The Mathematics of MEPSIM

For any particular multiemployer pension plan, the starting point for MEPSIMís calculations is the planís most recently filed 5500 data This data includes information such as the planís participant counts, contributions, normal cost, benefit payouts, assets, and liabilities, as well as the discount rate used to compute liabilities.

MEPSIM uses an algorithm to construct a realistic stream of accrued benefits consistent with the planís reported liabilities and discount rate. For example, if a planís discount rate is 7% and its reported liability is $100 million, MEPSIM creates a stream of accrued benefits that, when discounted at 7%, produces a liability equal to $100 million. The duration of this stream varies inversely with the planís maturity -- the greater the number of retirees relative to active workers, the lower will be the duration of the benefit stream.

A similar process is used to create a benefit stream for a planís normal cost. For example, if the reported normal cost is $5 million, MEPSIM creates a cash flow stream with a present value of $5 million. This stream will have a longer duration than that of total liability, because normal cost represents the new benefits accrued each year by active workers, while total liability captures all of the outstanding benefits previously accrued.

After calibrating the benefit streams, MEPSIM moves a plan forward one year at a time, executing the following steps in each projection year:

  1. Add interest to the planís assets. Interest is determined by multiplying total assets by a user-specified rate-of-return.

  2. Add contributions to plan assets. Contributions can either remain flat across time, or change each projection year at a user-specified rate. For example, total contributions could be assumed to increase at a rate of 1% per year.

  3. Shift the accrued benefit stream closer in time by one year. For example, a benefit payment projected to occur 10 years in the future in projection year ďXĒ will be shifted to 9 years in the future in projection year ďX+1Ē.

  4. Pay-out those benefits that come due. For example, if a payment of $10 million comes due in projection year ďXĒ, then the planís projected assets are reduced by $10 million to reflect the payment.

  5. Add new accruals occurring in year ďXĒ to the stream of remaining accrued benefits. Recall that this new-accrual-stream was determined using the planís normal cost data. Like contributions, a planís normal cost (the present value of new accruals) can either be held constant across time, or can be changed at a user-specified rate each projection year.

Using this modeling approach, a plan's financial position changes in a realistic manner across time. Some plans will move along a downward trajectory, eventually becoming insolvent, while others will gradually climb upwards. Users can experiment with assumptions (such as the return-on-assets and the rate-of-contribution increase) and observe how these changes affect outcomes.

MEPSIM halts benefit accruals after a plan becomes insolvent, but it leaves open the possibility that premiums might continue to be collected. MEPSIM's "post-insolvency premium %" parameter permits users to make their own assumption regarding premiums for insolvent plans. A value of 0% indicates that an insolvent plan pays no premiums, while a value of 100% indicates that premiums continue as if the plan had remained solvent. A value of X% indicates that premiums drop to X% of their pre-insolvency level.