Little Bit of Hell for Central States Retirees

In May of 2016 the Treasury Department rejected the application of the Central States Pension Fund (CSPF) to reduce benefits under MPRA and retirees celebrated this Round 1 victory and moved on to Round 2 – petitioning their government to investigate the Fund.
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Back in July of 2016 hopes were high:

The Government Accountability Office (GAO) formally accepted requests from both houses of Congress to investigate the pension fund’s investment activity, said Charlie Jeszeck, director of education, workforce and income security issues at the GAO. “We hope they really get after it,” said Tom Schwarzenberger, a retired Teamster and member of the Missouri-Kansas City Committee to Protect Pensions. “I think they’d have to go clear back to 1982.”

That report came out this week and, after having gone through it, I see a knockout of…

…the participants. The plan will fail eventually and the participants will take major cuts because the money will not be there and a bailout is problematic. What the GAO did for two years was run out the clock on any meaningful reform while absolving those who fed them information. Among the notable excerpts:

The number of active CSPF participants has declined over time. In 2016, 16 percent of about 385,000 participants were active, i.e., still working in covered employment that resulted in employer contributions to the plan. In comparison, CSPF reported in 1982 that 69 percent of more than 466,000 participants were active participants. Since the 1980s, CSPF’s ratio of active to nonworking participants has declined more dramatically than the average for multiemployer plans. By 2015, only three of the plan’s 50 largest employers from 1980 still paid into the plan, and for each full-time active employee there were over five nonworking participants, mainly retirees. As a result, benefit payments to CSPF retirees have exceeded employer contributions in every year since 1984. Thus, CSPF has generally drawn down its investment assets. In 2016, CSPF withdrew over $2 billion from investment assets. (page 12)

CSPF officials and other stakeholders identified several factors that contributed to CSPF’s critical financial condition and reflect the challenges faced by many multiemployer plans. For example, like CSPF, many multiemployer plans have experienced financial difficulties due to a combination of investment losses and insufficient employer contributions. In addition to being underfunded prior to the consent decree going into effect, stakeholders identified other specific factors that contributed to CSPF’s critical financial condition, such as trends within the national trucking industry and its workforce, funding challenges and common investment practices of multiemployer plans, and the impact of market downturns on long-term investment performance. Stakeholders also described the effects of the 2007 withdrawal of a key employer, United Parcel Service (UPS), on CSPF’s critical financial condition. (pages 25-6)

Stakeholders we interviewed also added that the calculation used to determine withdrawal liability may use an investment return assumption that inherently transfers risk to the plan. (page 31 and I would note that this is an amazing statement based on my experience with withdrawing employers getting sticker when they see their bills based on fewl factors).

Stakeholders we interviewed said that plan terms, such as contribution rates, which are set through the collective bargaining process, can create an additional challenge for multiemployer plans. Employers in multiemployer plans generally are not required to contribute beyond what they have agreed to in collective bargaining, and these required employer contributions generally do not change during the term of a collective bargaining agreement. CSPF officials said that up until the early 2000s, plan of ficials did not request modifications to collective bargaining agreements, such as reallocating contribution dollars, to respond to adverse investment returns. (page 34)

CSPF ’s investment performance since 2000 has reflected performance similar to other multiemployer plans and the plan went from 73 percent funded in 2000 to about 38 percent funded in 2017. While the plan used an assumed rate of return of 7.5 to 8.0 percent per year between 2000 and 2014, our analysis of the plan’s regulatory filings shows that the plan’s weighted-average investment return over this period was about 4.9 percent per year. (pages 35-6)

CSPF ’s deteriorating financial condition precipitated a recent investment policy change that will move plan assets into fixed income and cash equivalent investments ahead of projected insolvency. In early 2017, Northern Trust representatives revised the plan’s investment policy because they, in consultation with the trustees, believed the plan had no additional options to avoid insolvency. (pages 54-5)

Our analysis of available data from several different sources shows the returns on CSPF’s investments and the fees related to investment management and other plan administration activities appear generally in line with similar pension plans or other large institutional investors of similar size. (page 58)

We provided a draft of the report to the U.S. Department of Labor, U.S. Department of the Treasury, and the Pension Benefit Guaranty Corporation for review and comment. We received technical comments from the U.S. Department of Labor and the Pension Benefit Guaranty Corporation, which we incorporated as appropriate. The U.S. Department of the Treasury provided no comments. (page 72)

8 responses to this post.

