Multiemployer Pension Plans Need Financial Help or a New Investment Model

In a hearing, lawmakers heard about how the multiemployer pension plan crisis is affecting employers, employees and the economy today, why current legislation contributes to the crisis, and suggestions for moving forward.

Urgency was a common theme among those providing testimony to the House of Representatives’ Education and Labor Committee Subcommittee on Health, Education, Labor, and Pensions about the multiemployer pension plan crisis.

While several hearing witnesses pointed out that, at present, only about 10% of multiemployer plans are projected to become insolvent within the next 20 years, they testified that issues facing all multiemployer pension plans are creating problems for employers and the economy as a whole today. For example, Mary Moorkamp, the chief legal and external affairs officer at retail grocery chain Schnuck Markets, Inc., noted that since it entered the Central States Teamsters Pension Fund in 1958 it has funded its weekly contributions to the Central States plan, but despite taking its responsibility seriously for providing retirement benefits to its employees, it is now facing adverse effects to its business and to those benefits that were promised to employees. Moorkamp pointed out that in 1958 and for many years afterward, there were no withdrawal liability rules, tax deduction limitations on multiemployer plan funding or a Pension Benefit Guaranty Corporation (PBGC) to which multiemployer plans had to make premium payments.

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Now, Schnuck Markets is making contributions to the Central States plan for the benefit of employees that never worked for the grocer to support “orphaned” retirees from employers that withdrew from the multiemployer plan. In addition, given Central States projected insolvency along with the potential insolvency of the PBGC’s multiemployer plan insurance program, Schnuck retirees could receive less than half of what they were promised.

Moorkamp shared ways the multiemployer crisis is affecting its business currently, noting that by its calculations, each new Central States participant increases its withdrawal liability amount by approximately $268,000:

  • “Reluctance to expand into new markets. If we open a store in a new market, we would have to hire drivers to transport product to these stores. If the driver is covered by our Collective Bargaining Agreement with the Teamsters, that Teamster driver must become a participant in Central States. This adds to our Central States contribution base, which increases our withdrawal liability.
  • “Significant cost associated with growth in current markets. In a recent transaction involving the acquisition of a number of retail grocery stores in our market, we immediately rejected an overture to purchase the seller’s logistic operations that had employees in Central States. As the seller could not find any buyer, the seller closed these logistic operations.
  • “Recruiting and retention problems. The Central States crisis has created recruiting issues for Schnuck Markets. Oftentimes, when we inform a prospective Teamster driver that his or her pension will come from Central States, they lose interest in the position.
  • “We rely on private placement debt and bank lines of credit to augment our cash flow. As Central States positions itself for insolvency, our lenders are becoming increasingly concerned about the impact of the insolvency on our financial statements. When assessing a company’s financial strength, lenders and credit rating agencies factor potential pension withdrawal liabilities into their analysis, which affects our credit profile and our cost of capital.”

Because of the uncertainty of pensions for its employees, Schnuck adopted a 401(k) plan.

Glenn Spencer, senior vice president at the U.S. Chamber of Commerce, cited these as issues all employers participating in multiemployer plans are facing.

James Morgan, a retiree from Hostess Brands’ Wonder Bread, shared his story. Hostess filed for bankruptcy in 2012, and later that year, announced it was withdrawing from the 42 multiple employer pension plans in which it participated. According to Morgan, in August 2011, the CEO of Hostess Brands sent a letter to every employee saying that the company was suspending the contributions it was obligated to make to the Bakery and Confectionery Union and Industry International Pension Fund (B&C Pension Fund) according to its collective bargaining agreement. The CEO said the suspension of contributions was going to be “temporary,” but the company never resumed making payments to the Fund.

