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Central States Pension Fund expected to be insolvent In Seven Years

The pension crisis continues across the U.S., and public employees aren’t the only ones affected by it. Ninety-three percent of the biggest defined-benefit plans covering S&P 500 companies aren’t fully funded, which means those who were counting on pensions to support their retirement must immediately plan for the worst-case scenario. Congress has just waded into the fray on multi-employer pension plans by forming the Joint Select Committee on Solvency of Multiemployer Pension Plans, a committee to rescue these plans that are on the brink of insolvency, but some of them are already folding.

multi-employer pension Plans
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Central States Pension Fund expected to be insolvent by 2025

The executive director of Central States Pension Fund told the 400,000 members of the $15.1 billion fund this month that it will likely be insolvent by 2025. He also called on members to press Congress for a bailout. The formation of the congressional committee is certainly the first step toward bailing out multi-employer pension plans such as Central States, but now committee members must get to work and actually do something about all the pension plans that are heading for insolvency.

Central States Pension Fund shells out $2.8 billion in benefits annually while collecting only $700 million from members per year. The problem is that most of the companies that were participating in the funds have gone under or simply left the plans, and returns on the funds’ investments aren’t nearly enough to offset the difference.

Insolvency is the rule, not the exception

Central States is hardly the only multi-employer pension fund facing insolvency. Unfortunately, the fund’s problems have become very typical across the pension industry, with most of them facing the same fate in the coming years. This is why Congress is trying to provide relief for the millions of workers and retirees who will be affected.

According to employee-benefits expert Elliot Dinkin of Cowden Associates, 186 of the 200 biggest defined-benefit plans serving the S&P 500 aren’t fully funded. DuPont already announced that it will stop paying into 13,000 employees’ pensions, while 70,000 UPS workers won’t receive increased benefits if they work after 2020.

Yum! Brands is even paying off some of its former employees with lump sums to get rid of some of its pension liabilities. General Electric is by far the worst-off, he adds, and he blames company management for robbing its pensions to pay for mergers and acquisitions. GE’s pension is now running at a $31 billion deficit after having a $14.6 billion surplus in 2001, before CEO Jeff Immelt took the helm.

Few protections for retirees

The pension crisis has left many who are retired or close to retirement wondering what will happen to their pensions if or when they become insolvent. According to Dinkin, there are some protections in place for multi-employer pension plans, although they are limited until Congress crafts some sort of bailout.

“An on-going corporate pension plan and an on-going Multi-employer pension plans are required to pay the retiree benefit amounts required per each plan document, regardless of the current funded status,” he told ValueWalk in an email. “In the event that these plans cannot continue, then the PBGC [Pension Benefit Guaranty Corporation] steps in and takes over the operations of the pension plans.  The PBGC has certain guarantee levels that it will pay up to in the event of a take-over.”

Of course, this means that members won’t get all of the benefits they were counting on when their pension funds become insolvent. Dinkin adds that the government has already given approval for some “severely underfunded multi-employer pension plans” to reduce the benefits they pay to current retirees, but many such plans have yet to receive any sort of aid.

Here’s what the congressional committee can do

The congressional committee that was appointed to work on a fix for underfunded multi-employer pension plans does have a number of options to help retirees. Dinkin expects provisions such as loans or bonds, along with an order to change the plans themselves.

“The committee will investigate options that could include the providing of loans, issuing bonds, creating alternate amortization and funding rules, requiring plan mergers, and other such provisions to shore up the funded status of these plans,” he told ValueWalk. “It may also insist on slowing down of future benefit accruals for current actives, eliminate costly early retirement provisions and/or disability benefits.”

He also weighed in on steps multi-employer pension plans could take to improve their situation:

“In order to prevent the further erosion of pension plans, the approach should involve separating pension plans into various tiers based upon funded status,” he said. “Specific action plans would occur that are more drastic than exist under current law to bring severely underfunded plans to a higher level, over a set period of time (e.g. 3-5 years). Typically, a plan that falls into a poorly funded status, is often a direct result of worsening business conditions. More time should be provided to fund, if in fact, the company has a reasonable chance to recover. The other change would be to permit better funded plans to get some relief during the good times.”

The Multiemployer Pension Funding Study conducted by Milliman found that these pensions are better funded this year than they have been in the last decade, but it’s looking like too little too late.  At this point, the congressional committee that was appointed to work on the pension crisis facing multi-employer pension plans has yet to take any steps. The Joint Select Committee on Solvency of Multiemployer Pension Plans met last month to hear testimony from witnesses about the problem, but it’s still too early to know what kinds of steps it might take.

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