Analysis shows multiemployer
pension funded status has been steady so far in 2016
Welcome to Milliman’s Fall 2016 Multiemployer Pension Funding Study. This study reports on the estimated funded status of all U.S. multiemployer plans as of June 30, 2016, and shows the change in funding levels from December 31, 2015.
- The aggregate funded percentage for multiemployer plans is
estimated to be 76% as of June 30, 2016, compared with 75%
as of December 31, 2015.
- For most multiemployer pension plans, estimated 2016
investment experience through June 30, 2016, was over 3%,
just slightly below expected returns.
- About one-half of the total underfunding for multiemployer
plans continues to be attributable to plans that are less than
- Of the 300+ critical plans, about 40% are projected to be
insolvent at some point. Can these plans be helped by benefit
suspension provisions of the Multiemployer Pension Reform
Act of 2014 (MPRA)?
Current funded percentage
Figure 1 shows that the overall funding shortfall for all plans
declined by about $1 billion for the six-month period ending
June 30, 2016, while the aggregate funded percentage increased
slightly from 75% to 76%.
|FIGURE 1: FUNDED PERCENTAGE, ALL MULTIEMPLOYER PLANS*
(IN $ BILLIONS)
|LIABILITY FOR ACCRUED BENEFITS
|MARKET VALUE OF ASSETS
*Based on plans with complete IRS Form 5500 filings. Includes 1,286 plans as of
December 31, 2015, and 1,291 plans as of June 30, 2016.
The key assumption here is the discount rate used to measure liabilities, with each plan using its actuary’s assumed return on assets assumption. Assumed returns are generally between 6% and 8%, with a weighted average assumption for all plans of just below 7.5%. It is noteworthy that about 200 plans have
decreased their assumed rate of return over the last several years, which contributes to an increase in the shortfall.
Historical funded percentage
Figure 2 provides a historical perspective on the aggregate
funded percentage of all multiemployer plans since the end
of 2007 on a market value basis. Multiemployer plans had
made progress through the end of 2013. The aggregate funded
percentage had climbed up to an 80% funded level, which
reflects favorable investment returns as well as contribution
increases (including withdrawal liability collections) and benefit
reductions enacted by plans as they responded to the global
financial crisis of 2008. Since the end of 2013, however, plans
have not been able to make additional progress in the wake of
less-than-favorable investment returns in 2014, 2015, and the
first half of 2016. In general, the funded status of these plans
continues to be driven largely by investment performance.
FIGURE 2: AGGREGATE MULTIEMPLOYER PLAN HISTORICAL
FUNDED PERCENTAGE – MARKET VALUE BASIS
Results vary by plan
Aggregate funding levels of multiemployer plans have declined
over the past two years, but as might be expected, individual
plans are affected in different ways.
Figure 3 shows the historical funded percentage of all
multiemployer plans since the end of 2007 separately for plans
that are critical now (red line), plans that are not critical now
(light blue line), and all plans (dark blue line). We see that the
gap between the funded percentage of critical versus noncritical
plans has widened considerably since the market crash, which
left both groups of plans less than 60% funded. The aggregate
funded percentage of critical plans remains under 60% as of
June 30, 2016, while the funded percentage of noncritical plans
is in excess of 80%. Although critical plans have crawled above
the 60% threshold several times since 2009, cash flow needs
have made it difficult for these plans to build any momentum,
even after experiencing periods with more favorable market
conditions. Since 2015, the estimated funded percentage
projection for critical plans has leveled off while the line for the
non-critical projection plans has increased slightly.
FIGURE 3: HISTORICAL FUNDED PERCENTAGE - MULTIEMPLOYER PLANS SINCE 12/31/2007
Can the most poorly funded plans recover?
Since our first study as of December 31, 2013, the percentage of
plans in critical status has remained consistent at about 25% of
all plans. The number of plans that are less than 65% funded
showed little change and continues to account for more than half
of the aggregate deficit for all multiemployer plans of $150 billion.
Starting with 2014 Internal Revenue Service (IRS) Form 5500
filings, new information is provided for critical plans. We have
reviewed the new statistics for the 320 critical plans in our study
for which this information is available. Of these, 40% are projected
to become insolvent at some point, while the remainder are
projected to emerge from critical status in the future.
