STUMP » Articles » Central States: I Guess the Plan is To Run Out of Money » 22 May 2016, 07:31

Where Stu & MP spout off about everything.

Central States: I Guess the Plan is To Run Out of Money  


22 May 2016, 07:31

How else to take this story:

Pensions may be cut to ‘virtually nothing’ for 407,000 people

One of the biggest private pension funds in the country is almost out of money, and fresh out of options.
The Central States Pension Fund has no new plan to avoid insolvency, fund director Thomas Nyhan said this week. Without government funding, the fund will run out of money in 10 years, he said.

At that time, pension benefits for about 407,000 people could be reduced to “virtually nothing,” he told workers and retirees in a letter sent Friday.

In a last-ditch effort, the Central States Pension Plan sought government approval to partially reduce the pensions of 115,000 retirees and the future benefits for 155,000 current workers. The proposed cuts were steep, as much as 60% for some, but it wasn’t enough. Earlier this month, the Treasury Department rejected the plan because it found that it would not actually head off insolvency.

The fund could submit a new plan, but decided this week that there’s no other way to successfully save the fund and comply with the law. The cuts needed would be too severe.

Treasury explicitly said not enough was cut.

And now A letter has been sent to plan participants:

As you are aware, on May 6, the U.S. Department of the Treasury denied Central States Pension Fund’s rescue plan application under the Multiemployer Pension Reform Act of 2014 (MPRA). As a result, proposed benefit reductions required to save the Fund from insolvency will not take place. Since the application was denied, there will be no participant vote on the rescue plan.

The Trustees have met with the Fund’s actuaries and legal advisors to carefully consider the most appropriate next steps. Based on those discussions, it was concluded that due to the passage of time, Central States can no longer develop and implement a new plan that complies with the final MPRA regulations issued by Treasury on April 26, 2016. Therefore, there will be no new rescue plan.

Remember that the objections was that decisions/proposals weren’t communicated appropriately (easily fixed) and that the cuts weren’t equitable (may be easily fixed, but sure, there may have been some legal issues there)…. and that the projections were based on too optimistic predictions.

There was some bitchery in the letter saying that Treasury should have communicated objections earlier, but I think the “too optimistic assumptions” was the killer. If they put in something realistic…. the cuts may have been so deep they might as well have waited for the plan to be taken over by the PBGC.


So, there’s no current cut to the plan, which means everybody keeps getting their full benefit til the money runs out. At which point the benefits get drastically reduced. Much worse than what was proposed by Nyhan.

In the letter, Nyhan points to . This site has this FAQ for moving forward:

Will we continue to receive our same pension benefits moving forward since the rescue plan was denied?

Yes. While the benefit reductions proposed under our pension rescue plan will not be implemented based on the U.S. Department of the Treasury’s May 6 denial, our Pension Fund remains in critical and declining status. Without a legislative solution, Central States Pension Fund is expected to run out of money to pay benefits within ten years or less. We strongly encourage all Fund participants to call their Congressional representatives to demand legislative action that protects their pension benefits.
Will active members continue to accrue benefits in Central States Pension Fund and at what rate?

Yes. Active workers will continue to build additional pension credits at the current accrual rate of 1% of contributions. Because Treasury denied Central States’ pension rescue plan, the proposed reduction in the accrual rate to 0.75% of contributions will not be implemented.
What will happen if the Fund runs out of money to pay benefits?

Even if the federal government’s multiemployer pension insurance program, the Pension Benefit Guaranty Corporation (PBGC), had enough money to cover Central States’ benefit payments, all CSPF participants would see their benefits reduced, and many dramatically. For multiemployer funds like Central States, the PBGC monthly maximum benefit is $35.75 for each year of service. For example, a participant with 30 years of service would receive a monthly benefit of $1,072.50 from the PBGC:

$35.75 per month x 30 participant years of credited service = $1,072.50 per month

However, if the PBGC runs out of money by 2025 as projected, Central States participants would not receive even this greatly reduced benefit and would have their benefits reduced to nearly zero.

