A retirement plan supposedly is an excellent reason for joining a union. Yet a March report by the U.S. Government Accountability Office reveals chronic underfunding and potential insolvency of pension plans involving a union and two or more private-sector employers within the same industry. The insurance fund covering these “multiemployer” plans, run by a federal agency, Pension Benefit Guaranty Corporation (PBGC), “would be exhausted in about two to three years if projected insolvencies of either of two large plans occur in the next 10 to 20 years.” The study follows a January PBGC report projecting “current premiums ultimately will be inadequate to maintain benefit guarantee levels.” That same month (January), PBGC, the Labor Department and the Treasury Department jointly released a separate troubling report. The best option for the agency may be to phase out coverage of multiemployer plans altogether.
Traditional pensions are often known as “defined benefit” retirement plans. They are distinct from “defined contribution” plans, such as the 401(k), which give beneficiaries extensive leeway in determining how funds are to be invested. Roughly 5 percent of all private-sector employees, retirees and eligible family members in the U.S. participate in traditional pensions. That’s down from nearly 30 percent back in 1980. By contrast, “defined contribution” plans now account for about 30 percent of the population. Another 10 percent of adults participate in defined benefit-defined contribution hybrid plans. The remaining population has neither of these arrangements.
Nearly 30,000 PBGC-insured defined-benefit plans represent roughly 44 million persons. Of these, about 1,500 plans are of the multiemployer type covering 10.4 million workers, retirees and family members. By far the largest portion is in the construction industry. It’s not hard to see why. Multiemployer plans offer something that single-employer plans don’t: portability. Covered workers can continue to accrue benefits if they switch employers – turnover is high in construction – and the new employer contributes to the same plan. Unfortunately, even with the resurgent stock market of the last four years, many plans still lack the assets needed to pay for long-term obligations. Termination is a very real prospect if the employer is headed for bankruptcy or is otherwise troubled. Indeed, the largest recent pension cancellations have occurred in the airline and steel industries, where bankruptcies have been a fact of life. Delta, United Airlines, U.S. Airways, Bethlehem Steel and Weirton Steel each are examples of companies that during the last 15 years have declared bankruptcy and handed their pension commitments to PBGC.
Under current federal law, a plan is considered “endangered” if its assets are less than 80 percent of long-term liabilities or it is projected to have such a funding deficiency within seven years. It is considered “seriously endangered” if it is less than 80 percent funded and projected to have a funding deficiency within seven years. And it is considered “critical” if it is less than 65 percent funded and projects a funding deficiency within four years or insolvency within six years. If a plan falls into one of these categories, that doesn’t necessarily mean it can’t pay promised benefits in the here and now. It does mean, however, that the plan is operating with an elevated risk of failure.
If and when PBGC takes over a fund, it normally does so at the request of the sponsor. These “standard” terminations occur because the sponsor believes it is likely to default on its liabilities or to become unable to operate as an enterprise over the long run. In certain emergency cases, the agency steps in and forcibly takes over a plan. Either way, in assuming control of management functions, PBGC becomes legally responsible for paying benefits to eligible participants in a timely manner. For multiemployer plans, PBGC currently is required to pay up to $12,870 per individual in a given year, based on 30 years of employment. For single-employer plans, PBGC guarantees benefits up to $57,477.24 per year for a retiree at age 65 in plans that terminate this year.
