Private Pensions: Multiemployer Pensions Face Key Challenges to
Their Long-Term Prospects (18-MAR-04, GAO-04-542T).
Multiemployer defined benefit pension plans, which are created by
collective bargaining agreements covering more than one employer
and generally operated under the joint trusteeship of labor and
management, provide coverage to over 9.7 million of the 44
million participants insured by the Pension Benefit Guaranty
Corporation (PBGC). The recent termination of several large
single-employer plans--plans sponsored by individual firms--has
led to millions of dollars in benefit losses for thousands of
workers and left PBGC, their public insurer, an $11.2 billion
deficit as of September 30, 2003. The serious difficulties
experienced by these single-employer plans have prompted
questions about the health of multiemployer plans. This testimony
provides information on differences between single employer and
multiemployer pension plans, recent trends in the funding of
multiemployer pension plans and worker participation in those
plans, and factors that may pose challenges to the future
prospects of multiemployer plans. GAO will soon release a
separate report on multiemployer pension issues.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-542T
ACCNO: A09529
TITLE: Private Pensions: Multiemployer Pensions Face Key
Challenges to Their Long-Term Prospects
DATE: 03/18/2004
SUBJECT: Collective bargaining agreements
Employee retirement plans
Pensions
Comparative analysis
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GAO-04-542T
United States General Accounting Office
GAO Testimony
Before the Subcommittee on Employer-
Employee Relations, Committee on
Education and the Workforce,
House of Representatives
For Release on Delivery
Expected at 10:30 a.m. PRIVATE PENSIONS
Thursday, March 18, 2004
Multiemployer Pensions Face Key Challenges to Their Long-Term Prospects
Statement of Barbara D. Bovbjerg, Director Education, Workforce, and
Income Security Issues
GAO-04-542T
Highlights of GAO-04-542T, a report to House Subcommittee on
Employer-Employee Relations, Committee on Education and the Workforce,
House of Representatives
Multiemployer defined benefit pension plans, which are created by
collective bargaining agreements covering more than one employer and
generally operated under the joint trusteeship of labor and management,
provide coverage to over 9.7 million of the 44 million participants
insured by the Pension Benefit Guaranty Corporation (PBGC). The recent
termination of several large single-employer plans-plans sponsored by
individual firms-has led to millions of dollars in benefit losses for
thousands of workers and left PBGC, their public insurer, an $11.2 billion
deficit as of September 30, 2003. The serious difficulties experienced by
these singleemployer plans have prompted questions about the health of
multiemployer plans.
This testimony provides information on differences between single employer
and multiemployer pension plans, recent trends in the funding of
multiemployer pension plans and worker participation in those plans, and
factors that may pose challenges to the future prospects of multiemployer
plans. GAO will soon release a separate report on multiemployer pension
issues.
www.gao.gov/cgi-bin/getrpt?GAO-04-542T.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Barbara Bovbjerg at
(202)512-7215 or [email protected].
March 18, 2004
PRIVATE PENSIONS
Multiemployer Pensions Fact Key Challenges to Their Long-Term Prospects
The framework governing multiemployer plans generally places greater
financial risk on employers and participants and less on PBGC than does
PBGC's single-employer program. For example, in the event of employer
bankruptcy, the remaining employers in the multiemployer plan assume
additional funding responsibility. Further, PBGC's guaranteed participant
benefit is much lower for multiemployer participants, and PBGC does not
provide financial assistance until the multiemployer plan is insolvent.
Following two decades of relative financial stability, many multiemployer
plans appear to have suffered recent funding losses, while long-term
declines in participation and plan formation continue. At the close of the
1990s, the majority of multiemployer plans reported assets exceeding 90
percent of total liabilities. Since then, stock market declines, coupled
with low interest rates and poor economic conditions, have reduced assets
and increased liabilities for many plans. In its 2003 annual report, PBGC
estimated that underfunded multiemployer plans now face an aggregate
unfunded liability of $100 billion, up from $21 billion in 2000. PBGC also
reported an accumulated net deficit of $261 million for its multiemployer
program in 2003, the first since 1981. Meanwhile, since 1980, there has
been a steady decline in the number of plans, from over 2,200 plans to
fewer than 1,700, and a 1.4 million decline in the number of active
workers in plans.
The long-term prospects of the multiemployer system face a number of
challenges. Some are inherent in the multiemployer design and regulatory
framework, such as the greater perceived financial risk and reduced
flexibility for employers, compared with other plan types. The long-term
decline of collective bargaining also results in fewer participants and
employers available to expand or create new plans. Other factors that pose
challenges include the growing trend among employers to choose defined
contribution plans; the increasing life expectancy of workers, which
raises the cost of defined benefit plans; and continuing increases in
employer health insurance costs, which compete with pensions for employer
funding.