Only Congress can prevent this crisis by passing a legislative solution that protect Central States participants’ benefits. In the coming months, we will do everything in our power to support a viable legislative solution that protects the pension benefits of the more than 400,000 Central States participants and beneficiaries, who should not have to bear the emotional trauma of waiting until the Fund is at the doorstep of insolvency before Congress acts.

Remember, they’re showing that the maximum pension for 30 service years will be about $12K. That’s a lot less than current Central States benefits.

Total participants on 12/31/14: 397,492 including:
Retirees: 204,151
Separated but entitled to benefits: 128,814
Still working: 64,527
Asset Value (Market) on 1/1/14: 18,740,758,554

Payouts 2014: $2,822,248,296
Expenses 2014: $84,723,972

I’ll do the math: that works out to $13,824 in payouts per retiree — and that’s just an average. Many of them will have had far less than 30 years of service.

The full 5500 is 428 pages long. I’m not combing through it for more info.

Oh, and let’s look at those expenses. $85 million is 3% of the payout… hmmm.

And the $85 million in expenses is also 45 basis points of the asset values. I don’t know if 45 bps is terribly high, but it’s lower than most people get on their mutual funds, I do know that.


Which brings me to Ted Siedle and his failed-pension-audit crusade:

On May 6, the Treasury Department rejected Central States’ petition to cut benefits, saying the investment return assumptions were too optimistic and that therefore, the fund failed to show that the proposal would help it avoid insolvency (89 PBD, 5/9/16).

The decision was the department’s first under the law that authorized financially troubled multiemployer pension plans to cut benefits—and the process for seeking approval of such cuts—the Multiemployer Pension Reform Act of 2014, also known as the Kline-Miller Act.

The fund’s retirees, many of whom were facing cuts of up to 70 percent, greeted the rejection as a victory. The fund said May 19 that it wouldn’t submit a new proposal and would push for congressional action to help it avoid insolvency (see related article in this issue).

In the aftermath of Treasury’s decision, retiree groups, along with the Pension Rights Center and International Brotherhood of Teamsters, said they will be redoubling their efforts to push Congress to pass the Keep Our Pension Promises Act (H.R. 2844, S. 1631) or similar legislation. KOPPA, sponsored in the Senate by presidential candidate Bernie Sanders (I-Vt.), would repeal the MPRA’s benefit cutback provisions and shore up the Pension Benefit Guaranty Corporation’s financially beleaguered multiemployer pension plan insurance program. That program provides a safety net of benefits to retirees when their plans fail.

The call for a legislative solution has been echoed by the fund’s executive director and general counsel, Thomas C. Nyhan, who said that absent the benefit suspensions sought by the fund, Congress needs to find a solution to keep the fund solvent.

Investigation Option

For retirees of Central States and other plans facing insolvency, a forensic investigation may be more productive and more likely to succeed than lobbying Congress, Siedle said. If wrongdoing is found, those responsible can be made to compensate the fund for the damages they caused, he said.

If those responsible for running a pension fund know they will be held accountable for their actions, the potential for wayward behavior would likely be reduced, fewer plans would be heading to insolvency, and the PBGC would likely be much stronger, Siedle said.

I find this silly.

I think if one did an investigation, one will find most of what causes pensions to fail is not enough money put in early enough. While sometimes there’s malfeasance in the asset management, in general one finds that plans had been shortchanged on contributions for decades by the time they fail….and that this shortchanging was completely legal.

Imprudent, but legal.

Also imprudent, but legal: too optimistic valuation assumptions.

Yes, there are some bad incentives to pile on asset risk to make up for contribution shortfalls, and perhaps trustees would be more circumspect about allowing that if they knew there would be a forensic audit waiting for them once a plan failed.

Or maybe they think “it wasn’t my pension that failed. Oh well. Too bad, so sad.”

But back to Siedle:

For example, he has often seen a “money grab when pension plans are faltering,” he said. Trading costs and management fees go up in such situations, Siedle said. “If you want that practice to stop, it must be clear that the plan’s failure will be examined,” he said.