Pension Benefit Guaranty Corporation was created by the Employee Retirement Income Security Act of 1974 (ERISA) to make good on pension promises that can’t be kept. In the case of a terminated single-employer plan, PBGC takes over management functions outright. In the case of a terminated multiemployer plan, PBGC provides financial assistance but allows the plan to remain an independent entity. Funded primarily through sponsor-paid insurance premiums, the agency has never required a congressional appropriation (i.e., bailout). Congress, and not the agency, sets benefit and premium levels. Like other federal insurance agencies, especially the Federal Housing Administration (FHA), the presumably self-financing mechanism is running up against practical limits. Every year since fiscal year 2002 PBGC has run an operating deficit. That is, assets have fallen short of projected liabilities. In 2003, the Government Accountability Office added PBGC to its list of “high-risk” agencies. And the funding gap is likely to be around for a while. The agency was about $4 billion in the red at the end of fiscal year 2002 after years of being in the black. That shortfall would rise to $23.5 billion by the close of fiscal year 2004. While it fell to $11.2 billion by the close of fiscal year 2008, it again rose, this time to nearly $35 billion, four years later.
The widening gap of the last several years, it is worth noting, has occurred in spite of a massive reform law, the Pension Protection Act of 2006. Among other things, this legislation raised annual premiums to rates better reflecting what private-sector insurers charge. Current rates are: $42 per worker/retiree, indexed for inflation, plus another $9 for each $1,000 of unfunded vested benefits (single-employer); and $12 per worker/retiree, indexed for inflation (multiemployer). Yet even these sensible upward adjustments have proven insufficient. Premiums didn’t even cover half of the nearly $6 billion paid out to 887,000 retirees and family members in more than 4,500 plans during fiscal year 2012. PBGC Director Josh Gotbaum admitted last fall in the corporation’s annual report: “PBGC has enough funds to meet its obligations for years. But without the tools to set its financial house in order and to encourage responsible companies to keep their plans, PBGC may face for the first time the need for taxpayer funds. That’s a situation no one wants.”
The Pension Protection Act mandates that distressed multiemployer plans take steps to improve their long-term financial condition, so as to achieve solvency within seven years starting in 2008. But that’s easier said than done. A major reason for this is that plans typically result from the collective bargaining process. Studies released several years ago concluded that private-sector union-sponsored plans are heavily represented among the least funded:
St. Louis University. Two researchers in the St. Louis University business program late in 2008 published a report concluding that the multi-employer pension funds of five St. Louis-area construction unions on average had only about 70 percent of the assets needed to cover promised benefits to current and future retirees (i.e., liabilities).
Hudson Institute. In 2009, the Hudson Institute’s Diana Furchtgott-Roth and independent economist Andrew Brown, after analyzing IRS Form 5500 tax returns for union and nonunion plans for the year 2006, concluded that union-sponsored plans experienced underfunding a good deal more often than nonunion plans, among “large” and “small” plans alike. The study included single-employer as well as multiemployer plans.
Moody’s Investors Service. In 2009, Moody’s came out with a report based on about 125 multiemployer plans, and concluded that their overall asset-to-liability level declined from an already disturbing 77 percent in 2007 to 56 percent in 2008, the year of the stock market collapse. Of the roughly dozen affiliates of the Carpenters union, only one even exceeded 70 percent. Construction industry plans were only about 60 percent funded. Transportation industry plans, typically sponsored by the Teamsters or the Machinists, averaged slightly below 60 percent.
That brings us to the three aforementioned federal government reports on multiemployer pensions released earlier this year. Apparently, the upswing in the stock market that started in 2009 has made only a modest dent in the problem. Another economic downturn might well trigger a wave of collapses.
The Government Accountability Office (GAO) study, titled “Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies” (see pdf), noted that in 2008 there were 321 IRS-certified multiemployer plans that fell into either the “endangered” or “critical” zone. This compared to 1,047 “safe” plans. In 2009, given the fallout from the stock market collapse of the previous year, fully 934 plans were “critical” or “endangered,” as opposed to the 434 that were rated as “safe.” The recovery of multiemployer plans hardly has been dramatic. In 2010, there were 657 “endangered” or “critical” plans, compared to 682 “safe” ones. And in 2011, there were 531 “endangered” or “critical” plans, as compared to 774 “safe” ones. The number of plans, relatively speaking, remains high.
