Thank You, IMI

We’ve just returned from IMI’s latest conference, “Spring 2018 Consultants’ Retreat”, and I’d like to thank them for the work that they do to support the asset/liability consulting community.  KCS has benefited tremendously from the many conference providers in our industry (Opal, IMI, FRA, P&I, II, Markets Group, etc.), but no conference organization dedicates as much time and energy to the asset consultants than IMI’s Russ Mason.

Why is this important? The retirement industry is going through a critical and transformative phase, and the asset/liability consultants are still prominently involved in many of the critical decisions.  However, I believe that many of the consulting firms have been slow to evolve their thinking on how to tackle today’s retirement issues. The move to OCIO is meaningful, but the focus for these firms remains on the asset-side of the equation, which has been the focus for the past 50 or so years.

The opportunity to sit among our peers, both large and small, in an intimate setting, provides for outstanding dialogue and idea sharing, and this past event was certainly no exception. There is no one way to tackle this problem and no firm has the only secret sauce, but the willingness on the part of consultants to openly share ideas benefits the entire industry.

I want to thank IMI for arranging these bi-annual events, and to my fellow consultants for their willingness to discuss critical retirement-related matters so openly.  At the end of the day, we all have a responsibility to the beneficiaries of the plans for whom we consult. Challenging the common wisdom in a forum such as IMI’s may ultimately lead to necessary reforms. Great job, Russ and team!

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Let’s Just Cut Them Off!

As regular readers of this blog know, Ron Ryan and KCS are intimately involved in helping craft one of three potential implementations for the Butch Lewis Act (BLA) loan recipients.  Multi-employer pensioners are already facing an uphill climb with many of the “solutions” calling for potentially massive cuts to existing benefits. They certainly don’t need misinformation from the media adding to this burden.

In a recent article by Rachel Greszler, The Heritage Foundation, the author correctly highlights the fact that “a million or more workers and retirees now stand to lose a significant portion of their promised pension benefits.” Unfortunately, she goes on to say that the Butch Lewis Act (as well as other potential solutions) are nothing more than tax-payer bailouts.  She estimates that these bailouts could amount to as much as $1 trillion. I don’t know where she has gotten this figure, but it is not close to reality.

First, Ms. Greszler defines the potential recipients of these loans as the entire universe of multi-employer plans totaling roughly 1,375 with a current unfunded liability of $500 billion.  However, the Butch Lewis Act is only designed for those plans that are currently designated as “Critical and Declining” which number about 110.  The total amount of underfunding for this cohort is roughly $70 billion.  A far cry from the $500 billion that she highlights.

Furthermore, she claims that the $1 trillion figure is a possibility “because it would not only bail out all of the multi-employer pensions’ broken promises to date, but it would encourage private union plans – including responsible ones that haven’t broken their promises – to continue promising more than they can afford to pay, raising the taxpayers’ tab even higher down the line”. Not true!

Again, the BLA is only for those plans that find themselves in a difficult and deteriorating funded status at this time.  Furthermore, any multi-employer plan that receives a loan provided by the Pension Rehabilitation Administration (PRA) is forced under the law’s provisions to make the annual required contributions (ARC), cannot alter the promised benefits either up or down, and must use the loan’s proceeds to defease all of the plan’s current retired lives. These requirements are key to ensuring good behavior on the part of the plan sponsors.

Given the author’s concern for the million or so union workers whose benefits may be trashed, she certainly doesn’t propose any solutions other than to say that a “bailout” is a horrible way to go.  If these plans don’t receive assistance, they are likely to fail, placing a greater burden on the Pension Benefit Guaranty Corporation (PBGC), which is already financially troubled.

If pension benefits are slashed, how realistic is it that these retirees can reenter the workforce to make up for the lost benefits? We would say that it is very unlikely that a 70+-year-old will be able to find employment, which means that the country’s social safety net will have to make up the difference.  Doesn’t that mean that the taxpayer is on the hook?

Retirement benefits stimulate economic activity, and usually on the local level. The loss of retirement benefits will have a direct impact on these economies. Also, these benefits are taxed, which helps pay for a portion of the loans. Doing nothing is not an answer. I applaud the effort of those individuals who are driving the Butch Lewis Act. I encourage everyone to reach out to your legislatures to educate them on the BLA and to gain their support. There are millions of Americans who need your support.  Thank you!

Taking To The Streets

Last Thursday thousands of retirees took to the streets in protest, calling on the government to raise pensions and defend the Social Security system. This action occurred in Spain, but it could easily have unfolded in the U.S., as private pensions are transformed from defined benefit schemes to defined contribution plans, while Social Security adjustments continue to be contemplated, and in some cases, implemented.

The pensioners marched in the capital Madrid as well as Barcelona, Bilbao, Seville, and Granada.  The union-organized rallies called for “dignified” pensions, saying that the government’s 0.25% increase failed to keep up with inflation – sound familiar?

Given reports of inadequate retirement savings for the median American household, it isn’t out of the realm that we will witness similar demonstrations across America’s cities, as the U.S. workers struggle to live on meager account balances and inadequate Social Security benefits.

Sure, remaining in the workforce for a longer period will mitigate some of the financial shortfalls, but as we’ve witnessed, most older Americans don’t have control over that decision.  Furthermore, we already have nearly 95 million age-eligible workers out of the labor force for a variety of reasons, making it nearly impossible for many of them to make further contributions into a retirement savings vehicle.