PBGC Multiemployer Program Assets, Liabilities, and Net Position, 1980 -
2003
Dollars in millions
1,500
1,200
900
600
300
0
-300 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Year
Liabilities Assets Net position
Source: GAO analysis of PBGC data
Mr. Chairman and Members of the Committee:
I am pleased to be here today to discuss the health of the multiemployer
pension system and the challenges it faces. Multiemployer plans are plans
created by collective bargaining agreements covering more than one
employer. They are generally operated under the joint trusteeship of labor
and management and constitute an important segment of the nation's private
employer pension system. These defined benefit (DB)1 pension plans cover
over 9.7 million participants, representing about 22 percent of all
workers and retirees insured by Pension Benefit Guaranty Corporation
(PBGC).2
The recent collapse and termination of several large single-employer
plans-where individual employers are responsible for funding and
administering the plan-have resulted in millions of dollars in benefit
losses for thousands of workers and left PBGC, their public insurer, an
$11.2 billion deficit as of September 30, 2003.3 The serious difficulties
1Defined benefit (DB) plans promise a benefit that is generally based on
years of service and employee's salary for single-employer plans or a flat
dollar amount for multiemployer plans. In a single-employer DB plan the
employer is generally responsible for funding the benefit, investing and
managing plan assets, and bearing the investment risk. For a multiemployer
plan the employer generally makes contributions based on the collective
bargaining agreement and plan trustees are responsible for investment
decisions. In contrast, under a defined contribution plan, benefits are
based on the contributions to and investment returns on individual
accounts, and the employee bears the investment risk. An example of a
defined contribution plan is a 401 (k) plan, which operates as a salary
reduction arrangement under section 401(k) of the Internal Revenue Code.
The United States employer-sponsored pension system has historically been
an important component of total retirement income, providing roughly 18
percent of aggregate retirement income in 2000. However, the percentage of
the workforce with pension coverage has been near 50 percent since
the1970s.
2Since its enactment in 1974, multiemployer defined benefit pensions have
been regulated by the Employee Retirement Income Security Act (ERISA),
which Congress passed to protect the interests of participants and
beneficiaries covered by private sector employee benefit plans. Title IV
of ERISA created PBGC as a United States Government corporation to insure
the pensions of participants and beneficiaries in private sector-defined
benefit plans.
3Because of its accumulated deficit, the significant risk that other large
underfunded plans might terminate and other structural factors, we
designated PBGC's single-employer pension insurance program as a high-risk
program and added it to the list of agencies and major programs that we
believe need urgent attention. See U.S. General Accounting Office,
Pension Benefit Guaranty Corporation Single-Employer Program: Long-Term
Vulnerabilities Warrant Program's Assignment to GAO High Risk Designation,
GAO-03-1050SP, (Washington, D.C.: July 23, 2003). Congress is currently
considering legislation that would provide funding relief to certain
multiemployer pension funds.
experienced by these single-employer plans have prompted questions about
the health of the nation's multiemployer defined benefit plans.
The financial strength of the multiemployer system has crucial
consequences, not only for the both the employers and the millions of
workers and retirees participating in multiemployer pension plans, but for
the elements and structure of current national pension policy. We will
soon release a report addressing multiemployer issues that we undertook at
the joint request of the Committee on Education and Workforce and this
subcommittee. In seeking to clarify some of these issues today, my
testimony will focus on (1) how multiemployer defined benefit plans differ
from single-employer defined benefit plans, (2) recent and current trends
in funding and worker participation in these plans; and (3) potential
challenges to their long-term prospects.
To determine the trends in the funded status of multiemployer defined
benefit plans, we analyzed Form 5500 disclosure statements and PBGC data.
The Form 5500, which plans must file with the Department of Labor, is the
only comprehensive source of financial and other plan information on
private pension plans collected on a regular basis.4 Form 5500 provides
important pension information, such as the number of plan participants and
data on the financial condition of plans. However, the most complete Form
5500 data is from 2001, making it difficult to accurately discern recent
trends. Although some data obtained from PBGC may be more recent, much of
it is based on the Form 5500. This lack of comprehensive data makes it
difficult to depict recent developments, particularly with regard to plan
funding. To identify the major challenges to the future prospects of
multiemployer plans, we reviewed pension literature and interviewed
representatives in government, industry, and labor involved with such
plans. We conducted our work from April 2003 through January 2004 in
accordance with generally accepted government auditing standards.
In summary, after two decades of financial stability, many multiemployer
plans appear to have suffered recent and significant funding losses;
meanwhile, long-term declines continue in terms of new plan formation and
worker participation. At the close of the 1990s, the majority of
4U.S. General Accounting Office, Pension and Welfare Benefit
Administration: Opportunities Exist for Improving Management of the
Enforcement Program, GAO-02-232 (Washington, D.C.: Mar. 3, 2002).
multiemployer plans had reported assets exceeding 90 percent of total
liabilities, with average funding rising to 105 percent in 2000. However,
subsequent stock market declines, coupled with low interest rates and poor
economic conditions, have likely reduced the assets and increased
liabilities for many multiemployer plans. Comprehensive funding data are
not available to depict recent developments, but significant signs of
funding weakness exist. In its 2003 annual report, PBGC estimated that
underfunded multiemployer plans now face an aggregate unfunded liability
of $100 billion, up from $21 billion in 2000. While most multiemployer
plans continue to provide benefits to retirees at unreduced levels, the
agency has increased its forecast of the number of plans that will likely
need financial assistance from 56 plans in 2001 to 62 in 2003. PBGC also
reported that its multiemployer program had an accumulated net deficit of
$261 million at the end of 2003, the program's first deficit since 1981.