Those in charge of a plan will always say there’s no need to investigate and that there’s nothing to be gained, he said. However, there’s no substitute for having an investigation by a knowledgeable industry insider—someone who knows what’s best for the plan, about Wall Street practices, and how to monitor and assess the fund’s investment performance and fees paid, he said.

I’m sure such a knowledgeable industry insider as Siedle would do such an audit for free, right, because it’s so unseemly to siphon off precious funds from failing pensions….

Look, I agree that pensions should have investigations; actually, they should have regular audits well before they fail. But if Siedle doesn’t want people questioning his motives, perhaps he shouldn’t question the motives of pension managers — the reason that you’re going to see fee upticks when a pension is failing involves several obvious motives:

  • Nobody likes being associated with something that fails. You gotta pay me more for that (or get somebody who may be inexperienced/incompetent who doesn’t know going rates)
  • When a plan is failing, managers try gamblers’ ploys of riskier moves to try to clawback to solvency. This generally involves stuff like more complicated assets, which involves higher fees. Of course, this often can make a plan fail faster… but the “conservative” route shows that it will definitely fail. At least the gamble could win….right? right?
  • Can’t get paid when the fund runds out of money… pay me now!

Okay, that last one pretty much feeds into Siedle’s point.

But let’s think about the incentive to run into very risky assets…. why don’t other financial institutions do that?


Well, once upon a time, some insurers did. One made headlines:


Published: April 12, 1991

LOS ANGELES, April 11— In the largest failure of an insurer, California regulators seized control today of the Executive Life Insurance Company, which had been among the heaviest buyers of high-risk “junk bonds” in the last decade under its high-flying chief executive, Fred Carr.

John Garamendi, the California insurance commissioner, said the state had taken over the management of Executive Life because the company was in hazardous condition, primarily because of defaults and declining values in its huge portfolio of junk bonds.

The seizure left in doubt the company’s ability to honor all its financial obligations, both to holders of insurance policies and to owners of annuities and other investments the company sold to hundreds of thousands of customers around the country. Regulators said that for now, insurance and annuity payments would be met but they raised the possibility customers might have losses in the long run.

Questions on Industry Health

And it will undoubtedly focus renewed attention on the health of the insurance industry, the adequacy of the regulatory system and the rules applying to junk bond investments.

And that’s why RBC (risk-based capital) was born. I look at insurer portfolios as part of my day job — the highest allocation to junk bonds I see now (and usually they are just below investment grade) is 10%. From the article, Executive Life had 2/3 of its portfolio in junk bonds.

No insurer has anywhere near that high allocation, because they are heavily penalized with risk charges — sometimes 40-50% of the asset’s value.

There’s no such governor on pension assets, by the way. Especially public pensions.

Something like RBC wouldn’t work for pensions anyway, unless we required them to actually hold 100% of the liability valuation… plus the RBC on top.

Obviously, that’s not the pension regime we’re in.

That might be more protective against pensions failing than postmortems.


The underlying reason for fees to go up on failing pensions: paying a few extra basis points in fees is a hell of a lot cheaper than having to put 200% of current assets to top up funds.

The fees are paid to show that the plan is trying to do something to improve its situation… and it’s a wee little bit compared to the amount of money it would actually take to secure the pensions.


This all goes to say: there will be no bailouts. Mish agrees.

Also, this should be a signal to public employees and retirees in some places (like Illinois and New Jersey), which Mish and Mark Glennon point out.

Yes, it’s sad that retirees will get heavily slashed in retirement when they have little flexibility to increase their income. But that being sad didn’t stop Detroit pensions from being cut. That should have been a signal as well.

Detroit got no bailout. Central States will get no bailout. Neither Illinois nor New Jersey (nor California nor Connecticut nor…) will get bailouts.

There’s simply not enough money to fulfill all these promises.

So they will be defaulted on.

Whether or not there’s a formal bankruptcy process to recognize that default.

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