Investing August 11, 2020

Actuarial Firms, Treasury Clash Over Union Pension Cuts

Lead actuaries at Segal say the Treasury Department is preparing to wrongfully reject an application to reduce benefit payments made by one of its financially stressed union pension clients.

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Last week, PLANSPONSOR reported on the situation unfolding at the American Federation of Musicians and Employers’ Pension Fund (AFM-EPF), which applied last year to reduce the benefits being paid and accrued by pensioners, based on authorities granted under the Multiemployer Pension Reform Act of 2014 (MPRA).

The plan’s application was among more than 30 filed in the past several years by severely financially stressed multiemployer pension plans. So far, the applications have mainly covered workers in transportation and the building trades, but upward of 120 plans in a number of industries are considered “critical and declining.” Under the MPRA, this status means they are expected to run out of money within 20 years. Such plans may suspend benefits if that would prevent outright insolvency, subject to a majority vote by participants and approval by the U.S. Treasury.

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Our coverage explained how the Treasury’s staff had told the AFM-EPF it will recommend that the Treasury leadership deny the benefits reduction plan. In a statement about the news, the fund said it had been informed that the Treasury staff disagrees with two of the actuarial assumptions used in its application. On that basis, Treasury staff will apparently recommend that the Secretary of the Treasury deny the application.

The actuary involved in that matter is Milliman, but the publication of our story garnered an immediate response from Segal, another actuarial firm that is highly active in serving the multiemployer union pension marketplace. In a subsequent interview with PLANSPONSOR, three of the firm’s lead actuaries voiced frank frustration that their client, the Local 807 Labor-Management Pension Fund, is facing the same situation. The 807 Fund had $136.5 million in assets as of August 2019, when it was 41.3% funded on a Pension Protection Act of 2006 basis.

Simply put, the trio feel the Treasury staff’s disagreement with certain investment assumptions generated by Segal’s in-house experts and used by the Local 807 Fund’s proposal is arbitrary and inconsistent with the agency’s stated policies.

“Like the situation with the Musicians’ Fund, we have been made to understand that the Treasury staff intends to recommend that the Secretary deny the 807 Fund’s application, in our case because it cannot accept the reasonableness of the selected investment return assumption used to demonstrate that the 807 Fund will remain solvent after the proposed suspension,” explains Eli Greenblum, senior vice president and chief actuary at Segal. “We firmly believe that the investment return assumption used in the fund’s application is clearly reasonable for its intended purpose.”

Greenblum says the projection conforms to all statutory requirements and applicable regulatory guidance, and that it further adheres to applicable actuarial standards of practice embraced by industry professionals. For this reason, he and the other Segal leaders say they are left confused and frustrated by the Treasury staff’s stance.

To be clear, the Segal leaders say it is not abnormal for stressed union benefit cut applications to be denied under MPRA’s rules. In fact, not a single early application was approved under the Obama administration, and it took until 2016 for the first proposal to win approval by the Treasury. What they say is different in this case is that the Treasury staff has seemingly decided to simply change their expectations for how benefit cut plans are generated—not based on any actual piece of legislation, regulation, interpretation or guidance.

Jason Russell, a Segal consulting actuary and senior vice president, says the actual details of how the Treasury’s expectations have changed are rather technical, as they are tied to the way benefit reduction plans must spell out their investment assumptions over the first 10 years of the projection versus the time period from year 11 through the end of the benefits payment period. There are also matters to consider in terms of whether the projections are dollar-weighted or time-weighted, he says. The full technical details can be found in the letter Segal sent recently to the Treasury, asking the senior leadership at the agency to overrule the staff recommendations in this and similar cases.

The Segal experts say they are not sure what to expect in this case, but as Greenblum put it, “the Treasury Secretary has a lot going on right now, and it is probably not likely that this matter will be a priority.” This means it is likely that the 807 Fund will have to restart its application process from scratch, which is also likely the case for the American Federation of Musicians and Employers’ Pension Fund.

“Every day you have to delay one of these applications, and when you have to arbitrarily reduce the investment assumptions in the way the Treasury is seeming to demand, this means the pensioners will face even deeper cuts,” Greenblum says.

Alan Sofge, another Segal senior vice president and senior benefits consultant, adds that the Treasury staff, during a number of discussions with the 807 Fund and Segal, had not voiced any concern about the investment assumptions included in the benefits reduction plan. Instead, they seemed more interested in discussing the impact of the coronavirus pandemic on the 807 Fund, which has actually been muted, given the diverse employer base in the union.

