I’ve been discussing during my conference presentations the need for American pension systems to take some risk off the table, especially given the fact that we have enjoyed 10+ years of a bull market for US equities. I wish that my crystal ball was better than everyone else’s, but it isn’t! Given that I have no idea when the next bear market will begin, I look for opportunities to reduce risk where and when I can. This bull market has been longer than any previous one and only falls behind the great run of the ’90s when discussing gains. Why let your exposure to equities continue to grow as if this were some game of chance in Las Vegas or Atlantic City?

As a result of this nearly unprecedented move, many pension plans have enjoyed improved funded status. Do we really want to jeopardize those improvements? Can Pension America truly survive another major market decline that causes funded ratios to plummet and contribution expenses escalate to perhaps unsustainable levels? I don’t think so, at least not based on the number of plans that were forced to take corrective action following the last two such cycles.

Today’s market action, supposedly related to the Coronavirus and its potential impact on global growth, may prove to be nothing more than a blip on the radar, but it may not. Who knows? But, I do know that the combination of falling stock prices combined with falling interest rates negatively impacts a plan’s funded status and ultimately its level of contributions. Are we going to wait until well after the fact to de-risk or do we take a more proactive (dynamic) approach to asset allocation and pension management that has us managing near-term pension liabilities so that the remaining growth assets now have the luxury of time to work through any potential corrections in this equity bull market run?

I once asked an audience at an IFEBP conference if they recall what they were thinking in the Fall of 2006 and the Spring of 2007 regarding their plan’s asset allocation and risk profile. Were they concerned about the next leg in the market cycle? If so, did they do anything about it?  Well, we may be approaching the next cycle in this market environment.  What are you thinking about right now? I would encourage you not to become complacent. Call us, as we have a roadmap that would be specific to your plan’s liabilities and risk profile.

I entered the retirement industry in 1981 when asset consulting was still in its infancy. At that time many defined benefit plans were managed by a single balanced investment program (60% equity and 40% fixed income), and often it was a bank trust department that was responsible for the program’s implementation. They had recently taken responsibility for pension assets from fixed income managers who defeased the pension liabilities in a similar fashion to how lottery systems were managed then as they are today. That low-risk approach was deemed to be too expensive.

Unfortunately, plan sponsors were coerced into believing that asset consultants possessed a better mousetrap and through this enhanced asset allocation framework asset performance would be superior and contribution expense would be lower. So specialist managers were added and then real estate when stock and bond managers didn’t produce enough return to meet the ROA objective. As U.S. interest rates fell and U.S. equities outperformed, more plans shifted assets further away from the only assets (bonds) in the portfolio that were highly correlated to plan liabilities thus creating a huge mismatch.

Things got much more interesting when interest rates continued to fall and equities got smacked around twice by significant bear markets. In an attempt to enhance returns and lower volatility, significant exposure was given to alternative investments including private equity and debt, timber, agriculture, commodities, infrastructure, and worse, hedge funds! When this combination of products became too much for many plan sponsors to handle from an education and monitoring standpoint, the OCIO model was introduced.  Unfortunately, funded status has plummeted for many plans, while contribution expenses have risen rapidly.

One must now ask are we better off today than we were in 1981?  It seems as if going back to a single manager – the OCIO – hasn’t necessarily improved performance, but it certainly has created a far more complicated structure. It is amazing to see how exposure to U.S. equities has fallen for all plan types to about 26% (P&I) for Union and Public plans, while corporates are at about 16.5%.  Most pension plans would have benefitted last year from a good old fashion 60% equity/40% fixed income portfolio, as it would have generated a roughly 22.4% return slightly topping plan liabilities that came in at 22.2% (FAS 715 rates). Unfortunately, the more complicated asset allocation with very little exposure to US equities generated a roughly 15.7% return that underperformed liabilities by 6.5% and a traditional 60%/40% mix by nearly 7%. OUCH! Public and multiemployer plans faired better as the slightly greater exposure to US large-cap equities helped plans to a roughly 17.9% and 17.6% returns, respectively.

We’ve been running around the country speaking about bringing the basics back to pension plan management with a greater focus on liabilities.  It seems that a return to basics on the asset side of the equation may be warranted, too. How about building a simple portfolio that has the first 10-years of Retired Lives liabilities defeased, which might take between 20%-40% of the assets depending on the funded status, while the remainder of the assets is invested in traditional equities.  I would favor small-cap value for periods greater than 10 years, but that is just me.

