Segal Consulting Study Shows Impact of Changing Funding Rules for Multiemployer Pension Plans Would Be Disastrous

The possibility of using more conservative interest rates for valuing multiemployer plan liabilities has been raised in deliberations of the Congressional Joint Select Committee on Solvency of Multiemployer Plans. To determine the impact of such a change, Segal Consulting performed a detailed analysis of two national multiemployer plans. Segal modeled three scenarios for discounting liabilities using lower funding rates:

• The current single-employer legislated funding rates with “stabilization” relief (using a discount rate of 5.5 percent as a proxy for the 25-year average segmented yield curve corridor);
• The current legislated discount rates for single-employer plans without previously granted relief (using a discount rate of 3.7 percent as a proxy for the current two-year average segmented corporate bond yield curve); and
• The plan’s “current liability” calculated using the 30-year Treasury bond rate (currently approximately 3.0 percent, with legislated mortality).

Segal’s study illustrates that the increase in the necessary contributions to meet current funding standards would not be sustainable for either of the plans’ contributing employers or participating employees. Both plans are currently considered healthy plans based on their Pension Protection Act zone status. For example:

• If the discount rate changed to 3.7 percent, contribution rate for the first plan we studied would have to more than double (to more than $20/per hour) to avoid a funding deficiency. The impact of a 3.0 percent 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 percent, to prevent a funding deficiency and remain in the green zone, contributions for the second plan we 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 percent of multiemployer plans to every multiemployer pension plan.”

“That’s why Segal recommends no change in current practice for the discount rate/assumed rate of return,” said Diane Gleave, Senior Vice President and Actuary. She added, “it’s important to keep in mind that, under current law, the majority of multiemployer plans are on track to fully satisfy their benefit obligations.”

Segal’s study includes the graph below that summarizes rolling 30-year returns with data going back to 1927 for a sample investment portfolio.

Historic Performance for Portfolio with a 50% S&P 500^® / 50% Bond Index Asset Allocation (Annualized 30-Year Returns)

Source: Segal Marco Advisors, 2018

For the five most recent 30-year periods, the average return was 9.13 percent. Moreover, the portfolio’s annual rolling 30-year returns have never gone below 6.66 percent. That lowest return was for the 30-year period that ended December 31, 1958, which includes the 1929 market crash.

In a letter to the Joint Select Committee, Segal shared its position on the danger of using more conservative interest rates for valuing multiemployer plan liabilities. That letter and Segal’s study are available from this webpage: The Multiemployer Pension Plan Crisis: Segal’s Observations.

To speak with Mr. Brenner or Ms. Gleave about the study, please contact me.

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The Segal Group (www.segalgroup.net) is a private, employee-owned consulting firm headquartered in New York and with more than 1,000 employees throughout the U.S. and Canada. Members of The Segal Group include Segal Consulting, Sibson Consulting, Segal Select Insurance Services, Inc. and Segal Marco Advisors.