Meanwhile, multiemployer plans have continued their steady long-term
decline in numbers and worker participation. The number of plans has
dropped by a quarter since 1980 to fewer than 1,700, and only 5 new plans
have been formed since 1992. The number of workers covered by
multiemployer plans has also fallen by 1.4 million since 1980, with the
percentage of the private sector labor force covered by multiemployer
plans declining from 7.7 percent in 1980 to 4.1 percent in 2001.
A number of factors pose challenges to the multiemployer plan system over
the long term. Some are inherent to multiemployer plan design and
regulatory framework, which employers may perceive as financially riskier
and less flexible than other types of pension plans. For example, compared
with those sponsoring single-employer plans, an employer participating in
a multiemployer plan cannot as easily adjust plan contributions in
response to the firm's own financial circumstances. This is because
contribution rates are often fixed for periods of time by the provisions
of the collective bargaining agreement. Also, multiemployer sponsors may
face the risk of additional costs if one or more sponsors are unable to
fund their share of the plan's vested benefits. The long-term decline of
collective bargaining is another factor adversely affecting multiemployer
plan growth, in that fewer employers and workers are available to provide
opportunities for new plans to be created or existing ones to expand. As
of 2003, union membership, a proxy for collective bargaining coverage,
accounted for less than 9 percent of the private sector labor force and
has been steadily declining since 1953. Finally, experts have identified
other factors challenging the future prospects for defined benefit plans
generally, including multiemployer plans. These factors include the
growing trend among employers to choose defined contribution (DC) plans;
the increasing life expectancy of American
Multiemployer Plans Differ from Single-Employer Plans
workers, which will increase plan costs; and continuing increases in
health insurance costs, which will affect overall compensation costs,
including pensions, for employers.
It would be useful at this point to describe several differences between
multiemployer and single-employer plans. Multiemployer plans are
established pursuant to collectively bargained agreements negotiated
between labor unions representing employees and two or more employers and
are generally jointly administered by trustees from both labor and
management.5 Single-employer plans are administered by one employer and
may or may not be collectively bargained. Multiemployer plans typically
cover groups of workers in such industries as construction, retail food
sales, and trucking, with construction representing 38 percent of all
participants. In contrast, 47 percent of single-employer plan participants
are in manufacturing. Multiemployer plans provide participants limited
benefit portability in that they allow workers the continued accrual of
defined benefit pension rights when they change jobs, if their new
employer is also a sponsor of the same plan. This arrangement can be
particularly advantageous in industries like construction, where job
change within a single occupation is frequent over the course of a career.
Single-employer plans are established and maintained by only one employer
and do not normally offer benefit portability. Multiemployer plans also
differ from so called multiple-employer plans that are not generally
established through collective bargaining agreements and where many plans
maintain separate accounts for each employer.6 The Teachers
5The National Labor Relations Act (NLRA) provides the basic framework
governing private sector labor-management relations. NLRA provides
employees the right to form unions and bargain collectively and requires
employers to recognize employee unions that demonstrate support from a
majority of employees and to bargain in good faith. NLRA also specifies
the structure, rights, and responsibilities for union and employer
trustees of multiemployer pension plans. Since its enactment in 1935,
collective bargaining has been the primary means by which workers can
negotiate, through unions, the terms of their pension plan. The Taft
Hartley Act amended NLRA to establish terms for negotiating such employee
benefits and placed certain restrictions on the operation of any plan
resulting from those negotiations. For example, employer contributions
cannot be made to a union or its representative but must be made to a
trust that is jointly and equally administered by union and employer
representatives. Taft Hartley also established a formal set of conditions
under which these plans must be operated and provided a legal framework
for their management. See 29 U.S.C. 186(c)(5).
6Multiemployer plans as used throughout this testimony refer to defined
benefit pension plans. Note that there are other, sometimes separate,
multiemployer agreements that cover programs such as health and other
welfare benefits and defined contribution pension plans.
Insurance Annuity Association and College Retirement Equities fund
(TIAA-CREF) is an example of a large multiple-employer plan organized
around the education and research professions. TIAA-CREF offers a defined
benefit contribution plan, in which contributions are accumulated over a
career and paid out at retirement, often as an annuity.
Below are some features that illustrate some key differences between
single-employer and multiemployer plans:
o Contributions. In general, the same ERISA funding rules apply to both
single-and multiemployer defined benefit pension plans. While ERISA and
IRC minimum funding standards permit plan sponsors some flexibility in the
timing of pension contributions, individual employers in multiemployer
plans cannot as easily adjust their plan contributions. For multiemployer
plans, contribution levels are usually negotiated through the collective
bargaining process and are fixed for the term of the collective bargaining
agreement, typically 2 to 3 years. Employer contributions to many
multiemployer plans are typically made on a set dollar amount per hour of
covered work, and thus to the number of active plan participants. With
other things being equal, the reduced employment of active participants
will result in lower contributions and reduced plan funding.7
o Withdrawal liability. Congress enacted the Multiemployer Pension Plan
Amendments Act (MPPAA) of 1980 to protect the pensions of participants in
multiemployer plans by establishing a separate PBGC multiemployer plan
insurance program and by requiring any employer wanting to withdraw from a
multiemployer plan to be liable for its share of the plan's unfunded
liability.8 The law contains a formula for determining the amount an
employer withdrawing from a multiemployer plan is required to contribute,
known as "withdrawal liability." This amount is based upon a proportional
share of the plans' unfunded vested benefits.9 Furthermore, if a
participating employer becomes bankrupt, MPPAA requires that the
7Benefit levels are generally also fixed by the contract or by the plan
trustee, based on the agreed level of contributions.
