Structural reforms needed to stabilize multiemployer system, GAO says

Congress should consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer plan system, the GAO recommended in a recent report.

The report noted that in recent years, as a result of market declines, withdrawing employers, and demographic challenges, many multiemployer plans have had large funding shortfalls and face an uncertain future. The GAO sought to examine: (1) actions taken by multiemployer plans in the weakest financial condition to improve their long-term financial position; (2) the extent to which multiemployer plans have relied on PBGC assistance since 2009 and the financial condition of the PBGC’s multiemployer plan insurance program; and (3) options available to address the PBGC’s impending funding crisis and enhance the multiemployer program’s future financial stability.

GAO findings

The GAO found that the most severely distressed multiemployer plans have taken significant steps to address their funding problems and, while most plans expected improved financial health, some did not. A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the large majority of the most severely underfunded plans—those designated as being in critical status—either have increased or will increase employer contributions or reduce participant benefits. According to the GAO, most of the 107 surveyed plans expected to emerge from critical status, but about 25% did not and instead seek to delay eventual insolvency.

The GAO noted that the PBGC’s financial assistance to multiemployer plans continues to increase and that plan insolvencies threaten the PBGC’s multiemployer insurance fund’s ability to pay pension guarantees for retirees. The PBGC has estimated that the insurance fund would be exhausted in about 2 to 3 years if projected insolvencies of either of two large plans occur in the next 10 to 20 years. More broadly, by 2017, the PBGC expects the number of insolvencies to more than double, further stressing the insurance fund. “If the insurance fund is exhausted, many retirees will see their benefits reduced to an extremely small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits,” according to the GAO.

Policy options

Given the serious challenges facing the multiemployer system, the GAO recommended that Congress “consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system.” In doing so, the report said, Congress should consider the relative burdens, as identified by key stakeholders, that each reform option would impose on the competing interests of employers, plans, workers and retirees, the PBGC, and taxpayers.

The GAO report cited two policy options recommended by experts and stakeholders to avoid the insolvencies of severely underfunded plans and the PBGC multiemployer insurance fund, as well as other options for longer term reform. Experts and stakeholders said that, in limited circumstances, trustees should be allowed to reduce accrued benefits for plans headed toward insolvency. Also, some experts noted that, in their view, the large size of these reductions for some severely underfunded plans may warrant federal financial assistance to mitigate the impact on participants. Experts and stakeholders also noted tradeoffs, however. For example, reducing accrued benefits could impose significant hardships on some retirees, and any possible financial assistance must be considered in light of the existing federal debt.

According to the GAO, options to improve long term financial stability include changes to withdrawal liability—payments assessed to an employer upon leaving the plan based on their share of unfunded vested benefits—to increase the amount of assets plans can recover or to encourage employers to remain in or join the plan. In addition, experts and stakeholders said an alternative plan design that permits adjustments in benefits tied to key factors, such as the funded status of the plan, would provide financial stability and lessen the risk to employers.

Source: GAO-13-240, “Timely Action Needed to Address Impending Multiemployer Plan Insolvencies,” March 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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