WASHINGTON, D.C. - A rather gloomy report issued last month by the Pension Benefit Guaranty Corporation said substantial premium increases are going to be necessary to help keep the PBGC's multiemployer program afloat, as one way to keep it from running out of funds by 2025.

In a letter to Congress regarding the reports, PBGC's Board Chair and Secretary of Labor Tom Perez wrote: "Insolvency of PBGC's multiemployer insurance program would devastate the retirement benefits of 1 million to 1.5 million participants and their families... We must address the funding and other challenges of the multiemployer insurance program before it is too late."

There are about 10.5 million workers and employers who are participants in multiemployer plans, most of them in the construction industry. The role of the PBGC is to backstop benefits of failing pension plans, but increasingly it is unable to fully fund those benefits. In 2014, the PBGC had $818 billion in benefit liabilities vs. $397 billion in assets.

Multiemployer plans have been hurt by long-term demographic and economic trends, specifically declining or flat union membership levels and low interest rates on onvestments. Plus the 2009 start of the Great Recession put many multiemployer funds in a hole they have been unable to get out of.

The PBGC provides financial assistance to multiemployer plans when they run out of money so the plan can pay benefits up to the PBGC guarantee level and plan administrative expenses. Under the Multiemployer Pension Reform Act (MPRA) of 2014, the PBGC may also provide limited assistance prior to insolvency if a number of conditions are met. Currently, the agency is directly responsible for paying the benefits of about 1.5 million people in failed pension plans.

Rep. John Kline (R-Minnesota), chairman of the House committee with partial oversight of the PBGC, called for urgent action in light of the projections. “Today is a reminder of the urgent need to enact additional reforms to strengthen multiemployer pensions, reforms that would modernize the system for workers and provide PBGC additional resources to meet its obligations."

This year, premium revenue in the multiemployer program is projected to be less than $300 million, even after fully reflecting the increase enacted as part of MPRA. The PBGC said for it to meet its average projected financial assistance obligations through 2035, the MPRA Report projects that premiums will need to increase to more than four and one half times the premiums that are expected under current law.

What this means to individual plans and participants is that premiums for the PBGC multiemployer guaranty fund went from $13 to $26 per participant beginning after Dec. 31, 2014. The new proposal would hike that $26 by a factor of 4 to 4.5.

And still, premium hikes are only a small part of the solution in improving finances in the pension world. Ultimately, the best answer is more employers and employees contributing significantly more fund-hours to the plans, as well as significantly better investment returns. In the current political environment in Washington, there is scant chance of a taxpayer bailout. 

A dire financial scenario awaits union members in failing plans. For example, for a retiree with 25 years of service and a $25,000 annual benefit in a failing multiemployer pension plan, the maximum annual cut permitted under the 2014 law is $13,200, according to a cutback calculator at the Pension Rights Center’s website. But the PBGC is financially unable to fully backstop benefits for even that drastically reduced pension level.

Terence O’Sullivan, president of the Laborers International Union Of North America, wrote to Labor Secretary Perez, asking that the annual PBGC premiums for multiemployer pension funds not be increased. According to The Association for Union Constructors' account of the letter, "Increasing the premiums, O'Sullivan warned, "would encourage employers to leave the plans because of high costs. This would further weaken the multi-employer pension system." He also pushed for allowing the voluntary use of composite plans to sustain multi-employer funds.

Last month's report, says the PBGC, "shows the importance of carefully designing those (premium) increases to avoid exacerbating the amount of premiums needed. A well designed increase may encourage additional contributions and continued participation in plans and strengthen the multiemployer system. A poorly designed increase may accelerate plan insolvency. This would hurt participants and lead to even larger premiums. The president's 2017 Budget proposed a structure for increased premiums under the multiemployer program at a level that would eliminate most of the risk of the multiemployer program becoming insolvent within 20 years."