Posted:
April 14, 2010
Only 20 percent of multiemployer defined benefit pension plans are sound, compared to 80 percent in the first quarter of 2008.
Employee benefit fund actuaries Cary Franklin and Jason Russell reported the precipitous decline of the traditional pension plan in the United States in the Spring 2010 issue of Insights, a publication of the Association of Benefit Administrators Inc.
In their article, Franklin and Russell said recovery could be out of reach for most if not all of the ailing retirement funds.
Franklin and Russell linked severe pension fund deficiencies to the collapse of investment markets in 2008 and the difficult requirements of the federal Pension Protection Act of 2006.
Franklin and Russell, of Horizon Actuarial Services LLC, noted that the Dow Jones Industrial Average fell 4,500 points - a 34 percent decline - in 2008.
"Most of America's private pension plans - whose assets are invested in a diversified mix of stocks, bonds and alternative assets - lost between 20 percent and 30 percent of their asset values in 2008, with losses continuing in the early months of 2009," Franklin and Russell wrote.
Many plans today are "struggling" with the "often confusing and sometimes draconian" provisions of the 2006 pension law, they added.
The Pension Protection Act of 2006 was a response to the failure of defined benefit pension plans in the steel, airline and other industries. The law's "noble" intent, Franklin and Russell said, was to secure benefits through new funding requirements.
"To this end, the Pension Protection Act shortened the funding horizons for pension plans (from 30 years to 15 years), forcing contributions to be made sooner rather than later," they explained.
The Pension Protection Act also established color-coded funding status "zones" for multiemployer defined benefit pension plans, under which benefits are based on wages and length of service. Defined benefit pension plans are sponsored generally by labor unions and established and funded through collective bargaining.
"For example, a plan certified to be in critical status, or the Ôred zone,' must adopt a rehabilitation plan consisting of schedules of contribution increases, benefit reductions or both to emerge from the red zone in 10 years," they noted. "Bargaining parties must then negotiate over alternative schedules and decide which one to adopt in their contracts."
But the Pension Protection Act was considered in Congress and signed into law "at a time when market losses like those seen in 2008 were unfathomable," Franklin and Russell continued.
Thus, many "red zone" retirement plans with rehabilitation strategies developed after 2008 face prolonged difficulty, they said.
"For example, a (rehabilitation) schedule that preserves 2008 benefit levels could very well require a doubling or tripling of future contributions," Franklin and Russell warned. "A schedule that reduces benefits to the maximum extent allowed by law may still require significant contribution increases - in many cases, the necessary schedules will be unaffordable to both labor and management."
The Worker, Retiree and Employer Recovery Act of 2008 provided "some relief" by delaying the funding requirements of the 2006 law, but "more substantial" legislation is needed "to enable many plans to recover and remain viable," they said.
"With the economy and the financial markets in a state of flux, and the status of any significant relief from Congress unknown, the trustees of America's multiemployer pension plans will face difficult decisions in 2009 and beyond," Franklin and Russell concluded. "Trustees will need to work closely with their plans' advisors to address this significant challenge to the multiemployer pension system."
Market losses, the funding provisions of the Pension Protection Act and a protracted economic recession that slowed domestic shipping in key markets combined to force the multiemployer defined benefit American Maritime Officers Pension Plan into the "red zone" in October 2009. A year earlier, the AMO Pension Plan was able to meet all of its current and projected benefit commitments to participants.
The AMO Pension Plan's joint union-employer trustees developed a rehabilitation strategy that included a freeze on earned monthly retirement benefits as of December 31, 2009, significant increases in employer contributions to the AMO Pension Plan under all AMO deep-sea, Great Lakes and inland waters collective bargaining agreements, and the continued right to retire after 20 years of service, regardless of age.
The trustees also established the employer-paid American Maritime Officers Defined Contribution Plan, which is comparable to the defined contribution AMO 401(k) Plan and AMO Pension Plan Money Purchase Benefit, or MPB. The AMO Defined Contribution Plan provides additional individual retirement accounts that can be managed personally.
The defined benefit AMO Pension Plan will be terminated once it can cover all of its liabilities.
Editor's note - Actuaries Cary Franklin and Jason Russell and their firm, Horizon Actuarial Services LLC, provide no actuarial or consulting services to the AMO Pension Plan or to any other benefit fund established for AMO members and their families.
