A multiemployer pension plan that covered 1,000 pensioners in diverse industries had experienced poor investment return on the fund assets at a time when the overall equity market was deteriorating. The fund did not achieve the assumed investment returns of 7% and in some quarters had even suffered a loss. The trustees had been prudently monitoring the investments and had been meeting regularly with their investment consultant to review the fund’s goals and relocate its assets. Unfortunately, the market remained sour and the fund continued to fall short of the investment goals.
As a result of the poor investment returns, the minimum required contribution had been increasing each year. However, because this was a multiemployer plan, the contributions were based on set, negotiated rates. The annual rate of contributions was not sufficient to meet the long-term obligations and the credit balance was rapidly eroding. Milliman consultants warned the trustees that the low returns and stable contribution rates were placing the fund in a dangerous double bind and impairing its future ability to meet costs.
Interactive software quickly presents alternative solutions
In order to help the trustees understand the extent of the problem, Milliman consultants introduced FutureCost™, a software product we have developed, which combined our proprietary actuarial models with custom-coded data based on the assets and liabilities of the pension fund. Using this tool, we presented numerous what-if scenarios so that the trustees could explore the effects of different contribution levels, rates of return on investment, and future rates of accrual on the minimum funding requirements over the next decade. FutureCost provided clear visual representations of the effects of the trustees’ decisions and allowed them to test out different possibilities and immediately see the potential results on the fund’s future. It became clear to the trustees that if no changes were made the negotiated rate of contributions would not meet the minimum funding requirements by the end of the decade. FutureCost helped the trustees to better understand the scope of their situation and they were able to evaluate alternative solutions to the problem.
Instantaneous calculations enabled effective negotiations
Consequently, during negotiations the trustees were able to present the bargaining parties with clear information on the health of the pension fund. Using FutureCost software, they could instantly provide the bargaining parties with information on how proposed adjustments to the contribution rates would affect the fund in the long term. When counter-proposals were offered, these too could be easily and quickly factored into the future of the fund. The bargaining parties thus could discuss the potential impact of contribution rate changes easily during a single meeting, rather than have to wait for new calculations to be produced before continuing discussions. As well, both sides were able to more quickly and confidentially agree on the need to reduce the rate of future accruals and increase future contributions.
FutureCost also demonstrated the effects of staggering these increases over the following two years as the contracts came up for negotiation. Milliman assisted the trustees in anticipating the long-term needs of the plan. Rather than looking at the funding obligations of the plan year-by-year, trustees now could plan for future obligations.
Expert insight and technology leads to solid funding
Although the trustees adopted the funding improvement plan before PPA 2006 was enacted, the projections produced during these negotiations were precisely those that all multiemployer plans will need to prepare when PPA 2006 fully takes effect in 2008. PPA 2006 will require that all plans with insufficient funds be categorized as endangered or critical. Had it not been for the FutureCost projections and proposed changes the plan would have likely fallen into one of these categories; it is now projected to be neither. The insight of Milliman consultants combined with our expert technology enables trustees of multiemployer plans to understand the effects of funding decisions, prepare for the changing requirements put in place by PPA 2006, and explore options for meeting future obligations.
