Pension Lessons Learned

Ron Ryan and I will be participating in a new webinar series hosted by the Opal Group. The series, titled “Pension Lessons Learned” will have at least 2 episodes. The first session slated for 2pm DST on Wednesday, April 15, is “Protection From Market Disruptions” and the second webinar in the series in slated for April 22nd at the same time, and it will address “Enhanced Asset Allocation” strategies. We hope that you will consider joining us.

As a reminder, the true objective of a pension plan is to secure benefits in a cost-effective manner. Regrettably, Pension America has gotten away from focusing on the primary objective and has instead chased the return on asset (ROA) assumption. This has lead to a dramatic increase in allocations to risk assets, created a poorer liquidity profile, and lead to greater uncertainty in achieving the securing of plan benefits.

We hope that you can join us for both sessions. You can check out the following links for more information on the Opal Group website and the instructions to register for these events.


Registration link:

The financial security for so many Americans is directly correlated to the successful management of these important retirement vehicles. Continuing down the same asset allocation path has failed all of us. We need to take a path that is less traveled and one that might just return us to a route taken when pension plans were first introduced. Tune in – you won’t be disappointed!

In Pursuit of the ROA and the Long-term Implications

We’ve suggested for years that the pursuit of the return on asset (ROA) assumption as the primary goal of pension America was misguided and the latest market events certainly support our point. As plan sponsors and their asset consultants chased the ROA the asset allocation strategies pursued more products that were private in nature – equity, debt, real estate, infrastructure, etc. The hope of more return has likely not been realized and we may soon find out that true valuations have been masked. We certainly understand that pension plan liquidity has been diminished significantly.

With regard to private equity valuations, according to a new report from Investec, “private equity is about to go through a period of violent repricing matched only by the collapse in the global financial crisis: some 50% over the next 3 months!”

In the report from Investec’s Fund Finance team, authors Michael Zornitta and Ian Wiese write “that valuations will fall this month, with major adjustments downward foreseen in June reporting, and that hedging transactions are on the rise as risk management becomes the priority for fund managers. Just one problem: one hedges before the crisis, not after.”

According to the folks at Investec, “almost all managers have shifted their focus from deploying capital to defending assets,” Zornitta and Wiese wrote. Managers are looking into alternative forms of liquidity to prop up companies, prevent breaches and reduce the possibility of having to call any remaining capital” from investors, they wrote.

DB plans have seen substantial re-pricing for traditional domestic and international equities, and high yield. A repricing of anything near the 50% prediction by Investec will be devastating. We encourage all plans to once again focus on the promise that has been made to your participants (liabilities) to drive asset allocation and invest structure decisions, and to get away from chasing the ROA as if it were the Holy Grail. It is nothing more than a tarnished artifact!

Why Pension Reform Is Absolutely Necessary!

For those of you who are perhaps wondering why I’ve become so passionate about pension reform, there is a social and economic crisis impacting American retirees within the multiemployer universe of Critical and Declining plans (roughly 125) that is about to get even worse, as many of the plans once deemed Critical are likely to have fallen in status with the recent market action.

In 2014, Congress passed legislation (MPRA) that allowed for struggling multiemployer pension plans to file for benefit reductions. To date, there are roughly 15 funds that have been granted permission to “renegotiate” the benefits. These funds have about 75,000 retirees who have seen their benefits reduced. When my friend, John (a retired Teamster) first did his analysis on the impact from these CUTS, there were 43,000 retirees that were in funds that had seen benefit reductions. Their benefit reductions amounted to nearly $34,000,000 / month. What he discovered through his polling and outreach was shocking! Here are just some of the highlights:

95% were not able to work

72% were providing primary care for an ailing loved one

65% were not able to maintain healthcare insurance

60% had lost their home

55% were forced to file for bankruptcy

80% were living benefit check to benefit check

100% of the PBGC maximum benefit payout was inadequate ($12,870 of a retiree with 30-years of work)

50% of the retirees were U.S. service veterans

How could you not be shocked by these numbers? It is wonderful that we have seen action to help American families and businesses negatively impacted by the Coronavirus, but these American workers have been left behind and their fate won’t improve once the virus has subsided. Furthermore, there are 1.3 million American workers/retirees in failing plans that are right behind them in line! Are we truly okay with dooming them to a similar fate as those original 43,000 who have suffered so much? I am not! It bothers me to no end that our industry has failed to protect these pensioners. How is it that so many of us have prospered so greatly from our participation in this industry, yet the people who counted on us have not?