Morgan said the future of pension benefits has been hanging over the heads of him and his former co-workers for years. If they are lost or cut, many could not afford to pay bills or take care of necessary medical needs. He told the committee that his union, and the pension fund, support the Rehabilitation for Multiemployer Pensions Act, which would create an entirely new agency within the Department of the Treasury authorized to issue bonds in order to finance loans to “critical and declining” status multiemployer pension plans, plans that have suspended benefits, and some recently insolvent plans currently receiving financial assistance from the PBGC.

Unintended consequences of legislation

Several hearing witnesses blamed the multiemployer pension plan crisis on rules placed on these plans. For example, Josh Shapiro, vice president, Pension, American Academy of Actuaries, pointed out that the 1990s produced very large investment gains in the financial markets, which put many multiemployer plans into an overfunded position. Tax laws that made contributions to overfunded plans non-deductible to the employers caused many plans to significantly raise benefit levels over a short period of time. These benefits could not be taken away, so subsequent losses in the financial markets created large funding deficits.

Dr. Charles Blahous, J. Fish and Lillian F. Smith chair and senior research strategist at the Mercatus Center at George Mason University, told lawmakers that while market downturns and changing demographics in multiemployer pension plans—more retirees than active employees—have contributed to the underfunding crisis, “prudent pension management would anticipate them and, in any case, they do not account for the weakness of the multiemployer pension system relative to the single-employer insurance system which, though facing those same stress factors, is in a much stronger financial position.”

According to Blahous, the Pension Protection Act (PPA) bolstered the funding and premium requirements for single-employer pension plans, but it did not apply similar reforms to the multiemployer pension system. He said, “Relative to single-employer pensions, the multiemployer pension system suffers from a lax regime of funding rules, fostering inaccurate valuations of pension liabilities and assets, inadequate contribution requirements for continuing and withdrawing sponsors alike, and inadequate and poorly-designed premium assessments.”

Blahous told lawmakers that multiemployer plans are allowed to greatly understate their liabilities by using inflated discount rates to translate them into present-value terms. “A payment that is fully guaranteed and risk-free should be discounted at a Treasury bond rate, whereas pension obligations generally should be discounted at rates not exceeding those reflected in a yield curve of corporate bond rates. These principles, however, are widely violated; multiemployer pension sponsors routinely discount their obligations at rates of 7% or more, causing plan funding percentages that average less than 50% in reality to be misreported as being nearly 80%. The problem is a simple one: if pension liabilities aren’t properly recognized, they won’t be funded,” he said. Blahous added that multiemployer plans are given much longer time frames to address their underfunding, and critically underfunded plans are exempted from otherwise applicable statutory penalties for inadequate contributions. “Accurate measurement of pension liabilities and assets is the essential, irreplaceable component of multiemployer pension reform. It’s highly unlikely that any solution will hold if this is not done,” he said.

Blahous also noted that average insurance premiums paid to the PBGC by multiemployer plans are less than one-sixth of what they are for single-employer plans, despite the large multiemployer insurance program deficit. Underfunded multiemployer plans are also not subject to variable rate premiums as underfunded single-employer plans are, which means that the PBGC cannot charge sponsors of underfunded plans for the additional risks they pose to the insurance system.

In her testimony, Mariah Becker, director of research and education at the National Coordinating Committee for Multiemployer Plans (NCCMP), also pointed to withdrawal liability rules and laws that made contributions to overfunded plans non-deductible to the employers as contributors to the multiemployer pension plan crisis. She added that rejection by the Treasury of benefit reductions for certain plans, such as Central States, will have negative consequences for all stakeholders.

“For critical and declining status plans, every year that goes by without a real solution results in negative cash flow, which reduces the plan’s assets, and moves the plan closer to insolvency. This rejection also impacted the finances of the PBGC and its multiemployer program. Had the Central States Pension Fund’s [Multiemployer Pension Reform Act] MPRA application been approved, approximately $20 billion of the PBGC’s deficit would have been eliminated,” she said.

