Download - Mike Wagner Presentation on Pension Plans
0
Independent Retired Players Summit &
Conference
Considerations in today’s markets for
Multi-Employer pension plans
May 2009
1
Disclaimer
The assumptions made throughout this presentation are for illustrative purposes only. They must not be used, or relied upon, to make investment decisions. The assumptions are not meant to be a representation of, nor should they be interpreted as JPMorgan investment recommendations. Allocations, assumptions, and expected returns are not meant to represent any JPMorgan portfolio. Please note all information shown is based on assumptions; therefore, exclusive reliance on these assumptions is incomplete and not advised.
2
BERT BELL/PETE ROZELLE NFL PLAYER RETIREMENT PLAN
(1) Funded status at beginning of year; takes into account gross assets versus liabilities
(2) Adding next income to beginning of year net assets yields end of year net assets
Sources: Schedule H of Form 5500 (available at www.freeERISA.com), Money Market Directories
Fiscal year end March 2007. Total of 10,020 participants.
---62%Funded status¹
Beginning of year
$1,546,413,280 Liabilities
$961,895,197Current assets
$75,656,874 $221,332,543 Totals
Income and Expenses
$145,675,669 Net Income²
$9,550,102 Administrative Expenses
$66,106,772 Benefit Payments
$95,428,529 Investment Earnings
$125,904,014 Employer Contributions
Debits (-) Credits (+)
Bert Bell Plan Asset Allocation
6.6%
37.2%
17.8%
3.8%
20.2%
3.9%
10.6%
Cash Equities Mutual Funds Venture Capital
Synthetic GICs Corporate Bonds U.S. Gov't Bonds
NFL Total Plan Assets
43.1%
27.1%
21.5%
4.6%3.6%
Bert Bell Player Second Career Savings Coaches & Front Office Office Pension Plan Other
Liability Interest Rate Assumption 7.25%
Estimated investment return 13.3%
33
45%31%
12% 11%0% 0% 0%
0%
20%
40%
60%
<65% 65-74% 75-84% 85-94% 95-104% 105-114% 115%+
Funded Status
4% 8%18%
29%19%
12% 11%
0%
20%
40%
60%
<65% 65-74% 75-84% 85-94% 95-104% 105-114% 115%+
Funded Status
Distribution of funding ratios for Taft-Hartley pen sion plans
Actual PPA ‘06 zone status of Taft-Hartley pension plans% of plans–12/31/07
2008 projected zone status of Taft-Hartley pension plans% of plans–12/31/08
Source: Segal Survey Fall 2008, based on 344 plans. Actual PPA’06 data assumed to represent 12/31/07. 2008 zone data projected by JPMorgan based on Segal Survey 2007 results, assuming no change in liabilities and -26.9% 2008 investment performance as per the asset allocation of a typical Taft-Hartley pension plan. Asset values assume that contributions = service cost = benefit payments. The fund zone status identified about is based on the basic threshold: red “critical” plans are <65% funded, yellow “endangered” plans are <80% funded, and green plans are >80% funded. Please note that other measurements will impact the fund’s zone status beyond the basic threshold, such as the relationship between assets, contributions, and benefit payments.
Endangered plans
Endangered plans
Critical plans
Critical plans
44
Change of the funding ratio of a typical Taft-Hartl ey plan since the beginning of savings and loan crisis in 1989
Sourced from Datastream, and eVestment through March 31, 2009(1) Assumes Taft-Hartley plan began August 1989 with $1,000mm in assets and liabilities (100% funded)(2) Assumes monthly rebalancing of the portfolio, based on the average allocation of assets: 29% to fixed income, 59% to equity and 12% to alternatives.
(Source: Money Market Directories)(3) Assumes that contributions are equal to benefit payments, and liabilities grow due to normal cost of 8% per year
� The analysis assumes a 100% funding ratio in 1989(1)
� The typical Taft-Hartley plan has seen a drastic drop in its funding ratio in the current Global Financial crisis(2)
08/8
9
08/9
0
Val
ue (
in $
mill
)
Savings & Loan Crisis
Asian Financial Crisis
Sept 11 th
AttackGlobal Financial
Crisis
0
1,000
2,000
3,000
4,000
5,000
$6,000
0
20
40
160%
— Funding Ratio— Liability Value
— Asset Value
Funding R
atio60
80
100
120
140
08/9
1
08/9
2
08/9
3
08/9
4
08/9
5
08/9
6
08/9
7
08/9
8
08/9
9
08/0
0
08/0
1
08/0
2
08/0
3
08/0
4
08/0
5
08/0
6
08/0
7
08/0
8
Worst funding
ratio loss -14%
Worst funding
ratio loss -4%
Worst funding
ratio loss-19%
Liab +8%
per year
Worst funding
ratio loss-41%
5
60
29
12
50
38
11
48
41
11
Equity Fixed income Alternatives
12/31/0712/31/08YTD 03/31/09
High dispersion of asset class returns have resulte d in significant shifts of asset allocation
-37%
-43%
-53%
11%
-19%-10-20%-10-15%
-3%
1% n/a
-14%-11%
-10-25%
0%-2%
1%
US Equity Intern'lEquity
EmergingMarketsEquity
USTreasuries
InvestGradeCredit
HedgeFunds
RealEstate
PrivateEquity
2008 YTD 03/31/09
Dramatic divergent performances … … Led to over-allocation to FI and alternativesBenchmark returns1 as of December 31, 2008 and March 31, 2009 Asset allocation of an average Taft-Hartley 1,2 (%)
1 2008 return percentages calculated from representative benchmark returns. All benchmarks sourced from eVestments as of March 31, 2009, except for HFRI Fund of Funds Index (sourced from HFRI), real estate and private equity data (JPMorgan estimates). Other benchmark information is included in appendix.2 12/31/07 allocations correspond to an average Taft-Hartley allocation, as of 12/31/07 (Source: S&P Money Market Directories). However, note that alternatives are proxied with a HFRI Fund of Fund index (allocation: 5.2%) and MSCI REITs index (allocation: 6.8% ). Further allocations result solely from mark to market of investments, not from rebalancing nor cash in/outflows. Indices do not include fees or operating expenses and are not available for actual investment.
