April 2013

What Is Happening with Pension Funds?

When I speak to almost any ironworker, field or shop, about his pension, I am told that his contribution rate has increased, sometimes substantially, and his plan of benefits stayed the same, or was reduced.

When I speak to the employers who contribute to ironworker pension funds, they are all worried about withdrawal liability. These employers are not planning on becoming non-union employers, but they believe they are among the last employers to contribute to the fund.

So, why are defined benefit pension fund costs increasing?  As this issue is being printed the stock market hit an all-time high for both the DOW and the S&P 500. However, there are a number of reasons why the costs of pension plans are, in many cases, out of sight. There is: plan design; the changing nature of ironwork (read hours of contribution); actuarial interest income assumptions; changes to a fund’s ability to earn investment returns; and government oversight.

How did plan design increase costs? Remember those benefit improvements that applied to all your previous pension credits, they increased your plan’s liabilities (the dollars necessary to fund your benefit for your lifetime). These new liabilities were to be paid off over periods of time ranging from 15–30 years and all these new contributions were supposed to earn income at the rates assumed by the actuaries. When these plans were first formed, the assumptions were 3–4 percent, and in 1976 when ERISA became law, these assumptions ranged between 4–5 percent. In 1980, bonds or insurance company deposit administration contracts yielding 13 percent interest rates were not uncommon. Even blue chip stocks declared interest earnings of three-four percent.

In the last 50 years, the nature of ironworking has changed as well. Think of all the people it took to raise the structural steel building with rivets. Then remember how many people it took when bolts were introduced. It doesn’t take much imagination to see that with fewer ironworkers on the job, the hourly rate to support those new liabilities had to increase. Sometimes, the hourly rate increased, but at other times the assumed earnings rate was increased to offset the increase in cost. This seemed reasonable because most ironworker funds were growing in terms of dollars in assets. So in many instances, the pension funds grew because of both higher hourly rate, as well as a period of consistent and sometime extraordinary investment experience. So accompanying this growth in assets was an increase in the actuarial income assumption such that by the turn of the century these assumptions were 7 percent or greater.

During the same period the nature of investing changed from an emphasis on bonds to an emphasis on stocks. First, because interest rates started to incremental decline each year from 1980, and companies started to retain their dividends. Accordingly, trustees were forced to put more emphasis on stocks or equities in order to meet their actuarial income assumptions. So more and more fund income started to come from what some individuals perceive as a slightly higher risk investment. At the same time, because of their maturing liabilities pension funds became more and more dependent on investment earnings to pay benefits. This was an expected occurrence. The negative returns in 2001/2 and again in the 2008/9 markets were not expected and the losses incurred in those years will never be made up by excessive investment earnings, only by additional contributions and higher contribution rates.

Lastly, government regulation of defined benefit pension plans and multi-employer pension plans specifically, has also served to increase the cost of your pension plan. In the late 1990s, many pension plans were forced by the government to increase benefits in order to increase plan cost to keep contributing employer’s contributions tax deductible. Accordingly, pension plans complied with the requirement while continuing their ERISA funding requirements. Most ironworker plans were relatively well funded before 2001/2. However, at the same time as the stock market declined substantially, the government imposed new and stricter funding requirements requiring trustees to fund to a new standard, which called for funding improvement plans. Once again, this often required a larger hourly contribution rate to be negotiated. So here we are with higher contributions rates, low interest rates and an asset earnings environment that appears to be somewhat limited.

So why are employers worried about withdrawal liability in a construction pension fund?  The law allows an employer to go out of business or cease doing ironwork in the area without incurring withdrawal liability provided they do not operate as a non-union company.  But, the cost of providing all pension benefits is then shifted to the remaining employers; again increasing plan costs. However, an employer can also wind up with a withdrawal liability bill if there is a mass termination of a defined benefit pension plan and that is one of their present concerns. Their other major concern is that the fringe package will keep them from being competitive in bidding the work. Effectively, they are worried that their labor costs will keep them from competing in the market place. In addition, the Fair Accounting Standards Board requires that unfunded liabilities be noted in a company’s audit. This has resulted in insurance companies and banks viewing the company as a greater risk and has increased bond requirements, lowered lines of credit and increased interest rates for business loans.  Once again, an increase to the employer’s cost of doing business.

How do we cope with these problems? By developing new approaches to the funding and implementation of new types of pension plans, which will share the risk between employers and participants; by gaining market share and thereby increasing the number of contribution hours; and by developing new employers. The National Coordinating Committee for Multi-Employer Plans has submitted recommendations to Congress which propose changes in the law and should give the pension plans some breathing room. In addition, they have proposed some new approaches to providing share risk pension plans. The single biggest question for defined benefit pension plans is whether or not we will grow the number of ironworkers and employers to command the market. If ironworkers control the market that means no employer gets the project or job without a union ironworker. The net result is your defined benefit pension plan will be funded. There is no other way.