The Frustration is Palpable and More Than Justified!

Participants in failing multiemployer pension plans have fought for years to have their benefits restored and pension reform legislation passed, and to this point those incredible efforts have mostly fallen on deaf ears. They have been close at times to getting the relief that they need, such as the Butch Lewis Act being passed by the House of Representatives in 2019, only to have the US Senate fail to act on it. They were recently encouraging that negotiations surrounding another stimulus package would include the necessary funds to FINALLY get pension reform passed.

Regrettably, those efforts were once again met with empty promises by our “leaders” in Washington DC. In fact, the Senate has turned its collective back once more by recessing until November 9th, thus eliminating any possible last-ditch effort to provide necessary economic support to struggling American workers and pensioners prior to the election. Instead of getting legislation passed that would protect and preserve the promised benefits, we have only gotten legislation (MPRA) that allows struggling pension systems to break their promise to their workers by CUTTING benefits, and in many cases, those cuts amount to more than 50%. To date, 18 plans covering more than 100,000 plan participants have been permitted by the DOL to slash those promises – shameful!

Unfortunately, there are roughly 130 other Critical and Declining multiemployer plans that are on the cusp of failure and another 200+ that are deemed to be in Critical status. There are approximately 1.4 million Americans in the C&D plans that could see their retirements dramatically altered. These folks did nothing wrong, and to penalize them is just not right. It would be one thing if the PBGC’s multiemployer insurance pool actually had the financial resources to protect the promised benefits, but this entity’s financial condition is atrocious.

The PBGC has recently published the maximum benefits for 2021 for a 30-year employee at age 65-years-old, and it is once again $12,870. This is 5.6 times lower than the maximum benefit for a similarly tenured employee in a private single employer plan, which stands at $72,409 for next year. This massive difference continues to grow each year as the single-employer pension benefits are indexed, while the multiemployer protection is negotiated, and that level of protection hasn’t changed in years.

It would be one thing if the annual premiums per participant were 6 times greater for a single employer fund versus a multiemployer fund, but that is just not the case. According to the PBGC’s website, the 2021 premiums are $31 per participant in a multiemployer plan and $86 per participant in a single-employer plan. At the very least, participants in multiemployer plans should have their benefits protected to 36% of the maximum single-employer pension or $26,100. But, why stop there? Does it make sense to protect one class of beneficiary at nearly 6 times that rate of another group?

According to a research report from the Congressional Research Service, a majority of pension beneficiaries had promised payouts greater than the $12,870 limit. For those plans that aren’t currently receiving any support from the PBGC, the average benefit is more than twice the maximum protected benefit. If Congress would just get their act together and raise the maximum protected benefit to 50% of the single-employer protection ($36,000), a significant percentage of retirees would receive the benefit that they were promised.

If you find this situation faced by multiemployer pensions to be as unfair as I do, please reach out to your representatives in DC to get them off the fence. Passing the Butch Lewis Act should be the highest priority for the US Senate, but at the very least a renegotiation of the maximum PBGC benefit for multiemployer pensioners should be completed. The benefits to our economy, in the form of demand for goods/services and tax revenue, from these pensioners getting their full promised benefits far outweighs the cost of government support. Plus, it is the right thing to do!

Real People, Real Implications

I frequently read about issues within our pension industry, and there are many. Sometimes, and I am embarrassed to admit this, I fail to connect the problem that is being discussed with the harm that the issue in question brings to the individual(s) being impacted. For those of you who regularly read this blog, you know that I’ve written quite a bit about the Butch Lewis Act (legislation to help critical and declining multiemployer plans), and plan participants, such as Carol (8/28/18, 1/24/20, etc.), that desperately need to see this legislation passed in order to have their full benefits that were promised to them restored.

