Forbes published an article by Elizabeth Bauer on December 6, 2018, titled, “Could The Butch Lewis Act Solve The Multiemployer Solvency Crisis? The author concludes that despite the fact that “the Butch Lewis Act (BLA) is projected to have an overall positive impact, but because “it will only, on average, provide a partial solution” that it isn’t worth consideration. How troubling.

The article raises many of the same arguments that we’ve already addressed in previous blogs – impact on the deficit, as the CBO initially estimated a cost of $100 billion, declining union membership that will impact future contributions, changing investment managers “into a profit-seeking endeavor to build up profits from government loans”, and most troubling she claims is the fact that the government loans will actually become bailouts.

“Finally, the bills supporters emphasize that these are loans, not bailouts, but there’s fine print: If a plan is unable to make any payment on a loan under this section when due, the Pension Rehabilitation Administration shall negotiate with the plan sponsor revised terms for repayment reflecting the plan’s ability to make payments, which may include installment payments over a reasonable period and, if the Pension Rehabilitation Administration deems necessary to avoid any suspension of the accrued benefits of participants, forgiveness of a portion of the loan principal.”  Heavens!

The Butch Lewis Act’s loan program is designed to extend the life of these “critical and declining” plans by at least the life of the loan (30 years). As a reminder, these plans are forecasted to collapse within the next 15 years, with many expected to become insolvent before that, impacting potentially more than 1 million American retirees. The fact that the loan extends the benefits to the participants of these troubled plans for 30 years should be hailed, and not vilified. The economic benefits to local communities from the receipt of these important benefits far outweigh the potential cost.  How many times have America’s corporations had to renegotiate loan provisions because of an economic or business hardship?

When Cheiron (actuaries) did their analysis of the then 114 critical and declining plans, they determined that all but 3 of the plans would be able to repay the loan principal, interest, present retiree liabilities, and future liabilities needing only to achieve an annual return on assets (ROA) of 6.5%, which is much lower than most of the C&D plans are attempting to generate at this time. The 3 pension systems that can’t meet this goal without assistance from the PBGC will need far less in support than what the PBGC would be on the hook for should all of these plans collapse: a strong reality given their negative cash flow situation today.

The continuing delay in addressing this crisis is leading to more and more plans falling into C&D status, and that was before the dramatic events of the fourth quarter when the S&P 500 fell 9%, and other equities declined far more. The social and economic implications are grave. If you remain skeptical, may I please refer you to the blog post “The Deniers Need to Read This Post!”

The WSJ recently published an article highlighting a Federal Reserve research study suggesting that student loans have negatively impacted younger Americans in their ability to buy homes.  They estimate that nearly 400,000 young Americans were impacted.  Was a research paper really necessary to understand that $1.5 trillion in student loan debt, which is now greater than revolving credit card and auto debt, would impact home ownership?

The article indicated that home ownership had fallen among 24-32 year-olds by 9% during the 2005-2014 period. They estimated that 2% of the decline was directly related to the growing student loan debt.  I am personally skeptical that ONLY 2% of the 9% was related to this burden.  New Jersey has more 18-34 year-olds living with their parents or another relative than any other U.S. state. I suspect that Mom’s cooking isn’t the only reason that this is occurring.

Student loan debt is not just negatively impacting one’s ability to buy a home, but it is also delaying family unit creation and funding for one’s retirement program, which is particularly troubling given that this burden through defined contribution plans falls mainly on the individual.

“Skylar Olsen, director of economic research and outreach at Zillow, said student loans are combining with high rents and rising home prices to make it difficult for younger households to save for down payments. “It’s a one-two punch,” she said. (WSJ)”

According to the article, the average 22-27-year-old with a Bachelors degree earned about $42,000/year in 2017.  Despite significantly greater wages than those with just a high school degree, is $42,000 really enough to manage student loan debt, a mortgage, and have disposable income for anything else? Especially if one lives in a high tax state. Since the study also suggests that many of these younger Americans are flocking to cities because of jobs and the availability of rental properties, I would suggest that most live in tax-challenged environments.

H.R.397 — 116th Congress (2019-2020) is seeking to amend the Internal Revenue Code of 1986 to create a Pension Rehabilitation Trust Fund, to establish a Pension Rehabilitation Administration within the Department of the Treasury to make loans to multiemployer defined benefit plans, and for other purposes. Importantly, this Bill, which was recently filed by Congressman Neal, has currently 9 co-sponsors, including 5 Republicans and 4 Democrats. The fact that 5 Republicans have already stepped up to support this legislation is a huge turnaround from previous attempts to provide relief for critical and declining multiemployer pension systems.