8Congress is currently considering a proposal that would revise the
current requirements concerning withdrawal liability, shifting some of
those liabilities to PBGC.
9Vested benefits are benefits that are no longer subject to risk of
forfeiture. Unfunded vested benefits are the excess, if any, of the
present value of a plan's vested benefits over the value of plan assets,
determined in accordance with ERISA, including claims of the plan for
unpaid initial withdrawal liability and redetermination liability.
remaining employers in the plan assume the additional funding
responsibility for the benefits of the bankrupt employer's plan
participants. For single-employer plans, the sponsoring employer is liable
only for the unfunded portion of its own plan or its current liability in
a bankruptcy (distress termination).
o Different premiums and benefit guarantee levels. PBGC operates two
distinct insurance programs, one for multiemployer plans and one for
single-employer plans, which have separate insurance funds, different
benefit guarantee rules, and different insurance coverage rules. The two
insurance programs and PBGC's operations are financed through premiums
paid annually by plan sponsors, investment returns on PBGC assets, assets
acquired from terminated single employer plans, and recoveries from
employers responsible for underfunded terminated single employer plans.
Premium revenue totaled about $973 million in 2003, of which $948 million
was paid into the single-employer program and $25 million paid to the
multiemployer program. Single-employer plans pay PBGC an annual flat-rate
premium of $19 per participant per year for pension insurance coverage.
Plans that are underfunded generally also have to pay PBGC an additional
annual variable rate premium of $9 per $1,000 of underfunding for the
additional exposure they create for the insurance program. In contrast,
the only premium for multiemployer plans is a flat $2.60 per participant
per year. PBGC guarantees benefits for multiemployer pensioners at a much
lower dollar amount than for singleemployer pensioners: about $13,000 for
30 years of service for the former compared with about $44,000 annually
per retiree at age 65 for the latter.10
o Financial assistance and the insurable event. PBGC's "insurable event"
for its multiemployer program is plan insolvency. A multiemployer plan is
insolvent when its available resources are not sufficient to pay the level
of benefits at PBGC's multiemployer guaranteed level for 1 year. In
contrast, the insurable event for the single-employer program is generally
the termination of the plan. In addition, unlike its role in the
single-employer program where PBGC trustees weak plans and pays benefits
directly to participants, PBGC does not take over the administration of
10Under the single-employer program, the maximum guarantee in 2004 is
$44,386.32 annually ($3,698.86 monthly) for a single life annuity
beginning at age 65. The maximum is adjusted downward for retirees younger
than age 65. Under the multiemployer program, PBGC guarantees the first
$11 of monthly accrual and 75 percent of the next $33 of monthly accrual,
for a maximum monthly accrual of $35.75 per month times the years of
credited service. For a participant with 30 years of service under the
plan, the maximum annual PBGC guaranteed benefit would be $12,870. Workers
with less than 30 years service would receive a lower maximum guaranteed
benefit.
multiemployer plans but instead, provides financial assistance in the form
of loans when plans become insolvent. A multiemployer plan need not be
terminated to qualify for PBGC loans, but it must be insolvent and is
allowed to reduce or suspend payment of that portion of the benefit that
exceeds the PBGC guarantee level. If the plan recovers from insolvency, it
must begin repaying the loan on reasonable terms in accordance with
regulations. Such financial assistance is infrequent; for example, PBGC
has made loans totaling $167 million to 33 multiemployer plans since
198011
compared with 296 trusteed terminations of single-employer plans and PBGC
benefit payments of over $4 billion in 2002-2003 alone.12
The net effect of these different features is that there is a different
distribution of financial risk among, employers, participants and PBGC
under the multiemployer program, compared with PBGC's single-employer
program. Multiemployer member employers and participants bear far more
financial risk, and PBGC, and implicitly the taxpayer, bear far less risk,
under the multiemployer program. In addition, PBGC officials explained
that the features of the multiemployer regulatory framework have also led
to a lower frequency of financial assistance. They note that greater
financial risks faced by employers and the lower guaranteed benefits
assured participants create incentives for employers, participants, and
their collective bargaining representatives to avoid insolvency and to
collaborate in trying to find solutions to a plan's financial
difficulties.
11Of the 33 plans that have received financial assistance (loans) to pay
insured benefits, 24 received assistance in 2003, 4 merged with other
healthier plans and 1 purchased an annuity from a private sector insurance
company and terminated, transferring benefit obligations to the insurance
company. Only 1 plan has repaid any of its financial assistance and that
plan repaid only the principal amount of its financial assistance.
12 The number of trusteed terminated plans is based on the fiscal year
that PBGC trusteed the plans, rather than the fiscal year of the plan
termination.
