May 30, 2019
Majority of Multiemployer Plans Remain in Green Zone
The current zone-status breakdown for plans in Segal Consulting’s latest surveyis similar to the 2018 breakdown.
The average market-value rate of return (net of fees) for calendar-year plans was negative 3.5 percent in 2018.
It’s important to keep in mind that plans generally recognize the effects of any single year over five years to determine the zone status.
Because the zone-status breakdown for calendar-year plans is determined as of one date (January 1), neither unrecognized investment losses from 2018 nor improved investment performance since January 1, 2019 is taken into account.
Roughly two-thirds of plans have a Pension Protection Act of 2006 (PPA’06) funded percentage of at least 80 percent or more, which is similar to 2018 results.
Although a number of factors will affect the funded percentage, investment returns are a primary driver.
Investment returns that are lower than expected will have an adverse effect on funded percentage while better-than-expected investment returns will improve the funded percentage.
Nearly 60 percent of calendar-year plans had a lower PPA’06 funded percentage in 2019 than in 2018. The average PPA’06 funded percentage for calendar-year plans dropped by 1 percentage point: from 87 percent to 86 percent. Because this funded percentage is based on the actuarial value of assets rather than the market value of assets, continued smoothing of prior year investment gains and losses will contribute to changes in the funded percentage at future measurement dates.
Using the market value of assets, the average funded percentage for plans in the survey declined by 8 percentage points: from 89 percent in 2018 to 81 percent in 2019.
A plan’s direction is as important as its current zone status. Preparing for the future involves understanding vulnerability to risks, such as investment risk (i.e., the risk of actual returns being different than assumed returns) and employment risk (i.e., the risk that actual employment levels are different than assumed).
Trustees should monitor other measures beyond the zone status, such as cash flow, contribution margins or deficits, and the potential impact of plan design on plan risks.
Your Segal consultant can discuss approaches to evaluate your plan’s financial condition and inherent risks to help you understand your options going forward.
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