STUMP » Articles » Pensions Primer: Public, Private Single Employer, Multiemployer, and Church Plans - U.S. Landscape » 13 October 2019, 12:34

I have primarily focused on public pensions, but I also keep an eye on other types of pensions. I am very pro-reliable retirement income, and my interest got started in the difference between the valuation treatment of annuities (in which I used to work) and pensions of any sort.

That was over a decade ago, and I’m still keeping an eye on all of it.

I am going to provide an extremely high-level run-down of the various types of defined benefit pension systems out there. This is not comprehensive, and it will not be detailed.

PUBLIC PENSIONS

Public pensions, of course, is the main kind of thing I keep a look at. I’ve had an annual “public pension watch” thread on the Actuarial Outpost, reaching back to September 2008. Here is the watch thread I have for 2019. If you open up the first post spoiler, you will find a link to all my public pension watch threads.

Public pensions have no guarantee except for the sponsoring governments. Below, we will see that (some) private pensions do have a backstop in case of fund failure, but if the government sponsoring a public plan goes under, and the money in the pension fund runs out, there’s not much public employees and retirees can do. They can sue and try to get some recompense, but even constitutional “guarantees” cannot will money into being.

This happened with Prichard, Alabama, in which the pension fund did run out of money and the retirees got no benefits for over a year. A little bit on what happened:

[article from August 2013]

Prichard, Alabama, which experienced a population decline of approximately 50 percent over the past 50 years, filed for bankruptcy in 1999 after it was unable to pay approximately $3.9 million in delinquent bills. In addition to the unpaid bills, Prichard also admitted to not making payments to its employees’ pension funds and, even though the city had withheld taxes from employees’ paychecks, the city failed to submit such withholdings to the state and federal governments.

While in bankruptcy, the city successfully revised its budget so that it no longer operated at a deficit. However, Prichard was still unable to meet its pension obligations. In 2009, Prichard filed for bankruptcy for the second time in order to stay a pending suit brought by its pensioners after it failed to make pension payments for six months. In its chapter 9 petition, the city claimed that during the previous year it had operated a $600,000 deficit on its $10.7 million budget. Further, Prichard had failed to make a $16.5 million payment to its pension fund under its previous plan of adjustment.

Oh, and it gets worse.

Some public employees are not covered by Social Security old age benefits.

So, in some cases, when the public pensions fail, the retirees have no other retirement benefits to look to. (They may, of course, qualify for welfare benefits.)

Given that there’s no backstop in case of failure, what sorts of oversight are there for public pension funds?

First off, the funds have at least one fiduciary, who is responsible for making sure the funds are well-managed. The fiduciaries, though, are not responsible for contributions being made.

Next, there are actuaries, who are supposed to value the pensions. There are actuarial standards for pensions, but they are not specific to the type of pension [currently]. And there are all sorts of “outs” in the valuation, in terms of some extremely key valuation parameters being stated… by the plan sponsors. Who may have an interest in keeping that discount rate at 8%.

That said, one actuary has gotten suspended from the American Academy of Actuaries for iffy valuation parameters, though that expulsion will be up in 2020. There have been other public discipline surrounding public pensions, but it has been for things like getting quoted in the NYT saying public pensions practice was voodoo.

Mr. Schwartz, a former city actuary, said that he routinely skewed his projections to favor the unions — he called his job “a step above voodoo” — and admitted that he had knowingly overreached on the pension bill by claiming that it cost nothing, either now or in future years. “I got a little bit carried away in my formulation,” he explained.

There is a Governmental Accounting Standards Board which provides some standards with respect to that reporting with discount rate, but it really has bite only for the most deeply underfunded plans… at which point, all involved know it’s deeply underfunded.

There are credit rating agencies and bond buyers who theoretically could keep a leash on all of this. In addition, the SEC has been known to ding New Jersey and Illinois in the past for defective disclosures surrounding bond issues with respect to their pensions.

Public employee unions have direct interest in making sure the pensions are fully-funded, and often there are official union representatives on pension fund boards of trustees. However, most public employees aren’t finance experts, and may feel constitutional guarantees will protect the retirement benefits, even if the money runs out.

There are some IRS effects on public pensions, too, but it has to do with benefits that are too high or too low. If they’re too high, the contributions for benefits are not fully tax-deductible and federal taxes must be paid. If they’re too low, employees will be forced into Social Security coverage… and more federal taxes must be paid.

I could say stuff about taxpayers and voters, and their effect on public plan benefits and funding… but they are at least two layers away from the issue, and few people other than the public employees directly involved vote based on the pensions. They may vote based on the tax load, or vote on bond issues, but in many of these cases, the people actually paying for the services and benefits are minor considerations.

Especially when we’re talking about pension benefits that were earned before said taxpayers were born.

PRIVATE SINGLE EMPLOYER PENSIONS

I will be doing even less detail for the remaining pensions. First, everybody will be covered by Social Security, so even if all backstops fail, at least people who worked for private employers will be covered for something (of course, there are the people illegally not paying FICA all those years… and as I said above, I’m not going to get into deep detail).

