Can Multiemployer Pensions Build a 21st Century Plan?

A broad-based consortium of multiemployer pension advocates has targeted new pension models to bring creaky old-school benefits into the 21st century.


In the years since the financial crisis decimated pension funds of every stripe, the multiemployer universe has sought ways to marshal its own resources to tackle the unique problems of these jointly trusteed (by employers and employees) pension funds.

Multiemployer plans were created to accommodate union members who change jobs frequently, such as construction workers or truck drivers who move from project to project. With several employers within the same industry contributing to a pension plan, the union members can still accumulate pension benefits. While these plans are regulated by the Employee Retirement Income Security Act of 1974, a different set of rules applies to both union employees and their employers. For example, the ERISA-mandated pension insurance program run by the Pension Benefit Guaranty Corporation (PBGC) provides only limited benefits in the case of a plan failure. For their part, employers are penalized by withdrawal liability payments if they leave a multiemployer plan.

Today many multiemployer pensions are in dire need of help. Last year the PBGC, which insures some 1,500 “multis” in an insurance program managed separately from those of single-employer corporate plans, found that 21 percent of them required immediate funding solutions. These hobbled plans, in the so-called red zone as defined by the Pension Protection Act of 2006, have less than 65 percent of the assets needed to meet their future liabilities, necessitating the adoption of drastic measures, which might include reduced benefits.

In the four years since the financial crisis, the National Coordinating Committee for Multiemployer Plans (NCCMP), a union-sponsored organization based in Washington D.C., has been working to create solutions to the problems besetting multiemployer pensions. In August 2011 the NCCMP convened dozens of representatives from 40 employer and labor organizations along with asset managers, economists, investment consultants, policy experts and actuaries, to form the Retirement Security Review Commission. Their mission: to solve the top issues plaguing the pensions sponsored by multiple employers for union member employees.

The results of these efforts were published in a February 2013 report entitled, “Solutions Not Bailouts.” The first set of recommendations looks at how to strengthen the multiemployer pension system already in place. Proposals include refinements to the Pension Protection Act of 2006, passed by then-president George W. Bush to push pension funds into better-funded status. The financial downturn that followed its passage rendered many funds unable to comply with the act.

The second area of concern deals with the 5 to 10 percent of red-zone multiemployer plans that are deemed “deeply troubled.” The commission recommended drastic measures such as partially suspending accrued benefits for active employees and pay status for retirees, up to the point necessary to achieve solvency.

These fixes are important but it is the commission’s third recommendation — for new structures to deliver future pension benefits — that offers truly forward-thinking solutions.

A new model, the commission reports, would have to balance the needs of both employees and employers in sharing the risks of long-term investments. Viable new pension plans would also need to solve certain problems endured by employers, such as withdrawal liabilities. Employers also want to have more stable contributions into the plans. For their part, plan participants are best served within pooled, professionally managed vehicles that mitigate longevity and investment risks.

In proposing two new kinds of pension delivery models, the retirement security commission joins a growing chorus of policymakers, think tanks, actuarial consultants and others across the U.S. who have been calling for the redesign of the 20th century’s traditional defined benefit plans for the economic realties of the 21st century. Randy DeFrehn, executive director of the NCCMP says his members have ruled out defined contribution plans like 401(k)s as unsuitable substitutes for union employees’ pensions. “We wanted to look to other systems to see if there were structures we could borrow from,” DeFrehn explained to Institutional Investor about the commission’s search for answers, which included a look at European and Canadian pension systems.

After its exploration, the commission came out in support of two alternative approaches. The first, dubbed the “Variable Defined Benefit Plan,” was designed by actuarial consulting firm Cheiron in partnership with its client, the Washington, D.C.–based United Food and Commercial Workers International Union. Commission member David Blitzstein, special assistant to the president of the UFCW, who worked with McLean, Virginia–based Cheiron, notes the VDB plan is also called the Adjustable Pension Plan as benefits fluctuate with market conditions. In similar fashion to the Wisconsin Retirement System, it guarantees a 5 percent floor, which could return more based on the plan’s investment performance. Investment risks are mitigated in part through a relatively low assumed rate of return (the 5 percent) and annuitization of the benefits payable at retirement.

Like other well-regarded hybrid pension plans, the VDB offers pooled and professionally managed investments along with risk-sharing among participants, key elements of defined benefit plans that are absent in the more expensive and risky defined contribution model. Another key aspect, says Gene Kalwarski, Cheiron CEO, is that once a person retires, the assets are set aside in an annuity- or liability-driven investment fund, not invested in equity or real estate. “We don’t want active workers to cover stock market losses for retirees,” he explains. “This has been stress-tested, and the chances of developing unfunded liabilities is minimal.”

While no UFCW groups have adopted the new plan yet, says Kalwarski, others have, including the Newspaper Guild of New York’s represented employees at The New York Times and the Unite Here! Local 26 retirement plan in Boston. A version of the plan was also approved by a committee seeking retirement benefit solutions for the Maine Public Employees Retirement System, says executive director Sandy Matheson, who also serves as committee chairwoman. The state legislature, which appointed the committee, will need to approve the plan for the $11.3 billion state system, most likely in 2014.

The second pension model recommended by the NCCMP’s retirement security commission, called the “Target Benefit Plan” combines the retirement income security and economic efficiency of defined benefit plans with the predictable employer costs of defined contribution plans. It has no withdrawal liability, the bane of the multiemployer world; must be 120 percent funded; and must pay all benefits as annuities. It allows plan trustees more freedom to adjust benefits when economic conditions call for that. As an adjustable, not strictly defined, benefit plan, employers would not participate in the PBGC insurance program.

While the multiemployer world seeks to remedy its ailing plans, the notion of creating a better pension mousetrap for today’s economic realities is showing real promise.