Please continue to reach out to your legislators to get them to support this critically important effort. There are millions of American workers who are in desperate need of protection for their hard-earned pensions.

It is well documented that the financial impact on the 800,000 government workers and the roughly 4 million contractors will be tangible especially for the contractors who are not likely to see any compensation for the loss of business revenue.  We are now on day 25 in the shutdown with no end in sight.  It is estimated that roughly 14% of the government pool are folks making <$50,000 annually.  They, of course, are the most vulnerable in this saga.

Concerted efforts are being made by institutions to provide temporary relief, short-term loans, expedited hardship withdrawals from retirement accounts, companies are reducing fees, banks are breaking CDs, and on and on.  That is all great, BUT we’ve had a significant crisis developing since the Great Financial Crisis (GFC) impacting a significant percentage of our workforce that are living paycheck to paycheck!

Sure, this shutdown impacts a ton of people all at once magnifying the impact, but for many Americans, this situation has been a source of great stress for some time now.  This phenomenon is impacting wide swaths of our workforce and economy from farmers to professors, accountants, real estate agents, small business owners, etc.  Furthermore, they aren’t just Millenials, but include Gen Xers and Baby Boomers, too. They are city dwellers, suburbanites, and occupants of rural communities. As described above, few are immune.

According to a recent Washington Post article which referenced a Federal Reserve report, roughly 4 in 10 Americans couldn’t come up with $400 without sliding into debt or having to sell something.  We’ve reported on this issue before, but it just keeps getting worse. “It’s astronomical what people need just to make it month to month,” said Heidi Shierholz, a former chief economist at the Department of Labor who now studies how middle-class families spend their wages at the Economic Policy Institute, a Washington think tank that is funded by foundations and unions. “Given the high cost of transportation, housing, health care … There is often no wiggle room.”

Add to Heidi’s list the cost of education, insurance, and the funding of one’s retirement today, where is the disposable income? The fact that we could have politicians making statements such as “who’s living that they’re not going to make it to the next paycheck?” speaks volume to how out of touch many of our “leaders” truly are with the economic plight of our citizens.

For many Americans, the last two decades have seen wages stagnate, full-time jobs migrate to the on-call variety, benefits cuts or eliminated, degree inflation enacted, etc. Any wonder why the “Distress Index” is ratcheting higher?

At the same time that Americans have been asked to do much more with less, we are asking them to fund, manage, and then disburse a retirement benefit. Who is kidding who? The loss of defined benefit plans for the masses is exacerbating this trend and it will only get worse. Let’s figure out quickly how to get Americans working and wages growing so that the “average” worker has a chance to survive an economic shock of much more than just $400.

A recent article in FreightWaves discusses the filing of legislation by Congressman Richard Neal (D, MA).  The legislation know as the Rehabilitation of Multiemployer Pensions Act was first filed by Congressman Neal in 2017, but didn’t get the necessary support from the Joint Select Committee on Solvency of Multiemployer Pension Plans.

According to John Murphy, Teamsters Union Vice President, “it’s a different world in this Congress with the Democrats now the majority party in the House.” Mr. Murphy is pleased to see a more bi-partisan effort to support this version of the Bill, as support has come equally from both Democrats and Republicans.

According to the article, the new legislation is similar to what was filed in 2017, but the new language was not available for comparison purposes. In the original Bill, a new agency, the Pension Rehabilitation Administration (PRA), was to be established for purpose of providing loans to multiemployer plans deemed to be in Critical and Declining status.  There were 114 plans with this designation in 2017, but regrettably, this universe continues to expand. Doing nothing is not an option anymore.  There are too many American workers/retirees who will suffer both social and economic consequences from the failure to act now.

We will continue to provide updates on this important legislation as more information becomes available. Please reach out to your representative in Washington to encourage their support of this critical legislation.

We are pleased to provide you with the Ryan ALM Fourth Quarter newsletter. Each quarter Ron Ryan and his team provide plan sponsors an important view on how a generic liability stream, priced at market, would have performed relative to a plan sponsor’s representative asset allocation.

At the end of September, the representative asset allocation model had outperformed liabilities (marked-to-market) by more than 11%, with assets up 5.8%, while liabilities (U.S. Treasury STRIPS index) had declined by 5.3%.  The >11% advantage provided plan sponsors with a significant opportunity to de-risk their plans. De-risking in our view is a way to stabilize both the funded status and contribution expense.

