The economic crisis of the past year has left its mark on multi-employer pension plans. In a recent survey conducted by the International Foundation of Employee Benefit Plans, nearly three-quarters (73 percent) of multi-employer pension plans report they are less than 80 percent funded.
The Pension Protection Act of 2006 (PPA) requires multi-employer defined benefit (DB) plans to certify their funding status each year. A plan is considered to have a safe status (also referred to as being in the green zone) if it is at least 80 percent funded. Plans less than 65 percent funded have a critical status (red zone). Falling in between are plans that are considered endangered (yellow zone) or seriously endangered (orange zone).
“Just one year ago the funding levels reported by the multi-employer pension plans were very different,” explained Julie Stich, Senior Information/Research Specialist at the International Foundation. “The majority of plans held a safe status. Today, the funding level for many has dropped significantly.”
In 2008, 75 percent of survey respondents reported they held a safe status, 14 percent were endangered or seriously endangered and only one in ten (11 percent) reported being in a critical status.
Just one year later, only 27 percent of the survey respondents report holding a safe status. Slightly more than one-third (36 percent) are in an endangered status, and a similar proportion (37 percent) report a critical status.
“The number of plans reporting an endangered or critical status has almost tripled,” Stich stated. “These plans must now decide between taking immediate steps to improve their funding or taking the one-year funding status freeze.”
Under PPA, plans certified as endangered must create a funding improvement plan. Those certified as critical must create a rehabilitation plan. To provide DB plans temporary funding relief, the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) provides an alternative option – taking a one-year funding status freeze.
Slightly more than half of plans responding to the survey (54 percent) are taking advantage of the freeze option. One in four (25 percent) have decided not to take the freeze option. For the remaining 21 percent, the option is not applicable because their 2009 status remained the same as their 2008 status.
Plan sponsors that took the freeze option cited waiting to see if the markets will rebound as the number one reason for taking the freeze (75 percent), followed by waiting to see if the federal government will provide additional funding relief (50 percent), and allowing more time to fix funding on their own terms versus as directed by PPA (46 percent).
Of the plan sponsors not taking the freeze option, the majority stated they did not want to delay implementing changes to improve their funding status (78 percent). Other reasons cited include wanting to take advantage of the three-year extension for their funding improvement/rehabilitation plan (37 percent) and the thought that waiting will only worsen their finances and make finding solutions more difficult (33 percent).
Among plan sponsors with underfunded DB plans, slightly more than half (51 percent) have developed a funding improvement or rehabilitation plan which has been implemented or is on its way to being implemented The remaining sponsors with underfunded plans (49 percent) are waiting for guidance or are just starting to develop a plan.
Of those plan sponsors who have developed a plan to address their endangered or seriously endangered status, most (86 percent) are increasing employer contribution levels. Among plan sponsors who have developed a plan to address a critical status, a similar proportion (87 percent) report they are increasing employer contribution levels, 68 percent report reducing or eliminating early retirement subsidies, and 55 percent say they are reducing future benefit accruals.
The survey, Multi-employer Pension Funding Status and the Freeze Decision, was conducted in August 2009. Responses were received from 213 International Foundation of Employee Benefit Plans and International Society of Certified Employee Benefit Specialists members in the United States, each representing a separate plan.
Multi-employer Pension Funding Status and the Freeze Decision (Item #6740E) is published by the International Foundation of Employee Benefit Plans. The 15-page survey is available to Foundation members at no cost. Nonmembers can purchase the survey for $50. To order visit www.ifebp.org/books.asp?6740e or contact the Foundation Bookstore at email@example.com or 888-334-3327, option 4.
The International Foundation of Employee Benefit Plans is a non-profit organization, dedicated to being a leading objective and independent global source of employee benefits, compensation, and financial literacy education and information.