Clearly, Carol is not the only one being impacted by the ability of struggling multiemployer plans to “renegotiate” benefit payments to current and future retirees through MPRA (2014 pension “reform”). Below I present another example of a participant (Robert) whose benefits were slashed to the tune of 67.5%! Please think about your personal circumstances and whether or not you could sustain such a hit and not be financially (or mentally) devastated. Here are Robert’s words as printed in a recent Op Ed:

I worked at Yellow Freight/YRC for 27 years driving a forklift in Buffalo, Cincinnati, Indianapolis and in Maybrook, New York. My full pension was $2,600 a month, which I got for a year and a half. For the last 4 1/2 years, I’ve received $845 a month after my Road Carriers Local 707 pension fund went insolvent.” “We need the Butch Lewis Act to pass, to help those in multiemployer pension funds like mine.” Robert McGonigal, Clearwater, Florida

I am so sorry to read about your specific circumstance, Robert. It is not acceptable to me that our government is permitting plans to renege on the promise that was made to plan participants, who in most cases funded a portion of the benefits through the deferral of hourly raises. As a reminder, there are roughly 1.4 million American workers in these struggling plans that could see dramatic reductions, like those of Carol and Robert, without some form of pension relief. I prefer the Butch Lewis Act, and I think that most multiemployer plans do, too. It is time to get this done. The harm that is being wrought is truly unacceptable.

It Is National Retirement Security Week

National Retirement Security Week, held during the third week in October, is a dedicated effort to raising awareness and helping individuals take concrete steps towards a secure retirement. The week-long observance was initiated in 2006 after U.S. Senators Gordon Smith (R-OR) and Kent Conrad (D-ND) introduced a resolution for its creation. Beyond elevating public knowledge on the subject, those leading National Retirement Security Week (October 18-24 this year) encourages employees to speak to a retirement plan consultant or expert, and participate in an employer-sponsored retirement plan if available.

At Ryan ALM, we focus our attention on this critical issue 52 weeks per year, believing that everyone should have the opportunity to retire with dignity. As many of you know, our effort is focused on protecting and preserving defined benefit plans as the primary retirement vehicle. We strive to do this through a liability-focused lens. Defined contribution plans are fine as a supplemental savings vehicle, but DB plans provide REAL security. Let us help you preserve your pension plan for your employees and retirees. Together we can make a difference and insure that they will actually get to retire and enjoy it once it is started.

A Disconcerting Trend

I read a stat the other day that got me thinking. The report from which I grabbed my nugget of information indicated that the Millennial cohort has roughly 3% of the total wealth in the US. It seemed like a small share of the total wealth, but I lacked context. Was this percentage of wealth normal given that Millennials are only just hitting their strides? Unfortunately, for my four older Millennial children (we have a Gen Zer, too) and the millions of others of a similar age, this percentage of wealth is exceptionally (and shockingly) small.

When Boomers were approximately the same age as Millennials are today, they owned nearly 7 times the wealth that Millennials possess. Not 7% more, but 7 TIMES with more than 21% of the total pie. In fact, the Silent Generations’ wealth was ONLY two times that of Boomers. Unfortunately for Millennials, their wealth accumulation has basically flat-lined.

wealth by generation

No matter which generation we are referring to, wealth creation for those under 40 is a struggle, and Millennials are following this same pattern, and perhaps worse. What is particularly striking for me is how wealth creation has basically fallen off a cliff for those just hitting their 40’s (prime earning years?). As the following chart highlights, those aged 40-54 once averaged about 33% to 37% of the wealth at anytime up until about 2003. Today, their share of the pie has collapsed to just over 20%.

net worth by age

Poor wage growth, brought about by two major recessions, has conspired with significantly rising expenditures related to housing, college (student loans), healthcare, childcare, etc. to create the perfect storm. These realities are making it nearly impossible for this cohort to adequately fund their own retirement through a defined contribution plan. The long-term implications will be grave.

This generation has gotten a bad reputation because of their supposed spending habits (latte and avocado toast crowd), but so many things have conspired against them to create the current crisis. As the job market continues to transform, requiring workers to be more flexible responding to on-call/on-demand jobs, Millennials, and those generations that follow, will have a much more difficult time preparing for retirement, as they work to just keep meeting their basic needs.

And Then There were 61!

I wish that my reference to the # 61 had to do with Roger Maris breaking Babe Ruth’s home run record, but alas it has to do with the fact that there are ONLY 61 companies in the S&P 500 with a defined benefit plan still accepting new employees. What was once an important tool for the recruiting and retention of employees, the defined benefit pension is rapidly following the same path once taken by the dinosaur.

There are many reasons why DB plans are fast approaching extinction, but you can lay the primary blame on both legislation and collapsing interest rates. Tax cuts in 1986 and again in 2017 removed much of the incentive to offer this important retirement vehicle. In addition, escalating PBGC premiums are a tremendous financial burden, especially for those plans with funded ratios below 85%. Lastly, Fed policy decisions that have driven US interest rates to nearly 0% have obviously contributed to a dramatic rise in the present value of those future benefit payments.