Unfortunately, the fourth quarter’s significant drawdown for equities and a subsequent rally in interest rates completely reversed the earlier advantage. At the quarter’s end, assets were underperforming liabilities by nearly 2%: an almost 13% reversal in just 3 months. Wow!

Regrettably, most plan sponsors, especially those that follow GASB accounting rules for the discounting of pension liabilities, rarely get a view of those liabilities except once per year. As contribution expenses have risen rapidly during the last couple of decades, we think that it is becoming critically important to initiate strategies to potential slow this escalation before state and local budgets are no longer able to sustain the burden.

Oh, my!

I’m attending the Opal Public Funds Summit in Scottsdale this week.  Opal produces this critical forum twice per year at which public fund plan sponsors, consultants, actuaries, and invesment managers gather to discuss the state of the U.S. retirement industry while considering strategies to address issues and opportunities. Given how troubled our industry is, particularly after a challenging 2018, this year’s program takes on heightened urgency.

The title above, “Should We Just Take Our Lumps?” were words uttered by a plan sponsor during their panel discussion regarding the current environment for fixed income. This plan has roughly 22% in traditional fixed income instruments, and the sponsor was concerned that a rising interest rate environment might weigh heavily on future returns for their program. Instead of exploring options for the current exposure they were considering just letting the exposure get whacked while hoping the remaining 78% could generate alpha to make up for this potential underperforming asset class.

Thinking a little outside the box. We would recommend that the plan sponsor bifurcate their portfolio into insurance and growth assets. The insurance assets would be their current fixed income exposure converted from a return generating asset to a cash flow matching portfolio designed to meet near-term liabilities. This conversion will improve liquidity to meet those benefit payments while eliminating the interest rate risk that the sponsor was concerned about.  Furthermore, by building an immunized portfolio to meet near-term payouts the investing horizon gets extended for the growth portfolio. This strategy buys time for the growth assets to capture the liquidity premium that exists in many assets outside of fixed income.

By focusing on the return on asset assumption (ROA) as the primary objective, the sponsor was fearful that a conversion of the fixed income portfolio to meet near-term benefit payments would impact their ability to meet the ROA.  However, converting the current fixed income exposure to a cash flow matching (immunized) strategy, the portfolio’s yield is likely going to be enhanced, which would actually improve the plan’s ability to exceed their return objective.

Conferences, such as Opal, are potentially great sources of knowledge provided that one attends with an open mind to new and different ideas.  For too long our industry has been walking down the same path together (return focused), and we are now at a critical intersection in which the path less traveled needs to be explored.

The fourth quarter provided a tremendous amount of pain for Pension America. The feared double whammy occurred in which interest rates fell, increasing the present value of a plan’s liabilities, while assets simultaneously fell, too.  The combination impacted plan funded status and future contribution expense.

What could have been done to mitigate this risk? For plans focused on the return on asset assumption (ROA) as the primary objective, I would suggest that not much would have or could have been done.  ROA chasers have a set it and forget it mentality.  This “strategy” has unfortunately been the primary pension game for about 40 years coinciding with the explosion in the use of asset consulting firms.

For those few plans that are focused on the plan’s assets versus that plan’s specific liabilities, the end of the third quarter would have provided an outstanding opportunity to reduce risk within the portfolio in a responsive way.  However, in order to implement this action, one would have had to be monitoring their plan liabilities more frequently than the once per year view that is customary.

What was the opportunity? At the end of September 2018, a “traditional” asset allocation would have generated a return of 5.8% year-to-date. Furthermore, the backup in U.S. interest rates reduced the present value of plan liabilities (using US Treasury STRIPS) by -5.3%. The combination of these two actions would have worked to improve funding status in a dramatic way.  It would have been the perfect time to move assets from your “growth” portfolio to an insurance bucket designed to meet near-term benefit payments. Few did!

As a result, the fourth quarter’s equity swoon created significant headwinds for that sample plan asset allocation, and by the end of the year, the plan would have generated a -3% return.  A collapse of 8.8% in a single quarter.  Worse, U.S. interest rates began to fall.  The U.S. Treasury 10-year saw it’s yield fall from a high of 3.24% to the year-end low of 2.68%. For all of 2018, the U.S. 10-year had rates rise only 22 basis points. So much for significantly higher rates coming. The Treasury STRIP yield curve produced a -1.26% return for the full year, but that was improved by 4% in one quarter.

