What About Multiemployer Pensions?

The editors of the Washington Post remark on the public policy nightmare that is the Central States Pension Fund:

Multiemployer plans seemed like a great idea at the time, decades ago, when they were formed, and when the federal Pension Benefit Guaranty Corp. (PBGC) undertook to insure them against insolvency. It turned out, however, that many plans could not withstand the serial shake-outs that battered trucking, coal, commercial baking and other industries.

Today, the government considers about a 10th of the 1,400 plans “at risk.” The projected unfunded liabilities, in turn, could swamp the PBGC, whose multiemployer insurance fund had $2.3 billion in cash to cover insured liabilities of $56.2 billion as of Sept. 30, 2018. (PBGC’s separate fund for single-employer pensions faces no such problem.) At the heart of the issue: the mammoth Teamsters’ Central States Pension Fund. With an unfunded liability exceeding $20 billion, it is on course for collapse by 2025, which could bring down the PBGC’s multiemployer pension insurance fund with it.

Basically, the retirement livelihood of hundreds of thousands of working-class Americans is in jeopardy. So, too, are many businesses for which pension obligations have become a growth-stifling burden. A meltdown must be avoided, but so, too, must a massive federal bailout that would soak the rest of society, including many taxpayers who do not even have pensions. Between those poles lie inevitable shared sacrifices: a significant but finite injection of public funds, offset by limited benefit reductions, conditioned on long-term reforms to stabilize the system.

Congress actually adopted such a proposal on a bipartisan basis in 2014, but the Obama administration balked at implementing the required benefit haircut for Central States retirees on the eve of the 2016 election — which sent Congress back to the drawing board. Lawmakers from both parties and both chambers formed a committee to write a new bill, which would have gotten expedited consideration on the floors of both chambers. Unfortunately, the committee missed a self-imposed Nov. 30, 2018, deadline.

It did develop a draft that would have provided $3 billion per year in taxpayer funds to cover benefits for a certain category of retirees whose former employers had gone out of business, while requiring remaining pensions to make selective benefit cuts, pay higher PBGC insurance premiums and adopt more realistic economic assumptions. Hardly pain-free or perfect, the proposal had the virtue of realism and, in rough terms, fairness.

The conflict is between justice and mercy. The truckers depending on the fund aren’t exactly fat cats and many probably have few other resources to fall back on. But demanding that people who have no pensions themselves pay for the pensions of others doesn’t seem fair, either. How did the CSPF get into its mess? This explainer at Bloomberg casts a little light on the subject:

(1) Trucking Deregulation and Employer Exodus

When Congress passed a law in 1980 that led to the deregulation of the trucking industry, it caused tens of thousands of trucking companies to go out of business. By 2003, Central States lost 70 percent of the employers that contributed in 1980.

“If you look at the top 50 employers in 1980, now only three of them still exist (in the plan),” Tom Nyhan, executive director of the Central States fund, told Bloomberg Law. The plan’s largest contributing employers are ABF Freight System Inc., Jack Cooper Transport Co., and YRC Inc.

Trucking deregulation didn’t hit the Western Conference the same way because it had a more diverse employer base, said Chuck Mack, the plan’s co-chair.

“We have been structured as a plan that would open to any employer who wants to come in. As a result we have food processing workers, public employees, bus drivers, etc.,” he said. “If employers can only contribute 50 cents an hour (per worker) not $5, they can do that. That makes a difference in employers accepting the plan.”

The Western Conference plan’s largest contributing employers include United Parcel Service Inc., Costco Wholesale Group , Albertsons Cos Inc., and Allied Waste .

(2) Active to Inactive Ratios

The two plans have different ratios of active and inactive participants. When an employer withdraws from a multiemployer plan and stops paying contributions, its workers become “inactive.” The more inactive participants a fund has, the larger the burden is on other employers still contributing.

The Central States ratio suffered after UPS left the plan and turned 44,400 active participants inactive, resulting in a loss of more than $500 million in contributions, about one-third of total contributions at that time. More recently, Kroger withdrew in late 2017 to transfer about 1,800 active participants to a new pension fund it established.

(3) Weathering Financial Storms

The UPS withdrawal also coincided with the 2008-09 financial crisis, which caused the Central States fund to lose $7.6 billion in investments in 2008. That same year, Central States paid $1.8 billion more in benefits than contributions received.

“In down markets, Western Conference generates sufficient revenue from their contribution base, but Central States has to eat into its assets in order to make all the benefit payments,” Nyhan said.

Market downturns accelerated the harm to Central States, but Western Conference’s funding helped it better weather employer withdrawals and market corrections. Immediately after the dot-com bust and the 2008-09 financial crisis, Central States’ funded percentage took bigger hits than the Western Conference.

The Western Conference likely suffered less investment losses in the market turmoils because of its “conservative but diversified” investment strategy, said Mike Sander, the plan administrator.

(4) Funding Adjustment Structure

The Western Conference had an advantage in its funding policy that gave it the flexibility to adjust benefit accrual rates to adapt to changing financial conditions.

