Ryan ALM is a leading voice in the trying to rescue and preserve DB pension plans. We were established in June 2004 with the mission to try to preserve these incredibly important social and economic tools by focusing greater attention to the promise that was given to the plan’s employees. We believe that everyone should be entitled to a dignified retirement, but the demise of the DB plan and the greater, almost exclusive use of the DC plan (within the private sector), is undermining this important effort.

Regrettably, we’ve seen DB plans nearly wiped out in the private sector.  However, a significant majority of public employees (estimated at about 85%) still enjoy the benefits of a traditional pension plan.  But for how much longer will they?  As I mentioned at the Opal/LATEC conference in New Orleans just yesterday, there is a perception among public plan participants and sponsors that these plans are perpetual. However, since the Great financial crisis most, if not all, public plans have taken action to reduce the future liability by asking employees to contribute more, extend vesting periods, reduce benefits for new hires, eliminate COLAs, etc.

This doesn’t signal to us that everything is honky dory! In fact, employer contributions have rocketed higher in the last couple of decades.  There are many examples of annual contribution rates being 25% to more than 40% of salary. At what level of contribution do these “perpetual” plans become unsustainable?  For many states and municipalities, the pension contribution is but one element of a social safety net that must be funded.  As the contribution rate escalates for DB plans, it naturally squeezes out other necessary programs unless there is no restriction on the taxing authority’s ability to raise revenue.

Given the pension envy that exists among those taxpayers in the private sector that aren’t participants in a DB plan (most), it is doubtful that they would be supportive of any administration that attempts to substantially raise taxes in this economic environment to fund someone else’s retirement benefit.

DB plans can be saved, but plan sponsors and their consultants need to begin to think outside the box. Focusing on the return on asset assumption (ROA), as if it were the Holy Grail, has lead to greater volatility and little reward to show for it! DB plans need to focus on the promise that they have made, use their funded status to adjust asset allocation, and de-risk plans as they see improved funding.  We missed the boat to de-risk at the end of the 1990s.  Let’s not blow it again!

As much of Pension America struggles to meet the promised benefits, significant work has been done to address the benefits through various tiers and changes to benefit formulas. There has also been a concerted effort to address the investment side with a significant shift from traditional asset classes, such as bonds and equities, to much greater emphasis on private markets, but at what cost, and is this move actually going to help plan sponsors and their consultants achieve the desired results?

Actuaries are fond to remind us of the pension equation:

C + I = B + E

Where C is contributions, I is the investment return, B is benefits paid and E is expenses, a big part of which are investment fees paid to managers.

Andrew Vo, CFA, Founder and CEO, Aidos, has penned an excellent article titled, “Venture Capitalists Are Getting Rich Off The Management Fees”, in which he discusses the concept of asset gatherers versus performance generators. He specifically focuses on VCs for his series of articles, but the same case can be made for hedge fund managers, too. The mega funds generate so much in management fees (2% in many cases), that a $1 billion AUM fund would generate $20 million per year and $200 million during the life of the fund (assuming the fund has a 10-year life) before the investors earn $1.

As mentioned above, Pension America is struggling in many cases to meet the promised benefits, and the move to private markets may not be the right course of action if at the end of the day these funds with these extraordinary fees don’t produce net results that exceed traditional asset classes, such as equities (private equity) or bonds (hedge funds). At the same time that plan sponsors are asking their employees (average Americans) to fork over a greater percentage of their salaries to help fund their retirement benefit, these same plan sponsors are rewarding the general partners of these funds with greater compensation packages. According to Mr. Vo, “many of these average Americans are government employees who rely on, and indirectly self-fund, their public pension plan, the same public pension that often misallocates capital to Venture Capitalists who earn 85X the salary of the government employees who partly funded them.”

If asset consultants and their clients continue to believe that investing in private markets – both equity and fixed – makes sense for the long-term viability of Pension America then let’s align all of the interested parties. Let’s adopt a new framework in which management fees of this magnitude disappear for good and a greater percentage of the outperformance is provided to the GPs of these funds, such as 30%. What do you think?

We are pleased to share with you Ryan ALM’s latest research paper, “Pension De-risking, Cash Flow Matching versus Duration Matching”. You can view the full white paper here.

