Pity the Multiemployer Pension Plans by David Merkel, CFA of the Aleph Blog
Most of the efforts to encourage defined benefit pension plans in the US have been an exercise in wishful thinking. Then there are the efforts to discourage defined benefit plans, which came about because the IRS felt that they were losing too much tax revenue to overfunded plans. Thanks, IRS… many plans were not really overfunded, but you discouraged a healthy funding of DB plans.
But if things are bad with corporate DB plans, it is much worse with Multiemployer Pension Plans. These are plans meant to cover union laborers in a given industry. What led me to write this evening were the problems with pensions in the coal-mining industry. From the article:
Union miners are among the 10.4 million Americans with retirements tied to multiemployer pension plans, the large investment pools considered low risk because they don’t rely on a single company for financing. Two recessions, industry consolidation, and an aging workforce have the multiemployer funds facing a $400 billion shortfall. Dozens already have failed, affecting 94,000 participants.
Strong investment returns helped lift the average funding level of pension plans by three points, to 88 percent, from 2013 to 2014, according to Segal Consulting, which advises multiemployer trust funds. Yet, more plans were added to the “endangered” or “critical” lists that require fund managers to take steps to improve their financial status, including adding cash or adjusting future benefits.
“In 2001, only 15 plans covering about 80,000 participants were under 40 percent funded,” the government pension agency reported June 30. “By 2011, this had grown to almost 200 plans covering almost 1.5 million participants.”
The pension plan for union miners had about $5.8 billion in liabilities in 2012 and was only 71.2 percent funded at the end of 2013, according to Labor Department filings.
The trouble with multiemployer plans is that as some employers fail, the remainder of the employers have to pick up the bill for pensions. In a declining or cyclical industry, that is a recipe for disaster. As a result United Parcel Service, Inc. (NYSE:UPS) spent $6.1 billion to exit the multiemployer plan, while still guaranteeing benefits to its own employees. The $6.1B was the ransom payment to escape something far worse in an underfunded multiemployer plan.
Though average multiemployer plan may be better funded, the average hides a lot, as there are more people expecting benefits from plans that are dramatically underfunded. What’s worse, is that those in multiemployer trusts have a maximum guarantee that is around 30% of what a single-employer plan would receive.
As such, to the degree that unionized industries as a whole suffer, so will benefits to unionized laborers, present and past. People need to understand that pensions aren’t magic.
- Adequate contributions need to be made.
- Investment returns must be adequate.
- Benefits promised must be reasonable relative to contributions.
- Anti-selection should be limited in multiemployer trusts. Perhaps employers need to put up extra capital that they would forfeit if they wanted to leave the collective industry pension promises.
As it is, participants in the worst multiemployer pension plans will suffer losses, and the PBGC will guarantee small amounts of the benefits, and that is as it should be, because the ability to drag money out of a shrinking industry is hard, very hard.
So pity participants in multiemployer defined benefit pension plans. A significant portion of them will get far less than they expected.