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August 6, 2015

Multiemployer Plan Funding Remains Weak, Report Says

Multiemployer pension plan funding deficits have increased, and aren’t likely to be repaired in the next few years by either higher investment returns or interest rate increases, Moody’s Investors Service said in a recently released report.

The report concluded that, in the aggregate, multiemployer plans are very underfunded, and, consequently, the plan contributions of many plan sponsors will be “going up,” Wesley Smyth, vice president and senior accounting analyst for Moody’s in New York, told Bloomberg BNA July 30.

Smyth, who co-authored the report, said such underfunding has led some plan sponsors to divest their companies from the joint and several liability obligations to these plans. He added that although such restructuring is very expensive for plan sponsors, he expects more of these actions and other plan and benefit restructurings under provisions of the Multiemployer Pension Reform Act.

The aggregate underfunding of domestic multiemployer pension plans increased by 11% in 2013, to $318 billion, from $286 billion at the end of 2012. However, Moody’s found that funding ratios, which began 2013 at 48%, stood at 48% at the end of the year as well.

Randy G. DeFrehn, executive director of the National Coordinating Committee for Multiemployer Plans in Washington, said the report’s methodology, which uses a discount interest rate that is much lower than required for multiemployer plan funding, reflects a much worse funding outlook for the plans than truly exists. Consequently, the report far overstates the extent of the multiemployer funding problem, he said.

Multiemployer plans are long-term organizations subject to the contributions of a number of employers, and therefore the funding rules that apply to them should be and have been different than those applying to single-employer plans since the passage of the Employee Retirement Income Security Act, DeFrehn.

These differences have been consciously continued in each of the subsequent revisions to the federal funding rules since then, he said. In addition, legislation such as the Pension Protection Act and the MPRA have contributed to greater funding stability both for the funds and for their contributing employers, he said.

Smyth said the reprot attempted to measure single-employer and multiemployer plans on the same basis. To accomplish this, he said, Moody’s used a discount rate of about 4.5% for multiemployer plans, which is much lower than the 7.5% rate used by most multiemployer plans to calculate their funding obligations.


Moody’s said “in a few cases,” the amount of future funding obligations could result in credit downgrades for speculative grade companies that lack flexibility to make sufficient plan contributions.

Further, Moody’s said, under a “last man standing scenario,” certain investment grade companies could “eventually face substantial funding pressure” if smaller and/or weaker firms are unable to increase their contributions or possibly leave the plans because of bankruptcy.

Smyth said Moody’s has never downgraded the credit rating of a company based solely on its plan funding, but the fact that a company has significant plan obligations could be a contributing factor in such a decision.


Moody’s indicated that investment returns for multiemployer plans would need to be consistently very high to make much of a difference to the funding ratios calculated in the report, since “when a plan is only 50% underfunded, assets must work twice as hard to keep up with obligations.”

Since Moody’s calculates discount interest rates by using a 4 year weighted average of the yield on 30-year Treasury securities, the benefit of rising interest rates on plan funding ratios won’t be fully realized for several years, the report said. According to the report, “even if rates rise as expected, the 4 year averaging requirement will delay the benefits of rising interest rates until plans file 2017 returns and won’t be fully realized until 2021.”

The report which covered 124 multiemployer plans, including some of the largest in the US extrapolated publicly disclosed data for the plan year ending in 2013 to estimate the funding ratio of these plans.

Source: Bloomberg BNA