Who loses? Obviously, the American worker is the loser in this development. As a result of the demise of DB plans, we are left with an inferior scheme in DC plans that forces untrained individuals to fund, manage, and then disburse this “benefit”. Many Americans continue to struggle with the fallout from two vicious recessions and the Covid-19 crisis that have produced a tremendous loss of employment opportunities and wealth for a significant portion of our working population.

Call me naive, but I believe that companies trying to recruit the best talent, while also trying to hold onto their most important employees would be best served by offering a defined benefit plan that helps them manage their workforce through time. Are there potential issues? Certainly! Are they insurmountable? Hardly! I am very concerned about the impact of our failing retirement system on our broader economy, especially as our population ages. It is time for the Federal government to take the lead in rethinking many of the issues that have gotten us to this point before it is much too late.

Ryan ALM 3Q’20 Newsletter

We are happy to share with you the Ryan ALM 3Q’20 Newsletter. As is always the case, our newsletter provides a unique perspective on how pension assets have been performing versus plan liabilities and the history of those relationships. In addition, our newsletter contains links to recent research articles and blog posts. We hope that you find our perspective useful. Finally, we encourage and look forward to your feedback.

The Gap Matters Big time!

At roughly the same time that traditional DB plans were starting to fade from use in the private sector and workers were being asked to primarily fund their own retirements through a DC option, wage growth diverged unexpectedly and significantly from productivity growth.

The lack of wage growth not only coincided with the loss of a pension for many Americans, but it also came at the same time of rapidly rising costs for housing, education, healthcare, etc. Should we really be surprised that Americans are falling behind in saving for retirement? I’ve often stated that there is a basic level of income needed for the average American to live. Regrettably, for many Americans their current wage falls far below that basic level.

The folks at MIT have created a “Living Wage” calculator that helps to determine the necessary minimum wage based on local cost of living expenses. For instance, a single mother with two children living in Newark, NJ needs to earn $42.33/hour to meet her basic living expenses. Unfortunately, the minimum wage currently in NJ is $11.10/hour or roughly 1/4 of what she actually needs. If you are living in Mobile, AL, that single mother of two children requires an hourly compensation of $28.42 or roughly 2/3s what is needed in Newark. Regrettably, the minimum wage in Mobile is $7.25: again, roughly 1/4 of what is needed.

For our Newark resident who works 40 hours per week and 52 weeks per year, the annual compensation that she would need in order to meet her basic living expenses would be $88,046. As of 2018, the median family income in Newark, NJ was a shockingly low $37,642, or roughly 42.8% of what that family of three needs. Is there any wonder why she may not be funding her 401(k), if she even has access to one? It drives me crazy when I read about various generations being excessive consumers. You know, the latte, avocado toast people who would rather consume than spend wisely by investing in their future. I find it hard to believe that mom and her kids are spending much money, if any, on lattes.

We absolutely need to address the ever growing wage disparity that weighs heavily on a significant portion of our population. In a previous blog post I highlighted output from a study that found that the lowest quartile of workers by wages had seen a >30% loss of jobs during the Covid-19 crisis. These individuals have very little in financial resources to weather any loss of a job/wages, let alone continue to fund a retirement benefit. It is critically important to our workers and to our economy that we preserve DB plans for the masses so that older members of our society can remain active participants in our economy demanding goods and services. DC plans should continue to be supplemental to true retirement funds, as they were initially considered. Anything short of this will result in failure.

Corporate Pension Funding Drops Slightly in September

P&I is reporting that the average corporate pension plan experienced a marginal decline in the funded ratio, as the fall in asset values, primarily driven by lower equity returns, outpaced the slight fall in liabilities, as corporate spreads marginally widened during the month. P&I was referencing four different studies by Wilshire, Legal and General, Northern Trust, and Mercer. Only the Mercer study, which evaluated the funded status of the S&P 1500 companies with DB plans, showed pension funding to be flat during the month.

The average corporate plan’s funded ratio ranged from 77.9% (L&G’s analysis) to 83.1% (Northern’s review), while the Mercer and Wilshire output reflected more consistency with Northern Trust findings of roughly 83%. In any case, funded ratios are down about 4% this year, as discount rates have declined by about 57 bps (NT’s estimate), while asset levels are flat to up marginally.

