Pension Wars -- It's every man for himself
For those of you wondering what the future holds for union pension plans, here's a quick glimpse of what the future will bring. This just in from the Duluth News Tribune:
"An estimated 700 people packed Coffman Memorial Union at the University of Minnesota on Tuesday to oppose major pension cuts proposed by the Teamsters’ Central States Pension Plan.
One by one the Teamsters, many of them retired, stepped to the microphone to ask the U.S. Treasury to reject the cuts and find a different solution to the sea of red ink threatening to swallow the giant retirement fund. “We worked hard for our money,” said Teamster Dennis Henderson of North St. Paul. Others angrily described the proposed cuts as unfair and devastating. Kenneth Feinberg, the Treasury appointee who hosted the session, said he was determined to make sure retirees were heard. It’s the seventh feedback session on the cuts he’s held around the country. There was a similar turnout for a session in Detroit on Monday.
Key objections are the same, Feinberg said: The cuts won’t save the plan, the cuts weren’t equitable and when Teamsters get to vote on the deal, unreturned ballots will be counted as “yes” votes. Even Teamsters leadership has called on Treasury to reject the rescue plan, which was crafted by trustees of the Central States fund to rescue the giant fund from insolvency. Treasury has a May 7 deadline for a decision. The cuts would affect 272,600 members of the plan, nearly 15,000 of them in Minnesota. While the proposed reductions in Minnesota average 34 percent, cuts range to 50 percent or more and affect thousands of people who have already retired and depend on the checks. Gregory Hammer, 60, of Blaine, said his pension check would be cut more than 50 percent. After 31 years as a Teamster trucker and dock worker, he’s now picking up trash and recycling for the city of Minneapolis to pay the bills and mortgage. “I don’t know how much longer I can do it,” Hammer told Feinberg. If the cuts go through he would probably have to sell his house, Hammer said later. Feinberg is a well-known mediation and compensation fund expert overseeing implementation of the Kline-Miller Multiemployer Pension Reform Act of 2014.
The controversial act created an exception to long-standing federal rules that prohibit reducing retirement benefits already earned by workers. It was tacked onto a federal spending bill at the 11th hour -- through a parliamentary maneuver by Republican Rep. John Kline of Minnesota and former Democratic Rep. George Miller of California -- with no public hearings. The $17 billion Central States, Southeast and Southwest Areas Pension Plan (called the Central States fund), which holds the retirements for Teamsters union members, is one of the country’s largest multiemployer pension plans. It was the first to seek cuts under the new law. Two more retirement plans have followed suit. Severely underfunded, the Central States plan collects about $1 from employers for every $3.46 it pays out in retirement benefits, for an annual shortfall of $2 billion.
The fund is so large that if it failed, it would swamp the Pension Benefit Guaranty Corp., the federal backstop for broke pension funds that is itself expected to run out of money. In an opinion piece in the Star Tribune, Thomas Nyhan, head of the Central States fund, called the reductions “a gut-wrenching course of action that we must take.” Since September, when the Central States fund filed with Treasury, opposition to the rescue plan has grown louder. A bipartisan group of 26 senators, including Minnesota Senators Amy Klobuchar and Al Franken, have asked Treasury to reject the cuts. If approved, the senators wrote in a Feb. 2 letter, they’ll “set a dangerous precedent for other pension plans around the nation.”
Also last week, Sen. Charles Grassley, R-Iowa, asked the Government Accountability Office to investigate the Department of Labor’s oversight of the Central States fund, which has slid toward insolvency even though it has been monitored by a federal court and the department for more than three decades under a consent decree. Grassley said he wants to know whether the fund’s investments were similar in nature to those of pension plans that have remained solvent. “Has DOL been appropriately engaged in reviewing Central States decisions regarding changes in investment managers and investment strategies?” Grassley wrote.
Local Teamsters are circulating petitions. One asks Congress to investigate the Labor Department and Treasury in their oversight of the Central States fund. The other is a resolution of no confidence in the fund’s board of trustees."