Nationwide retirement crisis cripples 80 percent of traditional pension plans
Only 20 percent of multiemployer defined benefit pension plans are sound, compared to 80 percent in the first quarter of 2008.
Employee benefit fund actuaries Cary Franklin and Jason Russell reported the precipitous decline of the traditional pension plan in the United States in the Spring 2010 issue of Insights, a publication of the Association of Benefit Administrators Inc.
In their article, Franklin and Russell said recovery could be out of reach for most if not all of the ailing retirement funds.
Franklin and Russell linked severe pension fund deficiencies to the collapse of investment markets in 2008 and the difficult requirements of the federal Pension Protection Act of 2006.
Franklin and Russell, of Horizon Actuarial Services LLC, noted that the Dow Jones Industrial Average fell 4,500 points - a 34 percent decline - in 2008.
"Most of America's private pension plans - whose assets are invested in a diversified mix of stocks, bonds and alternative assets - lost between 20 percent and 30 percent of their asset values in 2008, with losses continuing in the early months of 2009," Franklin and Russell wrote.
Many plans today are "struggling" with the "often confusing and sometimes draconian" provisions of the 2006 pension law, they added.
The Pension Protection Act of 2006 was a response to the failure of defined benefit pension plans in the steel, airline and other industries. The law's "noble" intent, Franklin and Russell said, was to secure benefits through new funding requirements.
"To this end, the Pension Protection Act shortened the funding horizons for pension plans (from 30 years to 15 years), forcing contributions to be made sooner rather than later," they explained.
The Pension Protection Act also established color-coded funding status "zones" for multiemployer defined benefit pension plans, under which benefits are based on wages and length of service. Defined benefit pension plans are sponsored generally by labor unions and established and funded through collective bargaining.
"For example, a plan certified to be in critical status, or the Ôred zone,' must adopt a rehabilitation plan consisting of schedules of contribution increases, benefit reductions or both to emerge from the red zone in 10 years," they noted. "Bargaining parties must then negotiate over alternative schedules and decide which one to adopt in their contracts."
But the Pension Protection Act was considered in Congress and signed into law "at a time when market losses like those seen in 2008 were unfathomable," Franklin and Russell continued.
Thus, many "red zone" retirement plans with rehabilitation strategies developed after 2008 face prolonged difficulty, they said.
"For example, a (rehabilitation) schedule that preserves 2008 benefit levels could very well require a doubling or tripling of future contributions," Franklin and Russell warned. "A schedule that reduces benefits to the maximum extent allowed by law may still require significant contribution increases - in many cases, the necessary schedules will be unaffordable to both labor and management."
The Worker, Retiree and Employer Recovery Act of 2008 provided "some relief" by delaying the funding requirements of the 2006 law, but "more substantial" legislation is needed "to enable many plans to recover and remain viable," they said.
"With the economy and the financial markets in a state of flux, and the status of any significant relief from Congress unknown, the trustees of America's multiemployer pension plans will face difficult decisions in 2009 and beyond," Franklin and Russell concluded. "Trustees will need to work closely with their plans' advisors to address this significant challenge to the multiemployer pension system."
Market losses, the funding provisions of the Pension Protection Act and a protracted economic recession that slowed domestic shipping in key markets combined to force the multiemployer defined benefit American Maritime Officers Pension Plan into the "red zone" in October 2009. A year earlier, the AMO Pension Plan was able to meet all of its current and projected benefit commitments to participants.
The AMO Pension Plan's joint union-employer trustees developed a rehabilitation strategy that included a freeze on earned monthly retirement benefits as of December 31, 2009, significant increases in employer contributions to the AMO Pension Plan under all AMO deep-sea, Great Lakes and inland waters collective bargaining agreements, and the continued right to retire after 20 years of service, regardless of age.
The trustees also established the employer-paid American Maritime Officers Defined Contribution Plan, which is comparable to the defined contribution AMO 401(k) Plan and AMO Pension Plan Money Purchase Benefit, or MPB. The AMO Defined Contribution Plan provides additional individual retirement accounts that can be managed personally.
The defined benefit AMO Pension Plan will be terminated once it can cover all of its liabilities.
Editor's note - Actuaries Cary Franklin and Jason Russell and their firm, Horizon Actuarial Services LLC, provide no actuarial or consulting services to the AMO Pension Plan or to any other benefit fund established for AMO members and their families.