Many defined benefit systems, especially within the private sector, have been engaged in de-risking activities for some time now. The prevailing methodology has been to use duration matching, but is that really the most effective way to secure the promised benefits at the lowest cost and reasonable risk? We believe that Cash Flow Driven Investing (CDI) is the more effective process to ensure that the cash flows will be available to meet the benefits as they come due. This piece will explain why we’ve come to that conclusion.

We hope that you find our thoughts insightful, and we look forward to receiving your feedback whether in the form of questions, comments and/or concerns. Don’t hesitate.

In our continuing focus on why DB as opposed to DC or anything else resembling a retirement program, the U.S. economy is leaving a significant percentage of our workers behind. The following information is taken from an article, “Trump’s Economy Isn’t So Great” written by the leading retirement voice, Teresa Ghilarducci, Professor of Economics at the New School, who wants us to make sure that we aren’t confusing the economy with the stock market’s performance.

Teresa writes, “A Brookings Institution report found that low-wage earners—those who earn two-thirds median wage in the region—make up over 53 million workers or 44% of all workers ages 18 to 64. More than 40% are raising children, and over half are in their prime working years. 

And low-wage workers are unsettled and insecure. Another Brookings report, based on extensive interviews, found that “despite the rosy headlines, workers described feeling uncertain and uneasy about their future.” They live paycheck to paycheck, have inadequate or no health insurance, can’t see how their children could afford college, lack access to retirement plans and in many regions have trouble finding affordable housing. 

Even with low unemployment, low-wage workers are suffering what journalist Annie Lowery calls the Great Affordability Crisis: “Fully one in three households is classified as financially fragile,” lacking even $400 in emergency savings, so that “a surprise furnace-repair bill, parking ticket, court fee or medical expense remains ruinous for so many American families, despite all the wealth this country has generated.””

Yes, the stock market is booming, but according to Teresa, the stock market “barely touches the lives of most Americans”, as the median retirement balance for “All Near Retirees” is only $15,000. Social Security and one’s home provide most of the wealth for this cohort.

For those 53 million Americans age 18-64 who may or may not have access to an employer-sponsored retirement program, the paycheck to paycheck subsistence creates a profound impediment to funding a retirement plan. These folks need a DB plan. Without that the federal social safety net may be their only choice later in life.

Opponents of the Butch Lewis Act (H.R. 397) talk about this legislation as nothing more than another federal bailout that will further negatively impact the U.S. taxpayer. I say hogwash! If the taxpayer truly understood what the pension benefits actually do for not only the plan participant, but also both the local and national economies, I suspect that they would be fully supportive of having the federal government provide the low-interest loans called for in the BLA.

The following paragraph is from Michael Scott, Executive Director, NCCMP, from his December 6, 2019, letter to Senate Chairmen Grassley and Alexander.

“The Multiemployer system is an incredible economic engine for the U.S. Government and the American economy. In 2015 alone, the Multiemployer system and the job creating employers of America and labor that jointly sponsor these plans paid more than $158 billion in taxes to the U.S. Government and $82 billion to state and local governments. They also provided $41 billion in Pension income to our retirees and paid more than $203 billion in wages to our 3.8 million active workers. Combined, the pension and wage income supported 13.6 million American jobs and generated $1 trillion in GDP”!

Yes, that was $1 trillion in GDP and $41 billion in pension income – incredible! The BLA calls for less than $40 billion to be provided in loans that the actuaries from Cheiron estimate that 111 of the 114 critical and declining pension plans (the number has increased to roughly 125 plans) reviewed would be able to repay in full. It seems like the failure to provide lifelines to these struggling plans would result in a far greater loss of economic activity than anything close to the total cost of implementation. Talk about penny wise and pound-foolish! Instead of allowing the critics to label this program as just another bailout, let’s redefine the argument and suggest that the government is merely providing a rebate to the multiemployer system for their on-going significant contributions to our economy.

President Trump’s proposed budget for fiscal year 2020-2021 has two new premiums to help sure up the Pension Benefit Guaranty Corporation’s (PBGC) multiemployer insurance pool. The White House’s Office of Management and Budget estimates that the current PBGC multiemployer pool is short by $65 billion, with only $2.9 billion in assets at this time. The PBGC estimates that their multiemployer program will become insolvent by 2025, at which time participants in failing plans will likely receive 10% or less of their promised benefit.

