And now, the end is near
And so I face the final curtain
My friend, I’ll say it clear
I’ll state my case, of which I’m certain…

Mr. Frank Sinatra sang the above lyrics in the song “My Way”. The lyrics popped into my head this morning as I read an article from Pensions and Investments relating to a survey conducted by MetLife. The “2019 Pension and Risk Transfer Poll” revealed that 76% of corporate DB plans that have engaged in derisking activities intend to fully divest plan liabilities at some point down the road. The demise of the traditional DB pension system is moving full-steam ahead.

According to the P&I article, the “Poll” involved 102 corporate DB sponsors with derisking goals. Wayne Daniel, an SVP and Head of U.S. Pensions at MetLife was quoted as saying that “this is the strongest indication of how intentions of corporate plan sponsors have shifted”. Of the 67% of the sponsors considering a risk transfer strategy, more than three-quarters of them have evaluated the potential cost and nearly 60% have evaluated potential solutions available in the marketplace.

Mr. Daniel went on to say that “Managing a pension plan continues to be a distraction. It puts you in the pensions business…it distracts you from your core business.”  That is unfortunate because DB pensions used to be a great retention tool for companies. Furthermore, it helped move employees through their work life-cycle, encouraging a transition to retirement in a dignified way. Clearly, this is no longer the focus.

I truly appreciate all the feedback that we/I get from the posts that we produce.  Below is a response to my latest post, “So Out Of Touch!”, but it easily could have been in reference to our recent post titled, “A Developing Crisis Made Much Worse”. In any case, this is a story that must be shared. Why it hasn’t resonated at the same volume as the current plight of furloughed government workers is anyone’s guess.  Here is the reply:

Just pointing out the seriousness of comparison between the two issues or Groups NEEDS….”Furloughed Gov’t Workers” (FGW) vs “Benefit Reduced Pensioners” (BRP)… How long have we with Double the Victims 1.5 M vs 800K, for twenty times the Amount of Time near two years in some cases, have had to deal with Financial Devastation while Media screams for action NOW and gets it with S-24 in “13” days start to finish. WE have no recourse as Elderly & with Health issues prevent our Wealth Accumulation phase of Life Again… Where’s our Mortgage Forgiveness, where is our Gov’t promise of Back Pay ?? What must WE do for recognition… WE realize the Politics involved, with RESIST & OBSTRUCT but somewhere sometime these Legislators need to be doing something that benefits the Working Class Folks of this Country. Their Constituents… By speaking out, while riding the Coat Tails of these “FGW” Stories and News Articles we can highlight our own Crisis and bring these similar distressing details and facts into the Light……Here are Polling results of what WE are facing, just the ones still not “BRP” as of Yet. CSPF folks facts of life… Some of these “FGW” articles state that near 80% live check to check… WE as “BRP” know this situation all to well…86% of us live Check to Check by no fault of our own”

We have highlighted the plight of Carol, who has recently seen her benefits slashed by a very disgusting 63%, but thousands of pensioners have suffered considerable economic hardship and have had to endure for much longer. How can our august government agree, through MPRA, to slash the hard-earned benefits of these American workers with no relief in sight?  Why hasn’t this caught the attention of the American media? Whereas furloughed government workers are likely to get paid upon the opening of our government, the benefits that have been slashed for these retirees are permanent unless we can get Congress to finally act on legislation that will protect, preserve, and reinstate previously “guaranteed” monthly benefit payments.

Given that a significant majority of Americans are living paycheck to paycheck, could you endure a permanent slashing of your monthly compensation to the tune of 50% or more?  I wouldn’t think so. Let’s hope that the American media has finally awoken to the economic crisis that is afflicting most American workers and retirees. Please don’t stop letting us know about your situation. We are happy to take as many swings as we can on this issue.

Six days ago we published a post (“Hope That This Wasn’t A Surprising Revelation”) on the impact that student loan debt was having on the housing market.  Well, two days ago we got a glimpse of just how painful this debt load may be on the housing market, as the National Association of Realtors announced that existing home sales had fallen -6.4% in December and that they were down -10.3% from December 2017. OUCH!

A January 22nd WSJ article speculated as to why the weakest result since 2015 may have occurred, blaming both monetary policy (rising interest rates) and stock market volatility as the primary culprits.  Really? Our previous blog post highlighted the ever-growing mountain of student loan debt as a likely cause behind the sluggish US housing market.

Despite claims to the contrary, our employment situation is not robust, as we are still significantly behind where we were in 2007 with respect to the Labor Participation Rate (63.1%). Furthermore, the US continues to have a significant percentage of underemployed workers and those that have attached themselves to on-call jobs. Both of these categories have climbed substantially since before the GFC. In addition, wage growth, which had been muted for more than two decades, has only begun to show some life, which is one of the primary reasons that inflation has remained muzzled.

With so many Americans barely able to squeak by financially, a lack of affordable housing, modest wages, and an escalating debt burden may be too much to overcome at this time.

It would be really nice to read stories about Washington DC politicians who truly understand what is happening to every day Americans, whether they are currently being impacted by the government shutdown or just life in general. However, we get frequent stories that just highlight over and over how out of touch they are with the American worker’s reality.

I received an email that highlighted the following: “U.S. Commerce Sec. Wilbur Ross (BTW, a former partner of mine at Invesco) appeared on CNBC this morning, ostensibly to warn Americans that trade talks with China are going poorly. But he also got asked about furloughed federal workers who have been lining up at food banks, to which the billionaire said: “I know they are, and I don’t really quite understand why.””

He clearly doesn’t understand or want to know that 78% of American workers claim to be living paycheck to paycheck! That is both extraordinary and terribly frightening given that we have experienced an unprecedented stock market run. The average American is being asked to allocate their pressure compensation in more ways than they have historically, including having to fund their own retirement program. Given how little disposable income there is for these families, is it any wonder why defined contribution balances are so anemic?

It is about time that we have “leaders” who can recognize that the American dream is getting further and further from most people’s grasp.

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.