Milliman is reporting that multiemployer DB plans have seen a pick-up in their funded status during the first half of 2017, as asset returns have exceeded the annual return on asset (ROA) targets. That is terrific news!
However, that is where the good news ends. For those multiemployer plans that are defined as critical and declining funded ratios continue to hover around 60%. At that level of funding, plans need to generate returns that significantly exceed the ROA to begin to make a dent in the deficit.
Couple this with the fact that the U.S. is 8 1/2 years into a bull market for equities and 30+ years for bonds, how likely is it that DB plans continue to enjoy outsized returns? Also, please note that the funded ratio is calculated using liabilities that are discounted at the ROA, and not a risk-free rate. This methodology dramatically undervalues a plan’s liabilities, and thus inflates the funded status.
Plan sponsors believing that their plan’s funded status is better than it is will naturally act differently than if they had a more realistic view of their current situation. I know that I would. If I thought that my plan was 90% funded instead of something closer to 60-65%, my inclination would be to maintain the status quo instead of searching for a solution to our underfunding.
It is a positive development that funding has improved for multiemployer plans in general, but let us not kid ourselves that the average plan has a 90% funded ratio.