I have lived in New Jersey my entire life. I can only blame my parents for the first 18 years of my existence in this state. Beyond that is no one’s fault but my own.  I mention this because NJ ranks LAST among all 50 states for their current fiscal condition. People and businesses are migrating to other parts of this country to get away from this fiscal mess, but here I remain. Please help me!!

When I have opportunities to speak at conferences around the U.S. I often mention my fate, but there are many others living in states that have similar situations to NJ, such as Illinois, California, Connecticut, etc., so I really don’t get much sympathy. Why mention this today? Well, back in 2018, state Senate President Steve Sweeney put together a commission to explore solutions to NJ’s fiscal woes. The commission put together legislation that went before the Senate last May calling for a hybrid pension solution, but nothing happened as the bill sat in the senate (sounds eerily familiar to what transpired with the Butch Lewis Act and the U.S. Senate). Shocking!

In addition to the legislation to create a hybrid plan, there was a bill introduced that would have created a New Jersey economic and fiscal policy review commission to “provide ongoing review of state and local tax structure, economic conditions, and related fiscal issues,” including employee retirement matters, according to a bill summary. But alas, Governor Murphy vetoed the proposed legislation without explanation.  Is this another example of don’t ask, don’t tell?

Not only does NJ have ridiculously high property taxes, but the state income and sales taxes create a melange of real pain for residents. Couple this burden with the gaping financial hole within the NJ pension system (estimated at about $80 billion) and you have a formula for disaster. I give Sweeney and his commission credit for trying to do something before it is too late.  As anyone knows who reads these blogs, I am a huge fan of DB plans, but NJ’s may not be salvageable. In that case, exploring a hybrid solution is certainly more appropriate than thrusting NJ’s public employees into a defined contribution vehicle.

When are we going to get real leadership willing to put aside political differences to tackle real problems facing our residents? Everyone can’t live in Florida and Texas, but it sure seems like the thing to do these days! I’ve always teased my family about wanting to live on a ranch in Montana. That is getting to be more attractive every day!

I frequently write about the state of multiemployer plans in the U.S. There is a “grading” system that makes it easy to identify more successful plans (Green) from those that are in trouble, which are defined in not so favorable terms as Critical and Declining. Regrettably, we don’t have a similar warning system for our public funds, although many of us know that states such as Connecticut, Illinois, and my home state, New Jersey, would certainly not receive a grade of green, but likely one that has them more appropriately designated as being on life support.

Pension plans used to be managed like a lottery system where future promises (liabilities) were known and a present value calculation was used to determine the assets needed to defease that promise. Those assets were then basically set aside until the promised payout was due. Regrettably, we’ve gotten away from that course of action and decided that generating the highest return was the more effective approach to ensuring that future promises were funded and paid. Unfortunately, what has happened is that the funded status for these systems has deteriorated, returns have fallen short, plans have had to reduce benefits, add tiers, and contribute significantly more to these pension plans.

Many of the states have resorted to significantly increasing taxes to meet their pension promises. How has that worked? Well, according to data from the US Census Bureau, millions of Americans have fled high-tax states, such as Connecticut, Illinois, New Jersey, and New York to find more economically palatable locations, such as Texas, whose population growth was greater during the last decade than all of Connecticut. In fact, four of the six highest-tax states in 2010 were among the nine with population growth below 1 percent for the decade in which the US’s population grew by 6%. None of the 10 states with population growth over 11% for the last 10 years were among the 20 highest-tax states early in the decade and it shouldn’t be surprising to read that four were among the seven with no personal income or investment taxes.

So if public pension systems think that they can continue to ramp up taxes on their residents without consequence they will be sadly mistaken. Those days are over. Pension systems need to reduce the volatility of the plan’s asset allocation and the variability in both funded status and contribution expense. Doing the same old, same old has proven to be an unsuccessful approach.  It is time to go back to the future! We can help!

I first mentioned Carol’s plight in August 2018 when her story was brought to my attention. As you may recall, Carol was a retired Teamster who had been promised a benefit for life upon taking early retirement. Regrettably, her union plan (Local 805) filed for benefit relief under MPRA and was granted that relief effective January 1, 2019. The impact on her financially has been harsh. The psychological impact may be more damaging.