The Financial Stability of Multiemployer Plans Has Likely Weakened
Recently, while Long-Term Declines in the Number of Plans and Participants
Continue
While multiemployer plan funding has exhibited considerable stability over
the past two decades, available data suggest that many plans have recently
experienced significant funding declines. Since 1980, aggregate
multiemployer plan funding has been stable, with the majority of plans
funded above 90 percent of total liabilities and average funding at 105
percent in 2000. Recently, however, it appears that a combination of stock
market declines coupled with low interest rates and poor economic
conditions has reduced the assets and increased the liabilities of many
multiemployer plans. In PBGC's 2003 annual report, the agency estimated
that total underfunding of underfunded multiemployer plans reached $100
billion by year-end, from $21 billion in 2000, and that its multiemployer
program had recorded a year-end 2003 net deficit of $261 million, the
first deficit in more than 20 years. While most multiemployer plans
continue to provide benefits at unreduced levels, the agency has also
increased its forecast of the number of plans that will likely need
financial assistance, from 56 plans in 2001 to 62 plans in 2003. Private
survey data are consistent with this trend, with one survey by an
actuarial consulting firm showing the percentage of fully funded client
plans declining from 83 percent in 2001 to 67 percent in 2002. In
addition, long-standing declines in the number of plans and worker
participation continue. The number of insured multiemployer plans has
dropped by a quarter since 1980 to fewer than 1,700 plans in 2003,
according to the latest data available. Although in 2001, multiemployer
plans in the aggregate covered 4.7 million active participants,
representing about a fifth of all active defined benefit plan
participants, this number has dropped by 1.4 million since 1980.
Multiemployer Plan Funding Remained Stable during the 1980s and 1990s
Aggregate funding for multiemployer pension plans remained stable during
the 1980s and 1990s. By 2000, the majority of multiemployer plans reported
assets exceeding 90 percent of total liabilities, with the average plan
funded at 105 percent of liabilities. As shown in figure 1, the aggregate
net funding of multiemployer plans grew from a deficit of about $12
billion in 1980 to a surplus of nearly $17 billion in 2000. From 1980 to
2000, multiemployer plan assets grew at an annual average rate of 11.7
percent, to about $330 billion, exceeding the average 10.5 percent annual
percentage growth rate of single-employer plan assets. During the same
time period, liabilities for multiemployer and single-employer pensions
grew at an average annual rate of about 10.2 percent and 9.9 percent
respectively.
Figure 1: Aggregate Net Funding Position of PBGC-Insured DB Pension Plans,
1980-2001
Dollars in billions
600
500
400
300
200
100
0
-100 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Year
Single-employer plans
Multiemployer plans
Source: GAO analysis of PBGC data.
A number of factors appear to have contributed to the funding stability of
multiemployer plans, including:
Investment strategy . Historically, multiemployer plans appear to have
invested more conservatively than their single-employer counterparts.
Although comprehensive data are not available, some pension experts have
suggested that defined benefit plans in the aggregate are more than 60
percent invested in equities, which are associated with greater risk and
volatility than many fixed-income securities. Experts have stated that, in
contrast, equity holdings generally constitute 55 percent or less of the
assets of most multiemployer plans.
Contribution rates . Unlike funds for single-employer plans, multiemployer
plan funds receive steady contributions from employers because those
amounts generally have been set through multiyear collective bargaining
contracts. Participating employers, therefore, have less flexibility to
vary their contributions in response to changes in firm
performance, economic conditions, and other factors. This regular
contribution income is in addition to any investment return and helps
multiemployer plans offset any declines in investment returns.
Risk pooling . The pooling of risk inherent in multiemployer pension plans
may also have buffered them against financial shocks and recessions,
since the gains and losses of the plans are less immediately affected by
the
economic performance of individual employer plan sponsors.
Multiemployer pension plans typically continue to operate long after any
individual employer goes out of business because the remaining employers
in the plan are jointly liable for funding the benefits of all vested
participants.
Greater average plan size . The stability of multiemployer plans may also
partly reflect their size. Large plans (1,000 or more participants)
constitute
a greater proportion of multiemployer plans than of single-employer plans.
(See figs. 2 and 3.) While 55 percent of multiemployer plans are large,
only
13 percent of single-employer plans are large and 73 percent of single
employer plans have had fewer than 250 participants, as shown in
figure 2. However, distribution of participants by plan size for
multiemployer and single-employer plans is more comparable, with over
90 percent of both multiemployer and single-employer participants in large
plans, as shown in figure 3.
Figure 2: Distribution of PBGC-Insured DB Pension Plans by Number of Plan
Participants, 2003
Percentage of plans
80
73
70
60
50
40
30
20
10
0 <250 250-999 1,000-4,999 5,000-9,999 10,000+ Size of plan
Single-employer plans Multiemployer plans Source: GAO analysis of PBGC
data.
