Those who framed the tight funding rules for the PPA did not expect a credit tsunami and stock market collapse
THE EXTRAORDINARY COLLAPSE of America’s financial system in October has plunged the country — in fact, the world — into a recession that may be longer and deeper than any downturn we’ve seen in 25 years. What former Federal Reserve Chairman Alan Greenspan described as “a credit tsunami” has resulted in bank failures, mortgage foreclosures, a shrinking economy, and rising unemployment. The Dow Jones Industrial Average dropped from its historic high of over 14,000 points in Oct. 2007 to barely above 8,200 in Oct. 2008, a decline of over 40 percent.
Although the stock market has recovered some since that low, the Dow is still down about 37 percent as of this writing (Nov. 10), and analysts do not expect it to climb much (if any) by the end of the year. Losses of this magnitude are playing havoc with those who rely on investments for their income — including the millions of union members whose pension funds have been hit hard.
When the credit market froze, Congress voted quickly to spend over $700 billion to bail out the banks and mortgage and insurance companies at the center of the crisis. Their bold, rapid action has been praised by economists worldwide as the kind of action that may stave off a national — and international — economic disaster.
Now it’s time for Congress and the Treasury Department to turn their attention to the nation’s defined-benefit pensions. Pensions have been hammered by the stock market crash, and defined-benefit pensions may soon be dealt a death blow, not by an economic collapse, but by a law passed in 2006 that was intended to protect these pensions.
The Pension Protection Act of 2006 (PPA) made aggressive adjustments to ERISA’s standards for how defined-benefit pensions must account for the costs of future benefit payments. The new standards are so aggressive that many pensions, still struggling to make up for the slowly recovering stock market we have been experiencing since the recession of 2001, have already had to make painful adjustments this year.
The Boilermaker-Blacksmith National Pension was one of them. The adjustments that became effective Oct. 1 of this year were painful for all participants. But those adjustments are mild compared to what the PPA will require the Pension Trust to do in 2009 if the market remains near its current level.
On Wall Street, a strong market with constantly rising stock prices is called a bull market. A bear market is the opposite — prices that decline over a long period of time. Currently we have a bear market. Congress and the U.S. Treasury need to act so that bear doesn’t eat up our pensions. The Boilermakers’ union has joined with nearly 300 other organizations in co-signing a letter to Congress requesting that measures be taken to adjust the PPE, at least until the financial crisis has ended.
PPA’s funding formula is the problem
WHENEVER WE TALK about problems that our national funds face, many plan participants jump to the conclusion that the funds’ trustees or the money managers those trustees employ have been doing a poor job. That is definitely not the case. The Boilermakers’ National Funds are some of the best-managed Taft-Hartley funds around. That isn’t my personal opinion. That is what I have been told by consultants who monitor pension funds and rate them.
All of the Boilermakers’ national funds are invested conservatively. In downturns like the one we’ve been experiencing for the past year, our funds lose less money than many funds that take greater risks. That is a good part of the reason our Boilermaker-Blacksmith Pension has never missed a benefit payment since its creation in 1960 and was, in fact, able to raise the payout factor 20 times in its first 43 years.
The trustees have established a sound investment strategy and conservative target for returns on investments. They hire competent money managers and monitor them to make sure they are delivering returns that meet or exceed the target. Neither their actions nor the actions of the money managers are to be blamed for the current threat to our pension. That threat is the result of an unusually bad stock market combined with pension funding rules that handcuff the funds’ administrators.
Pensions operate on a timeline that is significantly different from anything most of us ever do. Because they accumulate funds over a person’s lifetime, they rely on a lifetime of investment gains to fund that person’s retirement. Actuaries use life expectancy formulas and projected earnings to determine how much the pension can pay each pensioner on retirement. The long-term nature of this work goes against our ordinary way of seeing the world. An accountant can tell you that you’re bankrupt. An actuary can tell you that you’re going to go bankrupt in 25 years — or 30 or 40.
Pension funds rely on that long window when setting benefit levels. When pensions take a 40 percent reduction in assets over a single year, it is not unreasonable to expect them to create a funding formula that will get that money back over a long period of time. After all, most pension plan participants are still decades away from collecting their pensions.
The PPA’s overly restrictive accounting formula could end up destroying the defined-benefit pensions it was intended to protect.
But the PPA imposes much shorter windows. It requires annual projections about a fund rather than looking at a fund’s projected performance over a longer period. In a bull market or a market enjoying modest gains, their rigid funding rules do no damage to pension funds, while ensuring that defined-benefit pensions are well-funded. Even in a “typical” bear market, the PPA rules might require some modest benefit reductions, but they would not threaten the viability of defined-benefit pensions.
But when the market falls 40 percent in one year, no fund can be expected to regain all those lost assets in just a few years. Nonetheless, the trustees of the Boilermaker-Blacksmith Pension must look at the fund’s performance in 2008 — the worst year for stocks since before World War II — and make adjustments to the benefit formula to account for all those losses.
The PPA does not even take into account the fact that some of those losses will never be realized. They are only “paper” losses — for example, stocks whose prices went down this year, but which regain their value next year or in the near future. When the stock prices rise again, the loss disappears. But the pension is required to act on the amount recorded this year.
It is truly ironic that a law intended to protect defined-benefit pensions might actually destroy them. But that is what could happen without government action.
Congress and Treasury should relax PPA regulations
SINCE THE FINANCIAL crisis began, the federal government has begun to shore up financial markets, hoping to ease credit and ultimately spur the economy to rebound. That is well and good. Credit makes the world go round. Without access to credit, many businesses cannot survive, and the economy falls into a deep and prolonged recession.
Now it’s time for the government to turn their attention to defined-benefit pensions. They must take action now so that pensions aren’t caught in a regulatory vise and forced to make drastic, perhaps fatal, benefit cuts. An important first step is to relax the strict PPA regulations. During this time of unprecedented economic duress, even the strongest pension funds will have trouble meeting these rigid requirements. The Boilermakers’ funds office is working very closely with the National Coordinating Committee of Multiemployer Plans and others to find a way to get through this crisis. We are hopeful that with our many allies in Congress — and soon in the White House — we can see this reform accomplished.
Relaxing the PPA — perhaps only temporarily — will enable the pension trustees and money managers to avoid making benefit cuts that destroy our pensions. The Boilermaker-Blacksmith Pension has weathered stock market downturns before — in the 1970s, in 1987, and in the early part of this decade. I have every confidence in the experienced and dedicated trustees who oversee the pension funds, the administrators and staff, and the consultants who provide advice and direction.
They have guided our funds successfully for decades, and they will continue to make sound decisions based on the best interests of plan participants and the long-term viability of the plan. I am confident they can get us through this crisis without allowing the recent financial collapse to destroy the primary source of retirement security for more than 73,000 Boilermakers.
But first the government has to take their handcuffs off.