The Pension Protection Act of 2006 (PPA) requires that multiemployer defined benefit pension plans arrange and report annual actuarial certification of their plans' funded status to the IRS within three months of the end of each plan year. Plans that are currently at least 80% funded and projected to meet minimum funding requirements for the next seven years are certified as healthy plans ("green" zone).

Plans that do not meet this standard are certified as "endangered" ("yellow" zone) or "critical" ("red" zone) depending on how severely the plan is underfunded. Unhealthy plans are required to adopt funding improvement or rehabilitation plans. Failure to earn healthy status has two negative consequences: The plan will have to comply with IRS-imposed rules for underfunded plans and the plan's board of trustees loses its authority to make decisions, which now may involve union and employer bargaining representatives.

Milliman's projections show plan vulnerabilities in future years

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Several months prior to a 2008 filing deadline, Milliman determined that primarily due to the stock market downturn, a construction-industry multiemployer plan would not be certified as healthy unless actions were taken to bring it back into compliance with the PPA's funding requirements. The plan was currently well funded at 102%, but was not projected to meet minimum funding requirements through the next seven years due to a deficiency in 2014.

Higher contributions over the next seven years were not a viable option, because the existing collective bargaining agreement did not expire until after the 2008 filing deadline.  Benefit reductions were not an option that the trustees wished to pursue to resolve the issue. Milliman requested a special meeting with the trustees prior to the end of the plan year to review other IRS-approved options that could allow the plan to be certified as healthy for 2008. Each of these options would defer certain minimum funding requirements that otherwise would be due within seven years.

Analyzing alternatives, determining a solution

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Our analysis of the plan revealed that two of the three IRS automatically approved options presented to the trustees—the asset method change and the funding method change—would not have increased funding levels enough for the plan to be certified as healthy. The third IRS option—combining credit amortization bases—allowed the plan to be certified healthy for 2008 by eliminating the projected deficiency in 2014 and was adopted by the trustees.

In conjunction with this consulting process, Milliman indicated that unless the plan's investment performance improved, contribution increases and/or benefit reductions would be necessary for the plan to be certified as healthy in future years. The trustees are monitoring plan performance with the knowledge that if returns do not improve, additional plan changes will be necessary within the next fiscal year to retain the plan's healthy certification.