  1. Posted by Tough Love on June 5, 2018 at 10:40 pm

    Given the strict rules that govern Single-employer Corporate-sponsored DB Plans, it amazes me that the US Gov’t EVER allowed the existing Multi-employer Benefit-Contribution structure.

    By virtual definition, you CANNOT have a disconnect between the promised benefits and the contributions necessary to fund them…… e,g., “negotiating” employer contributions that are both independent of promised benefits and which do not CHANGE as experience develops is absurd in the context of a DB Plan.
    ————————————

    That said ……… I still believe that there is zero justification for a Taxpayer bailout of Multi-employer Plans ……. at least not until the Gov’t ALSO makes everyone who lost money in a 401K contract during the dot-com bubble or the great recession whole.

    Reply

    • I believe they thought that they were being “nice” to unions re: the loose rules for MEPs.

      Of course, what really happened was those who got their early on won, and those in later generations… find that the loose regs weren’t being nice to them at all.

      Reply

      • Posted by Tough Love on June 6, 2018 at 8:07 am

        Indeed, and clearly one of the MEP design death-knells was the 30 and out provision …….. with no minimum age.

        The true cost of allowing such is huge (often raising the cost by over 50+% vs a pension of equal amount that starts at age 65) …………. as we’re now seeing with even the MORE generous Public Sector Safety-worker pensions.

        Reply

      • Posted by Tough Love on June 6, 2018 at 1:36 pm

        Mary Pat,

        You just LOVE this quote……………….

        “A pension fund is considered adequately funded when it is about 70% funded.”

        And it’s particularly egregious coming from Christopher Burnham with this bio:

        “I have been a dedicated public servant for more than 25 years. From 1995-1997, I served as Connecticut’s state treasurer, where I was the sole fiduciary of the $15 billion retirement fund for state employees and teachers, and turned the pension fund around from the worst state pension fund in the nation to being in the top 10. Then I served as CFO for the U.S. Department of State under President George Bush, and later as Under-Secretary General of the United Nations where I managed the U.N.’s $40 billion pension fund. I founded the Institute for Pension Fund Integrity, a non-profit group fighting to keep fiduciary responsibility in public pension fund management.”

        Source:

        https://www.forbes.com/sites/christopherburnham/2018/06/05/why-we-need-to-keep-politics-out-of-public-pensions/#41a8dc3d22ed

        Reply

  2. Posted by geo8rge on June 6, 2018 at 8:06 am

    Is the investigation going to uncover anything other than not collecting enough contributions?

    2:27 ‘We have some people losing all their pension’

    I thought under the PBGC minimum guarantee that losing all of a pension was impossible.

    Reply

    • Not impossible if we also lose the PBGC in 2025.

      Reply

      • Posted by geo8rge on June 6, 2018 at 10:18 am

        I mean under current PBGC guarantees why is that person losing ALL, not some, of their pension. If I understand it correctly the PBGC guarantees are small enough to bail out. I personally think the PBGC gets fully funded because by Fed Gov standards it is too small to not fund. Wasn’t the claim at the Select Committee on Pensions $1.6 billion a year for 10 years to meet minimum PBGC guarantees?

        Reply

        • Central States is paying out about $2.8 billion to 200,000 retirees which comes to about $14,000 each per year. At those amounts a large part would be covered by PBGC under the rules and they don’t have that type of money around. If they get $1.6 billion more a year that may cover Central States but, if not, then when Central States goes PBGC goes.

          Reply

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