Most private pension plans of any type, even defined contribution, are covered by federal law in the form of ERISA, which has gone through many iterations since the initial bill in 1974. (it’s as old as me!)

Let’s focus on defined benefit pensions for single employers, specifically.

Unlike with public pensions, there is a backstop for private plans, as well as funding and valuation regulations.

The PBGC (Pension Benefit Guaranty Corporation) is a federal agency that oversees private plans. Private plans, whether single employer or multiemployer, pay premiums to the PBGC to fund it, as, when a private plan fails, the PBGC takes it over.

About the PBGC:

PBGC is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private-sector defined benefit plans – the kind that typically pay a set monthly amount at retirement. If your plan ends (this is called “plan termination”) without sufficient money to pay all benefits, PBGC’s insurance program will pay you the benefit provided by your pension plan up to the limits set by law. (Most people receive the full benefit they had earned before the plan terminated.) Our financing comes from insurance premiums paid by companies whose plans we protect, from our investments, from the assets of pension plans that we take over as trustee, and from recoveries from the companies formerly responsible for the plans, but not from taxes. Your plan is insured even if your employer fails to pay the required premiums.

Pay attention to that “not from taxes” phrase — because I will come back to that for multiemployer plans.

Single employer private plans have been dwindling over the years for a variety of reasons.

Here’s a quick USA Today explainer by Nathan Bomey:

4 reasons the corporate pension is on its deathbed
….
1. Pensions are seen as expensive, risky
….
2. Union power has diminished
….
3. 401(k)s have been normalized
….
4. Public companies are under pressure to reduce pension debt

If Nathan Bomey’s name is familiar to you, it’s because he wrote the book on Detroit’s bankruptcy.

Pensions are expensive as interest rates are super-low and people are living longer. If you are guaranteeing payments, then one should value at guaranteed rates.

In any case, single employer pensions made the news last week because GE froze it pensions. Mind you, these pensions had been closed to new entrants.

I didn’t mention it in the public pensions section, but private employers have a variety of risk-mitigating choices they can make, such as closing their plans to new entrants (but allowing current participants to continue earning benefits) and freezing the plans (benefit accruals stop for everybody). Public pensions can usually do the first… but not the second. That’s a whole different issue I don’t want to discuss right now.

However, with GE freezing its pension, that does not mean the PBGC is taking it over.

As quoted earlier, the PBGC may take over private pension plans under certain situations, and for single employer plans, it will be equivalent to a plan freeze for most participants. There are limits to the maximum guarantee which can be found here. It’s based on age. If you retire at a reasonable age (65 or older), the maximum guarantee is fairly high.

Keeping in mind that those in single-employer plans are also in Social Security, this is pretty good.

MULTIEMPLOYER PLANS

Now for this and the next group, the news is not quite so good.

Multiemployer plans are often referred to as union plans — this is a case where the fund is for a particular union, say the Central States Teamsters, but the members could be working at various employers.

For a variety of reasons, some of these plans are doing extremely poorly, and various bailouts have been proposed over the past couple years.

Multiemployer plans are also covered by the PBGC, but the issue is that their guaranteed amounts are extremely low. You almost may as well not have a guarantee at all it’s so low (of course, some money is better than no money at all.)

In 2014, during the Obama administration, a last-minute bill was passed that allowed benefit cuts in failing multiemployer plans before the plans got taken over by the PBGC. The people covered were almost definitely going to have their benefits cut drastically if the PBGC took over the plan, but for these benefit cuts to be approved (and some cuts have been approved), the cuts need to be less drastic than the PBGC maximum guarantees and the plan needs to show sustainability after the cuts. There are other requirements as well, but this was the point.

John Bury has been good at covering applications for benefit cuts, providing some stats with each application. If you’d like to look at the history of applications, withdrawals, approvals and disapprovals, you can see that here.

There is a bill working its way through Congress, the Butch-Lewis Act, that has been passed by the House. But it’s just… doing nothing in the Senate as far as I can tell.

Congress needs to do something, because of one pension plan in particular: Central States Teamsters.

I started a multiemployer pension watch in April 2013 because of the Central States fund declining status. Central States is important — there are almost 400,000 participants in the pension plan. That’s a lot of people.

The plan is projected to run out of assets by 2025. Even with low guarantees, the number of people involved are enough to make the PBGC multiemployer plan run out of assets, too. Even if Central States doesn’t get directly bailed out, even to cover the very low guarantees, the taxpayer will be called to step in to bail out the PBGC.

Multiemployer Pension Lifeboat Sinking Fast

The Pension Benefit Guaranty Corporation (PBGC)’s multiemployer insurance program, which covers over 10 million people, remains in “dire financial condition,” and has not veered from its trajectory to become insolvent by the end of fiscal year 2025, according to the agency’s latest projections report.

“This year’s projections for PBGC’s Multiemployer Program continue to show a very high likelihood of insolvency during FY 2025, and that insolvency is a near certainty by the end of FY 2026,” said the PGBC in its report.