The path ahead for multiemployer plans

Dr. James Naughton, assistant professor of accounting information and management at the Kellogg School of Management at Northwestern University, said lawmakers have the task of figuring out what to do about the current underfunding and potential insolvency of multiemployer plans as well as the PBGC multiemployer plan program, as well as the task of figuring out how to ensure that the current level of underfunding does not deteriorate further and how to put the system on a sustainable path going forward. “These two decisions require different solutions, and trying to solve both at the same time creates unnecessary difficulty. In my opinion, the more pressing decision is the second one, as that decision offers the hope of limiting any further deterioration of the multiemployer system,” he said.

According to Naughton, multiemployer plans have not collected actuarially sound contributions and have invested the contributions they received aggressively. The solution he offered: “If these plans had chosen to collect actuarially sound contributions and purchase annuity contracts (or mimic the investing philosophy of life insurance companies), there would be no crisis. Participants would be receiving or would be scheduled to receive the annuity benefits purchased with the contributions made on their behalf. No industry deregulation or competitive events would change this outcome.”

He added, “I believe it is critically important that any framework for addressing the multiemployer pension plan crisis incorporate the notion that insurance companies are experts at providing fixed annuity benefits, and that their general approach should be adapted for the multiemployer pension plan system.”

Naughton said he’s not aware of any convincing reason why multiemployer plans should invest primarily in the stock market. “They do not have the ability to respond to large fluctuations in the value of the assets in the pension trust, both because contributions are typically set over multiple years and because contributing employers vary over time, either because of bankruptcy or because of selective exit through withdrawal. These plans also cannot carry a funding surplus, which is necessary to withstand the negative returns that are an inevitable component of risky investment choices,” he told lawmakers.

According to Naughton, once the decision is made to adopt some form of annuity purchase model, it will be far easier to address other issues related to the amount of aid to be provided to failing plans, the amount of the PBGC guarantee and how the PBGC should interact with failing plans, as well as any potential changes in the amount of PBGC premiums. “To ensure that employers do not selectively withdraw from plans, it is worth amending the current withdrawal rules to prohibit withdrawals until a legislative solution to the current crisis is finalized,” he added.

A replay of the hearing and text of witness testimony may be found here.

Retirement Industry People Moves

GoldPoint Partners Appoints Managing Principle; Jennison Associates Names Sales and Client Services Manager; IRI Promotes Former Legal and Governmental Industry Experts; and more. 

Art by Subin Yang

Art by Subin Yang

GoldPoint Partners Appoints Managing Principle

GoldPoint Partners, a private equity affiliate of New York Life Investment Management LLC, has promoted Scott Iorio to managing principal.

“Scott demonstrates the values of integrity, collaboration and work ethic so crucial to GoldPoint and its investors,” says Tom Haubenstricker, chief executive officer of GoldPoint Partners. “We are thrilled to elevate him to Managing Principal and are confident he will be an integral part of our team helping to drive our success.” 

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In his new position, Iorio takes a leadership role on deal teams and will serve on the firm’s investment committee.

Prior to joining GoldPoint in 2006, he was an analyst in Citigroup’s Global Banking Division where he advised clients in the technology, media and communications industries. Iorio earned a bachelor’s degree in finance from Providence College.

Jennison Associates Names Sales and Client Services Manager

Peter Latara has joined Jennison Associates as a managing director and relationship manager. The role will include a focus on both sales as well as client service. Latara will report to Lori McEvoy, Jennison’s global head of distribution.

“We are delighted to welcome Peter to Jennison,” says McEvoy. “His professional experience complements our strong existing team. We look forward to working with him to achieve our strategic objectives of deepening our relationships with clients and distribution partners, expanding our global reach into new markets and client segments, and enhancing our client service excellence.”

Latara, who has 22 years of investment industry experience, joins Jennison following a 15-year tenure with Fred Alger Management, where he led the firm’s institutional client relations efforts and was a member of the firm’s senior distribution team. Prior to Fred Alger, Latara spent eight years at Gabelli Asset Management, where he was responsible for institutional sales, client relations and consultant relations in the Midwest region. Peter holds a bachelor’s degree in economics and political science from Emory University, and an MBA from the University of Maryland.

