By Doug Peterson AGCs Director of Labor Relations
Construction professionals and craftsmen work hard for many years and deserve a decent retirement benefit. So given the volatility of the stock market over the last few years its prudent to ask: How are the pension plans co-sponsored by AGC faring? Very well thanks to sound investment decisions and the flexibility provided by the Pension Protection Act of 2006.
Through its collective bargaining agreements AGC of Washington participates in multiemployer pension plans for employees in the Carpenters Cement Masons Laborers Operators and Teamsters unions. The Pension Protection Act (PPA) of 2006 – which was phased-in with many provisions taking effect this year – is having significant impacts on these plans and others across the country.
The PPA gives multiemployer pension plans (union pension plans) more flexibility to accumulate reserves and set standards for the financial health of the plans. Plus PPA requires more transparency for employers and participants.
Prior to the PPA multiemployer plans were required to spend amounts in excess of 100 percent of current liabilities. If the plans became over funded the contributing employers could have lost the deductibility of their contributions. The problems with this policy became clear following the 9-11 and tech bubble stock market downturns. All pension plans are dependent on market returns with older more mature plans being even more vulnerable as their annual benefits to participants exceeds the contributions from employers.
The PPA raised the funding limits to 140 percent of current liabilities. This gives multiemployer plans much more latitude to accumulate reserves to protect against future troubles in the markets.
The PPA created three categories of funding with specific criteria the most significant of which is funding ratio:
– Red zone less than 65% (considered critical);
– Yellow zone less than 80% (endangered)
– Green zone more than 80%
In addition to specifying these zones the PPA required actions for improving the funding status of troubled plans with penalties for not doing so.
About 25 percent of multiemployer plans throughout the nation are in the red zone and many others in the yellow zone. These plans are facing very difficult corrective action. However the five pension plans with which the AGC is affiliated are all in the green zone and are heading toward 100 percent funding.
Furthermore the PPA required that plans provide annual reports including funding status to employers and participants. Currently these reports use rates of return which are less than the assumed rate of return used by the actuaries to project future benefits. This understates the condition of the plans and may give employers concern. Beginning in 2009 however the plans will be allowed to use the assumed rate of return which better reflects their health.
While 2008 has seen a very volatile market the future of the pension plans of the five basic crafts looks good. The plans have given minimum benefit increases remain in the green zone and are increasing their funding levels. The goal of the Trusts is to build reserves for the plans beyond 100 percent funding. It is within reach for all the Trusts.