The PBGC also said that about 125 of the 1,400 multiemployer plans that it insures are in critical and declining status, and will be unable to raise contributions sufficiently to avoid insolvency during the next 20 years.

They don’t mention it, but it’s due to Central States, primarily.

I haven’t been blogging about this situation, partly because both John Bury and Elizabeth Bauer (here’s her most recent post on Central States) are covering it, but mainly because things are stuck in Congress. The Senate is where bills go to die, currently.

Bailing out Central States in particular is not really a partisan issue: there are politicians of both parties who have direct interest that that specific pension plan gets bailed out. That said, plenty of politicians of both parties are not all that interested in doing an outright bailout.

The thing is, not all MEPs are failing, but where they’re failing tends to be the midwest in declining industries. Too many of the MEPs required an increasing pool of participants in order to keep going… and if your membership is shrinking? Not so good.

What is most interesting to me is that Trump hasn’t said a damn thing about union pensions, as far as I can tell. Given he’s such a chatterbox, I would have expected something. But I can’t find anything. I did this search on pensions, and this on Teamsters.

CHURCH PLANS

This one will be quick – I just wanted to mention this group, because they are also a hot point.

Church plans are what you think they are (for the most part): pension plans for people who work for churches. What’s important is that these plans are often not covered by the PBGC. So when one of these pension plans fail…. basically, it’s like public plans.

The issue with church plans is similar to public plans, in that the failing ones are partly due to decreasing revenue bases. To be sure, churches can have a revenue source that collapses much more rapidly than a government.

But here’s the other issue: some of these church plans aren’t for church staff, but were for hospital employees as various churches ran hospitals and other healthcare establishments. But then, these hospitals can be sold to non-churches.

This is a big brou-ha-ha in upstate New York, as a hospital that got sold from the Catholic diocese to a private owner had a pension fund… that is completely spent. You can read about it here:

Bradley, 56, is one of the hundreds of workers at St. Clare’s, which was founded by the Catholic Church, who lost their pensions after its retirement fund collapsed.

The case highlights a more widespread problem: Because of a loophole, many religious organizations are not covered by a federal guarantee that protects most other workers’ pensions, so the workers can get left with nothing.

By one estimate, more than 1 million workers and retirees from religious organizations lack this federal protection.

I could also remark: because of a loophole, no public pensions are covered by a federal guarantee that protects most other workers’ pensions.

And, if I go by the Public Plans Database, there are 25 million people covered by public plans that lack this federal protection.

Yowza.

DEFINED BENEFIT PENSIONS SHARE PROBLEMS

From the above, you can see the different pension plans, differing by sponsors, have different levels of oversight and guarantees.

But all defined benefit pensions in the U.S. share similar problems:

• An extremely low interest rate environment, that has persisted for over a decade
• Pensioners live longer than ever, and their longevity continues to increase
• Benefit definitions are such that the benefits generally cannot be adjusted downward automatically to improve sustainability; this includes aspects such as retirement age, not only COLAs, 13th checks, etc.
• Funding approaches often assume that the base for future contributions is only growing

As I mentioned in linking to Nathan Bomey’s piece in USA Today, the promises being made in defined benefit plans with traditional benefit definition are actually very expensive.

They weren’t always this expensive – they really were worth less than now when interest rates were much higher and people died younger. That’s just a fact.

But there is one additional issue, and I’ll let Robert Verbruggen of National Review explain:

If You Think Politicians Cater to Seniors Now, Just Wait

Republicans are giving up on entitlement reform, and seniors’ share of the population will only grow.
…..
In 2016, 71 percent of those age 65 and up voted; so did 67 percent of those 45 to 64, the folks who will be retiring in the next two decades. Those 18 to 29 voted at a rate of 46 percent, those 30 to 44 at a rate of 59 percent. Put differently, those 45 and up outnumber those 18 to 44 about five to four among citizens — but nearly two to one among voters.

This longstanding gap in political involvement will only become more important as the Baby Boomers retire. Between 2020 and 2040, the senior population is expected to grow by 44 percent, while the 18–64 population grows by just 6 percent. That’s why seniors are and will continue to be such a key constituency — and it explains much about our fiscal crisis, too.

As the Baby Boomers retire?! The oldest Boomers (born in 1946) are 73 years old. They’ve been retired for years.

But here is the bit you don’t hear about – the Boomers are usually defined as being born between 1946 and 1964. The peak birth year (even including immigrants) was around 1957/1958. Those folks just turned 60.

Verbruggen is writing about Social Security and Medicare specifically, but it also applies to all these failing pension plans — heck, it applies more to these, because most of the failing plans have people retiring much younger than the earliest Social Security retirement age of 62.

So you will be seeing more and more of the people in these plans making noise — they are extremely interested, and are going to be rightfully angry that they’re getting much less than they had been promised.

But the issue is: they can vote for all the bailouts they want.

But will the money actually be there to bail them out?