PBGC Issues Dire Forecast on Growing Deficit of Multi-Employer Plans and Suspects that Its Own Solvency is at Risk
By Mark Johnson, Ph.D., J.D.


Although the financial outlook of single-employer pension plans and programs is expected to improve, the state of the country’s multi-employer plans (MEP) is at a crucial tipping point. The pension benefits of more than 10 percent of MEP participants are in peril, potentially affecting more than one million people.


That was the grim warning recently issued by the Pension Benefit Guaranty Corporation (PBGC) as a result of findings in its annual FY 2013 Projections Report (formerly known as the “Exposure Report”).


Through an actuarial evaluation pulled from hundreds of economic scenarios, the Projections Report is able to estimate and project the future well-being of private pension plans and their effect on PBGC’s financial stability in the future.


Projections of Faltering Multi-Employer Plans


The PBGC attributes the diminishing funds of MEPs to a variety of reasons including two recessions, industry consolidation and an aging workforce.


“Despite the improving economy and strong asset returns in 2013, some already distressed plans remain critically underfunded and will not be able to further raise contributions or reduce benefits sufficiently to avoid insolvency,” the agency said in a news release.


Key projections found in the report include:


• Insolvencies may affect more than 1 million of the 10.4 million beneficiaries in multi-employer plans

• Insolvencies of distressed multi-employer plans will be “more likely and more imminent”

• Failures of these plans will drain PBGC of its assets in the program and render it broke and unable to pay guaranteed benefits to MEP members

• The likelihood of PBGC running out of multi-employer plan program funds is possible in eight years and most likely within 10 years

• The multi-employer program's FY 2013 deficit of $8.3 billion will widen to, on average, $49.6 billion by FY 2023 if failures continue and no significant changes are made with the law or by increasing premiums


New Methodology Leads to New Numbers


The risk of the PBGC running out of money has not only increased, but projections are actually worse (higher) than last year’s forecast. For example, according to the 2012-based report, there was a 36 percent chance of insolvency by 2022. Yet for the same period in the 2013-based report, the projected risk of insolvency jumped to 59 percent. Why?


The worsening prognosis of multi-employer plans can be explained by a new methodology the PBGC applied to assess and estimate liabilities.


An external peer review was made on the PBGC’s projection methodology and, as a result, several recommendations were made to update the older evaluation model to “reflect a more current understanding about the actual experience of multi-employer pension plans.”


These updates included a revised outlook on the number of plan participants in the future, the rate of future plan contributions, and also took into account that some multi-employer plans have not adopted legally available contribution increases and benefit adjustments because they decided that they were not feasible.


In the End, Significant Benefit Reductions


“Virtually all of our projections show a significant worsening of PBGC’s financial position over the next 10 years,” the report concludes.


For participants in failed plans, this means significant benefit reductions under the PBGC's current guarantee program.


The PBGC multi-employer guarantees are much lower than those in its single-employer program. Typically, participants in a failed multi-employer program receive about $13,000 a year. Then again, PBGC charges companies in those plans an annual insurance premium of only $12 per plan participant, less than one-fourth of what other pension plans pay.


If projections pan out and the PBGC itself becomes insolvent, then guarantees will be cut much further.


The PBGC hopes its report will compel Congress to take action including giving it the authority to raise premiums. But that is open to debate as a group of trade associations, professional organizations and companies came out with a study in May that contends increases in premiums would translate into a big hit to the economy—worth billions of dollars—and cost an average of 42,000 jobs a year.


In any event, Congress is walking a tightrope as voters don’t want to fund bailouts or provide safety-net programs, and retirees don’t want to suffer forced and painful benefit cuts.


July, 2014



ABOUT THE AUTHOR: Mark Johnson, Ph.D., J.D.

Mark Johnson, Ph.D., J.D., is a highly experienced ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances.


ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.


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