Figure 4 shows the aggregate funding shortfall for the plans that
are in critical status and projected to become insolvent, broken
down by the year of projected insolvency.
|FIGURE 4: AGGREGATE FUNDING SHORTFALL FOR PLANS
PROJECTED TO BECOME INSOLVENT, BY YEAR OF
PROJECTED INSOLVENCY (IN $ BILLIONS)
|YEAR OF INSOLVENCY
||NUMBER OF PLANS
|PRIOR TO 2025
|2025 – 2034
|2035 AND AFTER
Looking ahead, the $41 billion shortfall for plans headed
toward insolvency is likely to increase, short of sustained
excess returns, significant contributions increases, or benefit
suspensions that may be adopted under MPRA. While some
plans may become eligible for suspensions and decide to
pursue these changes, it is still too early to gauge the impact
they might have on the health of those plans or whether they
can gain approval from the U.S. Treasury Department first, and
then their participants.
Notably, the Central States Teamster Fund application for
suspensions was denied by the Treasury; therefore, the fund
will not make another application. This fund alone represents
almost $20 billion of underfunding, approximately half of the
above $41 billion.
Figure 5 shows the $37 billion shortfall for plans that are
projected to emerge. If the projection assumptions for these
plans are met, we may see a reduction in the shortfall for such
plans, especially those that are expected to emerge prior to 2025.
|FIGURE 5: AGGREGATE FUNDING SHORTFALL FOR PLANS
PROJECTED TO EMERGE FROM CRITICAL STATUS, BY
YEAR OF PROJECTED EMERGENCE (IN $ BILLIONS)
|YEAR OF EMERGENCE
||NUMBER OF PLANS
|PRIOR TO 2025
|2025 – 2034
|2035 AND AFTER
Note that the information in Figures 4 and 5 is not representative
of the status of all critical plans today. These results are largely
based on projections from 2014 and thus do not reflect the less-than-favorable investment returns since then.
Where do we go from here?
So what happens if market returns do not improve? Can funds
survive without better asset performance? Figure 6 shows the
impact of a range of possible asset returns for the year ending
December 31, 2016. With a variety of alternative returns, the
results look like a rake.
In the aggregate, the return for the rest of 2016 needs to be
3% to remain at the current 76% funded percentage level. A
strong 9% return for the second half of the year would result in
aggregate funding above 80%, while a poor -3% return would
pull it down toward 70%.
The return for our sample portfolio for the third quarter of 2016
was over 3%. That result has the potential to place the aggregate
funded percentage on the middle prong at the end of 2016.
However, there is still a long way to go and the U.S. presidential
election or any other number of world events before the end of
the year could impact the outcome of the returns.
FIGURE 6: IMPACT OF VARIOUS RETURNS FOR JULY 2016 TO DECEMBER 2016 ON AN AGGREGATED BASIS
What lies ahead?
The future health of most multiemployer plans very much
depends on investment performance. For critical plans,
persistent strong returns will likely be needed to recover.
For critical and declining plans, prospects for MPRA benefit
suspensions and/or partitions may offer some relief. Failing that,
such plans may end up relying on assistance from the Pension
Benefit Guaranty Corporation (PBGC), which is facing its own
financial issues. Healthier plans face the risk of increased PBGC
premiums and trustees for these plans need to be vigilant in
monitoring the financial trends and risk exposures. Trustees
may also want to explore potential plan design changes such as
variable annuity plans (e.g., a Sustainable Income Plan™), which
could mitigate the negative impact of future market volatility.
About this study
The results in this study were derived from publicly available IRS Form 5500 data as of August 2016, for all multiemployer plans,
numbering between 1,200 and 1,300, depending on the measurement date used. Data for a limited number of plans that clearly
appeared to be erroneous was modified to ensure the results were reasonable and a sufficiently complete representation of the
Liability amounts were based on unit credit accrued liabilities reported on Schedule MB, and were adjusted to the relevant
measurement dates using standard actuarial approximation techniques. For this purpose, each plan’s monthly cash flow, benefit
cost, and actuarial assumptions were assumed to be constant throughout the year. Projections of asset values reflect the use
of constant cash flows and monthly index returns for a simplified portfolio comprised of 45% U.S. equities, 20% international
equities, and 35% U.S. fixed income investments.
Significant changes to the data and assumptions could lead to much different results for individual plans but would likely not have a
significant impact on the aggregate results or the conclusions in this study.