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The Markets January 24, 2014
Risk Questions on Multiemployer Plans
When you take on investment risk, you know returns could be high or low. But what that means for a multiemployer pension plan is different than for a single-employer plan.
Reported by Rebecca Moore
A single-employer plan can manage funding deficits or surpluses, in part, by changing contributions. In a multiemployer plan, members expect contributions to be fairly stable, it is not so easy to increase them, and often, benefit accruals are cut to deal with deficits, explains Cameron McNeill, senior vice president and Canadian business leader at Segal Consulting in Toronto. But, the risk is not symmetrical, McNeill tells PLANADVISER. “If there’s a surplus, plans could augment benefits, but most won’t do that because they want some margin, or cushion, against [investment] volatility.”
“If your asset allocation has a 50% chance of leading to benefit cuts and a 5% chance of leading to enhancements, would you see that as a reasonable risk?” McNeill queries in a blog post on Segal Canada’s website. There is no standard for how much surplus a plan must have before it is large enough to convert to benefit improvements, he says. Multiemployer pension plan trustees need to be aware of the extent to which they are taking risk that is unlikely to be rewarded.
Step one is to understand the actual chance of going above or below return expectations, according to McNeill. He says trustees need modeling to know this, and it doesn’t have to be a complex model. They can then rethink their investment and funding strategy accordingly. McNeill contends plans can take some risk off table without impacting their actuarial valuations by replacing funds that take on higher risk, with similar-return funds that take on lower risk.
He adds that trustees also need to understand how to communicate with members to change their expectations for contribution and benefit levels. He points out he does not trumpet cutting benefit accruals. “This can result in some [participants] working longer. It is best [for the plan] to move ahead knowing when folks will retire, and what [liabilities] to expect.”
McNeill believes multiemployer plans are a good pension vehicle; they nicely share risk between members and the plan itself. “But you cannot ignore what risks are there, they have to be managed and communicated properly,” he concludes.