Action is needed soon to keep multiemployer pension plans from sliding into insolvency, according to a new government report.

The report, released Monday by the Government Accountability Office, acknowledged that the most severely distressed multiemployer plans have taken significant steps to address their funding problems. While most plans expected improved financial health, some did not.

A survey conducted by a large actuarial and consulting firm serving multiemployer plans suggests that the large majority of the most severely underfunded plans—those designated as being in critical status—either have increased or will increase employer contributions or reduce participant benefits.

In some cases, these measures will have significant effects on employers and participants, the GAO noted. For example, several plan representatives said that contribution increases had damaged some firms' competitive position in the industry, and, in some cases, threatened the viability of such firms. Similarly, reductions in certain benefits—such as early retirement subsidies—may create hardships for some older workers, such as those with physically demanding jobs.

Most of the 107 surveyed plans expected to emerge from critical status, but approximately 25 percent did not and instead will seek to delay their eventual insolvency.

The Pension Benefit Guaranty Corporation's financial assistance to multiemployer plans continues to increase, and plan insolvencies threaten PBGC's multiemployer insurance fund's ability to pay pension guarantees for retirees, the GAO noted. Since 2009, the PBGC's financial assistance to multiemployer plans has increased significantly, primarily due to a growing number of plan insolvencies.

The PBGC estimated that the insurance fund would be exhausted in about two to three years if the projected insolvencies of either of two large plans occur in the next 10 to 20 years. By 2017, the PBGC anticipates the number of insolvencies to more than double, further stressing the insurance fund. PBGC officials said that financial assistance to plans that are insolvent or are likely to become insolvent in the next 10 years would likely exhaust the insurance fund within the next 10 to 15 years.

“If the insurance fund is exhausted, many retirees will see their benefits reduced to an extremely small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits,” the GAO report warned.

Experts and stakeholders cited two policy options to avoid the insolvencies of severely underfunded plans and the PBGC multiemployer insurance fund, as well as other options for longer term reform. Experts and stakeholders said that, in limited circumstances, trustees should be allowed to reduce accrued benefits for plans headed toward insolvency.

In addition, some experts noted that, in their view, the large size of these reductions for some severely underfunded plans may warrant federal financial assistance to mitigate the impact on participants. Experts and stakeholders also noted tradeoffs, however. For example, reducing accrued benefits could impose significant hardships on some retirees, and any possible financial assistance must be considered in light of the existing federal debt. Options to improve long-term financial stability include changes to withdrawal liability--payments assessed to an employer upon leaving the plan based on their share of unfunded vested benefits--to increase the amount of assets plans can recover or to encourage employers to remain in or join the plan.

In addition, experts and stakeholders said an alternative plan design that permits adjustments in benefits tied to key factors, such as the funded status of the plan, would provide financial stability and lessen the risk to employers. These and other options also have important tradeoffs, however.