Articles | April 6, 2020

Will Your Multiemployer Pension Plan Ride Out the Storm?

4/6/20 – The effects of the coronavirus (COVID-19) public health emergency have been swift and dramatic. The economy has been hit hard. It’s understandable for trustees to be concerned about the impact on multiemployer pension plans. Uncertainty about what will happen to industries and investments for the remainder of 2020 and beyond is undeniably unsettling.

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The current rapidly changing circumstances create a sense of urgency that makes it difficult to keep in mind that pension plans are long-term programs. Their time horizon is measured in decades, not weeks or months. That perspective is particularly important when evaluating recent developments.

In contrast, group health plans face immediate challenges. Contributions are declining as stay-at-home orders result in furloughs and layoffs. Elective and routine care is being deferred, not eliminated. In prior economic downturns, trustees sometimes turned to diverting pension contributions to companion multiemployer health funds.

This discussion of the impact of the COVID-19-related economic collapse on multiemployer pension plans covers employment, investments and funding issues.

The most important takeaway is: Although there may be severe challenges in the short term, most plans, especially those that are better funded, are likely to recover in the long term as the economy rebounds. With that said, rising unemployment and investment losses will have a significant impact on all multiemployer pension plans, which is why they need legislative relief — now more than ever.

Impact on employment

Unemployment has risen dramatically in just the last 30 days. Yet the impact differs dramatically by industry.

Some industries are very busy. Frontline workers in the healthcare industry as well as food and bakery workers, for example, are working under stressful and dangerous conditions.

However, most industries have experienced a sudden precipitous decline in employment. Construction is down significantly, which is affecting the building trades. Hotel vacancies are at all-time high. Airlines continue to cancel flights, and most seats are empty. In the entertainment industry, productions have stopped. In the sports industry, games are cancelled. Within these industries, many participating employers may be concerned about their ability to recover once economic activity returns to normal.

However, a short-term reduction in hours, even if severe, will not have a material impact on most healthy pension funds.

Impact on investments

The response of the financial markets to COVID-19 is distressing. The double-digit decline in stocks over the first quarter of 2020 was the worst loss since 2008 for the S&P 500® and the worst since the fourth quarter of 1987 for the Dow Jones Industrial Average.

To put that disappointing performance in context, consider that 2019 was a very good year for investments. Also, experience has shown that severe downturns are typically followed by strong bounce-backs.

In the long run, since funding a DB plan is a long-term obligation, history has shown that most funds ultimately recover from market crashes. In recent memory, multiemployer pension plan investment performance ultimately recovered from the burst of the 2001–2002 dot.com bubble and the 2008 Global Financial Crisis and the resulting recession that lasted until June 2009, though it took most funds many years to recover from both of those downturns.

When it happens, a market bounce-back from the current downturn, while not completely restoring the entire investment loss, will help.

Impact on immediate funding levels

Actuarial projections for a plan’s Pension Protection Act of 2006 (PPA’06) certification of “zone” status are based on annual market values locked in on the last day of the prior plan year. Consequently, the impact on funding in 2020 depends on when a plan year ends.

For calendar-year plans (those that end on December 31), 2020 PPA’06 zone certifications were just completed. Many funds showed improved funding levels due to the very good market returns in 2019. (In the coming weeks, Segal will report the latest zone-status breakdown of calendar-year client plans.) These calendar-year plans will not have to reflect the COVID-19 crisis investment downturn in their funding levels until December 31, 2020 and there is a lot of time to go between now and December 31.

For the other funds, the COVID-19 crisis impact will depend on their plan year end date. Many funds will have several months for investment performance to level off or even bounce back somewhat before year-end investment experience is locked in for funding purposes.

Think about the long-term implications for your plan

Clearly, the impact of COVID-19 on your plan depends on a number of factors:

  • The course of the epidemic
  • The effect on the overall economy
  • The level of employment in your industry — including the duration of shutdowns, if applicable, and degree of recovery, both of which affect future contribution levels
  • Investment returns
  • Funded status
  • The possibility of federal funding relief

While current conditions are evolving, it is important to not overreact. It’s difficult to make long-term projections when the situation is changing so frequently.

There is no single course of action appropriate for all multiemployer pension plans. Trustees are in the best position to assess the short- and long-term implications for their industries and can work with their advisors to assess the potential impact on their plans.

Keep your participants informed

In the current circumstances, your participants will appreciate the value of their DB pension plan, but they are likely to be worried about it. Reach out to them. Remind them of the advantages of a DB plan design in which their retirement benefit is not directly tied to market performance. Reassure them that trustees are monitoring the implications of COVID-19 for the pension plan.

If you offer a companion DC (annuity) plan and have decided to take advantage of some new limited options for giving participants more access to their account balances, let them know.

Your source for trusted advice

Segal will keep you informed as this fluid situation evolves. You can get all of our insights related to COVID-19, including summaries of new laws and regulations, on this website.

As always, Segal is ready to help you navigate through the current crisis. Segal Marco Advisors investment consultants can assist with reviews and reallocation of investment performance. Segal Benz communications consultants know how best to educate participants while addressing their concerns.

Although we can’t predict how the current crisis will play out, your Segal benefits consultant can help you understand the range of possibilities through actuarial modeling of various scenarios for contribution levels and investment performance. Armed with that information, we can help you prepare to make decisions with confidence when necessary.

The big picture: the impact of COVID-19 on the multiemployer solvency crisis

Before the COVID-19 public health emergency began, the multiemployer pension system was already facing a solvency crisis. Some 130 plans in critical and declining status covering over 1.4 million workers, retirees and beneficiaries, were already projected to become insolvent. The insolvencies of these plans would also cause the insolvency of the PBGC’s multiemployer program, likely around 2025.

Depending on how the current COVID-19 crisis evolves, most plans already in declining status will see their projected dates of insolvency moved forward by one or more years. There will also likely be a new group of plans entering declining status as a result of the current crisis. The size of that group will depend on how severe and long-lasting the impact of the COVID-19 crisis is on financial markets, individual industries and the overall economy.

At the same time, most healthy plans will likely be able to withstand the impact of the COVID-19 crisis and recover over the long term.

The urgent need for legislative relief to address the crisis

This is the right time for thoughtful legislation from our elected officials in Congress to address the impact of COVID-19 on the multiemployer pension system.

Even before COVID-19, the need for a legislative solution to the projected insolvency of multiemployer plans in critical and declining status, as well as PBGC’s multiemployer program, was very clear to all concerned, including key leadership of Congress. In all likelihood, the effect of COVID-19 will worsen the solvency crisis, putting more workers and retirees at risk of losing their hard-earned pensions.

In all likelihood, legislative relief will also be needed for many healthy plans that will be able to recover on their own, but need more time to do so. Congress provided similar relief in the wake of the 2008 financial market collapse, allowing plans more time to develop corrective action plans to improve or rehabilitate funding levels.

Both the Worker, Retiree, and Employer Recovery Act of 2008 and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 provided relief was much-needed and proved to be very helpful. Similar measures would also be helpful to multiemployer plans as they recover from the impact of COVID-19.

Relief for multiemployer plans may be included in the fourth stimulus bill that is currently being discussed in Congress

Concluding observations

Absent a prolonged economic downturn, we expect a majority of multiemployer pension plans will be resilient and will recover from the impact of the COVID-19 crisis.

Nevertheless, the multiemployer pension system needs help from Congress, both to resolve the immediate solvency crisis and to allow healthy plans more time to recover from the impact of COVID-19.

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