Is my multiemployer plan financially secure?

By Bruce Cable

The Pension Protection Act (PPA) provides a stop-light approach to categorizing multiemployer plans, with labels such as “Green Zone” or “Safe Status” often interpreted as indicators of strong financial health. Plans in Safe Status generally have a funded ratio of at least 80%, which can sound reassuring at first glance.

However, plans within Safe Status can have significantly different levels of underlying financial strength. It is not uncommon to hear statements like, “The plan is 95% funded, so it’s fine.” While that may be true in the short term, the more important question is whether the plan is truly financially secure over the long run.

Determining financial security requires a deeper analysis that goes well beyond a single funded ratio at a point in time. True measures of financial health examine a range of risks, including investment risk, demographic risk, and contribution risk. Key indicators may include plan maturity metrics such as cash flow as a percentage of assets and the ratio of inactive to active participants, among others.

While these indicators are helpful, they are not sufficient on their own. A more robust risk analysis typically includes scenario and sensitivity testing of key metrics, as well as stochastic modeling to evaluate the probability of various outcomes—such as the likelihood that a plan will remain more than 90% funded in future years.

So when is a multiemployer plan financially secure? The answer varies and ultimately depends on each plan’s unique circumstances. With expert guidance from their actuary and other plan professionals, Boards must determine the level of funding and risk tolerance that constitutes security for their plan. For one plan, that threshold may be 105% funded; for another, it may be 115%.

With this type of comprehensive analysis in hand, a plan is better positioned to make informed decisions about benefit improvements and proactive actions to manage and mitigate risk.

Funded status is only one piece of the story. Rael & Letson helps plans assess the full picture, develop thoughtful funding strategies, and communicate clearly with stakeholders. Contact us to learn how we can support your plan.