Shifting Demographics a Challenge for Multiemployer Plans

Plans continue to gain financial stability, but changing participant demographics threaten to derail this in the future.

Despite the financial volatility caused by the 2008 Great Recession, the majority of multiemployer defined benefit (DB) pension plans remain financially stable and have seen an increase in funding levels and overall assets, according to a report from the International Foundation of Employee Benefit Plans and Horizon Actuarial Services, LLC.

As of December 31, 2013, there were 1,387 multiemployer DB pension plans—1,349 of which were financially solvent. These plans have total assets of $460 billion, up from $400 billion in 2012. The plans serve 10.4 million participants and beneficiaries.

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Investment returns for multiemployer DB plans were quite volatile over the past decade. In the 2008 calendar year they saw a median investment return of -23.5%. The stabilizing market resulted in double-digit returns in four of the five years from 2009 through 2013.

Plan trustees have taken significant action to improve plan funding levels. As of December 31, 2013, the median funded percentage was 86% (based on the market value of assets). This is a significant improvement over the median funded percentage at the end of 2008 (68%) and is approaching the median funded percentage prerecession in early 2008 (89%). The increase in funding allowed more plans to enter the “green zone” under the Pension Protection Act (PPA). For 2013, 57% of plans had green zone status, up from 34% in 2009.

NEXT: Changing demographics challenge financial stability

“The higher investment returns and increased funding levels of plans are good signs, but plans on the whole are becoming more mature,” says Jason Russell, consulting actuary, Horizon Actuarial Services, LLC. “When you look at demographics and net cash flows, it’s clear that plans are aging and tilting toward more inactive versus active members.”

According to the report, at the end of 2004, the median ratio of active participants to inactive participants was nearly 1:1, meaning there was almost the same number of active participants, with contributions made on their behalf, as there were inactive participants. By the end of 2013, the median ratio of active to inactive participants was 6:10.

“As plans become more mature, it becomes more difficult for them to improve funding levels with changes to contribution levels or future benefit accruals. Trustees may want to evaluate their funding and investment strategies to make sure they are in line with their plans’ demographics,” says Russell.

The report also reveals that as of December 31, 2013, there were 1,132 multiemployer defined contribution (DC) retirement plans. These plans have total assets of more than $120 billion and cover more than 3.7 million participants and beneficiaries. A majority of these plans—at least 80%—are offered in tandem with a DB plan.

The volatile economy over the past decade significantly impacted investment returns for multiemployer DC plans. In 2008, the median investment return was -21%; in 2013, the median investment return was 15%.

The report, “The Multiemployer Retirement Plan Landscape: A Ten-Year Look (2004-2013),” analyzes key trends in demographics, cash flows and investments for defined benefit and defined contribution plans over the ten-year period from 2004 through 2013. It is free for International Foundation of Employee Benefit Plans members, and can be downloaded at www.ifebp.org/MultiemployerRetirement.

Investors Choose Guarantees Over Growth

Eighty-one percent would prefer a product with a guaranteed 4% return.

Market volatility has made investors skittish, according to the 2015 Market Perceptions Study from Allianz Life Insurance Company of North America. Eighty-one percent would prefer a product with a guaranteed 4% return to one with an 8% return that is vulnerable to market downturns. This is up from 78% who expressed this preference in 2014, when Allianz Life first started this study.

Asked if they would invest if they had extra cash, 37% said “fear of market uncertainty” would prevent them from doing so. While this is down slightly from 40% in 2014, it is still the major impediment keeping people from investing, followed by “lack of reliable financial guidance” (23%) and “today’s low interest rates” (21%).

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Just over one-third, 34%, say they believe the market is “too volatile and too risky” for their investment style. Only 18% say they think “the stock market is a necessary place to invest money for the long term, even though it can be nerve-wracking at times.” Another 25% say they believe that “with a balanced approach, the stock market is a smart place to invest a portion of one’s assets,” and 23% said they are “comfortable with the stock market for the long term.”

NEXT: Outlook on volatility

Nearly two-thirds, 62%, expect the market will continue to be uncertain, similar to the 64% who expressed this sentiment in 2014. Not surprisingly, 79% think it is important to have a guaranteed source of income in retirement, in line with the 80% who said so in 2014. Only 26% are comfortable with current market conditions and are ready to invest now, down from 28% in 2014.

“Whether it’s a hangover from the market crash of 2008 or the various bumps in the road we’ve experienced along the way, the majority of Americans are simply not comfortable with any type of market volatility and are looking for ways to mitigate exposure while still building up their retirement nest eggs,” says Katie Libbe, vice president of consumer insights for Allianz Life. “Persistent desire for guarantees in this market environment tells a compelling story that, regardless of how the market actually performs, Americans want some type of protection against losses in their retirement savings strategy.”

Asked what they would do if they had extra cash to purchase a financial product, 36% said they would seek out a product that offers a balance of potential growth and some level of protection. Twenty-two percent said they would put extra cash into a product with modest growth potential, 21% said they would put the cash into a savings account earning little or no interest, 13% said they would wait for the market to correct before investing the money, and only 9% said they would seek out a product with high growth potential and no protection from loss.

Ipsos conducted the study for Allianz Life among 797 adults on October 21 and 22.

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