Still No Relief For Struggling Multiemployer Pension Plans

House Democrats had crafted their own proposed legislation to compete with the Senate’s stimulus proposal. The House version included the Butch Lewis Act to help those Critical and Declining multiemployer pension plans that are on the verge of collapse. Regrettably, the Senate version that passed last night does nothing to help the 1.4 million American workers and retirees in the roughly 125 C&D pension plans. Furthermore, given the devastating impact on pensions from collapsing equity markets and lower interest rates, there are likely to be many more multiemployer plans that now fall into the C&D bucket. Prior to the last month or so there were roughly 200 multiemployer plans that were in the Critical zone.

According to my contact on the front lines of this battle, there may in fact be another bill that specifically addresses the pension crisis. Let’s hope that is the case, as these plans have less time to be saved than they did just two months ago. While Congress tinkers, the fate for millions of retirees and near-retirees becomes more tenuous.

I Am Truly Torn

I read with great interest a P&I article from last Friday that mentioned a group of retirement industry trade groups (roughly 25*) had sent a letter to Congress seeking immediate action to help employers that sponsor retirement programs, participants, and retirees during this unprecedented crisis. According to the article they were calling “for allowing penalty-free qualified distributions and loan modifications for individuals impacted by the coronavirus pandemic; providing a temporary waiver for calendar year 2020 of the rules for required minimum distributions from defined contribution plans and individual retirement accounts; assisting defined benefit plan sponsors by freezing the interest rate at pre-COVID-19 pandemic levels, and extending the final contribution due dates, among other suggestions.”

I am all for protecting the few remaining corporate DB pension plans, so whatever action needs to be taken to protect them I say, “let’s go for it!” But, I am much more concerned about the impact that this crisis is having on both current plan participants and retirees.

My anxiety has to do with these proposed short-term actions to help DC participants and retirees and whether or not they will lead to significantly greater issues in the future. I can’t begin to tell you how many articles/posts I’ve written regarding DC plans being nothing more than glorified savings accounts. Dire circumstances such as the present show that more clearly than ever.

Regrettably, there is no question that a significant percentage of Americans will be harmed by the sudden loss of their livelihoods. The financial impact will be devastating to so many; providing a little lifeline to those individuals that actually have some savings in a defined contribution plan may make all the difference in their ability to keep a roof over their head and food on their table. I get it! But, allowing the raiding of one’s retirement plan will likely sabotage them later in life. We need to make sure that any actions we take now are not setting us up for more pain down the road.

“Financial relief and support is critical as we work through this crisis,” said Tim Rouse, executive director at the SPARK Institute. “The retirement community stands ready to do its part. Really? Where were these groups when DB plans were being wiped away and the dream of a retirement for most Americans crushed?

We have had a slowly unfolding social crisis in our country for decades where a significant percentage of those working full-time barely earn enough to provide the very basics needed to live – our “working poor”. Adequately funding a DC retirement account is out of the question for many even in good times. What we need is real reform that once again provides the American worker with a professionally managed retirement program that can’t be accessed until retirement and is paid out in the form of a monthly annuity. This will then allow workers to use DC-like plans like the glorified savings account that they’ve become. We should allow for payroll withdrawals to fund these emergency accounts so that the financial burden from a crisis of this magnitude can be mitigated to a certain extent.

Let’s not muddy the waters here. We have a retirement crisis that will impact lives for generations which is separate from the immediate crisis that threatens both our economy and our broader way of life. Allowing participants to draw-down their scant retirement savings is not only robbing Peter to pay Paul, it’s robbing Peter and Paul to take out a contract on both of their lives.