Latara will work at Jennison’s New York headquarters.

IRI Promotes Legal and Governmental Industry Experts

The Insured Retirement Institute (IRI) announced promotions for Jason Berkowitz and Paul Richman in recognition of their leadership efforts and growing responsibilities. 

Berkowitz will be the chief legal and regulatory affairs officer and Richman will be the chief government and political affairs officer.

“Paul and Jason are exceptional advocates on behalf of IRI and our members and have consistently delivered results to advance our industry’s agenda before federal and state policymakers,” says Wayne Chopus, IRI president and CEO.

Berkowitz joined IRI in 2012 and has most recently served as vice president and counsel, regulatory affairs. He has provided leadership and support for IRI member company priorities in the state and federal regulatory and legislative arenas and works with member company representatives to develop effective government affairs and compliance programs that meet their business needs. He also has assumed greater responsibility of the association’s legal oversight duties. Berkowitz previously worked for Hartford Financial Services Group and had stints at two law firms.

Richman joined IRI in 2015 and has served as vice president, government affairs, leading the association’s federal and state legislative advocacy initiatives and the organization’s political outreach efforts through its federal political action committee. He has 33 years of experience working in both government and the private sector including two other trade associations. He also served in senior policy making positions in the Clinton Administration at the White House in the Office of the Vice President and at the U.S. Department of Labor (DOL). Before that, Richman served as the special counsel for economic development to former New York Governor Mario Cuomo.

Drinker Biddle & Reath Adds Team of Lawyers to Hartford Office

Drinker Biddle & Reath LLP has added a team of trial and class action lawyers led by veteran insurance and financial institutions lawyer James Jorden. The team will expand Drinker Biddle’s office count to 13 with the opening of a Hartford, Connecticut, location.

Jorden is one of 14 new litigation partners and three associates, all previously with Carlton Fields Jorden Burt P.A. Most members of the team are based in Drinker Biddle’s Washington, D.C., office, with several establishing the new Hartford office.

Jorden and the team have built a litigation and regulatory practice defending financial institutions, life insurers, mutual funds, investment firms and banks in high-stakes matters, including securities, ERISA, RICO and pension cases. The group is known for defending clients in large class actions, with its members having served as lead or co-lead counsel in more than 100 such matters. Jorden has been lead trial counsel in some 50 individual cases that went to trial in federal and state courts, and has argued before the U.S. Supreme Court and eight of the federal circuit courts.

In addition to their trial, class action and appellate work, Jorden and his team represent clients before the Securities and Exchange Commission (SEC), the Department of Justice, the Internal Revenue Service (IRS), the Department of Labor (DOL), and numerous state oversight and regulatory agencies. The group has long represented the American Council of Life Insurers, providing amicus briefs on important industry litigation. The lawyers also have experience overseeing complex multidistrict cases and government investigations and enforcement proceedings.

In Washington, D.C., the full roster of incoming partners includes Frank G. Burt, Josephine Cicchetti, James F. Jorden, Roland C. Goss, W. Glenn Merten, Shaunda Patterson-Strachan, Brian P. Perryman, Waldemar J. Pflepsen Jr., Kristen Reilly, Kristin Ann Shepard and Dawn B. Williams.

The Drinker Biddle Hartford location launches with new partners Stephen J. Jorden, Ben V. Seessel and Michael A. Valerio, with Jorden serving as the office’s regional partner in charge.

The firm plans to open a new office in Miami in the near future to accommodate several members of the Jorden group.

Hub Acquires Assets from Peak Financial Group

Hub International Limited (Hub) has acquired the assets of Peak Financial Group LLC in Houston, Texas. Terms of the transaction were not disclosed.