The social and economic ramifications will be profoundly negative as a result of our failure to adequately prepare our workers for a “dignified” retirement. We are quickly running out of time to deal with this unfolding crisis.

 

More Needs To Be Done

New Jersey State Senator, Vin Gopal, is planning to introduce legislation barring the NJ pension system from investing in manufacturers of firearms and firearm ammunition. While we applaud his effort and legislative objective, given NJ’s significant underfunding and the burden that this is placing on the State’s fiscal status, I wish that his enthusiasm for pension reform would include other meaningful reforms while he’s at it.

Let’s see NJ’s Senate pass legislation that mandates that the annual required contribution (ARC) is paid. Let’s also restructure the oversight of the plan so that the asset side of the equation starts talking to the benefit side so that true asset/liability management can be attained.  Let’s mandate that NJ use multiple discount rates, and not just the return on asset assumption (ROA) so that the true scale of the underfunding is known and can thus be managed.

NJ needs pension reform in order to protect this important benefit but doing the same old, same old is creating a pension deficit that has the potential to create a devastating economic impact on the State’s social safety net, while likely leading to an exodus of well-heeled residents.

 

Millennials Facing Uphill Climb

The 83 million-strong Millennial cohort are facing an uphill struggle to appropriately prepare for retirement. Despite the fact that this group is more highly educated than either the baby-boomers or Gen-Xers, they entered the workforce during the last 15 years when the U.S. economy was struggling with two major economic shocks.  This resulted in lower wages at the outset of their careers.

In addition to the lower wages, Millennials find themselves in jobs that don’t provide the same benefits – healthcare and retirement – that previous generations enjoyed, and we know through various studies that people just don’t save for retirement outside of an employer-sponsored plan.  Furthermore, more than 50% of this cohort is burdened with student loan debt, which on average represents more than 1/3 of their earnings.

Furthermore, this cohort is likely to live longer than the Baby-boomers, but will only begin to collect Social Security at age 67, which will be a financial burden for many, especially for non-college educated and lower income workers that have fewer options to remain in the workforce.

Millennials still have a lot of time to reverse their current situation, but they are on average well behind the savings rates of previous cohorts.  In addition, they are marrying later (50% fewer marriages at age 25 than the Baby-boomer generation), and purchasing their first home much later, which is another source of retirement funding.

 

Financial Fragility

The Center for Retirement Research at Boston College has come out with another piece measuring the current state of our retirees.  BC does a great job in this area, and we often use them as our go-to source for pension-related information. The article is titled, “Will the Financial Fragility of Retirees Increase?”

Here are the brief’s key findings:

  • Retirees have long been seen as financially fragile – that is, ill-equipped to handle a financial shock without severe hardship.
  • Interestingly, the research suggests that the vast majority of current retirees can weather shocks such as high medical bills and widowhood.
  • Future retirees, however, face greater risk as most people are not saving enough and it is hard to manage a nest egg.
  • The best responses are to reduce fixed expenses (e.g., downsize) and draw more income from assets (e.g., buy an annuity).

We are actually surprised to read that a majority of current retirees can handle either widowhood or a financial shock such as a high medical bill.  However, a “high” medical bill is measured as a $400 surprise expense, which doesn’t seem like that would be a shock to one’s financial situation.  The fact that widowhood isn’t creating more of an issue is a bit more shocking until one realizes that a healthy percentage of our retirees are still participating in a defined benefit system, and many of the benefit payouts come with survivorship rights.

With regard to future retirees, the lack of a monthly annuity in the form of a pension payout will mean that many of those workers aspiring to retire one day may just need to reconsider their potential retirement date. Asking untrained individuals to fund, manage, and disperse a retirement benefit is proving to be exceptionally difficult. As the article highlights, the average retirement balance for a typical 55-64-year-old with a 401(k) had a balance (401(k) and IRA) of only $134,000.  Also, remember that only about 50% of the working population have a company-sponsored retirement plan.

Will future retirees become more financially fragile?  I don’t see any way that they don’t, especially for lower-income individuals. It takes about 80% of one’s retirement income to meet the basic needs of housing, food, transportation, clothing, and healthcare. With the greater dependence on income generated from a 401(k), retirees will be subject to the negative impact of financial shocks and likely lower market returns in the foreseeable future.

Short-term Stimulus, But Longer-term?

According to an article that appeared on CNBC’s website, the U.S. consumer continues to take on a greater debt burden.

  • Total household debt rose to an all-time high of $13.15 trillion at year-end 2017, according to the Federal Reserve Bank of New York’s Center for Microeconomic Data.
  • The report said it was fifth consecutive year of annual household debt growth with increases in the mortgage, student, auto and credit card categories.

The debt load grew by nearly $200 billion in the fourth quarter alone. The U.S. consumers have now amassed more than $1 trillion in both auto and student loan debt while ringing up more than $800 billion in credit card debt.

This total debt may be an economic stimulant in the short-term, but it eventually has to be paid down, which could weaken demand for goods and services longer-term. Furthermore, we have more than 94 million age-eligible workers on the sidelines and an LPR of only 62.7%, which certainly curtails their ability to remain robust participants in the economy.

The benefits from the recent tax law changes do not provide the “average” American worker with significant tax relief, especially if one lives in a “Blue” state with heavier property tax burden.