Horizon Self Interest (1) – Motive

The Joint Select Committee on the Solvency of Multiemployer Pension Plans (Bailout Committee) heard from ‘stakeholders’ verbally and later in writing. Here are those texts from James Naughton, Assistant Professor/Donald P. Jacobs Scholar, Kellogg School of Management, Northwestern University and Joshua Rauh, Director of Research and Senior Fellow, Hoover Institution, Stanford University.

This week Horizon Actuarial Services, LLC sent an 11-page letter to the committee “to express our serious concern about using corporate bond or Treasury yields as mandated discount rates for minimum funding purposes, which would endanger currently healthy plans, participants, and employers alike.  In this letter, we provide general commentary regarding discount rates plus specific commentary in response to points made by James Naughton and Joshua Rauh in their testimonies to the Joint Select Committee on July 25, 2018.”

Touching on practically every bit of specious reasoning to protect their turf, this letter rates a series and here it is – starting off with the motive.

According to 5500 data from 2015 Horizon Actuarial Services, LLC services 82 multiemployer plans which, according to their ‘best’ estimates, are in total over 80% funded:

  • Assets (Actuarial Value): $65,375,055,675
  • Liabilities (about 7.5% interest): $81,388,698,492
  • Unfunded Liabilities: ($16,013,642,817)
  • Funded ratio: 80.32%

However, using realistic assumptions:

  • Assets (Market Value): $62,718,585,821
  • Liabilities (about 3.5% interest): $146,408,795,385
  • Unfunded Liabilities: ($83,690,209,564)
  • Funded ratio: 42.84%

6 responses to this post.

  1. Posted by Tough Love on September 22, 2018 at 9:42 pm

    Where you stated …………… “using realistic assumptions” ……… what rate levels did you mean (20 year treasuries ?, the rates typically used by Private Sector DB Plans in their valuations ?, something a bit higher, such as 5% ?)


  2. Posted by Tough Love on September 22, 2018 at 11:05 pm

    The following is one paragraph form Horizon’s 11 page letter:

    “The theory of discounting benefit obligations using risk-free or low risk bond yield rates, and thus also prescribing investment solely in bond portfolios to fund those obligations has received attention in academic circles, but it does not consider the practical reality of how pensions plans are –and should be –invested. It is unreasonable to suggest that anyone should invest for retirement in a portfolio consisting solely of risk-free assets. Since the typical multiemployer plan’s investment earnings will be greater than they would be if the assets were invested in a risk-free portfolio, the value of the benefit obligation should recognize those greater expected investment earnings in determining the contributions needed to fund the promised benefits.”

    What poppycock. Did you note the inclusion of the words …………… “and thus also prescribing investment solely in bond portfolios to fund those obligations”

    No one is suggesting the pensions Plans should INVEST only in Bond portfolios, only the if you are going to invest in real estate & equities then you SHOULD factor into the choice of the plan’s discount rate (and hence the Plan’s funding requirements) the RISK associated with such investments, and doing so brings the discount rate DOWN to something close to Corporate Bond rates. And it should not be forgotten, that should the Plan have extended high ACTUAL returns, those high ACTUAL returns act to dampen the additional funding that results from a lower discount rate. Using a Corporate Bond yield rate for the assumed FUTURE returns only means that you CANNOT count on Equity investment-level returns while at the same time ignoring the risk associated with equity investments.


  3. Posted by The Analyst on September 23, 2018 at 12:20 am

    How did you get access to this letter from Horizon to the committee? Did Horizon Post this on their website? How does one get access to other comments submitted?

    Lastly , the discount rate argument is almost irrelevant since the funds under Butch Lewis ( BLA) have to be put into cash flow matching bonds which will all be quoted in Future Values vs. Present Value. SO much brainpower focused on the wrong subject.

    It will have an impact on future contributions, so then the debate can continue, but its not relevant to the current solution being proposed.


  4. Posted by Bill Hamm on September 25, 2018 at 5:42 pm

    Funded ratio, not funded ration


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