Multiemployer Plan Conundrum: Are Composite Plans the Answer?


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The creation of composite plans could be a solution to poorly funded multiemployer pension plans and avoid the severe benefit cutbacks proposed by a number of plans.

A composite multiemployer plan has features of both a defined benefit and a defined contribution plan. As in a defined benefit plan, the trustees would establish the benefit accrual rate and eligibility provisions. Like a defined contribution plan, contribution rates would be negotiated by the bargaining parties. It can be created as a stand-alone plan or as an add-on to an existing defined benefit plan.

A hypothetical composite multiemployer pension plan could survive severe economic stress through a combination of contribution increases and benefit reductions, a recent analysis found.

Segal Consulting conducted the analysis to determine what level of remedies would be required to restore this plan to a required funded ratio of 120 percent in 15 years after a shock such as the Great Recession of 2008-2009.

“Given the investment and employment shock similar to what happened in 2008, we asked what level of corrective actions would be needed for a composite plan to build its way back to health,” Diane Gleave, senior vice president of Segal Consulting in New York, told Bloomberg BNA.

Under the composite plan design suggested by advocates such as the National Coordinating Committee for Multiemployer Plans, the plan would have to be 120 percent funded 15 years into the future, Gleave said.

Benefit improvements would be allowed only if the projected funded ratio is at least 120 percent after the improvement. If the 15-year projected funded ratio is less than 120 percent, the plan trustees would have to establish a realignment program that they monitor and update annually.

The analysis comes amid a flurry of debate over the merits of the composite multiemployer plan design, and against the backdrop of the Treasury Department’s rejection of a petition by Central States pension fund to cut plan participant and retiree benefits (see ‘Composite' Approach for Multiemployer Pensions Sparks Debate; Treasury Rejects Central States Rescue Plan).

Mature Plan Studied

Typically a composite plan would start with zero assets, but Segal decided to analyze the impact of economic stress on a hypothetical “mature” plan, that is, a plan that is already in existence, Gleave said. Such a plan would have experienced investment gains and losses, plan amendments, changes in contribution rates and employee demographics.

The plan was presumed to be 100 percent funded in 2016, falling to 73 percent funded in 2017 as a consequence of the severe shocks similar to those that defined benefit plans experienced in 2008-2009, and projected to be at 60 percent funding in 15 years.

The hypothetical plan would experience a 22 percent loss on investment in 2016, mirroring the average defined benefit plan’s rate of return for 2008, and a 25 percent contraction in the active employee population, which some industries experienced after 2008.

Plan Realignments

The analysis found that either of two possible realignment programs would increase the hypothetical plan’s funding to 121 percent in 15 years—slightly above the 120 percent funding requirement.

In the first program, the parties would negotiate a 54 percent increase in contributions spread out over three years. Future benefit accruals would be reduced by 30 percent and all non-core, non-retiree benefits (such as early retirement subsidies and optional forms of benefit) would be eliminated. There would also be a 6 percent reduction in non-core retiree benefits (such as benefits beyond the accrued benefit at normal retirement age).

Future benefit accruals would also be reduced by 30 percent under the second realignment. It would also include removal of all non-core non-retiree benefits and a 4 percent reduction in core non-retiree benefits.

The analysis did not factor in any kind of recovery in the stock market or increase in active employee population, but instead was limited to how resilient a composite plan would be under stressful economic conditions, Gleave said.

Nor did the analysis account for future investment gains or losses, she said. “Investment return assumptions have to be established based specific to each plan and based on investment allocation, expectation for return, risk profile and other factors.”

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