The Slippery Slope Is Primed

Usually, congratulations are in order for finishing first, but in this situation, I will hold back on my celebration. Why? I am not inclined to applaud the Treasury Department’s decision to approve the rescue request for Iron Workers Local 17 Pension Fund, Cleveland. See, this plan becomes the first multiemployer pension plan to win approval to reduce benefits under the Kline-Miller Multiemployer Pension Reform Act (MPRA) of 2014.

According to a December 26, 2016, article in P&I, the benefit reductions can not be lower than 110% of the PBGC’s guarantee, which is presently just under $13,000 per retiree, per year for someone with 30 years of service.  Little consolation as far as I’m concerned for a retiree who may have been receiving $20,000 per year and now has to make due with a 35% reduction.  If only this worker had been in a corporate plan as opposed to a multiemployer pension for that individual’s benefits are protected to nearly $60,000 per year by the PBGC!

Regrettably, Local 17 isn’t the only plan seeking to reduce existing benefits, as there are an additional 60 multiemployer plans that have notified the Department of Labor of “their critical and declining” status, which makes them eligible to consider applying for benefit reductions.

There were several reasons that were cited in the P&I article as to why Local 17 gained approval when four other plans, including the $17.8 billion Teamsters Central States plan were rejected.   Two of the primary reason were the plan’s small size (roughly $90 million in assets) and its reduction in the return assumption from 7.5% to 3.75%.

We do want to recognize that trying to save the plan is better than having it end up being the responsibility of the PBGC as retirees who worked a minimum of 30 years will get at least 10% more from this plan.  However, we continue to worry that this is just a band-aid for an industry that continues to focus on the wrong objective – the return on asset assumption (ROA).

As this situation is proving, the fund only exists to meet a promise that was made to the employee.  The promise is the plan’s liabilities, and meeting that liability should be the main objective, not an arbitrary return target that doesn’t guarantee a plan’s success. Furthermore, with the potential for interest rates to back up in the near future, the present value of that liability declines.  We could witness improved funding without the need to reduce some poor retiree’s benefits.

Instead of granting permission to reduce benefits for all those multiemployer plans currently in the queue, let’s help them change their focus from managing the return side of the equation to finally using the promise that they made to drive asset allocation and investment structure decisions.

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