Severely Underfunded Plans Have Cut Benefits to Current Employees and Increased Employer Contributions, but Financial Outlook for Some Plans Remains Bleak

The large majority of the most severely underfunded multiemployer  plans—those in critical status—have, according to a 2011 survey, both  increased required employer contributions and reduced participant  benefits in an effort to improve plans’ financial positions. Plan officials  explained that these changes have had or are expected to have a range  of effects, and in some cases may severely affect employers and  participants. While most critical status plans expect to recover from their  current funding difficulties, about 25 percent do not and instead seek to  delay eventual insolvency. In addition, the plan  considered the impact of funding the necessary contribution increases  through reductions to base pay. PBGC Provides Financial Assistance to a Greater Number of Plans Each Year, Endangering the Multiemployer Program and Guaranteed Retiree Benefits

PBGC’s financial assistance to multiemployer plans has increased  significantly in recent years, and projected plan insolvencies may exhaust  PBGC’s multiemployer insurance fund. While retirees of insolvent plans  generally receive reduced monthly pension payments under the PBGC  pension guarantee, this amount would be further reduced to an extremely  small fraction of what PBGC guarantees, or nothing, if the multiemployer  insurance fund were to be exhausted. PBGC officials  said that the insolvency of either of these two large plans would exhaust  the insurance fund in 2 to 3 years. Key Options to Reduce Liabilities and Change Plan Designs Could Help Improve Financial Stability, but Pose Trade-offs

Experts and stakeholders we interviewed cited two key policy options to  avoid the insolvencies of severely underfunded plans and the PBGC  multiemployer insurance fund, and a number of other options for longer  term reform of the multiemployer system (see fig. They noted that this flexibility is essential because 1) the most severely  distressed plans will be unable to avoid insolvency using traditional  methods—increasing employer contributions and/or reducing future  benefit accruals or adjustable benefits—and 2) benefit reductions will  occur in any case and will be more severe in the event of plan insolvency,  especially in the event of the insolvency of PBGC’s multiemployer  insurance fund. Representatives of one of these plans referred to  appeal letters to the plan that had been submitted by participants and/or  their spouses, noting that older workers or retirees can be in some  financially difficult situations, and cuts to accrued benefits would deepen  and increase the number of such hardships. For example, given the sacrifice it would impose on  participants, several experts and plan representatives said that allowing  reductions in accrued benefits should only be considered as a last resort  for plans headed for insolvency. Changes to Plan Design and Other Options Could Address Challenges of Withdrawal Liability and Improve Long-Term Financial Stability

			Addressing the Problems Associated with Withdrawal Liability Policies

ERISA requires that employers wishing to withdraw from a multiemployer  plan pay for their share of the plan’s unfunded liabilities. For example, representatives from one of  the largest plans said that due to the relatively large size of their plan and  the amount of their funding shortfall, a merger is not an option for them. Matters for Congressional Consideration

Given the serious challenges facing PBGC’s multiemployer insurance  fund and critically underfunded multiemployer plans, and to prevent the  significant adverse effects of PBGC insolvency on workers and retirees,  Congress should consider comprehensive and balanced structural  reforms to reinforce and stabilize the multiemployer system. We  received formal written comments from the PBGC, which generally  agreed with our findings and analysis. 2) To what extent have plans relied on PBGC assistance since 2009, and  what is known about the prospective financial condition of the  multiemployer plan insurance program? 3) What options are available to address PBGC’s impending funding  crisis and enhance the program’s future financial stability? Specifically, we  obtained data on the liabilities attributable to plans on PBGC’s list of plans  that are insolvent or considered likely to become insolvent in the next 10  years, as well as those thought likely to become insolvent in the next 10  to 20 years. To identify and assess available  options, we interviewed a wide range of pension experts—including  academics, actuaries, attorneys, plan trustees and administrators,  employers and trade associations, unions, advocacy organizations,  government officials, and other relevant stakeholders.
Why GAO Did This Study

Multiemployer pension plans--created by collective bargaining agreements including more than one employer-- cover more than 10 million workers and retirees, and are insured by the PBGC. In recent years, as a result of investment market declines, employers withdrawing from plans, and demographic challenges, many multiemployer plans have had large funding shortfalls and face an uncertain future.
GAO examined (1) actions that multiemployer plans in the weakest financial condition have taken to improve their funding levels; (2) the extent to which plans have relied on PBGC assistance since 2009, and the financial condition of PBGC's multiemployer plan insurance program; and (3) options available to address PBGC's impending funding crisis and enhance the multiemployer insurance program's future financial stability.
GAO analyzed government and industry data and interviewed government officials, pension experts--including academics, actuaries, and attorneys, multiemployer plans' trustees and administrators, employers and trade associations, unions, advocacy organizations, and other relevant stakeholders.

What GAO Found

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. In some cases, these measures will have significant effects on employers and participants. For example, several plan representatives stated that contribution increases had damaged some firms' competitive position in the industry, and, in some cases, threatened the viability of such firms. Similarly, reductions in certain benefits--such as early retirement subsidies--may create hardships for some older workers, such as those with physically demanding jobs. Most of the 107 surveyed plans expected to emerge from critical status, but about 25 percent did not and instead seek to delay eventual insolvency.
The Pension Benefit Guaranty Corporation's (PBGC) financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC's multiemployer insurance fund's ability to pay pension guarantees for retirees. Since 2009, PBGC's financial assistance to multiemployer plans has increased significantly, primarily due to a growing number of plan insolvencies. PBGC 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, PBGC expects the number of insolvencies to more than double, further stressing the insurance fund. PBGC officials said that financial assistance to plans that are insolvent or are likely to become insolvent in the next 10 years would likely exhaust the insurance fund within the next 10 to 15 years. 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.
Experts and stakeholders cited two policy options 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. 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. These and other options also have important tradeoffs, however.

What GAO Recommends

Congress should consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system. PBGC generally agreed with our findings and analysis.