PBGC Reports Multiemployer Program Likely To Be Insolvent In 10 Years Without Large Premium Increases
The Pension Benefit Guaranty Corporation ("PBGC") just released its latest quinquennial report on the multiemployer insurance program. The new report, released March 31st (the "March 2016 report"), shows a better than even chance that, by 2025, the multiemployer insurance fund will run out of money to pay guaranteed benefits for insolvent multiemployer plans absent substantial increases in premiums. The March 2016 report may be found at http://www.pbgc.gov/documents/Five-Year-Report-2016.pdf.
The March 2016 report takes into account the passage of the Multiemployer Pension Reform Act of 2014 ("MPRA"). In particular, the PBGC took into account the increase in premiums under MPRA (currently $27 per participant, up from $26 in 2015), and MPRA's provisions that allow failing plans to suspend (that is, reduce) benefits or partition the plan (so that a portion of the original plan receives financial assistance from the PBGC). Using three possible scenarios with respect to suspensions and partitions, the PBGC projected that:
- Under all scenarios, with the current premium structure, there is more than a 90% likelihood of insolvency in the multiemployer insurance program in 20 years, and more than a 40% likelihood of insolvency in 10 years,
- Premiums would need to be increased by six to eight times the 2015 level (depending on the scenario) to avoid insolvency with near certainty in 20 years, and
- Premiums would need to be increased by three to four times the 2015 level (depending on the scenario) to avoid insolvency with near certainty in 10 years.
The multiemployer insurance program's deficit stood at $42.4 billion as of September 30, 2014, with assets of only $1.8 billion compared to liabilities of $44.2 billion. However, the deficit does not tell the full story. The more relevant measurement is whether and when the program will run out of money to pay guaranteed benefits. PBGC used its model to determine the probability that it would run out of money in the future. It found a greater than 50% chance that it would run out of money by 2025 and a 91% chance that it would run out of money by 2032. This is the result even if failing plans reduce benefits to the fullest extent allowed by MPRA.
No Increase in Multiemployer Guarantee Level
The PBGC is required by law1 to prepare a report every five years on the condition of the multiemployer insurance program addressing the premiums needed to maintain the current guarantee and whether the guarantees may be increased without increasing the premium. The March 2016 report is based on the PBGC's 2014 projections of the condition of the program, which incorporated the changes made by MPRA. The March 2016 report concludes that the "high likelihood of insolvency and the current program net deficit indicate that current premium levels do not support an increase in the multiemployer guarantee level."
Steps to Prevent Program Failure
The March 2016 report examines the changes in premiums necessary to prevent program failure under three different scenarios concerning usage of the provisions for benefit suspensions and plan partitions provided by MPRA to help failing plans survive. The first scenario assumed that no plans would institute any of the changes allowed by MPRA. The second scenario assumed that only 20% of the eligible plans would be able to take advantage of the partition remedy because of financial constraints on PBGC, while the third scenario assumed that because of additional premiums, 60% of eligible plans would be partitioned (and, apparently, the second and third scenarios assumed that 60% of plans that are in "critical and declining" status would suspend benefits2). The results show that the multiemployer insurance premiums would need to increase to $156 ($26 times 6) or $208 ($26 times 8), depending on the scenario, to reduce the probability of insolvency after 20 years to 2% or less. According to the PBGC's projections, premiums would have to be increased to $78 ($26 times 3) or more, depending on the scenario, to reduce the 10 year probability of insolvency below 2%.3
Alternatives to the Flat-Rate Premium
The March 2016 report discusses alternatives to the current flat-rate premium structure. The report notes that the President's current budget proposal would give the PBGC's Board of Directors authority to adjust premiums to better reflect the varying risks of underfunding posed under different plans and by different sponsors. In addition to creating variable-rate premiums (VRP), the budget also assumes that the PBGC will use its premium-setting authority to assess an exit premium, payable to PBGC, on employers that withdraw from multiemployer plans.
The March 2016 report notes that although actual insolvency appears delayed until after the next five-year report, PBGC is at risk of not having the funds under the program to continue to pay benefits beyond the next decade. The report concludes that increased premiums, including the proposed VRP and exit fee, may "provide a path to solvency for the multiemployer program." Finally, the report states that the Administration expects to work with Congress and the multiemployer plan community to craft a financially sound multiemployer plan program.
Given that there will be a new President and new Congress next year, it is doubtful that the PBGC will be given the authority to set premiums in the near future. However, absent alternative sources of funding, it appears that substantial premium increases will likely be considered by Congress, which is similar to the experience under the single-employer insurance program.
Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.
1 Section 4022A(f) of the Employee Retirement Income Security Act of 1974 (ERISA), as amended.
2 However, the modeling assumed that one large systemically important plan has a 100% likelihood of applying for and complying with the requirements for suspending benefits. See footnote 14 of the March 2016 report.
3 See Figures 3, 4, and 5 in the March 2016 report.