Segal Consulting: Change to Actuarial Assumptions Not Reasonable for Multiemployer Plans

In the first two public hearings held by the Joint Select Committee for the Solvency of Multiemployer Pension Plans, some members raised questions suggesting that one way to reduce the risk associated with multiemployer plans would be to force them to use more conservative actuarial assumptions and to adhere to stricter funding standards—in other words, follow funding rules similar to those in place for single-employer plans, according to Segal Consulting.

To determine the impact of such a change, the firm performed a detailed analysis of two national multiemployer plans.

Segal Consulting found that the increase in the necessary contributions to meet current funding standards would not be sustainable for either of the plans studied, both of which are currently considered healthy. If the discount rate changed to 3.7%, the contribution rate for the first plan it studied would have to more than double (to more than $20/per hour) to avoid a funding deficiency. The impact of a 3.0% discount rate would be considerably more severe: contributions would have to nearly triple (to around $30/per hour).

If the discount rate were to change to 3.7%, to prevent a funding deficiency and remain in the green zone, contributions for the second plan it studied would have to increase from $40 million to over $400 million over the next three years.

David Brenner, senior vice president and national director of Multiemployer Consulting points out that, “a change to a considerably lower discount rate would expand the current pension crisis from about 10% of multiemployer plans to every multiemployer pension plan.”

Segal Consulting concludes that applying single-employer funding rules to multiemployer plans would be unreasonable and inappropriate. Many participating employers would not be able to afford significantly higher contributions, which would drive them to withdraw from the plans in which they participate. In some cases, financially weak employers may be forced into bankruptcy. If new, unreasonable funding standards precipitate employer withdrawals, contribution bases will be significantly weakened. Many otherwise-healthy plans could be pushed toward insolvency.

The firm says the suggestion ignores key information about these stricter single-employer rules:

• As a result of these rules the number of active single employer defined benefit plans has declined because of increased cost and significantly increased variability in annual contribution requirements.
• Since implementing the rules, relief measures have had to be adopted to restore stability to the single-employer system, with minimal positive impact.

Segal Consulting shared its findings with Joint Select Committee for the Solvency of Multiemployer Pension Plans. A link to the letter and the firm’s study results can be found here.

During a hearing before the committee, witnesses suggested that a long-term, low-interest-rate loan program would be a solution to the multiemployer pension crisis.