Given that the average corporation’s funded ratio is now below 85%, PBGC variable premiums are kicking in. As a reminder, plans pay 4.5% ($45) in variable premiums for every $1,000 in UVB. It might make sense to close that gap with additional contributions or the injection of proceeds from a bond offering given the incredibly low rates. We’ll discuss that strategy in a future blog post. Have a great day!

What’s The Objective?

There has been a tug of war for decades within pension systems (public, private, and multiemployer) as to what is the correct objective: maximizing return or securing the promised benefits. Unfortunately, the idea that pension systems should maximize return has come out on top in this battle. Regrettably, this “goal” has done little to improve the funded status of these plans despite the last decade of strong equity and fixed income returns. We’ve gotten a lot of risk with little to show in terms of more stable plans.

So what is the goal? I grabbed the following quote from a Voya white paper “The Lost Decade” that suggests that securing the promised benefits should be the primary objective. “Pension plans are not hedge funds. Their objective function… should be geared toward solvency and liquidity — not maximizing returns.” Furthermore, “there is an asymmetric payoff when it comes to taking equity risk. Plans receive limited upside when equities rise and incur all of the downside when equities underperform.”

Given that objective, how do we accomplish the goal of improving solvency and liquidity? We, at Ryan ALM, would recommend adopting a cash flow driven investing (CDI) approach to secure the near-term Retired Lives Liability, while then using the balance of the corpus as alpha assets to maximize return in order to meet future liabilities. In this example, we accomplish both competing objectives – securing benefits and maximizing return – while also reducing funding costs and risk.

A CDI strategy is nothing new. Immunization and dedication strategies have been utilized since the creation of DB plans. However, somewhere in the early 1980’s the pension objective switched to a more aggressive implementation that favored maximizing returns in lieu of protecting the promise that was made to the participants. We think that the current environment is perfect for adopting this strategy. Equity valuations are near all-time highs, and despite recent strength in the markets, there seems to be a disconnect between stock performance and the global economy that continues to struggle under the weight of Covid-19.

The benefits of a CDI approach are numerous, including; 1) improved liquidity, 2) reduced funding costs, 3) buys time for the alpha assets to do their job, and 4) secures the promised benefits. Importantly, this is a “sleep well at night” implementation that would be quite comforting to your plan participants. I have no idea where markets are going to be in the next 2-3 years let alone tomorrow, so if I were a plan sponsor, I’d much prefer securing the promised benefits which buys my alpha assets time as opposed to letting the focus be on achieving the ROA by injecting more risk into the process today with no guarantee of success.

The Most Vulnerable Get Hit The Hardest!

Often we read that a current event is different than that which we’ve experienced in the past only to realize that history is actually repeating itself. Well, the impact of Coronavirus on our most vulnerable workers, those making the least in earnings (bottom quartile), is highlighting the fact that circumstance are, in fact, very different this time. As the chart below highlights, job losses in previous recessions have tended to impact those in different earnings categories quite similarly. Sure, the impact on the lowest paid segment of our labor force has tended to be slightly greater with the exception being the 1990 recession. But, we’ve never experienced anything to the degree that Covid-19 has produced.

Workers in the lowest 25% of the labor force based on earnings witnessed job losses that represented more than 30% of their cohort. There has been a bit of a recovery, but for many of these workers in service industries they may be facing extended periods of unemployment, if jobs ever come back. Unfortunately, our country was already experiencing a widening in income disparity and the impact from Covid-19 has only accelerated the gaping differential.

In an age in which many American families are barely able to meet their basic needs, we are watching as the cost of education, healthcare, retirement, etc. continue to grow nearly unabated. Is there any wonder why millions of Americans haven’t been able to save for retirement? Without any discretionary income is it any wonder that “retirement” vehicles such as 401(k) plans aren’t meeting their needs?

Even though defined benefit plans only covered about 40%-45% of the labor force at their peak, the loss of these vehicles today is crushing the retirement dreams for millions of Americans who will never be able to retire with dignity, if they can retire at all. DC plans were established to be supplemental savings accounts. Today, they aren’t supplementing anything, especially for those making less than the median compensation. This income inequality will create major impediments for our economy, as demand for goods and services wanes. I find this situation to be tragic and unacceptable. We need to redouble our efforts as an industry to try and preserve DB plans where possible. DC plans have never been the answer.