A big problem with union funds is in the way they allocate their plan assets. For whatever reason, they somehow fully correlate "risk" with "volatility." So they get into non-volatile bonds and other fixed income instruments that actually lose purchasing power when the maturation date is finally reached. Another problem is pension funds getting involved in speculative investments like private equity deals (e.g., shopping centers). These create huge pricing and valuation problems since it is impossible to price certain non-liquid assets. These valuation issues undermine sincere attempts to pinpoint outstanding liabilities so pensioners can actually get their promised money. So you just make up a value for the non-liquid asset when the deal is made and then stick with that value forever even if the underlying instrument has lost a lot of its original value. It just seems the whole system is rigged to generate fees for the Wall Street players while the plan administrators and pensioners are left holding the empty bag. Plan administrators use the big brand name investment firms as a layer of fiduciary insulation. But the insulation is starting to wear thin.
As a communications professional with some knowledge of investment strategies and financial portfolio management, this is a difficult movie to sit through. In fact, it is painful to watch. Mismanaged money and poor communication seems to be plaguing far too many funding venues. So I would advise Fund managers to start thinking hard about what they are doing with the pension money, and what they are telling pensioners about what they can expect to receive. You can keep quiet and hope for the best. You wouldn't get an award for originality, but you'd certainly fit in with your cohorts. But you may be fitting in with people about to get hammered with lawsuits from injured parties. This will surely turn into a feeding frenzy for attorneys. The personal liability issue is certainly a new twist, and it's magnitude will be decided by the rigor with which the US government goes after Wall Street to pay a very large outstanding bill. Unfortunately, there is very little separation between the interests of Wall Street financiers and many politicians who wouldn't be in office without support from Wall Street. So if the heat isn't turned on Wall Street because of cozy government relationships and back room deals, the next most likely targets are trustees and administrators. This is definitely going to get ugly. It's just a question of who is going to pay the price for the money mismanagement. This much is certain -- pensioners are going to pay the bill, but they are going to make a lot of noise along the way. As the volume goes up, prepare for the worst, and prepare to say goodbye to your golf buddy/investment broker. Now it is every man for himself, and the sooner you make fiscally prudent strategic moves, the better. And along the way, keep EVERYONE informed. Not only does it make perfect legal sense, it's the humane thing to do.
"An estimated 700 people packed Coffman Memorial Union at the University of Minnesota on Tuesday to oppose major pension cuts proposed by the Teamsters’ Central States Pension Plan.
One by one the Teamsters, many of them retired, stepped to the microphone to ask the U.S. Treasury to reject the cuts and find a different solution to the sea of red ink threatening to swallow the giant retirement fund. “We worked hard for our money,” said Teamster Dennis Henderson of North St. Paul. Others angrily described the proposed cuts as unfair and devastating. Kenneth Feinberg, the Treasury appointee who hosted the session, said he was determined to make sure retirees were heard. It’s the seventh feedback session on the cuts he’s held around the country. There was a similar turnout for a session in Detroit on Monday.
Key objections are the same, Feinberg said: The cuts won’t save the plan, the cuts weren’t equitable and when Teamsters get to vote on the deal, unreturned ballots will be counted as “yes” votes. Even Teamsters leadership has called on Treasury to reject the rescue plan, which was crafted by trustees of the Central States fund to rescue the giant fund from insolvency. Treasury has a May 7 deadline for a decision. The cuts would affect 272,600 members of the plan, nearly 15,000 of them in Minnesota. While the proposed reductions in Minnesota average 34 percent, cuts range to 50 percent or more and affect thousands of people who have already retired and depend on the checks. Gregory Hammer, 60, of Blaine, said his pension check would be cut more than 50 percent. After 31 years as a Teamster trucker and dock worker, he’s now picking up trash and recycling for the city of Minneapolis to pay the bills and mortgage. “I don’t know how much longer I can do it,” Hammer told Feinberg. If the cuts go through he would probably have to sell his house, Hammer said later. Feinberg is a well-known mediation and compensation fund expert overseeing implementation of the Kline-Miller Multiemployer Pension Reform Act of 2014.