Figure 3: Distribution of Participants of PBGC-Insured DB Pension Plans by
Plan Size, 2003
Percentage of participants
80
73
70
60
50
40
30
20
10 0
Although data limitations preclude any comprehensive assessment, available
evidence suggests that since 2000, many multiemployer plans have
experienced significant reductions in their funded status. PBGC estimated
in its 2003 annual report that aggregate deficit of underfunded
multiemployer plans had reached $100 billion by year-end, up from a $21
billion deficit at the start of 2000. In addition, PBGC reported a net
accumulated deficit for its own multiemployer program of $261 million for
fiscal year 2003, the first deficit since 1981 and its largest ever. (See
fig. 4.) While most multiemployer plans continue to provide benefits at
unreduced levels, PBGC has also reported that the deficit was primarily
caused by new and substantial "probable losses," increasing the number of
plans it classifies as likely requiring financial assistance in the near
future from 58 plans with expected liabilities of $775 million in 2002 to
62 plans with expected liabilities of $1.25 billion in 2003.
Private survey data and anecdotal evidence are consistent with this
assessment of multiemployer funding losses. One survey by an actuarial
<1,000 1,000-4,999 5,000-9,999 10,000+ Size of plan
Single-employer
Multiemployer
Source: GAO analysis of PBGC data.
Data Suggest the Funded Status of Multiemployer Plans Has Declined Since
2000
consulting firm showed that the percentage of its multiemployer client
plans that were fully funded declined from 83 percent in 2001 to 67
percent in 2002.13 Other, more anecdotal evidence suggests increased
difficulties for multiemployer plans. For example, discussions with plan
administrators have indicated that there has been an increase in the
number of plans with financial difficulties in recent years, with some
plans reducing or temporarily freezing the future accruals of
participants. In addition, IRS officials recently reported an increase in
the number of multiemployer plans (less than 1 percent of all
multiemployer plans) requesting tax-specific waivers that would provide
plans relief from current funding shortfall requirements.
Figure 4: PBGC Multiemployer Program, 1980-2003
Dollars in millions
1,500
1,200
900
600
300
0
-300 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Year
Liabilities Assets Net position
Source: GAO analysis of PBGC data.
As with single-employer plans, falling interest rates coincident with
stock market declines and generally weak economic conditions have
contributed to the funding difficulties of multiemployer plans. The
decline in interest rates in recent years has increased the present value
of pension plan liabilities for DB plans in general, because the cost of
providing future promised benefits increases when computed using a lower
interest rate. At the same time, declining stock markets decreased the
value of any equities held in multiemployer plan portfolios to meet those
obligations. Finally,
13Segal Benefits, Compensation and HR Consulting, SEGAL Survey, Effects of
"The Perfect Storm" Begin to Emerge: Erosion of the Funded Position of
Multiemployer Pension Plans, Spring 2003.
because multiemployer plan contributions are usually based on the number
of hours worked by active participants, any reduction in their participant
employment will reduce employer contributions to the plan.
Multiemployer Plans Experiencing Long-Term Declines in Plan Formation and
Worker Participation
Despite their relative financial stability, the multiemployer system has
experienced a steady decline in the number of plans and in the number of
active participants over the past 2 decades. In 1980, there were 2,244
plans, and by 2003 the number had fallen to 1,623, a decline of about 27
percent. While a portion of the decline in the number of plans can be
explained by consolidations through mergers, few new plans have been
formed - only 5, in fact, since 1992. Meanwhile, the number of active
multiemployer plan participants has declined in both relative and absolute
terms. By 2001, only about 4.1 percent of the private sector workforce was
composed of active participants in multiemployer pension plans, down from
7.7 percent in 1980 (see fig. 5), with the total number of active
participants decreasing from about 6.1 million to about 4.7 million. 14
14A similar decline was observed for active participants of
single-employer plans, with the total falling from 27.3 percent of the
private sector labor force in 1980 to 15.5 by 2001.
Figure 5: PBGC-Insured Active Participants as a Percentage of Private
Sector Wage and Salary Workers, 1980-2001
Percentage of workers
30
25
20
15
10
5
0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Year
Single-employer active participants
Multiemployer active participants
Source: GAO analysis of PBGC data.
Finally, as the number of active participants has declined, the number of
retirees increased - from about 1.4 million to 2.8 million, and this
increase had led to a decline in the ratio of active (working)
participants to retirees in multiemployer plans. By 2001, there were about
1.7 active participants for every retiree, compared with 4.3 in 1980. (See
fig. 6.) While the trend is also evident among single-employer plans, the
decline in the ratio of active workers to retirees affects multiemployer
funding more directly because employer contributions are tied to active
employment. The higher benefit payouts required for greater numbers of
retirees, living longer, and the reduced employer contributions resulting
from fewer active workers combines to put pressure on the funding of
multiemployer plans.
Figure 6: Number of Active Participants per Retiree, 1980-2001
Active participants per retiree 6
5
4
3
2
1
0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000
Year
Single-employer Multiemployer
Source: GAO analysis of PBGC data.
