Issue 1-09
Survey Finds Current Economic Downturn Negatively Affects Defined Benefit-Multiemployer Pension Plans
CAWP contractors contribute money into union pension plans on behalf of their union employees. These funds are called multiemployer defined benefit pension plans: “multiemployer” since several different employers contribute to one plan, and “defined benefit” because the plan provides retirees with a guaranteed monthly payment based on a predetermined formula. This type of plan relies on contributions from employers and investment income to provide the retirement benefit, and is administered by employer and union trustees. Multiemployer defined benefit plans are also commonly referred to as “Taft-Hartley” plans, after the federal act that gave rise to these types of plans.
During the week of April 13, 2009, the International Foundation of Employee Benefit Plans conducted a survey of trustees and plan administrators, affiliated with multiemployer defined benefit pension plans, concerning defined benefit pension fund status levels. The introduction of the survey report laid out the current economic conditions that these types of pension plans find themselves in today.
As the population has aged in recent years, concern has increased regarding the adequacy of defined benefit plan funding. Plan sponsors have watched plan liabilities grow faster than assets. Congress responded by passing the Pension Protection Act of 2006 (PPA).
To stimulate increases in defined benefit plan funding levels, PPA requires all Taft-Hartley multiemployer defined benefit pension plans to certify their funding status each year. In general, a plan is considered to have safe status (also referred to as the green zone) if it is at least 80% funded. At the opposite end of the continuum are critical status (red zone) plans that are less than 65%funded. Falling in between are plans that are considered endangered (yellow zone) or seriously endangered (orange zone). Under PPA, plans certified as endangered must create a funding improvement plan. Those certified as critical must create a rehabilitation plan.
Just as the new PPA requirements were coming into play, the nation was hit by the worst economic crisis seen in decades. Stock values dropped dramatically and many plans experienced negative investment returns. Defined benefit plans that had seen funding improvements in recent years saw gains wiped out. Congress supplied temporary relief via the Worker, Retiree and Employer Recovery Act of 2008 which offers multiemployer defined benefit plans the option of a one-year funding status freeze. Plans certified as safe for the 2008 plan year, but now certified as endangered or critical, can choose to freeze their safe status for the 2009 plan year. Likewise, plans certified as endangered for 2008 but critical for 2009 may freeze their endangered status.
The survey report concludes with the following:
The economic crisis of 2008-2009 has created setbacks for defined benefit pension plans in the United States. Plans that experienced positive investments returns and defined benefit funding improvements before the market downturn saw those improvements wash away. Multiemployer plans facing strict funding requirements after the Pension Protection Act of 2006 were granted some relief in the form of the Worker, Retiree and Employer Recovery Act of 2008 (WRERA).
According to the survey findings, the majority of responding DB plans were adequately funded in 2008 – being certified as safe or in the green zone. Investment losses throughout 2008, however, took their toll. An increasing percentage of plans entered endangered or critical status for 2009. Many plans have chosen to take advantage of the one-year freeze option offered by WRERA.
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The International Foundation of Employee Benefit Plans is a nonprofit organization, dedicated to being a leading objective and independent global source of employee benefits, compensation and financial literacy education and information.