The GAO also wanted to know how managers of critically underfunded multiemployer plans (less than 65 percent underfunded) were resolving their respective situations. Toward that end, it commissioned Washington, D.C.-based benefits specialist Segal Consulting to survey 107 such plans. About four-fifths of the respondents said they instituted a combination of contribution increases and benefit cuts, while the remainder said they had done one or the other. Most of the respondents said they expected to emerge from their current status in sound condition. But about 25 percent said this was not possible; their continued participation simply was a holding action.
So how frequent will insolvencies be over the years? The GAO concluded that by 2017, they would more than double. Financial assistance to plans that are insolvent, or likely to become so during the next 10 years, could exhaust the PBGC multiemployer insurance fund. In the event of that happening, many retirees will see their benefits reduced to a tiny fraction of their original value. To avert such a consequence, most of the experts that the GAO contacted about this scenario recommended one or both of two actions: 1) allow trustees, under limited circumstances, to reduce accrued benefits for plans headed for insolvency; and 2) provide federal loans to severely underfunded plans facing large benefit reductions. As for the second, the GAO admitted that such “loans” in the past rarely have been repaid because the plans rarely emerge from insolvency.
The PBGC report, released to Congress in January in accordance with ERISA statutes requiring an actuarial review of the multiemployer insurance fund every five years, isn’t encouraging either. PBGC staff calculated that as of September 30, 2012, the fund had total assets of $1.8 billion and liabilities of $7.0 billion. In other words, it was running an operating deficit of $5.2 billion. To maintain the program, the report emphasized, “Premiums must be sufficient to cover current and future financial assistance obligations.” But this negative equity carries the risk of bringing PBGC down. Based on asset and liability projections, and assuming no changes in multiemployer plans or in the PBGC multiemployer program, the study estimated there is about a 35 percent probability that the assets of the agency’s corresponding insurance fund will be exhausted by 2022 and about a 90 percent probability of exhaustion by 2032.
Pension Benefit Guaranty Corp. has been a very busy agency as of late. This January, PBGC, the Department of Labor and the Department of the Treasury jointly released a report to Congress, as required by the Pension Protection Act of 2006, analyzing multiemployer plan underfunding and the possibility of PBGC insurance fund depletion. The situation, noted the authors, even given the ongoing stock market recovery, is less than healthy:
As of the first day of the plan year beginning in 2009, the value of vested benefits promised by all multiemployer plans was $673 billion; to cover those liabilities, multiemployer plans had only $327 billion in assets. This translates to an aggregate funding level of only 49 percent. Although asset values recovered to some extent during the 2009 and 2010 plan years, climbing from $327 billion at the beginning of the 2009 plan year to nearly $400 billion by the end of the 2010 plan year, aggregate underfunding remained significant.
The report noted elsewhere:
Data available through November 2012 indicate that 52% of participants are in moderately or severely distressed plans…this percentage has declined from over 70% two years ago, due in part to improvements in some plans but also due to the effects of funding relief calculations which made it easier for plans to avoid endangered, seriously endangered or critical status. Although many plans are slowly recovering, the long-term financial condition of multiemployer plans does not appear to have improved as substantially as the change in plans’ certified statuses might suggest.
The tri-agency report made no formal recommendations. The authors instead called for a “serious collaborative effort by all of the stakeholders, the Administration and Congress to discuss the current potential future problems faced by multiemployer plans and to work toward consensus around the best ways to solve them.” In practice, then, union officials, plan trustees and beneficiary groups will have a major say in any kind of restructuring. And that means that plans necessarily will become more expensive to sustain. Given that PBGC Director Joshua Gotbaum is the son of former New York City public employee union boss Victor Gotbaum, it’s not likely the agency will side against the unions.
