Baby Steps

With the bipartisan effort recently put forward by the U.S. Senate to support funding for the nearly collapsed United Mine Workers pension system, Congress is finally showing an interest in supporting the American worker that was promised a benefit, but who have been left high and dry in many recent cases. Given Congress’s heightened focus on the impeachment hearings, I wasn’t sure that much, if anything, was going to get done during the remainder of the year. Glad that I might be wrong!

The proposed American Miners Act of 2019 would transfer funds from the Interior Department’s Abandoned Mine Land fund to help meet the benefit obligations (including some healthcare expenditures) for those workers in the 1974 Pension Plan, which is a plan with roughly $3.1 billion in assets, while saddled with an estimated $3 billion in unfunded obligations. The legislation was introduced by West Virginia Senators Shelly Moore Capito (R) and Joe Manchin (D) along with Senate Majority Leader Mitch McConnell, (R-KY). The legislation is also co-sponsored by a number of Senators from mining states, such as Ohio, Pensylvania, and Virginia, as well as others.

This is a good first step, but much more needs to be done to sure up the failing pension systems for roughly 120 other multiemployer plans. Hopefully, with McConnell’s support of this effort, he will be more inclined to bring to the floor for a vote the Butch Lewis Act that passed through the House in July. Time is wasting, and with each passing day, more pressure is applied to these cash-starved plans. A major market correction prior to receiving critical support would likely be a death knell event.

 

Here we Go Again?

My wife and I are blessed with four grandchildren, and with that gift comes many opportunities to “sing” nursery rhymes to our little ones.  One of my favorites is the “Wheels On The Bus”, which as you know go round and round and round and round and… Well, I can’t help think that the song is relevant to decision making within the U.S. pension industry. We continuously live through multiple cycles running concurrently as if they are just wheels on the bus going round.

I recently presented to attendees at the IFEBP conference in San Diego. My topic was “Modern Asset Allocation”, and my thesis was that doing the same old, same old, was just NOT going to cut it anymore! We need to finally stop that bus. (Please reach out to me if you are interested in getting my presentation and notes). Managing to the return on asset assumption (for public and multiemployer plans) has led to the habitual underfunding of the pension plans through lower contributions, while also leading to more aggressive risk profiles than necessary as asset allocations are stretched to achieve more aggressive return targets. You would think that having suffered through two significant market declines in the last 18 years that consultants and plan sponsors would want to get off the asset allocation rollercoaster.

Well, according to database provider Wilshire Trust Universe Comparison Survey (TUCS), few have learned their lesson, as public pension systems continue to either increase equity exposure or they’re letting their gains just ride. According to Wilshire, equity and equity-like alternative weights are now at pre-2007 levels as median exposures for domestic equities sit at 47.3%, while private equity averages roughly 5.6%. In addition, traditional fixed income, the only asset class that correlates to a pension’s liabilities, has been significantly reduced and the composition of the bond portfolio has changed dramatically with the additions of high yield and private debt, potentially injecting more risk into the equation.

I certainly don’t know when the next recession might occur, but it will. Do we really want to have these plans sitting with their highest equity exposure when it hits the fan? Shouldn’t we be looking for ways to reduce risk after a long cycle of outperformance? Contribution expense as a percentage of salary has been growing leaps and bounds. In a recent article in Cal Matters, pension costs were highlighted. Specifically, the Stanislaus Consolidated Fire Protection District was highlighted. It seems that pension costs are about to bankrupt this entity because CalPERS has levied an additional annual required contribution to cover the UAL.

Even with the extra CalPERS charge in 2015-16, Stanislaus Consolidated’s retirement costs were not overwhelming, about 32% of wages and salaries for the district’s employees. But the UAL squeeze was about to get tighter. It jumped to $397,981 the next year and $517,834 in 2017-18. The agency’s 2019-20 budget sets aside $842,404 for UAL, contributing to a financial freefall. This rapid increase has caused layoffs of staff and the closing of a firehouse. Residents are obviously not pleased to see their taxes go up at the same time that services are diminishing.

But, let’s just keep swinging for the fences, and maybe, just maybe, we’ll get lucky this time. I don’t know about you, but I wouldn’t want to have to rely on luck to make sure that the promised benefits would be paid. It may not be time to get off the bus, but let’s encourage the driver to take a different route this time.

