By Pension and Benefits Editorial Staff
The Pension Benefit Guaranty Corporation (PBGC) has released the findings of its Fiscal Year (FY) 2019 Projections Report, providing ten-year projections, ending with FY 2029 (September 30, 2029), of the financial status of the multiemployer and single-employer plan insurance programs under a range of future financial scenarios.
The report notes that, although last year’s report projected that the PBGC’s multiemployer insurance program would become insolvent during FY 2025, this year’s projections show a very high likelihood of insolvency during FY 2026 and that insolvency is a near certainty by the end of FY 2027. According to the report, this change is due primarily to the enactment of the Bipartisan American Miners Act of 2019 (Division M of the Further Consolidated Appropriations Act, 2020 (P.L. 116-94)), which provided federal funding for the United Mine Workers of America 1974 Pension Plan. The PBGC’s multiemployer program covers approximately 10.8 million participants in about 1,400 plans and is under severe stress.
The news, however, is much better for the PBGC’s single-employer insurance program, which covers about 25 million participants. Results for this year’s projections show the PBGC’s single-employer program is likely to remain out of “deficit” over the next decade. Last year, this program emerged from a negative net position or “deficit” for the first time since 2001. Continued future improvement is expected, but not assured. The program still remains vulnerable to an unexpected downturn in the economy.
The projections report, required under ERISA, is the PBGC’s annual actuarial evaluation of its future operations and financial status. The report provides a range of estimates of the future status of insured pension plans and their effect on the PBGC’s financial condition, based on many different economic scenarios.
The report generally uses data and assumptions as of September 30, 2019, the end of FY 2019. The projections start with the PBGC’s FY 2019 Annual Report and forecast results under a range of future economic scenarios for the following ten-year period, without presuming any changes in current law. The economic activity since September 30, 2019 has been volatile and uncertain and is not reflected in the report. The effects of the Bipartisan American Miners Act and the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, however, are reflected in the report.
The PBGC notes that questions have been raised about the effect of COVID-19 on a number of government programs. According to the report, market volatility and economic deterioration associated with COVID-19 are unlikely to have a material effect on the timing of the insolvency of the multiemployer program. However, economic disruption caused by the pandemic could result in losses in the single-employer program, particularly if unforeseen bankruptcy activity accelerates beyond those companies that were financially troubled prior to the pandemic.
Multiemployer program projections. The PBGC said that the multiemployer program continues to report large deficits (i.e., negative net positions) and, unless there are changes in law, the financial condition of the multiemployer insurance program will continue to worsen over time. Specifically, the results, presented as present values as of September 30, 2019, show the mean net financial position (i.e., average of all the scenarios modeled) in the multiemployer program declining from negative $65.2 billion, the actual reported net position on September 30, 2019, to negative $82.3 billion at September 30, 2029 (shown on a present value basis as of September 30, 2019). This represents a decline of $17.1 billion over the ten-year projection period, according to the PBGC.
The increase in the projected deficit is due primarily to a considerable decline in both the projected investment returns on plan assets and the discount rate used to value the liabilities. This increase is partially offset by a $6 billion improvement resulting from the enactment of the Bipartisan American Miners Act of 2019. The Act is projected to keep the United Mine Workers Plan solvent throughout the projection period under the assumptions used for this projections report.
The PBGC expects that the net financial position will worsen from the end of FY 2019 to the end of FY 2029 due largely to additional multiemployer plans that are projected to become insolvent within the ensuing 20-year period and will need financial assistance from the PBGC. Out of roughly 1,400 insured multiemployer plans, 124 plans have reported that they will run out of money within 20 years and are in “critical and declining” status, according to the PBGC.
The PBGC’s multiemployer program is projected to run out of money by the end of FY 2026. While this is one fiscal year later than was projected in the FY 2018 Projections Report, the actual change may be less than 12 months. The report notes that the primary reason for the change is the recent enactment of the Bipartisan American Miners Act. Also, other favorable experience during FY 2019, most notably asset returns that were higher than expected, also contributed to the later insolvency year.
If the multiemployer program were to run out of money, current law would require the PBGC to decrease guarantees to the amount that can be paid from multiemployer program premium income. The PBGC said that this would result in reducing guarantees to “a very small fraction of the benefits guaranteed by PBGC.” The PBGC’s guarantee is the amount of retirement benefits that the Agency insures for each participant, which is capped by law.
Single-employer program projections. The single-employer insurance program covers about 25 million participants in about 24,000 pension plans. The program’s financial status has evolved from very recent deficits to a positive net financial position projected to grow over the next ten years. Similar to the pattern reported last year, the projections show that the single-employer program net financial position is likely to continue to improve, according to the report. The PBGC explains that the improved net financial position is due primarily to low claims activity and increasing premium revenue. Higher premium revenue has resulted from higher premium rates, especially from plans that have underfunded vested benefits subject to the variable rate premium. Despite the projected improvement in the program’s financial position, significant risk of higher claims remains.
Specifically, the mean projection shows the net financial position in the single-employer program growing from $8.7 billion, the actual reported net position as of September 30, 2019, to $46.3 billion at September 30, 2029 (shown on a present value basis as of September 30, 2019). The PBGC notes that the starting point of the projection period is higher for this report than it was for the FY 2018 report.
However, although the average projected net financial position is positive, risk remains for the single-employer program because of the continued underfunding in some ongoing plans that could potentially become claims to the PBGC. The report explains that underfunding is more acute in the plans that are most likely to present a claim to the PBGC, and any downturn in the economy increases both underfunding and the probability of claims to the PBGC. Plans sponsored by employers with below-investment-grade credit ratings had an aggregate underfunding of $155 billion as of December 31, 2018, according to the PBGC’s FY 2019 Annual Report.
Source: FY 2019 PBGC Projections Report.
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