirees will see their benefits reduced to an extremely small fraction of their original value,” the GAO said in the report.
The reasons for the severity of the problem include a 1980 law that requires employers that leave underfunded multiemployer plans to pay a share of the plans' promised but unfunded benefits.
The withdrawal liability fear is why the Central States plan “has not been able to attract many new employers to replace the ones that failed,” Mr. Nyhan said in his congressional testimony.
“Theoretically, withdrawal liability sounded like a great idea, but it has never worked,” Randy DeFrehn, executive director of the Washington-based National Coordinating Committee for Multiemployer Plans, which represents about 400 plans, said in an interview.
The risk to employers of joining underfunded multiemployer pension plans is so great, “no one wants to come in,” Earl Pomeroy, senior counsel at Alston & Bird L.L.P. in Washington and a former Democratic senator from North Dakota, said during the conference.
“If a plan can't attract new employers to replace those who leave, it is a death spiral,” PwC's Mr. Abraham said in an interview.
Other reasons for the plans' funding problems include federal rules that bar contributions after a multiemployer plan reaches certain funding levels, effectively blocking surpluses that could be drawn upon in later years, observers say.
In addition, federal deregulation of certain industries, such as trucking, meant more competition and more failures of existing companies. At the Central States plan, more than 600 companies in the plan have gone into bankruptcy, with just four of the 50 largest employers that contributed in 1980 still in the plan today, Mr. Nyhan said.
With fewer employer participants, contributions needed to pay benefits of plan participants, including those who worked for failed companies, have doubled over the past 10 years. Even so, 2012 benefit payouts were more than four times as great as revenue from employer contributions and withdrawal liability payments, Mr. Nyhan said.
What action Congress will take is not yet clear.
A commission organized by the National Coordinating Committee on Multiemployer Plans recommended earlier that plans projected to go insolvent should have the authority to partially suspend participants' benefits, an idea that has some support.
“Without adjustments, plans will be drained of every penny to pay for current retirees, while active employees” not yet receiving benefits could end up with nothing, Mr. Sandusky said.