Could It Happen Here?

The Chilean pension system, adopted in the early 1980s, was once heralded as a “model of privatization” and imitated by other countries, but has recently been derided for failing to provide the promised benefits. The pension plan is a defined contribution system that depends on employees having access as well as making contributions in order to receive the benefit. Sound familiar?

More than 1 million Chileans have marched through the streets of the capital city, Santiago, protesting all sorts of social issues, including the country’s pension system. Workers are asked to pay 10% of their wages each month to for-profit funds called AFPs. Regrettably, many workers are not able to contribute enough to their plans to provide for an adequate retirement benefit. Compounding the issue are the roughly 1/3 of Chileans who have a less formal working arrangement, the unemployed, and women leaving the workforce to raise their children.

The prior pension system was a pay-as-you-go defined benefit plan. Many Chileans switched to the new plan on the promise that they would be able to retire on a full pension for life. Instead, it has basically left millions struggling in their golden years. The supporters of the system say that the real issues are low wages, a weak job market, an aging population, and long retirement periods relative to the worker’s career. Again, I ask, does this sound familiar?

The U.S. has witnessed the collapse of the defined benefit pension system in the private sector and public fund and multiemployer plans that are struggling under low funding status and escalating contribution expenses. The private sector has shifted a significant percentage of the workforce into DC plans, but a large percentage of workers don’t have access to an employer-sponsored plan. They, too, are struggling with decades of weak wage growth, a changing workforce, longer longevity, and the burden, and it is a burden, of our retirees having to manage the disbursement of retirement assets through an uncertain retirement life cycle.

We are reminded nearly daily of the wealth gap that has been created in our country, as the bottom 50% of Baby Boomers only have 1% of the wealth among the members of this cohort. We are also told that the Millennial generation is fairing no better. At what point do we see millions of Americans marching through our capital cities? Think that can’t happen? Please don’t kid yourself. DC plans were once used as supplemental benefits for middle-level executives that wouldn’t spend enough time at their new employer to make the DB plan an attractive retention tool. Oh, how times have changed. Asking untrained individuals to fund, manage, and then disburse the proceeds from a DC plan is a math problem too hard for most of our citizens. The outcome is not going to be positive!

Why It Makes No Sense

One of the ideas bandied about within the Joint Select Committee on Solvency of Multiemployer Pension Plans was the idea that discount rates (for plan liabilities) should be adjusted for all multiemployer pension systems to reflect a more realistic valuation, such as a risk-free Treasury rate. The idea was that discounting plan liabilities at the return on asset assumption (ROA) had habitually underfunded these plans and forced asset allocations into more risky investments. That may be true, but to force plans to adopt this accounting of liabilities at this time for these mature plans makes no sense.

Employers and employees are already feeling the pinch of higher contribution expense. Dramatically reducing the discount rate would be an incredible burden and would likely lead to the eventual termination of the DB system. Just how profound would this impact be on the current universe of multiemployer systems? According to Ben Ablin, pension actuary for Horizon Actuarial Services and someone with whom I’ve shared the podium a couple of times at IFEBP events, produced a wonderful analysis that determined that all but 6% of the plans using FAS 715 rates would fall below 80% funded, while only 2% of plans would remain above 80% funded using a 30-year Treasury discount rate. More than 50% of multiemployer plans are >80% when using the plan’s ROA to discount liabilities.

As mentioned above, the impact on contributions would be crippling. In Ben’s analysis, he estimated that contribution expense would grow by 1.7 to 2.4Xs when using corporate discount rates and 2 to 3X when using the 30-year Treasury discount rate. If the goal is to drive these plans into the outstretched arms of the PBGC, you would likely accomplish your objective. Since that is not what most of us want to see, forcing plans to adopt a substantially lower discount rate in this environment is just not prudent.

This doesn’t mean that plans shouldn’t become more liability focused. They should look for opportunities to defease Retired Lives liabilities using their current fixed income exposure while managing the balance of the assets relative to future liability growth. This approach will help to stabilize the funded status and contribution expense as it relates to the piece that is being defeased. You have now bought time for the growth assets (non-defeased assets) to outperform your plan’s future liabilities. The bonds are now providing the cash flow, net of contributions, to meet the Retired Lives liabilities and are no longer considered performance assets, nor should they be, given the low-interest-rate environment.