The first premium adjustment is a variable premium to be paid by the individual plans per participant, both active and retired, and based on the funding status of the plan. The worst the funded status the more you pay per participant. The second proposed premium is described as an exit premium that will be “equal to 10 times the variable-rate premium cap – to be assessed on employers that withdraw from a multiemployer plan to compensate the multiemployer program for the additional risk imposed on it when employers exit” (ASPPA).

This proposed premium adjustment was part of the Grassley/Alexander proposal that has been floated. Unfortunately, it does nothing to keep these plans viable, but does provide a greater safety net should a plan fail. As we’ve discussed many times, there are roughly 125 multiemployer plans that have been designated as Critical and Declining, which means that they are <65% funded and will likely become insolvent in the next 15 years.

These plans are so cash flow negative that it is highly probable that they will all fail during that period. Raising the cost per head (as much as $80 from $29) isn’t going to help with the cash flow necessary to meet the promised benefits. Also, creating an exit premium (in lieu of withdrawal liability or in addition to?) will likely lead many of these plans to seek an alternative or hybrid retirement program.

The only legislation that keeps these plans alive is the Bill passed by the House of Representatives in July (H.R. 397), which provides critical loans to these failing plans. The plans receiving loans must defease their current Retired Lives Liability thus guaranteeing that the promised benefits will be paid in full, while extending the life of these plans by 30-years. Despite passing the House in July, this legislation continues to sit within the Senate as no action has been taken. It appears that Senate Republicans have no interest in providing a lifeline to these pension plans.

Why let these important retirement vehicles die? Wouldn’t it make more sense to keep these pension funds as on-going concerns so that current and future employees could also benefit from having a DB plan? Funding the PBGC and not these cash-starved plans is like allowing the patient to die, but giving them a nicer funeral! I don’t want to see these plans die!

For the past couple of years, we’ve been reporting on Carol and the cruel reality that she faces as a result of her multiemployer plan getting benefit relief under MPRA. We told you that there are 1,000s of similar stories to what Carol is experiencing. We’ve also reported that Cheiron estimates that the multiemployer pension crisis gets worse by $750 million per month. As such, Carol’s story and that of Valerie, who I will tell you about shortly will be replicated over and over. It isn’t fair!

Through no fault of their own, plan participants in roughly 125 multiemployer plans that are designated as Critical and Declining are in jeopardy of seeing their monthly pension checked slashed. In some cases, these plans have been able to file for benefit relief before the insolvency has occurred, but that hasn’t rescued the promised benefits. For many others, transfer to the PBGC awaits as these plans are forecast to become insolvent within the next 15 or so years, and in some cases much sooner than that.

I ask why is our government sanctioning this action? Would my Senator or yours be sitting on their hands if their family member was being dealt this raw deal? Doubtful! I am picking on the Senate because the House of Representatives actually did something in July with the bi-partisan passage of H.R. 397. Unfortunately, the Butch Lewis Act, as it is known, has been sitting in the Senate since then without being brought up for a vote. We need for them to hear or read about the painful stories of those who were once promised, and who contributed to, a defined benefit pension that is being pulled from them.

Valerie’s story follows:

Valerie tells us ” March 1st, 2020 we lose $1000 (per month) from my husband’s pension. Local 641 NJ. We both know the Republicans are never going to fix the pensions. Did they help all the people who lost their homes and retirement in 2008? They only helped the banks and big businesses. Once again the average guys get screwed. I’m sick and tired of being held hostage by these people. I don’t care anymore…My husband and I have already lost. We now have to move out of state, away from my grandchildren and family. Away from the only place we’ve ever known. My husband’s had two strokes and heart surgery. I will live in a strange place with no friends or family and a sick husband. Talk about a nightmare. We will sit there alone until the end. ”

Horrible, yet Valerie isn’t unique regrettably. The fact that Congress was willing to step in following the GFC at >$800 billion, yet claim that they are protecting the taxpayer now (which by the way each of these plan participants is) rings hallow to me. These DB pension payments are the lifeblood for many American workers. They produce significant economic activity, generate tax revenue at the local and federal level, and keep families off the social safety net, yet we have politicians who are willing to let these plans crash and burn because of ideology – shameful.

