STUMP » Articles » Other Pension News: Low Interest Rates, MEP Cuts, and More » 17 January 2021, 20:17

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Other Pension News: Low Interest Rates, MEP Cuts, and More  

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17 January 2021, 20:17

Clearing the decks for more mortality posts, let’s look at general non-public pension news.

Interest rate environment killing DB pensions

Bloomberg at Yahoo Finance: Pensions Swamped in a Sea of Negative Real Rates

Defined-benefit pension plans were already barely treading water heading into 2020. In the years ahead, the risk is as great as ever that a large swath of them will drown.

As the name implies, defined-benefit pensions promise to pay a set amount to retirees. While corporate America has largely moved away from this structure in favor of 401(k) options (or “defined contribution” plans), virtually all state and local governments still offer these reliable retirement payouts. And they’ve been falling behind in a big way: In the 2019 fiscal year, states had $1.48 trillion in unfunded pension liabilities, while the 50 largest local governments faced $478 billion in adjusted net pension liabilities, according to calculations from Moody’s Investors Service. The 100 largest corporate defined-benefit plans had a deficit of $285 billion in November, according to Milliman data.

That $2 trillion hole is only going to get deeper as the Federal Reserve pledges to keep interest rates near record-low levels for years to come as the U.S. emerges from the Covid-19 pandemic. Moody’s, unlike many states and cities, uses a market-based discount rate to determine the present value of a pension’s future liabilities. The lower the rate, the larger the current value. Analysts expect to apply a 2.7% rate to local governments’ fiscal 2021 reporting, down from 4.14% in fiscal 2018 and about the same as Milliman’s current discount rate for corporate pensions. It will likely cause pension shortfalls “to increase by double-digit percentages” in the next two years, Moody’s says.

Negative interest rates have been around in the world for years, most notably in Japan and the EU. That’s nominal negative interest rates — where you have to essentially have money taken out of you to park the money in a bank or bond or whatever.

In the U.S., negative nominal interest rates have legal questionableness, but real negative interest rates, where inflation makes the interest rates essentially negative, have appeared multiple times but generally not for long. An extreme example: suppose the annual inflation rate is 10%, and your interest rate is 5%. In one year, $100 becomes $105 from interest accrual, but worth only 105/1.1 = $95 — basically, a negative 5% interest rate. That’s a negative real interest rate – the interest rate is less than the inflation rate.

Negative interest rates, real or nominal, kill public pensions as well as private pensions, but the public pensions under current accounting rules don’t have to recognize that.

PBGC will be seeing pain in short order

The PBGC (Pension Benefit Guaranty Corporation) covers both single-employer DB plans and multiemployer plans. If these privately-sponsored DB plans run out of assets, the PBGC is supposed to provide for covered employees up to guaranteed amounts.

The PBGC doesn’t cover public pension plans. Nothing, other than the supposed infinite power to tax, covers public pension plans.

ai-CIO: PBGC Pension Programs Continue Divergence

The Pension Benefit Guaranty Corporation’s (PBGC) insurance programs for single-employer and multiemployer plans continue to diverge, as the former remains healthy while the latter faces impending insolvency, according to the agency’s annual report.

The programs cover the pensions of more than 34 million participants with plan benefits worth more than $3 trillion. The multiemployer program covers approximately 10.9 million workers and retirees in some 1,400 pension plans, while the single-employer program covers approximately 23.5 million workers and retirees in about 23,200 pension plans.

Although the PBGC’s multiemployer insurance program improved its net position by $1.5 billion in fiscal 2020, it remains “severely underfunded” with a negative net position of $63.7 billion and is expected to become insolvent by 2026. Meanwhile, the single-employer plan continues to improve and has a positive net position of $15.5 billion as of the end of fiscal year 2020.

For all Congress wants to do Trump show trials even after he’s gone, this is a serious problem that will completely collapse within five years. They’ve been squabbling over a half-assed bailout versus bailout and stricter oversight for years, and once the Teamsters go kerflooey, that’s it.

I have no idea if this will get addressed in 2021. Some members of Congress (both Dem and Repub) know this is a looming problem, and while I expect a half-assed approach by Dems as they’re throwing money around, it hasn’t seemed to get headline news even as Democrats talk about specific economic woes.

It may not get addressed at all in 2021.

More multiemployer pension woes

Deadline: Musicians Union’s Pension Fund Again Seeks OK From Treasury Dept. To Cut Benefits To Prevent Insolvency Within 20 Years

The American Federation of Musicians and Employers’ Pension Fund again has applied to the U.S. Treasury Department for permission to reduce benefits for nearly half of its 51,521 participants. The Plan is currently in “critical and declining” status, and is projected to run out of money to pay benefits within 20 years.

