Many multiemployer plans have been challenged in recent years by investment volatility, declining union membership, an aging population that is living longer, and an uncertain political landscape. As we begin 2018, we expect that multiemployer plans will continue to operate under pressure from these issues, while also facing new challenges and opportunities. Listed below are six areas that trustees and administrators may need to understand or explore in the upcoming year.
- The impact of asset performance during 2017- Multiemployer plan funding overall is nearing its best position since the market collapse of 2008. However, the gap between the funded percentages of critical plans (Red Zone) versus noncritical plans continues to widen. For more information, visit this link:
Additionally, many investment advisors anticipate lower expected returns in the future, with some expecting a market correction. Therefore, it is imperative that plans review the sensitivity of asset returns on the plan’s funded status and long term viability. With this information, trustees will be better prepared to handle the impacts of potential poor investment returns.
- Benefit Suspensions- the Multiemployer Pension Reform Act of 2014 (MPRA) allows trustees of deeply underfunded plans (those in critical and declining status) to reduce benefits for both current and future retirees. Several plans have applied for reductions and a few plans have received approval for and implemented reductions. There’s no doubt that this will continue to be a hotly debated topic.
- The PBGC’s need for funds- Further increases in Pension Benefit Guaranty Corporation premiums are a strong possibility as the agency tries to stave off projected insolvency of its multiemployer trust. Some plans are considering different strategies in anticipation of this, such as lump sum payouts to terminated vested members to potentially lower their premiums. As interest rates rise, this may become of more interest to additional plans.
- Plan Mergers- Merger activity continues to gather steam. More plans are exploring this option to improve their financial outlook and take advantage of economies of scale. An objective evaluation and proper due diligence in selecting a merger partner remains key.
- Alternative Plan Designs- Over the last few years, a number of multiemployer plans have changed their design to strengthen long term viability while still providing members with lifelong pension benefits. For instance, some plans have considered alternative designs where benefit accruals move up or down with the fluctuating return on plan assets, as well as cash balance plans and other hybrid designs. Additionally, there have been proposed changes in the law that would allow for new designs including composite plans. This trend of seeking out or studying alternative plan designs is expected to continue.
- Membership Benefit Plan Education- How well members understand their benefit plans will help lay the foundation for a successful transition into retirement. Effective communication and education can improve member appreciation for the benefits their pension and health plans provide.
As we enter 2018, trustees and professionals will need to understand all the options so that the best decisions can be made for plan members. In future articles, we will discuss each of these critical issues in more detail.
Victor Harte and Tim Connor are Principals and Consulting Actuaries for Milliman, specializing in Taft Hartley plan issues.