Ron Ryan and I continue to run around the country bringing Carol’s and other’s stories to one conference after another (IFEBP, Opal, MIA, etc.) in an attempt to put a face on the pension crisis that is unfolding in our country. We find it shameful, and totally unacceptable, that we have legislation that permits the rug to be pulled out from under the feet of these retirees who worked hard every day believing that their hard work would be rewarded with a pension in retirement. But, through no fault of their own, that promise has not been kept.

I’m also guilty of not providing more frequent updates as to the impact that these decisions are having on the lives of people like Carol. For instance, the following was shared on Facebook several months ago.

• russellkamp@gmail.com;
• R Kamp;
• Karen Ferguson

I am at the Made In America conference in Las Vegas.  I enjoy this particular event because the crowds tend to be smaller providing the participants with more of an opportunity to interact. This particular gathering has a really good mix of agenda items and presentations, but I was reminded once again how our industry continues to focus exclusively on the asset side of the pension equation. Hopefully, my session, “Managing Through A Liability Lens”, will wake them up to the fact that pension plan liabilities exist and that assets need to be managed against them.

Day one had us hear once again that there are only two ways to improve funding: 1) contribute more, and 2) earn more on the investments. Yes, those are two ways, but not the only way to see funded status improved. Unfortunately, as I stated above, pension liabilities are like Mr. Cellophane of the pension world, especially when plans elect to use the same discount rate for both assets and liabilities (ROA). In an environment that values liability growth at 7.5% each and every year, it is no wonder that most plan sponsors and consultants forget that liabilities are bond-like in nature and that they don’t grow at the same rate as pension assets.

Because liabilities are bond-like, they move up and down in value with changes in interest rates. Regrettably (for pension systems), we’ve basically been on a slippery slope of declining US rates for much of the last 4 decades. As a result, plan liabilities have dramatically outperformed plan assets during this period and particularly in the last 20 years. I would guess that most sponsors think that 2019 was an incredible year for pension funding as assets enjoyed a magnificent 12-months, but they would be mistaken as the significant decline in US long-term rates boosted liability growth to as much as 25.6% when pricing liabilities using PPA spot rates and 22.2% when using ASC 715 rates (AA Corporate).

Unfortunately, this phenomenon has had the biggest impact on public pension systems that have habitually maintained higher return on assets assumptions which acts to keep contributions lower than they should have been.  Pension America’s precarious position would not be so severe if WE, as an industry, had collectively focused more attention on the promises that were made to our employees. I’ll update you tomorrow on whether any rotten fruit was thrown in my direction during my discussion.

Every year brings something new to the Social Security system if only a slight inflation adjustment and 2020 is no different. The Social Security Administration announced in October that benefits would increase by 1.6 percent in 2020.

For a recipient earning $1,479, the average monthly benefit among all retired workers, checks will increase to about $1,503 per month. If my math is correct, that equates to an additional $24/month. Please don’t plan to spend all of it too soon.  For Social Security calculations, the standard CPI is inferior for this purpose, as the CPI-E, which measures inflation for Seniors, should actually be used. It is estimated that the CPI-E is 0.2% higher annually than the Standard CPI. Not that the 0.2% would be a financial windfall, but every little bit helps. As you know, cost-of-living adjustments, which began in 1975, are implemented in order to counteract the effects of inflation.

The maximum Social Security benefit for a worker retiring at full retirement age will rise to $3,011 per month in 2020, from $2,861 per month last year. There is a retirement earnings test that is applied to those who claim Social Security while still working. The test takes two main factors into account: your age and income.

In the first case, the retirement earnings test withholds benefits before you reach full retirement age if your income exceeds a certain threshold – and then adds them back once you reach full retirement age. That threshold amount for 2020 is $18,240.

A higher threshold applies to those will reach full retirement age during the year. For 2020 it is $48,600. The program withholds $1 in benefits for every $2 of earnings in excess of the lower exemption amount, and $1 for every $3 in excess of the higher exemption amount.

What you shouldn’t fear is Social Security running out or money. It is a fallacy to believe that there exists a “lockbox” that contains all of our contributions. The US enjoys the benefits of having a fiat currency and all of the federal debt held in U.S. dollars. We absolutely have the ability to meet all future calls on Social Security benefits. What we should fear is our august Congress not understanding this concept and acting rashly to address the impending “crisis”. More to come on this issue.

The Pension Benefit Guaranty Corporation announced on January 14, 2020, the first merger of two multiemployer plans under the Multiemployer Pension Reform Act of 2014. The two plans are the Local 1000 Pension Fund, which covers more than 400 participants, and the Local 235 Pension Plan, which has more than 1,100 participants. Local 1000’s plan is in Critical and Declining status, while 235’s plan is in the green zone. Local 1000’s plan was forecast to become insolvent by 2026.