Let us assume, and without cynicism, that the study hints at the need for a moderate-scale bailout. While such a course of action certainly is preferable to a full-scale bailout, it wouldn’t necessarily address the underlying problem of multiemployer pension plans. Under federal law, MEPPs must continue to make all promised contributions and payments should a participating employer exit a plan for whatever reason (e.g., bankruptcy, liquidation, sale of assets). Thus, all remaining employers are required to pick up the slack and assume proportionate liability for the payments owed to the exited firm’s “orphan” employees. This “last man standing” rule, as it is known, is the key feature of the Multiemployer Pension Plan Amendments Act of 1980. The law was established to protect beneficiaries from the consequences of sudden sponsor withdrawals. But aside from unwittingly giving pension managers an incentive to downplay or deny bad news, this provision renders multiemployer plans unstable. To put it succinctly: Nobody wants to be the last man standing. This puts Pension Benefit Guaranty Corp. in the role of the ultimate “last man.”
In practice, this statute can impose high costs upon employers. In a dramatic example, United Parcel Service in December 2007 agreed to pay $6.1 billion to the Teamsters Central States Pension Fund so as to absolve itself from contractual obligations to make further contributions. Under the agreement, UPS would remain liable for its own employees’ retirement, but wouldn’t have to pay for the retirement of other Teamsters who hadn’t worked for the company. Thus, UPS’ “escape” hardly let it off the hook. The last man standing rule especially can be devastating to small firms unable to pay the union “greenmail.” A Walled Lake, Mich. (suburban Detroit) concrete forming company, Fastdecks Inc., is finding out the hard way. The firm recently got a bill from the Central States Fund for $465,774 after having laid off its sole remaining union employee. Company CEO George Kerver explains: “As companies leave the pool of contributors, each remaining company’s percentage of the growing shortage gets larger. That means, theoretically, that the withdrawal liability for the last company that stays in the pool will be $25 billion, or however much the entire fund is underfunded.” Such is the dominant reality of the “last man standing” rule: The union calls the shots.
So is a multiemployer pension bailout on the horizon? In a sense, a bailout already has begun. In 2008, Congress enacted the Worker, Retiree and Employer Recovery Act (WRERA), which provides relief for troubled pensions. As the law pertains to multiemployer plans, it allows fiduciaries to temporarily freeze their funding status at the prior year’s level, and extend the time frame for achieving a benchmark for solvency from 10 years to 13 years. In 2010, lawmakers created the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act (PRA), which provides additional funding for qualifying multiemployer plans. The aid could have been ramped up to nearly stratospheric levels had Congress passed proposed 2010 legislation sponsored by Reps. Earl Pomeroy, D-N.D., and Pat Tiberi, R-Ohio, and Sen. Bob Casey Jr., D-Pa., to require taxpayer support for “orphan” multiemployer plans to which one or more employers have stopped making contributions.
Raising insurance premiums and restricting benefits may be necessary for the short run in stabilizing the balance sheets. But such steps have major limitations over the long run, even given an improved stock market and federal reform laws such as the Pension Protection Act. Taken beyond a certain limit, such approaches would render multiemployer pension plans unattractive, especially as the average percentage of participants who are active workers continues to decline. The best reform of all would be for PBGC to phase out coverage of multiemployer pensions altogether and encourage sponsors to seek coverage in the private insurance market. This isn’t at all an extreme measure. The multiemployer pension is a distinct type of financial instrument serving a distinct purpose. Yet in practice it has proven a good deal riskier than the single-employer pension. Given the trendlines of the former, PBGC increasingly is being called upon to do something it can’t do in lieu of a deep public subsidy. It should focus instead on what it can do without a subsidy: insuring single-employer plans.
The key obstacle to any phase-out of multiemployer pensions is the unions. For it is a union, and not employers, that benefits from imposing an agreement on employers from which they legally cannot escape. As a proxy for federal action, states should ban, or at least curb, the use of Project Labor Agreements, especially given that the construction industry accounts for about half of all underfunding. In the end, a pension plan is only as sound as its ability to deliver on future promises. And far too many private-sector multiemployer plan sponsors have made promises they aren’t likely to keep.