Multiemployer Pension Actuarial Certifications Revisited

The COVID-19 pandemic has drastically impacted benefit trust funds and will continue to have a marked effect on these plans. With volatile market performance that has not been seen since 2008, many plans are finding that their funding levels are suddenly in trouble.

The Back to the Future: PPA and MPRA Revisited International Foundation webcast revisits the two major pieces of legislation that pension plans have relied on to address funding issues over the past decade. Jay K. Egelberg, ASA, EA, FCA, MAAA, Consulting Actuary at First Actuarial Consulting, Inc. (FACT) and James K. Estabrook, Esq., Shareholder at Lindabury, McCormick, Estabrook & Cooper, P.C. explained that the Pension Protection Act of 2006 (PPA) was intended to improve the financial condition of defined benefit plans by making new tools available in connection with major changes in actuarial analysis and funding rules for multiemployer pension plans for plan years starting after 2007.

PPA burst on the scene just as the economic recession of 2008/2009 was unfolding. The current economic downturn of 2020 brings Jay and James back to the future to review available funding tools and share their experiences with PPA actuarial analysis over the past 12 years.

Multiemployer Pension Actuarial Certifications Revisited

What Was New About PPA?

Before PPA, the required annual actuarial valuations focused on past experience of the plan and cost for the upcoming plan year. PPA required actuaries to make forward-looking projections of expected financial position called annual certifications which are required by the 90th day of the plan year. The actuary makes certifications about the funded percentage, projections of employer contributions, projections of cash flow and expectations of insolvency. Trustees also add their own input on these projections.

Investments in Today’s Climate and Beyond

Actuarial Report & Annual Certification

The actuarial valuation is a snapshot look at the plan’s funding status—normally completed on the last day of the plan’s fiscal year. The actuary places a value on all of the liabilities owed to participants and compares these liabilities to the market value of trust assets. The actuarial valuation permits trustees to see once a year whether current funding is meeting retirement benefit liabilities and what the plan funding will look like one, five, ten, 20 and 40 years in the future.

The annual certification corresponds to a colored zone status. A plan’s zone status may be red (critical), orange (seriously endangered), yellow (endangered) or green (none of the above). A plan in a zone other than green needs to use the tools provided by PPA.

Note: The Multiemployer Pension Reform Act of 2014 added the statuses of critical and declining. For more details, see the background article PPA Paradoxes Eliminated: MPRA Offers Technical Corrections . . . and More listed here.

Role of Actuaries

The actuary is responsible for gathering data and making calculations that determine defined benefit pension plan funding. To make all the necessary calculations, the actuary uses financial and participant data supplied by the plan and must make several assumptions about future data that affects the plan’s funding levels. An actuary has a legal duty to use his or her best judgment in making assumptions and calculations concerning plan funding.

Role of Trustees

Trustees give input about projected industry activity to the actuary. The trustees must provide their collective best estimate and act in good faith. Trustees have a responsibility to inform the plan actuary of information that will affect actuarial assumptions. If either the labor or the management trustees have information on anticipated changes in the industry covered by the fund, covered employment or expected employer contributions, they should share this with the actuary.

When an economic downturn is foreseeable and downsizing in an industry labor agreement will be by seniority, the actuary must assume the total amount of employer contributions will decrease. There will also be an assumed increase in the average participant’s age and service because a larger proportion of younger workers will be laid off.

PPA Certifications Today

Multiemployer pension plans with April 1st plan years had PPA certifications due June 30. Most plans will have to certify lower funding levels due to the reduced market value of their investment portfolios. IRS has given an extension of the deadline to file the certification but has not provided any relief about the funding zone implications. Plans that were certified in the green zone before COVID-19 may now be certified in critical status (red zone) and be required to adopt a rehabilitation plan, while plans already in critical status prior to COVID-19 may now be heading toward insolvency.

Any Relief for Multiemployer Plans?

Single employer plans, which have somewhat similar certifications, got relief under the CARES Act that allowed plans to substitute last year’s zone for this year. It is uncertain whether multiemployer plans will get similar relief through legislation or agency guidance.

Proposed Form for Certification

On June 24, 2020, IRS posted a notice seeking comments about a proposal for actuaries to use an established form for annual certification of funded status as required by Internal Revenue Code Section 432 (which was added by PPA). IRS has stated that currently actuaries submit certifications in various formats and lengths. IRS has stated that creating an established form would encourage format consistency of annual certifications, limit the submissions to the information required and simplify the process. Comments are due August 24, 2020.

Learn More

Listen to the full on-demand webcast Back to the Future: PPA and MPRA Revisited to review the tools available to keep your plans on the “path to green,” including:

  • MPRA requirements for critical and declining status plans
  • Remediation measures for deeply troubled plans
  • New plan designs that can stabilize benefit trust funds from shock waves
  • Current issues that plans are dealing with such as contributions varying widely by industry.

Jenny Lucey, CEBS
Manager, Reference/Research Services at the International Foundation

The latest from Word on Benefits:

Jenny Gartman, CEBS

Manager, Reference/Research Services at the International Foundation

Favorite Foundation Member Service: Personalized Research Service

Benefits Topics That Interest Her Most: Mental health, work/life benefits, retirement readiness of different generations

Personal Insight: Jenny gets things done. She started working on her CEBS just over two years ago. Welcoming her daughter into the world during this time frame did not slow her down—she recently completed her last exam and earned her designation. When she’s not working or studying she enjoys family playtime, knitting and exercising.



Recommended Posts

The Multiemployer Retirement Plan Landscape: DB Takeaways

Justin Held, CEBS

According to recent data from Horizon Actuarial Services, LLC and the International Foundation of Employee Benefit Plans, the fifteen-year period between 2006 and 2020 was turbulent for multiemployer defined benefit (DB) pension plans. Financial markets were volatile, and 2008 saw the biggest […]

The DOL Retirement Security Final Rule: Highlights for Plan Sponsors

Jenny Gartman, CEBS

On April 25, 2024, the Department of Labor (DOL) published the retirement security final rule defining fiduciary status for investment advice to retirement investors under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). It is set to […]

Health Plan Oncology Offerings—Designing the Best Possible Benefit

Anne Newhouse

In recent years, various sources including SunLife and the Business Group on Health have reported that cancer leads high-cost health claims for self-funded plans. Claims data shows the top three diagnoses currently driving claims are cancer, cardiovascular and musculoskeletal diseases. It’s no […]