If plan sponsors and their consultants had implemented more of a liability focus, they could have protected the funded status and future contribution expense by taking risk off the table at the point when assets were outperforming liabilities by 11.1%.  Instead, the set it and forget it mentality resulted in plan assets underperforming a true market-to-market liability growth rate by -1.7%. We cannot afford to sit by any longer with the wrong pension objective.  Plans must be managed against the promise that they’ve made to their participants.

The following was found on the U.S. Department of the Treasury’s website:

“On December 16, 2014, the Kline-Miller Multiemployer Pension Reform Act of 2014 (MPRA) was enacted into law. In MPRA, Congress established a new process for multiemployer pension plans to propose a temporary or permanent reduction of pension benefits if a plan is projected to run out of money before paying all promised benefits.

MPRA requires the Treasury Department, in consultation with the Pension Benefit Guaranty Corporation (PBGC) and the Department of Labor, to review a multiemployer pension plan’s application to reduce benefits and determine whether it meets the requirements set by Congress.”

The idea of proposing a “temporary or permanent reduction” sounds so simple and almost painless; as if the reduction is nothing more than a slight tax increase. But, the pain inflicted on these innocent participants is real and in many cases, devastating to the pensioner’s financial and psychological well-being, as we’ve heard of situations in which the benefits have been slashed by more than 50%!!

You may recall that we’ve written about Carol (blog posts from 8/22 and 12/3), who is a member of Local 805. Carol was given an early retirement (she worked for 26 years for Panasonic) with the promise of $2,600/month for life. Unfortunately, Local 805’s pension system filed for benefit relief under MPRA, and it has resulted in Carol’s monthly pension being slashed from $2,600 to $1,022 per month, an incredible 61% decline! The reduction was to begin in January 2019.

We’ve just heard from Carol, who shared with us the latest in her unimaginable saga. These are her words: “This afternoon, I went to the bank to see if they could check on the reason my pension check didn’t post yet. I called the pension first, and they said that it must be a problem with the bank. Anyway, I have been afraid to see it in print, but I had a good week to keep repeating the amount I will get….$889.14. That is $1022.00-13%. My forever check was $2262.00, which was $2600.-13% So the bank officer said here it is, it just posted..Local 805 Union in the amount of $671.45. To say I had a meltdown is putting it mildly! I started arguing with the guy, and then I broke down in tears…he couldn’t understand me…I was shaking…I felt physically sick. He got me a glass of water and I sat there talking outloud to myself for a while. Then I pulled out my phone and called the union. I got the same girl as I did earlier. She asked for my SS# then got back on the line and said in a jovial voice, “Oh, I see what they did…you were getting $338.00 deducted from each check for taxes”…I said yes I know…13%, so I figured my new amount deducting 13% and it should be $889.14. So she said, “well I guess instead of figuring it out, they just carried over the amount you always had deducted”..I was screaming at her…I said this will barely pay my gas and electric…how could you take over $200.0 more out of a pension that was already cut 61%?   She said it wasn’t them, it was the government…she will send me a form I have to fill out, mail to the tax department and they will change it!’ How screwed up is that? Who the hell knows if I will get that $217.69. I’m done… I’m just done. I should be able to sleep because I’ve been living on cat naps, but I cant. Thanks for being here because I had to let it out…it won’t change things, but I still had to vent.”

The ability to significantly reduce a beneficiary’s pension is an incredibly callous action with absolutely no regard for the individual’s future. The fact that Congress has permitted this action is unacceptable. I guess that we shouldn’t hold out much hope that they will see the error of their ways and finally pass legislation that will help preserve and protect the potentially millions of “Carols” that are facing a similar fate. The longer that they delay (where are we with the Joint Select Committee on Solvency of Multiemployer pension plans?) the more likely that we will see the list of critical and declining plans expand.

Furthermore, we are more than 10 years into a stock market recovery that is showing signs of exhaustion. Funded status hasn’t improved much during this recovery despite outsized equity returns. Just how devastating will another market correction be on these plans and pensioners? We need action now, as Carol, and millions more, are counting on us to remedy this nightmarish situation. There is a retirement crisis that needs our attention. Will you be part of the solution?

I hope that everyone had a wonderful holiday season.  Furthermore, I wish each of you a healthy and prosperous New Year!

After 7+ years, I will be leaving KCS to join Alan Biller and Associates as a Managing Senior Consultant.  I will continue to work from New Jersey, primarily covering the firm’s east coast clients and prospects. This is a wonderful opportunity for me to join an outstanding asset and liability consulting firm, whose mission mirrors that of KCS.

Lastly, I want to thank everyone who supported our efforts at KCS.  The past 7 years have been a tremendous learning experience, and I very much look forward to this next chapter in my career.