Shifting Demographics a Challenge for Multiemployer Plans

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.

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.