A number of factors pose challenges to the long-term prospects of the
multiemployer pension plan system. Some of these factors are specific to
the features and nature of multiemployer plans, including a regulatory
framework that some employers may perceive as financially riskier and less
flexible than those covering other types of pension plans. For example,
compared with a single-employer plan, an employer covered by a
multiemployer plan cannot easily adjust annual plan contributions in
response to the firm's own financial circumstances. This is because
contribution rates are often fixed for periods of time by the provisions
of the collective bargaining agreement. Collective bargaining itself, a
necessary aspect of the multiemployer plan model and another factor
affecting plans' prospects, has also been in long-term decline, suggesting
fewer future opportunities for new plans to be created or existing ones to
expand. As of 2003, union membership, a proxy for collective bargaining
coverage, accounted for less than 9 percent of the private sector labor
force and has been steadily declining since 1953. Experts have identified
other challenges to the future prospects of defined benefit plans
generally, including multiemployer plans. These include the growing trend
among employers to choose defined contribution plans over DB plans,
including
A Number of Factors Challenge the Long-Term Prospects of the Multiemployer
Defined Benefit System
multiemployer plans; the continued growing life expectancy of American
workers, resulting in participants spending more years in retirement, thus
increasing pension benefit costs; and increases in employer-provided
health insurance costs, which are increasing employers' compensation costs
generally, including pensions.
Certain Features of the Current Regulatory Framework and the Decline of
Collective Bargaining May Discourage Future Plan Growth
Some factors raise questions about the long-term viability of
multiemployer plans are specific to certain features of multiemployer
plans themselves, including features of the regulatory framework that some
employers may well perceive as less flexible and financially riskier than
the features of other types of pension plans. For example, an employer
covered by a multiemployer pension plan typically does not have the
funding flexibility of a comparable employer sponsoring a singleemployer
plan. In many instances, the employer covered by the multiemployer plan
cannot as easily adjust annual plan contributions in response to the
firm's own financial circumstances. Employers that value such flexibility
might be less inclined to participate in a multiemployer plan. Employers
in multiemployer plans may also face greater financial risks than those in
other forms of pension plans. For example, an employer sponsor of a
multiemployer plan that wishes to withdraw from the plan is liable for its
share of pension plan benefits not covered by plan assets upon withdrawal
from the plan, rather than when the plan terminates, as with a
single-employer plan. Employers in plans with unfunded vested benefits
face an immediate withdrawal liability that can be costly. In addition,
employers in fully funded plans also face the potential of costly
withdrawal liability if the plan becomes underfunded in the future through
the actions of other sponsors participating in the multiemployer plan.
Thus, an employer's pension liabilities become a function not only of the
employer's own performance but also the financial health of other plan
sponsors in the multiemployer plan. These additional sources of potential
liability can be difficult to predict, increasing employers' level of
uncertainty and risk. Some employers may hesitate to accept such risks if
they can sponsor other plans that do not have them, such as 401(k)-type
defined contribution plans.
The future growth of multiemployer plans is also predicated on the future
of collective bargaining. Collective bargaining is an inherent feature of
the multiemployer plan model. Collective bargaining, however, has been
declining in the United States since the early 1950s. Currently, union
membership, a proxy for collective bargaining coverage, accounts for less
than 9 percent of the private sector labor force. In 1980, union
membership accounted for about 19 percent of the entire national workforce and
about 27 percent of the civilian workforce in 1953.
Multiemployer Plans Are Limited by the Same Factors Affecting All Defined
Benefit Plans
Pension experts have suggested a variety of challenges faced by today's
defined benefit pension plans, including multiemployer plans.15 These
include the continued general shift away from DB plans to defined
contribution (DC) plans, and the increased longevity of the U.S.
population, which translates into a lengthier and more costly retirement.
In addition, the continued escalation of employer health insurance costs
has placed pressure on the compensation costs of employers, including
pensions.
Employers have tended to move away from DB plans and toward DC plans since
the mid-1980s. The total number of PBGC-insured defined benefit plans,
including single employer plans, declined from 97,683 in 1980 to 31,135 in
2002. (See fig. 7.) The number of DC plans sponsored by private employers
nearly doubled from 340,805 in 1980 to 673,626 in 1998.16 Along with this
continuing trend toward sponsoring DC plans, there has also been a shift
in the mix of plans that private sector workers participate in. Labor
reports that the percentage of private sector workers who participated in
a primary DB plan has decreased from 38 percent in 1980 to 21 percent by
1998, while the percentage of such workers who participated in a primary
DC plan has increased from 8 percent to 27 percent during this same
period. Moreover, these same data show that by 1998, the majority of
active participants (workers participating in their employer's plan) were
in DC plans, whereas nearly 20 years earlier the majority of participants
had been in DB plans.17 Experts have suggested a variety of explanations
for this shift, including the greater risk borne by employers with DB
plans, greater administrative costs and more onerous regulatory
requirements, and that employees more easily understand and favor DC
plans. These experts have also noted considerable employee demand for
plans that state benefits in the form of an account balance and
15"Strengthening Pension Security: Examining the Health and Future of
Defined Benefit Pension Plans" Hearing before the Subcommittee on
Employer-Employee Relations of the House Committee on Education and
Workforce, (Washington D.C.: June 4, 2003).
161998 is the most recent year for which the Department of Labor has
issued its Private Pension Plan Bulletin: Abstract of Form 5500 Annual
Reports.
17U.S. General Accounting Office, Private Pensions: Participants Need
Information on Risks They Face in Managing Pension Assets at and during
Retirement, GAO-03-810 (Washington, D.C.: July 2003).
emphasize portability of benefits, such as is offered by 401(k)-type
defined contribution pension plans.
