October 2014 NewsLetter, "Shades of Green: Key Questions to Ask About Being in the Green Zone"

Abstract

It is tempting to assume that satisfying the following Pension Protection Act of 2006 criteria for being in the green zone means a multiemployer pension plan is well funded: the plan is at least 80 percent funded and its Funding Standard Account credit balance is projected to stay positive at least for the near term. However, because being in the green zone on a particular measurement date just means not being in the red zone (critical status) or the yellow zone (endangered status), it is not a measure of a plan's long-term financial well-being. In essence, there are many shades of green. The variance in hue only emerges as additional projections of the zone criteria are performed. Understanding shades of green is an important part of plan stewardship.

This NewsLetter notes the questions that Segal Consulting believes trustees of the majority of plans that are in the green zone should be asking themselves:

  • How green is our plan?
  • How long will our plan stay green?
  • Which financial measures are the best indicators of the plan's financial well-being?
  • Is our plan green enough to improve benefits or reduce contributions?
  • Should projection assumptions take into account adverse-experience risks?
  • Should we consider de-risking?
  • Should the bargaining parties be encouraged to increase contributions or reduce prospective benefits in order to stay green longer?
  • If benefits need to be reduced and/or contribution rates need to be raised, what is the best way to communicate that news with stakeholders?

The steps required to determine whether a plan will remain in the green zone include determining whether a plan is projected to remain green in the absence of intervention, the likelihood that early remedial action might be necessary to ensure continued success, and how key measurements (such as funded ratio or credit balance) could change over time. Depending on their plans, the trustees may want to develop a strategy that incorporates future actions to increase the likelihood of the plan remaining in the green zone forever.

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