Peak Financial Group is an independent firm specializing in retirement plan services, providing retirement plan design assistance and employee education programs to businesses of all sizes.

“Retirement preparedness is a growing issue, and it’s important for clients to address it now to help improve the financial futures of the next generation,” says David Reich, national president of retirement services, Hub International Investment Services. “Peak Financial Group is a great addition to Hub’s retirement planning practice as we continue to build our service to help clients.”

Janine Moore and Darrell Ellisor of Peak Financial Group will join Hub Texas as senior vice presidents, reporting to David Reich, Hub’s national president of Retirement Services, Hub International Investment Services, and Randy Martell, senior vice president, Employee Benefits of Hub Texas.

Investment Consultant Joins SageView’s Connecticut Team

Ken Hyne has joined SageView Advisory Group as managing director in the Connecticut office.

Hyne has over 30 years of experience in the investment consulting field, specializing in plan development, implementation and investment monitoring for defined benefit (DB) and defined contribution (DC) plans.

He began his career at the investment and retirement divisions at CIGNA, then went on to Advest, Inc. as the senior director of Investment Management Services (IMS). More recently, he served as the president of USI Investment Advisory Services and Senior VP of USI Consulting Group.

Hyne received his bachelor’s degree in economics from Drew University and an MBA in finance from the University of Connecticut. He holds the Certified Investment Management Analyst (CIMA) designation from the Investment Management Consultants Association (IMCA) and the Wharton Business School at the University of Pennsylvania.

MetLife Announces Series of Promotions in Senior Leadership

MetLife Inc. has added a series of changes to its senior leadership ranks in connection with its CEO transition, all effective on May 1.

Executive Vice President and Chief Risk Officer Ramy Tadros will become president, U.S. Business. He will succeed Michel Khalaf, president, U.S. Business and EMEA, who will then work as MetLife’s president and chief executive officer. Tadros will report to Khalaf and continue to serve on the company’s executive group. Dirk Ostjin, senior vice president and head of EMEA, will continue to oversee the EMEA business, reporting to Khalaf. 

Tadros joined MetLife in September 2017 from Oliver Wyman, where he was a partner, global head of insurance, and member of the firm’s operating committee. 

“Ramy is a seasoned executive with more than 20 years of experience advising global life and property and casualty insurers on strategy, product, distribution and financial topics,” says Steven Kandarian, chairman, president and chief executive officer of MetLife. “As chief risk officer, his leadership has been essential to elevating our risk function in support of MetLife’s transformation into a company that appropriately balances growth and risk while generating stable free cash flow.”

MetLife also announced today that Marlene Debel, currently executive vice president and head of Retirement & Income Solutions (RIS), will become MetLife’s chief risk officer. She will report to Khalaf and join the company’s executive group.

Before joining MetLife in 2011, Debel was global head of liquidity risk management and rating agency relations at Bank of America. Prior to that, she was assistant treasurer of Merrill Lynch & Co. She spent 20 years in a number of leadership positions across global treasury at Merrill Lynch.

Graham Cox, executive vice president in Global Risk Management (GRM), will succeed Debel as head of RIS and report to Tadros. Cox has held several leadership roles since joining MetLife as an actuary in 1995. He has overseen MetLife’s group life product portfolio. He has also served as head of Western Europe.

SFG Retirement Plan Consulting Brings In Chief Operations Officer 

SFG Retirement Plan Consulting announced that Carl Steinhilber has joined the firm as chief operations officer. Steinhilber joins the executive team consisting of Mark Shuster, founder/managing partner; JoAnn Parrino, partner/chief of sales; Cristopher Borden, chief investment officer; and Nathan Gierke, chief compliance officer.

Steinhilber, based on the east coast, came to SFGRPC from MassMutual where he was the national government market leader. Prior to MassMutual, Steinhilber held leadership roles at Voya. He earned his bachelor’s degree from the University of Connecticut and holds FINRA designations as well as a certified fund specialist certification.

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