 

Moving In The Right Direction?

A Washington Post article is suggesting that negotiations for the Butch Lewis Act may be moving in the right direction after a suggestion to tack on the BLA to the USMCA (the former NAFTA trade deal). Conversations between Representative Richard Neal (D, MA) and Treasury Secretary Steven Mnuchin have taken place and may suggest that final “intense deal-making” has begun.

According to the article, “the pension overhaul legislation could act as a powerful sweetener for organized labor and wavering Democrats who are skeptical about agreeing to a rewrite of the North American Free Trade Agreement that is being pushed by President Trump.” It is suggested that Mnuchin had a “courteous” response to Neal’s suggestion about tacking the BLA onto the trade deal. Let’s hope!

We will share more as more is known.

 

 

And Then There Were None!

It has been reported by the WSJ that Murray Energy’s bankruptcy filing removes from the Coal Miners Pension system the last major contributor. This action places in jeopardy the retirement benefits for roughly 90,000 former and current workers and their families, while also potentially impacting healthcare benefits for many, as well. The urgency for Congress to address the ever-growing retirement crisis within the multiemployer space is palpable.

There are many factors contributing to the demise of the Coal Miners pension, now estimated to be at only 38% funded, but the fact that at least eight coal companies have filed for bankruptcy protection since last October means that the plan is receiving contributions (roughly $30 million in 2018) that are being dwarfed by benefit payments estimated at greater than $600 million.

There is no way that this plan, or any plan with a similar asset to liability ratio, could earn enough to ever meet all of the plan’s future obligations. The only way to “save” this plan is through an injection of funds as a lifeline or through benefit cuts that would obviously be tragic for those workers and their families that were promised the benefits if they risked their lives on a daily basis.

The Coal Miners plan was forecast to run out of money in 2022, and it was one of three plans examined by the Cheiron actuarial firm that was going to need additional assistance beyond the loan proceeds from the Butch Lewis Act (H.R. 397) to meet all of its obligations. It appears now that 2022 may be wishful thinking if the last of the major contributors can no longer meet its obligation. The demise of these companies and the subsequent bankruptcy filings also means that withdrawal liability is not being paid that would have at least supported the current funded status.

Is Congress willing to see these hard-working Americans lose most of their promised benefit? There is legislation before the Senate that could help. Action is needed before this plan, and others, suffer a total collapse. The damage to many local economies will also take a toll on small businesses and employment in those communities.

SECURE what?

The House of Representatives passed the SECURE Act (Setting Every Community Up for Retirement Enhancement) earlier this year with near-unanimous support from the members (417-3).  Although we are pleased to see the bi-partisan effort, is this where their energy should be focused? The bill has 29 provisions – yes, you read that correctly, 29 distinct elements that are being addressed, but regrettably, not a single one of those provisions addresses the crisis unfolding within the defined benefit space for multiemployer pensions.

Most of the Act’s focus is on the defined contribution space. We applaud the idea that part-time workers may get coverage, that small business will get some relief in establishing plans, that participants can hold off on mandatory distributions (RMDs), and that other provisions are geared to improving coverage, which remains modest, at best.  However, we have millions of Americans in struggling DB plans that may lose a substantial percentage of their promised retirement benefit if nothing is done. The Butch Lewis Act (H.R. 397) is the only legislation focused on this crisis.

DC plans were never intended to be anyone’s primary retirement vehicle. They were established to be supplemental savings accounts. The problem with DC plans is that they are self-directed and funded (or not) by individuals with little discretionary income and/or knowledge of how to successfully manage the program and eventually the distribution of funds.

At least the House of Representatives has been trying to get something done to tackle retirement issues so that our workers can successfully create meaningful retirement accounts providing them with the means to retire with dignity. While the House has been busy, the Senate seems totally absent. We need true leadership at this time to address both the SECURE Act and the Butch Lewis Act before it gets too late. If I had my preference, I’d prefer to see the BLA passed first as the cost of this program grows with each passing day while the number of troubled plans expands.