Fall 2008 Report of Results from the Updated Survey of Plans’ Actual Zone Status

Abstract

Under the funding provisions of the Pension Protection Act of 2006 (PPA'06), trustees must review projections of the financial status of multiemployer plans at least annually in order to identify emerging funding challenges so they can be addressed effectively. The plan's actuary must prepare a certification no later than 90 days after the beginning of the plan year. If the actuary's projections reveal an emerging funding problem, a plan will be classified as being in either "endangered status" (colloquially referred to as being in the yellow zone) or "critical status" (nicknamed the red zone). In either case, the trustees and bargaining parties will be required to take specific actions to improve the plan's financial status. Plans with funding status that is neither endangered nor critical are considered to be in the green zone.

The Segal Company's Updated Survey of Plans' Actual Zone Status reports the percentage of multiemployer pension plans with plan years beginning January 1 through July 1 that fell into each of the three zones - green, yellow, and red - based on Segal actual certifications. The key survey findings follow:

  • The average PPA'06 funded percentage was 94 percent. This is a decline from 97 percent in Segal's previous zone-status survey which was limited to calendar-year plans.
  • As a percentage of the total, fewer plans are now in the green zone, and more plans are in the yellow and red zones.

The market downturn, since the survey of only calendar-year plans was conducted, contributed to these changes, but did not fully affect the actual 2008 PPA'06 funded percentage and zone status of plans included in the survey. It is expected to continue to have a negative impact on future survey results - unless there is a dramatic rebound in the markets before the end of the year.

Even without taking into account the dramatic market downturn of late 2008, the survey data indicates that, over the next two years, 10 percent of green-zone plans may migrate into the yellow zone unless additional actions are taken (up from 7 percent in the survey of only calendar-year plans). To illustrate the effect of market volatility, Segal calculated the potential change in the surveyed plans' zone status if the plans' PPA'06 funded percentages were to increase 10 percent or decrease 10 percent, assuming zone status were determined using only a plan's PPA'06 funded percentage.

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