Under the Multiemployer Pension Reform Act, pension plans that are “critical and declining” can apply to Treasury for approval to reduce participants’ benefits by an amount sufficient to avoid insolvency. The Fund is in trouble because as of March 2019, its $3 billion in liabilities exceeded its $1.8 billion in assets, meaning that it’s underfunded by about $1.2 billion.

…..
Back in August, Treasury denied the Fund trustees’ first request to reduce benefits, saying that two elements of the application’s actuarial assumptions – the mortality rate assumption and the new entrant assumption – “are not reasonable under the standards in the regulations.” If approved this time, the benefit reductions would go into effect on January 1, 2022.

John Bury: Stop This Steal

Plan Name: American Federation of Musicians and Employers’ Pension Fund and Subsidiary

EIN/PN: 51-6120204/001

Total participants @ 3/31/19: 50,135 including:

Retirees: 16,069
Separated but entitled to benefits: 13,754
Still working: 20,316
Asset Value (Market) @ 4/1/18: 1,876,609,576

Value of liabilities using RPA rate (2.98%) @ 4/1/18: $5,204,629,080 including:

Retirees: $2,283,396,311
Separated but entitled to benefits: $718,144,272
Still working: $2,203,088,497
Funded ratio: 36.06%

WSWS: Carpenters in Detroit denounce draconian pension cuts proposed under 2014 federal law

The general assault on the pensions of US workers under the Obama era Kline-Miller Multiemployer Pension Reform Act of 2014 has now taken aim at the pensions of tens of thousands of construction workers in southeast Michigan. Nearly 20,000 active and retired carpenters and millwrights in the Detroit metropolitan area are facing deep cuts in their pensions in July 2021.

The Warren, Michigan-based Carpenters and Millwrights fund submitted a revised application in 2020 to Treasury Secretary Steven Mnuchin under the Application for Suspension of Benefits required by the 2014 federal legislation. The current Board of Trustees includes now president of the Michigan Regional Council of Carpenters and Millwrights, Mike Barnwell, and other officials of the carpenters and millwrights regional and local unions.

According to data presented to the US Treasury Department, the $772 million carpenters and millwrights fund is only 34.5 percent funded and in “critical and declining” status. It is projected to run out of money to pay benefits to 19,600 active or retired members by 2035.

…..
This is the second submission to the US Treasury by the fund. Some retirees have been told they would get cuts of 15 to 26 percent in their monthly checks. The comments from pension recipients related to looming cuts to Detroit-area carpenters were closed by the US Treasury Department in mid-December, 2020. The projected cuts have been denounced by many workers on the Regulations.gov comments website.

There is a lot of MEP pension pain around, but the only one requiring attention is the Central States Teamsters plan, as I mentioned in the prior section.

I’m not ignoring the individual pain of MEP participants seeing benefit cuts when I say this, by the way, but just pointing out that the reason the PBGC will go bankrupt is solely due to Central States and its particular underfundedness.

It’s not clear to me at all whether other MEPs will get half-assed-bailed-out when Congress gets around to half-assed-bailing out Central States.

More MEP stories:

Limits on pension fund activism likely limited in a week or so

Let’s be real — the following is a Trump administration rule and will likely be retroactively dropped by a Biden administration.

U.S. Labor Department finalizes limits on pension-fund voting on corporate proxies

The U.S. Department of Labor on Friday finalized a rule requiring pension funds to vote on shareholder proposals only when there is an economic reason, a change that would curb investors from casting their ballots on many corporate proxies.

The new rule is the latest from the Trump administration targeting investments focusing on environmental, social and governance (ESG) factors.

Last month, the Department of Labor finalized a rule clarifying that pensions must put retirees’ financial interests first when allocating investments, rather than other concerns such as climate change or racial justice.

The rule “makes clear” that pension fund managers do not have to vote every corporate proxy, said Jeanne Klinefelter Wilson, acting assistant secretary at the Department of Labor, on a call Friday afternoon.

“This rule sets appropriate guidelines …to ensure that fiduciaries keep their eyes focused on the financial interest,” of pension fund beneficiaries, Klinefelter Wilson said.

Look, I have had my say on pension fund fiduciary duty many times, but I am a lone voice crying in the wilderness (yes, there are others, but as a group, we’re ignored).

As long as Biden DOL folks are on the ball, they will immediately revoke these rules.

Whether this is a good idea, or really adheres to the concept of fiduciary duty, I leave it to you.

A different viewpoint: Can we rely on pension funds to finance the green transition?

I’m not going to even quote that one, for multiple reasons. One reason is that this is about UK (private-ish) pension funds, and not U.S. private pensions. The other reason is that it is too full of technical language, and I have no interest in confusing my readers. The final reason is that I just need to move on to the next item.

Other pension stories


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MEP Watch: About Those Plans to Bail Out Union Pensions
Multiemployer Pension Plans: Critical Plans Treading Water, Waiting to Drown
A New Plan to Deal with Multiemployer Pensions
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