Witnesses for the newly formed Joint Select Committee on Solvency of Multiemployer Pension Plans spelled out for legislators the history of multiemployer pensions and how they got into the crisis they are in today.

In his testimony, Thomas A. Barthold, chief of staff of the Joint Committee on Taxation, offered a very detailed history of the multiemployer pension plan system both before and after enactment of the Employee Retirement Income Security Act (ERISA). He identified four issues contributing to the underfunding of multiemployer pensions.

He said that while the amount of employer contributions specified in bargaining agreements generally takes into account benefits to be earned under the plan, it historically has not been explicitly tied to the amount needed to satisfy Internal Revenue Code and ERISA funding requirements. Secondly, if the industry covered by the multiemployer pension plan has contracted (resulting in fewer active employees), the liabilities for benefits of retirees and other former employees generally have become disproportionately large compared to liabilities for benefits of current employees.

Barthold noted that liabilities under the plan include previously earned benefits for employees of employers that no longer participate in (i.e., contribute to) the plan. “Former participating employers may have withdrawal liability, but payments may not be sufficient to cover the unfunded amount,” he said. In addition, the former participating employer may no longer exist and is not able to pay the withdrawal amount.

Finally, Barthold said, “Underfunding in many cases is too great to realistically cover with future investment income or ongoing contributions.”

Ted Goldman, senior pension fellow with the American Academy of Actuaries, noted these same issues in his testimony. He pointed out that there are fewer unions and fewer young employees joining them, leading a lower proportion of active workers who contribute to their plans than inactive workers who do not contribute. He also noted that many withdrawn employers are bankrupt, meaning they are unable to pay their full withdrawal liability.

Goldman explained that when the Employee Retirement Income Security Act (ERISA) was passed, it protected benefits that plan participants had already accrued, often referred to as the “anti-cutback” rule. In addition, employers contributing to multiemployer plans became responsible not only for their negotiated contributions, but also for any funding shortfalls that developed in the plans. ERISA also introduced minimum funding standards, expanded participant disclosures, and fiduciary standards.

An issue that led to the current state of multiemployer plan crisis was that during the late 1990s, very strong asset returns led many plans to improve benefit levels in order to share the gains with participants and protect the deductibility of the employer contributions, according to Goldman. However, these years were followed by a period of very poor asset returns that erased much of these investment gains. The increased benefit levels were protected by ERISA’s anti-cutback provisions. “This combination of temporary asset gains and permanent benefit improvements is a contributing factor in the challenges facing multiemployer plans today,” he said.

Goldman added that plans have invested in diversified portfolios to try to achieve investment returns that can support higher benefit levels and lower contribution requirements than would be possible if the assets earned risk-free rates of return. However, plans need additional contributions or reduced benefits if the anticipated investment returns are not achieved.

He pointed out that the 2000 dot-com bust left some plans financially weakened and the 2007 to 2009 recession further strained the financial stability of most plans.

“For decades, these plans worked much as expected, with little threat of insolvency. However, a combination of economic, demographic, and regulatory changes have placed a small but material segment of these plans at risk. Employees who negotiated for these benefits as part of wage and benefit packages were expecting to benefit from these arrangements at retirement. Now those expectations may not be met,” Goldman said.

Source: Plan Sponsor