For a secure retirement, nothing beats union membership – so say union officials. Yet their respective organizations aren’t likely to tell current or prospective members an inconvenient truth: Their pension plans in recent years have been underperforming. Indeed, several major funds may be unable to meet long-term obligations. That’s the conclusion of two new reports, one published by the Hudson Institute and the other by Moody’s Investors Service. In each case, the authors concluded that union pension assets in most cases fall short of liabilities, and in many cases, way short. This may well be a precursor to a wave of takeovers by Pension Benefit Guaranty Corporation (PBGC), which Congress created some 35 years ago to avoid such a scenario.
Union-sponsored pensions are of the traditional “defined-benefit” variety. These professionally-managed plans promise participating workers a specified monthly stipend beginning at eligible retirement age. In some cases, active workers must make contributions; in all cases, employers must contribute. The vast majority of these are single-employer rather than multi-employer plans. Defined-benefit retirement plans contrast with “defined-contribution” plans such as the 401(k) and the 403(b). The latter type of financial instrument allows employees wide latitude in choosing their type of investment vehicle and in what contribution amount. And they have the advantage of being portable should an employee change jobs. Defined-contribution plans have been on the upswing over the past couple decades, whereas defined-benefit plans have been on the decline. It’s not a great surprise. Employees prefer flexibility. And equally to the point, many employers, especially in unionized industries such as steel and automobiles, can’t afford to carry a defined-benefit plan. Tens of thousands of employers over the years simply have folded their plans, preferring a PBGC takeover. In the mid-80s, roughly 175,000 private-sector PBGC-insured defined-benefit plans were in force; now there are 44,000, covering some 42 million U.S. workers, retirees and family members.
A defined-benefit plan is not legally required to be fully funded at all times – that is, assets are not required to match or exceed liabilities. Financial markets by nature fluctuate, and given reasonable funding levels, a deficit can turn into a surplus in a relatively short time. Still, it’s a benchmark of the Employee Retirement Income Security Act (ERISA) of 1974, the law creating PBGC, that a plan becomes “endangered” when its asset-to-liability level falls below 80 percent, and it’s “critical” when it drops below 65 percent. The new studies at hand, each released in September, reveal a that disturbing number of union plans are in the critical zone.
The Hudson Institute study updates a report it released last year. Authored by Hudson Research Fellow Diana Furchtgott-Roth and independent economist Andrew Brown, the report, “Comparing Union-Sponsored and Private Pension Plans: How Safe Are Workers’ Retirements?,” analyzes IRS Form 5500 tax returns for 2006, the most recent year for which data are available. By various key indicators, nonunion pension plans are better positioned to deliver promised benefits. “Large” (100 or more participants) nonunion plans as a whole were 97 percent funded, as opposed to union plans, which were on average 86 percent funded. Among nonunion plans, only 14 percent were “endangered.” The corresponding figure for union plans was a whopping 41 percent. Among those in “critical” condition, the respective figures were 1 percent and 13 percent. Among smaller plans, the portion of union plans falling below the critical level was 15 percent, more than twice the figure for nonunion pensions.
The authors offer potential explanations for the markedly poorer performance among union pension plans, most importantly, the high commitments required of employers through collective bargaining and the inherent aversion of union officials to conveying bad news to their members. “It is part of trade union doctrine that defined benefit plans are safe,” write Furchtgott-Roth and Brown. “For the leadership to acknowledge that it must struggle to sustain adequate funding suggests that the annual contributions are inadequate to assure rank-and-file members a stable retirement.” In other words, because unions accentuate the positive in order to maximize membership and loyalty, they downplay or ignore unpleasant news that might make their organizations less likely places in which to join or remain.
The Moody’s study, “Growing Multiemployer Pension Funding Shortfall is an Increasing Credit Concern,” likewise updates an earlier report in an effort to account for last year’s stock crash. Like the Hudson study, it found an overall deterioration in funding levels among union- and employer-sponsored plans. The authors estimated funding levels for 126 pension funds participating in multiemployer pension plans as of the end of last year, and compared funding levels with those of 12 months earlier. Overall funding status on December 31, 2007 was 77 percent, but had declined to 56 percent as of December 31, 2008. Union plans are among those who got slammed. Of the roughly dozen affiliates of the United Brotherhood of Carpenters and Joiners, for example, only one had an asset-to-liability level exceeding even 70 percent. Construction industry plans as a whole were 60.1 percent funded. Transportation-industry plans, mainly sponsored by the Teamsters or the Machinists, were 58.6 percent-funded.
Multiemployer plans are far fewer in number than single-employer plans. But the downside is that their beneficiaries live in a good deal more insecurity. Under current rules, PBGC insures only up to $12,870 in annual payments for each individual beneficiary enrolled in a multi-employer plan. This contrasts with the annual payout of up to $54,000 to a worker who retires at age 65 under a single-employer plan. Unionized workers and retirees in skilled trades may wind up highly disappointed if their plans collapse.
These studies, especially the Moody’s report, amplify the findings of a report released last December by researchers at St. Louis University. That particular study concluded that multi-employer pension funds sponsored by five construction unions in the St. Louis area had combined assets of only about 70 percent of liabilities. Authors John McGowan and Catherine Donovan estimated that as of the end of 2008, the situation had gotten worse due to the stock market crash. The findings also come in the wake of an April 30 letter from the Service Employees International Union own pension fund managers to union leadership that its member fund is in critical status.
What makes such findings especially troubling is that Congress in 2006 enacted overdue ERISA reforms designed to shore up defined-benefit plan actuarial soundness and make PBGC less vulnerable to the need for a federal bailout. The Pension Protection Act, as the legislation is called, raised sponsor premiums and required multiemployer plans to absorb their entire funding liability as a 15-year debt, among other provisions. In all, the law has forced managers of more than 300 at-risk pension plans to take remedial action. That the situation has continued to deteriorate suggests that pension fiduciaries, especially of union plans, have been less than diligent investors. ERISA from the start has mandated that pension fund managers seek a safe and prudent return on investments. Whether by accident or design, many managers have not met this standard.