These two unions had merged years ago, but their plans remained separate and distinct. According to PBGC’s Executive Director, Gordon Hartogensis “Through this facilitated merger, we are preventing a failing plan from going broke and preserving benefits in a financially responsible way.” The agency will commit to providing $8.9 million in each of the next three years, which they have determined is enough to maintain the benefit levels for the participants in both plans, while saving the PBGC additional financial stress should Local 1000 collapse.

“By law, PBGC may not approve a facilitated merger that harms the solvency of the agency’s Multiemployer Program. PBGC approved this merger after determining that the merger reduces PBGC’s expected long-term loss with respect to the Local 1000 Plan and that providing financial assistance to the merged plan will not impair the agency’s ability to meet its existing financial assistance obligations to other multiemployer plans.” (PBGC Website)

On the surface, this arrangement seems like a smart approach to an on-going funding issue for many struggling multiemployer plans. Congress continues to kick the pension reform can down the road, and as we learned recently from Cheiron’s updated study, the funding problem just gets worse and worse to the tune of $750 million/month.

Of course, I have not seen any actuarial studies regarding this arrangement. It has not been announced what the funded status will be following this merger nor how this impacts future negotiated contributions from both employees and employers.  In addition, I don’t know how this might change the return on asset assumption or the plan’s asset allocation. Lot’s of questions to be answered, but if benefits can be maintained for both entities, it seems like a win for all parties.

Who knows whether or not this first merger will open the floodgates to many more, but at least those participants in Local 1000’s plan can sleep better at night knowing that their benefit will be there each month as promised!

We have recently reported on the $1.02 trillion federal deficit for 2019. What amazes me is that we are constantly told that the Republican lead U.S. Senate can’t support H.R. 397 (the Butch Lewis Act) and nearly 1.4 million multiemployer pension plan participants because it wouldn’t be “fair” to the American taxpayer.  Please stop with this charade.  The total cost to save the critical and declining pensions is a drop in the bucket compared to the lost annual economic activity produced by the benefit payments and the lost revenue collected in taxes by federal, state, and municipal entities.

The CBO’s analysis found “that under H.R. 397, the government would disburse $39.7 billion in loans to certain multiemployer pension plans. (That total excludes some forms of assistance that resemble loans but do not receive FCRA treatment because they do not meet the definition of a loan under FCRA.) Under CBO’s official approach (which excludes grant assistance), the present value of loan repayments would total $7.9 billion, CBO estimated, leading to a net subsidy cost of $31.8 billion. Under the alternative approach (which includes grant assistance), the estimated net subsidy cost would be $5.8 billion because some loans would be repaid using grant assistance. The subsidy cost for all loans (regardless of the estimating approach) would be recorded as direct spending.”

The $39.7 billion would represent <4% of the current deficit, if accounted for in one year, but less than 0.1% per year if spread over the life of the loans, which is 30 years. Any claim on the part of our Washington DC leadership that the failure to address our burgeoning pension crisis is because they are trying to protect the U.S. taxpayer is a joke. As we reported, the federal deficit has and will continue to be stimulative to our economy, and shouldn’t create inflationary pressures provided the additional demand for goods and services can be met by our economy’s ability to meet that demand.

No one in DC has earned the right to call themselves fiscally conservative!

The U.S. Treasury released data highlighting that the fiscal budget deficit topped $1 trillion for calendar year 2019 for the first time since 2012, increasing 17.1% in 2019 from 2018’s budget deficit that had grown by more than 28.2% from the previous year. Tax receipts increased by 5%, as corporate taxes rebounded, but outlays were up 7.5% to $4.5 trillion as federal spending for both the military and healthcare increased. This trend has continued into 2020’s budget with the deficit growing by 12% through the first 3 months.

Importantly, this fiscal stimulus continues to support the U.S. stock market, as the deficit, a liability of the U.S. government, is an asset of the private sector. According to a WSJ article, “annual deficits are projected to more than double as a share of the economy over the coming decades, as a wave of retiring baby boomers pushes up federal spending on retirement and health-care benefits.” Again, this is not necessarily bad news if the demand for goods and services fueled by this incredible stimulus doesn’t exceed our economy’s ability to meet that demand through greater production.