I’m going to be a bit of a jerk this morning, so please bear with me. I was reading an article about the new crop of DB pension CIOs and how they are likely to be better prepared than the previous lot that barely weathered the market crisis of 2007-2009. In fact, there are 13 new CIOs among the 20 largest DB plans. Despite not having endured the pain of the incredible market volatility and lack of liquidity that prevailed daily for nearly 18 months, we are to believe that because this “new class” of investor is better with data that all things will be great for these DB plans. They better be right, for most of these plans cannot afford another significant increase in contribution expenses. The next crisis may in fact be the last one for many of these plans.

The article described how several of these plans and their consultants had stressed-tested their pension systems through a number of iterations for both return and liquidity. But, I tend to remember that during the last crisis nearly everything correlated toward 1. In addition, during any crisis it becomes very difficult to alter one’s path to try to take advantage of any market dislocations. That needs to be done well ahead of the actual crisis. Others were cited, as having reduced their return on asset assumption, which I tend to believe, is a very prudent decision.

In another example, a plan with an experienced CIO had increased fixed income exposure from 34% to 46% explaining that the fixed income portfolio was less risky. Okay, but equity exposure was only reduced to 64% from 66% because they are now using leverage. Are you kidding me?

Plans need to act before the next crisis. They need to ensure that liquidity is in place to meet monthly benefit payments (Retired Lives liabilities) so that less-liquid assets aren’t sold under less than ideal conditions to meet those payments. Time (investment horizon) is an investor’s friend – the longer the better – especially for all of the alternative assets that have been brought into these systems.

Sponsors should be taking risk off the table now, but they should be bifurcating their asset allocation into beta and alpha assets, where the beta assets (bonds) are cash flow matched to meet benefit payments, while the alpha assets (everything else) have time and no liquidity pressure to meet future liabilities. This is a low-risk, prudent, and time-tested strategy for plan sponsors to adopt, especially in this low-interest rate environment where returns going forward may be challenged.

According to Milliman, which produces regularly the Pension Funding Index (PFI), the top 100 US Corporate plans witnessed their pension plan funding deteriorate by $73 billion. The primary driver of this poor performance was the continuing fall in the discount rate. In fact, Milliman used a 2.85% discount rate, the lowest in the 20-year history of producing the PFI, and only the second time that the discount rate was below 3%.

The rate fell by 35 bps in January resulting in an increase in pension liabilities of $87 billion, which was only partially offset by asset growth of $14 billion during the month. The aggregate funded ratio fell to 85.7%. Milliman sees a way forward in which the funded ratio improves to 99% by the end of 2021, but that scenario would result only if pension assets grew by 10.6% in each of the next two years, with a corresponding rise of 60 bps in interest rates in both 2020 and 2021.

However, a further deterioration in the aggregate funded ratio of the top 100 Corporate plans to 73% would occur if U.S. long-rates continue to fall to 2.3% by the end of 2020 and 1.7% by 2021, while plan assets only grow at 2.6% each year through 2021’s conclusion. Since I’m not a betting man, I’d rather de-risk my pension plan to secure the plan’s Retired Lives, extend the investing horizon for the portfolio’s alpha assets to beat future liability growth, and improve liquidity to meet current benefit payments then forecast that rates will eventually rise and assets will not see a correction. What do you think?

It has been 34 years since the U.S. Treasury last consistently issued a 20-year bond, but they have announced plans to once again bring these bonds to the market. According to an article in FinReg which cited an article By Kate Davidson and Julia-Ambra Verlaine February 5, 2020, The Wall Street Journal, the “Treasury said it plans to issue new 20-year bonds each quarter—in February, May, August and November—and will hold auctions in the third week of the month, the same week as Treasury inflation-protected securities, or TIPS.” They have not yet determined when the first auction will be held or the size of the initial offering.

There are natural buyers of longer-dated instruments, such as corporations, pension funds, insurance companies and banks. However, it is a fallacy that the Treasury has to issue debt to finance its spending. It doesn’t. Treasuries are issued to set interest rates and NOT finance the deficit spending (see Mosler, The Seven Deadly Innocent Frauds of Economic Policy).