Figure 7: Number of PBGC-Insured DB Pension Plans, 1986-2003
Plans in thousands 140
120
100
80
60
40
20
0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Year
Source: GAO analysis of PBGC data.
The increased life expectancy of workers also has important implications
for defined benefit plan funding, including multiemployer plans. The
average life expectancy of males at birth has increased from 66.6 in 1960
to 74.3 in 2000, with females at birth experiencing a rise of 6.6 years
from 73.1 to 79.7 over the same period. As general life expectancy has
increased in the United States, there has also been an increase in the
number of years spent in retirement. PBGC has noted that improvements in
life expectancy have extended the average amount of time spent by workers
in retirement from 11.5 years in 1950 to 18 years for the average male
worker as of 2002. This increased duration of retirement has required
employers with defined benefit plans to increase their contributions to
match this increase in benefit liabilities. This problem is exacerbated
for those multiemployer plans with a shrinking pool of active workers
because plan contributions are generally paid on a per work-hour basis,
contributing to the funding strain we discussed earlier.
Increasing health insurance costs are another factor affecting the
longterm prospects of pensions, including multiemployer pensions. Recent
increases in employer-provided health insurance costs are accounting for a
rising share of total compensation, increasing pressure on employers'
ability to maintain wages and other benefits, including pensions. Bureau
of Labor Statistics data show that the cost of employer-provided health
insurance has risen steadily in recent years, growing from 5.4 percent of
total compensation in 1999 to 6.5 percent as of the third quarter of 2003.
A private survey of employers found that employer-sponsored health
insurance costs rose about 14 percent between the spring of 2002 and the
spring of 2003, the third consecutive year of double-digit acceleration
and the highest premium increase since 1990.18 Plan administrators and
employer and union representatives that we talked with identified the
rising costs of employer-provided health insurance as a key problem facing
plans, as employers are increasingly forced to choose between maintaining
current levels of pension and medical benefits.
Conclusions
Although available evidence suggests that multiemployer plans are not
experiencing anywhere near the magnitude of the problems that have
recently afflicted the single-employer plans, there is cause for concern.
The declines in interest rates and equities markets, and weak economic
conditions in the early 2000s, have increased the financial stress on both
individual multiemployer plans and the multiemployer framework generally.
Most significant is PBGC's estimate of $100 billion in unfunded
multiemployer plan liabilities that are being borne collectively by
employers and plan participants.
At this time, PBGC and, potentially, the taxpayer do not face the same
level of exposure from this liability with multiemployer plans that they
do with single-employer plans. This is because, as PBGC officials have
noted, the current regulatory framework governing multiemployer plans
redistributes financial risk toward employers and workers and away from
the government. Employers face withdrawal and other liabilities that can
be significant. In addition, should a multiemployer plan become insolvent,
workers face the prospect of receiving far lower guaranteed benefits than
workers receive under PBGC's single-employer program guaranteed limits.
Together, not only do these features limit the exposure for PBGC, they
create important incentives for all interested parties to resolve
difficult financial situations that could otherwise result in plan
insolvency.
18Employer Health Benefits 2003 Annual Survey, The Kaiser Family
Foundation and Health Research and Education Trust.
Because the multiemployer plans' structure balances risk in a manner that
fosters constructive collaboration among interested parties, proposals to
address multiemployer plans' funding stress should be carefully designed
and considered for their long-term consequences. For example, proposals to
shift plan liabilities to PBGC by making it easier for employers to exit
multiemployer plans could help a few employers or participants but erode
the existing incentives that encourage interested parties to independently
face up to their financial challenges. In particular, placing additional
liabilities on PBGC could ultimately have serious consequences for the
taxpayer, given that with only about $25 million in annual income, a trust
fund of less than $1 billion, and a current deficit of $261 million,
PBGC's multiemployer program has very limited resources to handle a major
plan insolvency that could run into billions of dollars.
The current congressional efforts to provide funding relief are at least
in part in response to the difficult conditions experienced by many plans
in recent years. However, these efforts are also occurring in the context
of the broader long-term decline in private sector defined benefit plans,
including multiemployer plans, and the attendant rise of defined
contribution plans, with their emphasis on greater individual
responsibility for providing for a secure retirement. Such a transition
could lead to greater individual control and reward for prudent investment
and planning. However, if managed poorly, it could lead to adverse
distributional effects for some workers and retirees, including a greater
risk of a poverty-level income in retirement. Under this transition view,
the more fundamental issues concern how to minimize the potentially
serious, negative effects of the transition while balancing risks and
costs for employers, workers, and retirees, and for the public as a whole.
These important policy concerns make Congress's current focus on pension
reform both timely and appropriate.
GAO Contact and Staff Acknowledgments
This concludes my prepared statement. I am happy to answer any questions
that the subcommittee may have.
For further questions on this testimony, please contact me at (202)
512-7215. Individuals making key contributions to this testimony include
Joseph Applebaum, Tim Fairbanks, Charles Jeszeck, Gene Kuehneman, Raun
Lazier, and Roger J. Thomas.
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