Central States may have made bigger benefit promises than what the contribution can support, John Lowell, a partner at actuarial firm October Three, told Bloomberg Law.

Western Conference had a formal funding policy since the 1980s that adjusts its benefit accrual rates, Sander said. This allowed the plan to quickly adapt to changes in the economy. For example, the benefit accrual rate was reduced twice in 2003, because the trustees saw the market after the dot-com bust and felt it was necessary.

Central States doesn’t have such an automatic adjustment structure, Nyhan said. The benefit accrual rate remained 2 percent since the late 1980s until it was reduced by half in 2004. Benefits accrual rate is just one of the factors that determine the overall benefits promises made, and Central States took a few other measures.

In other words the problem was caused by initial overregulation, precipitous Congressional action, bad union management, and bad pension management.

In my view, since consumers were among the main beneficiaries of trucking deregulation, putting the taxpayer on the hook for some of the shortfall is just. But consumers weren’t the only ones who benefited. So did Congressmen, union leaders, the investment managers involved, and the truckers themselves. In a just world some massive clawbacks would be in order. That’s pretty unlikely.

12 comments… add one
  • Guarneri Link

    Clawbacks –

    Too unwieldy. Speaking of which. Try financing a company that has one of these. Like landing a man on the moon. You don’t know what liability you are underwriting.

    It was not well thought out from the start.

  • Gray Shambler Link

    And it’s way bigger than pensioners. YRCW for example, suspended plan payments and accrual of benefits ten years ago. They pay $100,000/ month interest on past due plan payments and have just signed a new five year union contract that continues to kick that can down the road. Under their contract with the fund, they will be required to liquidate assets to settle when the plan runs out of money in January 2025. I have no idea how they keep drivers. Yes, Kroeger withdrew, I believe that cost $70M penalty, but YRCW doesn’t have the money. Many small companies can’t withdraw and with 1/2025 fast approaching, lenders are taking note of their contract obligations.
    Don’t know what, if anything, will come of this:

    “Introduced by Rep. Richard Neal, D-MA, the newly minted chair of the House Ways and Means Committee, the Rehabilitation for Multiemployer Pensions Act has a total of 10 sponsors, five from each party as of 1/2019.”

  • Gray Shambler Link

    Oh, and Drew, since I’m going to need money, does that make YRCW a good short?

  • It was not well thought out from the start.

    On this we are in agreement. Regulation is a steed from which it is difficult to dismount.

  • Gray Shambler Link

    Well the govt. created the fund, under the consent decree, to save the truckers from the mob, but the Teamsters were left in charge of negotiating contracts. The deferred promise of pension increases kept labor peace and saved on present wage costs, but there was a big disconnect between those who contacted promises and those (at the fund) who had the fiduciary responsibility to fulfill them.
    Don’t know what will happen, but then, who ever really does?

  • there was a big disconnect between those who contacted promises and those (at the fund) who had the fiduciary responsibility to fulfill them

    That’s very much the point I was making about clawbacks. I find it infuriating that Congress creates chaos and then just walks away.

  • steve Link

    “that Congress creates chaos”

    I don’t the history as well as some people, but it was my understanding that with the mob involvement chaos was existed when the plan was enacted. It worked until we had deregulation. If anyone should get credit for the eventual mess it should be those who deregulated. They should have created a fix for this eventuality.

    Steve

  • It’s not just that. Deregulation should have been implemented slowly to ease the transition, with lots of oversight. But Congress is always looking for the quick fix, the grand solution. Government is hard. It requires effort. Congress doesn’t like that. Never has.

  • Guarneri Link

    Gray

    I don’t give individual securities advice. I will only note, as many have here, government. They fuck almost everything up.

    And yet so many vote for more government. Its irrational. And at some point one has to say: “you brought this on yourself.”

  • TastyBits Link

    @Drew

    Clawbacks –

    Actually, they would improve an investment. Companies that have not properly planned for the future are probably not a good investment. Kinda like mortgage borrowers.

    I would like to see everybody subject to clawbacks – executives, investors, mortgage lenders, mortgage borrowers (no bankruptcy protection for houses), politicians, and anybody else spending “somebody else’s money”.

    I realize this is “pie in the sky”.

  • Gray Shambler Link

    Here’s another one with major exposure to the fund, DF, Deans Foods. Please be aware, this company is the largest bottler and distributor of dairy products in the U.S., they operate in all 50 states. 30% of their stock is now shorted, trading at about a buck and a half, compared to $20, 3 years ago. Wasn’t really asking for advice, just pointing out this is a major financial crisis. But then, trucking firms are just that, not irreplaceable financial pillars like Sachs.

  • Guarneri Link

    Tasty

    Yes, pie in the sky. You pays yer money and take yer chances.

    More seriously. In the investment world you have concepts like accredited investors, the business judgment rule, reasonable man standards etc. In other words, if you want into this card game you better know what you are doing. Fraud is the standard by which malfeasance and the associated liability is based.

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