The controversial act created an exception to long-standing federal rules that prohibit reducing retirement benefits already earned by workers. It was tacked onto a federal spending bill at the 11th hour -- through a parliamentary maneuver by Republican Rep. John Kline of Minnesota and former Democratic Rep. George Miller of California -- with no public hearings. The $17 billion Central States, Southeast and Southwest Areas Pension Plan (called the Central States fund), which holds the retirements for Teamsters union members, is one of the country’s largest multiemployer pension plans. It was the first to seek cuts under the new law. Two more retirement plans have followed suit. Severely underfunded, the Central States plan collects about $1 from employers for every $3.46 it pays out in retirement benefits, for an annual shortfall of $2 billion.
The fund is so large that if it failed, it would swamp the Pension Benefit Guaranty Corp., the federal backstop for broke pension funds that is itself expected to run out of money. In an opinion piece in the Star Tribune, Thomas Nyhan, head of the Central States fund, called the reductions “a gut-wrenching course of action that we must take.” Since September, when the Central States fund filed with Treasury, opposition to the rescue plan has grown louder. A bipartisan group of 26 senators, including Minnesota Senators Amy Klobuchar and Al Franken, have asked Treasury to reject the cuts. If approved, the senators wrote in a Feb. 2 letter, they’ll “set a dangerous precedent for other pension plans around the nation.”
Also last week, Sen. Charles Grassley, R-Iowa, asked the Government Accountability Office to investigate the Department of Labor’s oversight of the Central States fund, which has slid toward insolvency even though it has been monitored by a federal court and the department for more than three decades under a consent decree. Grassley said he wants to know whether the fund’s investments were similar in nature to those of pension plans that have remained solvent. “Has DOL been appropriately engaged in reviewing Central States decisions regarding changes in investment managers and investment strategies?” Grassley wrote.
Local Teamsters are circulating petitions. One asks Congress to investigate the Labor Department and Treasury in their oversight of the Central States fund. The other is a resolution of no confidence in the fund’s board of trustees."
A big problem with union funds is in the way they allocate their plan assets. For whatever reason, they somehow fully correlate "risk" with "volatility." So they get into non-volatile bonds and other fixed income instruments that actually lose purchasing power when the maturation date is finally reached. Another problem is pension funds getting involved in speculative investments like private equity deals (e.g., shopping centers). These create huge pricing and valuation problems since it is impossible to price certain non-liquid assets. These valuation issues undermine sincere attempts to pinpoint outstanding liabilities so pensioners can actually get their promised money. So you just make up a value for the non-liquid asset when the deal is made and then stick with that value forever even if the underlying instrument has lost a lot of its original value. It just seems the whole system is rigged to generate fees for the Wall Street players while the plan administrators and pensioners are left holding the empty bag. Plan administrators use the big brand name investment firms as a layer of fiduciary insulation. But the insulation is starting to wear thin.
As a communications professional with some knowledge of investment strategies and financial portfolio management, this is a difficult movie to sit through. In fact, it is painful to watch. Mismanaged money and poor communication seems to be plaguing far too many funding venues. So I would advise Fund managers to start thinking hard about what they are doing with the pension money, and what they are telling pensioners about what they can expect to receive. You can keep quiet and hope for the best. You wouldn't get an award for originality, but you'd certainly fit in with your cohorts. But you may be fitting in with people about to get hammered with lawsuits from injured parties. This will surely turn into a feeding frenzy for attorneys. The personal liability issue is certainly a new twist, and it's magnitude will be decided by the rigor with which the US government goes after Wall Street to pay a very large outstanding bill. Unfortunately, there is very little separation between the interests of Wall Street financiers and many politicians who wouldn't be in office without support from Wall Street. So if the heat isn't turned on Wall Street because of cozy government relationships and back room deals, the next most likely targets are trustees and administrators. This is definitely going to get ugly. It's just a question of who is going to pay the price for the money mismanagement. This much is certain -- pensioners are going to pay the bill, but they are going to make a lot of noise along the way. As the volume goes up, prepare for the worst, and prepare to say goodbye to your golf buddy/investment broker. Now it is every man for himself, and the sooner you make fiscally prudent strategic moves, the better. And along the way, keep EVERYONE informed. Not only does it make perfect legal sense, it's the humane thing to do.
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