London Market Monitor – 31 December 2021
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Milliman serves as the actuary for a multiemployer pension fund that was dealing with several difficulties. The fund was having trouble attracting new employers, and the retirees were finding it difficult to continue to make ends meet without cost-of-living adjustments to their benefits.
In addition to these concerns, the industry was experiencing numerous consolidations, and some of the existing employers were either going bankrupt or were in the process of being sold. As a result, there were fewer contributing employers in the plan. The remaining employers were becoming concerned about the potential unfunded liability remaining as other employers left the fund.
New employers were hesitant to join the plan due to their concerns regarding potential withdrawal liability associated with multiemployer pension plans. The existing employers were also looking for ways to reduce their potential withdrawal liability exposure.
After reviewing numerous alternative plan designs, including shifting to a defined contribution plan, Milliman identified a solution that satisfied the trustees. Specifically, the trustees were looking for a way to:
Milliman was able to help the trustees meet their goals by changing the plan to a Milliman Sustainable Income PlanTM (SIP) and by modifying the withdrawal liability procedures to make use of the direct attribution method. By shifting away from the rolling-five method, the withdrawal liability will not be inherited by new employers as a result of simply joining the plan.
For this plan, the benefits earned under the SIP structure are adjusted each year to reflect actual market returns. If the plan’s assets earn more than 5%, the benefits will increase; if the assets fall short of the 5% threshold, benefits may decrease. Based on historic market returns of 7% to 8% and a 5% threshold, the benefits are expected to increase 2% to 3% per year on average.
However, the SIP design is further enhanced by building up a reserve when market returns are above 10%. This reserve is used to help protect against benefit reductions in years when the market returns are less than the 5% threshold.
Under the SIP, both the plan’s benefits and the plan’s assets will reflect the investment experience over the previous year. Therefore, the plan is structured to reduce the potential for unfunded liability. This change, coupled with the change in the withdrawal liability procedures, helps to eliminate the potential liability concerns for any new employers who join the plan and discontinues accruals under the prior benefit structure that can become underfunded. Over time, withdrawal liability for current employers will be reduced.
The trustees implemented the required changes for future accruals. The existing benefits are protected and will increase due to future increases in pay. The benefits provided under the new SIP are equal in value to those provided under the prior formula. Additionally, the SIP benefits for future retirees are expected to increase over time and are anticipated to provide some protection against inflation.
One of the larger contributing employers was recently sold as part of a potential bankruptcy. When these types of transactions occurred in the past, the acquiring entity refused to participate in the plan due to concerns about potential withdrawal liability. However, as a result of the plan design changes and the change in the withdrawal liability procedures, the acquiring employer agreed to participate in the plan.
Milliman assisted the trustees in communicating these important plan changes to plan participants and contributing employers. The participants were pleased to learn that they would continue to earn lifetime annuity benefits under a defined benefit plan and that there was no decrease in the value of the benefits they are earning. They also appreciated that the trustees were working to find solutions to help protect them and their retirement benefits.
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