These pensions could fail
If you have clients or loved ones who are counting on getting retirement income from their multi-employer defined benefit pension plan, this might be a good time to have a talk about not putting all the eggs in one basket.
The Pension Benefit Guaranty Corp. (PBGC) is warning that the current multi-employer system, which covers more than 10 million participants, “is under severe stress, and, absent changes in current law, many plans are likely to fail” in the next 5–20 years.
In a new report, the federally-created guarantor of private-sector pension plans said almost 1.5 million people are “at risk” of seeing their benefits cut “significantly” to PBGC guaranteed levels. This assumes that PBGC’s multi-employer fund itself remains solvent. Remaining solvent is not a sure thing, since according to the report, PBGC faces “a significant risk of running out of money in as little as five years.” (Note: PBGC funding comes from insurance premiums paid by the employer sponsors, investment income, and funds received from PBGC plan takeovers.)
There are plenty of scary numbers in this report, but the stand-outs include how a melt-down of the at-risk underfunded multiemployer plans could impact PBGC-guaranteed benefits paid to pensioners.
“At 30 years of service, benefits of more than $3,960 per year are only 75 percent” covered by PBGC, up to a “maximum” guarantee level of $12,870 per year,” the report states. Participants with fewer years of service get a pro-rated amount, and even those who are paid the maximum guarantee will see their benefits cut by at least 18 percent.
This is not a future that the almost 1.5 million people are envisioning. The same could be said for many if not most financial professionals. Indeed, for clients having pensions, many professionals run retirement income scenarios based around certain lifetime payout assumptions related to the pension.
Now, in view of the PBGC projections, advisors may want to ask: “What kind of pension do you have again? Is it multi-employer or single-employer?” If it’s multi-employer, that might be reason for the advisor to learn more about it and/or to suggest the client step up his or her personal savings outside the plan.
As a refresher, multi-employer pensions are collectively bargained plans maintained by more than one employer (typically in the same or allied industries) and a labor union. Industries include building and construction, entertainment, retail food, garment manufacturing, mining, trucking and maritime. PBGC also guarantees single-employer plans, but although these still have underfunding problems, they are not as acute as in years past.
Time was when underfunded multi-employer plans were not a front-burner issue. In 2001, for instance, only 15 plans covering about 80,000 participants were under 40 percent funded, according to the PBGC report.
However, the two recessions of the 2000s took their toll, and by 2011, the number of severely underfunded multi-employer plans had grown to almost 200, covering almost 1.5 million participants. PBGC considers “severely underfunded” plans to be those that are less than 40 percent funded, based on estimated market rates.
PBGC points out that the reports’ projected values are estimates, not predictions. In addition, they resulted from projection models that have undergone “considerable revamping” from previous reports. Even so, the numbers are chilling enough to merit reading the entire report, for purposes of taking the pension plan temperature if nothing else.
The risk presented by PBGC is not pertinent to every client. However, to people facing the potential for major benefit cuts, should amelioration not occur, a heads-up now could make a critical difference in the retirement strategy they take.