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After several years of strong financial gains, many multiemployer pension plans areincreasingly underfunded now due to the financial market impacts ofCOVID-19 in the first months of the year. Adownturn in business activity related to the pandemic is also toblame, according to a study by international actuarial andconsulting firm Milliman.

The multiemployer pension system's aggregatefunding level is estimated to have declined from 85% to 74% betweenJanuary 1st and April 7th, the firm found, undoing much of the lastdecade's improvement. That is equivalent to an additional $21,000underfunding per active plan participant, unless the return onassets improves over current assumptions.

The funding shortfall has increased by about $80 billion sinceDec. 31, according to the company's Multiemployer Review update.

"We've had three massive market events in 20 years and it willbankrupt many of our plans without government intervention," saidKelly Coffing, principal and consulting actuary at Milliman, basedin Seattle, Washington. "The notion that we can fix this bydemanding higher PBGC premiums from the so-called healthy planswon't work because many are already strained and having them fundthe fallen plans is going to further stress the system."

Mature pension plans with more benefit payouts and expenses thancontributors are particularly at risk from deteriorating conditionsand without a rapid recovery in financial markets,  orCongressional intervention, a wave of pension-plan failures couldeventually result, the report said.

More than 10 million Americans rely on the multiemployerdefined-benefit retirement pension system, the study said.

According to a Dec. 2019 Milliman survey, 130 pension plans werein declining status or insolvent and receiving aid from the federalPension Benefit Guaranty Corporation at the end of last year.Without a strong recovery from the current pandemic, that numbercould grow quickly, the consultants said. Entering 2020, 60% ofplans, or 742 out of 1249 plans, were at least 90% funded.

A  Milliman survey on corporate pensions released this weekfound that the corporate pension funding ratio was about 87.5% in2019 despite the best asset performance in more than 16 years.

The authors noted that pension plans already have suffered twoso-called "once in a lifetime" events after the collapse of thedotcom bubble from 2000- 2002, and the mortgage meltdown andhousing crisis of 2008. A third could bring down some pension plansthat are still standing, they said.

Following the 2008 crisis, fewer participants elected to takevoluntary retirements in the following years as theytried  to rebuild their savings. It's not clear if thatwould, or could, happen this time. It's also not clear whethermortality would increase from the COVID-19 crisis enough to reducepension liabilities. Pensions may commonly have 10% to 15% ofliability from participants who are 75 and older, the reportsaid.

Multiemployer pensions have already shot most of the arrows intheir quiver during past crises to help keep plans solvent. Theyinclude reducing benefits, increasing employer contributions,reducing early retirement options and reducing accrued benefits forall participants. As a result, each dollar contributed to plans nowyields about half the benefit it provided in 2008, researcherssaid. Therefore, using the same strategies to improve plan fundingthis time may not be successful or even feasible, they said as thereduced benefits may make participation less attractive toemployees.

The PBGC also would not likely be able to handle a new batch ofstruggling underfunded pension plans, they said, as itsmultiemployer insurance program was  slated to run out offunds in fiscal year 2025 even before the pandemic hit.

The report concludes that many plans may not be able to survivethe COVID-19 crisis and a global economic recession, and that itmay be time to look at different types of benefit plan designsincluding variable plans or modified variable plans that canwithstand market volatility.

"They wouldn't  fix our current underfunding but theyprovide a viable path forward," said Coffing. "What I like aboutvariable plans is that essentially each cohort pays for theirbenefits and the benefits they get from contributions made on theirbehalf retains longevity pooling without burdening the futurecohorts to fund losses," she said.

READ MORE: 

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• Employers say multiemployer plans needtaxpayer-funded loan 
• Improvement in PBGC multiemployer deficit toolittle, too late