We need an enormous Federal stimulus somewhere on the order of 15% to 25% of GDP (i.e. $3-5 trillion) that recognizes the existential threat to American families and immediately provides them with direct cash resources, debt forgiveness, and jobs guarantees in crucial industries to weather this storm. We also need the Senate to pass the Butch Lewis Act now. This loan program is needed now more than ever, as the market action of the past month has likely expedited the insolvency that has been predicted for many of these funds and that which jeopardizes the “golden years” for more than 1.4 million American workers and retirees.. No financial package should be passed without addressing the retirement crisis. Furthermore, we absolutely should not encourage American workers to mortgage their futures by borrowing from what little retirement savings we have.

*note: According to P&I, the groups that signed the letter to Congress were the SPARK Institute; American Benefits Council; American Council of Life Insurers; American Retirement Association; Association for Advanced Life Underwriting; Committee on Investment of Employee Benefit Assets; Defined Contribution Alternatives Association; ERISA Industry Committee; Financial Services Institute; Insured Retirement Institute; Investment Adviser Association; Investment Company Institute; National Association of Insurance and Financial Advisors; National Association of Manufacturers; NTCA-The Rural Broadband Association; Retirement Industry Trust Association; Retirement Industry Trust Association; Securities Industry and Financial Markets Association; Small Business Council of America; Small Business Legislative Council; and Stable Value Investment Association.

Is It A Tactical Move?

Bond funds have seen unprecedented outflows. According to Refintiv Lipper data released yesterday, U.S. investment-grade bond funds saw $35.6 billion pulled in the week ending March 18th. To put that in context, the previous “record” was $7.3 billion that had been established just the week before. If that isn’t enough, municipal bond funds experienced withdrawals that were nearly 3 times greater than the previous record, as $12.2 billion was taken out. Actually, nothing was spared within the universe of bonds, as mortgage, high yield, and leveraged loan funds also experienced nearly unprecedented activity.

What is inspiring this dramatic pace of withdrawals? Are the actions specific to fears related to the bonds themselves, such as lower quality corporate bonds that might be in industries most susceptible to the impact from the Coronavirus or are their other reasons? One explanation may be a tactical move back into equities, as DB pension plans, E&Fs, and individuals rebalance their asset allocation back to equities following their precipitous fall. There is some support for the latter explanation, as Vanguard S&P 500 ETF had experienced 19 straight days of inflows until Tuesday.

At Ryan ALM, we have been encouraging our clients and prospects to sell long-dated treasuries (10-years and longer) to take advantage of the strong performance that they’ve experienced and to use those proceeds to establish a cash flow matching portfolio to defease the plan’s, in the case of DB plans, Retired Lives liability. With the nearly unprecedented widening that we’ve witnessed in the yield spreads of corporates, both investment grade and high yield, relative to Treasuries, we believe that the timing is very good.

Thank You, Kelsey!

I am going to depart from my normal focus on pension-related issues to thank my daughter, Kelsey, and all the other medical professionals that are on the front lines of the battle to help those currently stricken with the Coronavirus. I’ve grown up admiring the incredible work and passion displayed daily by nurses, as my mom, sister, sister-in-law, and now daughter are proud members of that amazing fraternity.

Life has been disrupted for most Americans at this time, but where as my wife and I, and our other family members are home safe and secure, we watch as Kelsey commutes to NYC for her shift at NY Presbyterian’s MICU, where they are caring for the hospital’s Coronavirus patients. I so admire her courage as she risks her own health to make sure that those afflicted receive the best care that they can and do deserve. She will tell you that this is what she signed up for, but is it really?

Kelsey’s story is being repeated daily by millions of American health professionals, as there are roughly 1.1 million doctors, 2.9 million RNs, and countless others who are right there with them doing their very best to attack this crisis head on. Please pray that those that are willing to sacrifice so much for us, get through this crisis as well as can be. I am so proud of you, Kelsey. Love you, Dad!