“It was only about a week and a half ago that we first learned about their disagreement with our investment assumption,” he says.

Compliance August 11, 2020

American Airlines Prevails in ERISA Lawsuit

A federal judge found the plaintiffs did not show they suffered an injury by American’s decision to include a credit union fund rather than a stable value fund in its 401(k) plan.

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A more than four-years-long lawsuit arguing American Airlines should have offered a stable value fund in its 401(k) plan rather than the AA Credit Union Fund has ended with a federal judge granting summary judgement to American Airlines.

The original complaint stated the following: “The AA Credit Union Fund effectively delivered, at all material times, the returns of a poorly managed checking account. The AA Credit Union Fund consistently failed to outpace inflation and was at all times thus a categorically imprudent retirement investment under ERISA [Employee Retirement Income Security Act]. Therefore, defendants violated their duties of prudence under ERISA by including it as a retirement investment option in the plan’s menu of investment options.”

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U.S. District Judge John McBryde of the U.S. District Court for the Northern District of Texas previously denied class certification of the case, denied a motion to dismiss the case and rejected a proposed settlement as being insufficient. The current opinion and order addresses motions for summary judgment filed by American Airlines, its Pension Asset Administration Committee and American Airlines Federal Credit Union (Credit Union).

American and the committee asserted a time-bar ground, contending that “this court should reject as time-barred any challenge to American’s inclusion of the Credit Union option in the plan,” because it was first introduced into the plan more than 35 years ago. McBryde rejected this, saying that he does not interpret the plaintiffs’ criticism of the existence of the AA Credit Union Fund option as being based solely on the initial decision to include it in the plan, but instead interprets their complaint to be that American and the committee, during the six years before the complaint was filed, violated their fiduciary duties by not taking appropriate steps to remove that option and/or to add to it a capital preservation investment option that would have been more financially beneficial to the participants. He concluded that the time-bar ground is without merit.

However, McBryde noted that to establish standing, “plaintiffs must show that each has suffered a concrete, particularized injury, actual or imminent, fairly traceable to defendants challenged behavior, and likely to be redressed by a favorable ruling.” He said the violation of duties under ERISA is not in and of itself an injury in fact to plaintiffs. McBryde also said the plaintiffs cannot establish that American and the committee were required to select a stable value fund instead of the AA Credit Union Fund option. “But, even if they could, their alleged injuries are at best speculative, not concrete,” he added.

He noted that the plan provides that participants are responsible for making investment decisions, and the plaintiffs do not point to any evidence showing that they would have chosen the stable value fund for their investments. McBryde pointed out that one named plaintiff never took even basic steps to evaluate the stable value fund as an investment option when it became available, and another chose not to invest in a stable value fund when he had the option to do so. “Plaintiffs have not established standing to pursue the claim regarding an alternative capital preservation option, i.e., the stable value fund,” he wrote in his opinion.

McBryde also said that “procedural lapses alone, assuming plaintiffs could establish any, are insufficient.” The plaintiffs must show that the procedural lapses led to plan losses. In addition, he said, because the plaintiffs contend that the AA Credit Union Fund should not have been offered at all by the plan, they must establish that no reasonable fiduciary would have included such fund in the plan. McBryde found that the expert testimony presented did not suffice to do this.

The plaintiffs complain that the interest rate on the AA Credit Union Fund was “abysmally low,” but McBryde held that making a bare allegation does not mean anything without a meaningful benchmark. The plaintiffs do not point to any similar demand deposit funds to show that they earned a better rate of return. And, they rely on a comparison to stable value funds, even though their expert admitted that the two investment options have different characteristics. McBryde said comparing the AA Credit Union Fund to stable value funds is like comparing apples to oranges because the AA Credit Union Fund is a liquid demand deposit that is fully guaranteed by the United States government up to $250,000, while stable value funds include a wrap contract—a limited guarantee from an insurance company or bank.

Separately, McBryde found that the plaintiffs’ claims against the Credit Union fail for a number of reasons. First, they have not shown that the Credit Union is a fiduciary under ERISA for the purpose of their claim. In addition, he found that the plaintiffs have not shown that the Credit Union’s investing of amounts deposited was improper or a violation of any duty owed to them or the plan.

McBryde noted that it seems the plaintiffs intend to abandon their claim that American and the committee engaged in a prohibited transaction under ERISA because they made no response to the ground of the summary judgment motion urging that they could not establish this claim.

McBryde ordered that the defendants’ motions for summary judgment be granted and that plaintiffs’ claims be dismissed with prejudice. “With prejudice” means the case can’t be brought back to court.

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