66
Behavior of a typical Taft-Hartley plan through dif ferent financial crises
-6.4%
4.5%
-12.4%
-34.5%
9.4% 9.4% 8.7% 10.1%
85.6%95.6%
80.6%
59.5%
-40%-30%-20%-10%
0%10%20%30%40%50%60%70%80%90%
100%110%120%
Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis Global Financial Crisis
Asset Return Liability Return Funding Ratio
Sept 1990 Aug 1998 Sept 2002 Feb 2009
Performance from the start of the crisis until its worst point (1,2)
8.9%
24.1%
-6.4%
-30.9%
15.9% 13.0% 10.1% 10.8%
94.0%
109.8%
85.1%
62.4%
-40%-30%-20%-10%
0%10%20%30%40%50%60%70%80%90%
100%110%120%
Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis Global Financial Crisis
Performance from the start of the crisis until its end (1)
Aug 89 – Jun 91 Jul 97 – Jan 99 Sept 01 - Nov 02 Dec 07 – Current(2)
(1) Worst case defined as lowest funding ratio across the crisis analyzed.(2) Assumes Taft-Hartley plan begins each financial crisis at 100% funded. Liability assumed to grow due to service cost at 8% per year. Data as of 3/31/09. (3) Asset allocations correspond to a typical Taft-Hartley plan as of 12/31/07 (Source: S&P Money Market Directories). However, note that alternatives are
proxied with a HFRI Fund of Funds index. Due to unavailable data, a portion of the alternatives and REITs allocation during the Savings & Loans crisis was proxied using the NCREIF index for direct real estate. The real estate allocation as of Q1 2009 is assumed to be -17.5%
The Taft-Hartley plan is assumed to begin with 100% funding ratio at the beginning of each crisis
The asset allocation(3) is typical of a Taft-Hartley plan (59% allocated to a diversified equity portfolio, 29% to a diversified fixed income portfolio and 12% to alternatives)
The portfolio is not rebalanced throughout each crisis
Out of the four financial crises analyzed, the current crisis has the lowest funding ratio of 62.4%
Source: eVestment and Datastream
77
Behavior of a typical Taft-Hartley plan through dif ferent financial crises
-6.4%
4.5%
-12.4%
-34.5%
9.4% 9.4% 8.7% 10.1%
85.6%95.6%
80.6%
59.5%
-40%-30%-20%-10%
0%10%20%30%40%50%60%70%80%90%
100%110%120%
Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis Global Financial Crisis
Asset Return Liability Return Funding Ratio
Sept 1990 Aug 1998 Sept 2002 Feb 2009
Performance from the start of the crisis until its worst point (1,2)
8.9%
24.1%
-6.4%
-30.9%
15.9% 13.0% 10.1% 10.8%
94.0%
109.8%
85.1%
62.4%
-40%-30%-20%-10%
0%10%20%30%40%50%60%70%80%90%
100%110%120%
Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis Global Financial Crisis
Performance from the start of the crisis until its end (1)
Aug 89 – Jun 91 Jul 97 – Jan 99 Sept 01 - Nov 02 Dec 07 – Current(2)
(1) Worst case defined as lowest funding ratio across the crisis analyzed.(2) Assumes Taft-Hartley plan begins each financial crisis at 100% funded. Liability assumed to grow due to service cost at 8% per year. Data as of 3/31/09. (3) Asset allocations correspond to a typical Taft-Hartley plan as of 12/31/07 (Source: S&P Money Market Directories). However, note that alternatives are
proxied with a HFRI Fund of Funds index. Due to unavailable data, a portion of the alternatives and REITs allocation during the Savings & Loans crisis was proxied using the NCREIF index for direct real estate. The real estate allocation as of Q1 2009 is assumed to be -17.5%
The Taft-Hartley plan is assumed to begin with 100% funding ratio at the beginning of each crisis
The asset allocation(3) is typical of a Taft-Hartley plan (59% allocated to a diversified equity portfolio, 29% to a diversified fixed income portfolio and 12% to alternatives)
The portfolio is not rebalanced throughout each crisis
Out of the four financial crises analyzed, the current crisis has the lowest funding ratio of 62.4%
Source: eVestment and Datastream
88
An overview of Taft-Hartley pension plans
12/31/071 Estimated 12/31/081
Assets $ 132 bn $ 96 bn
Liabilities $ 140 bn $ 140 bn
Surplus / (Deficit) ($8 bn) ($ 44 bn)
Industry funding ratio 94% 69%
Funding zone status GreenGreen YellowYellow
Average plan asset performance in 2008 (until 12/31/08)1 -27%
1Source: Segal Survey Fall 2008, based on 344 plans which responded to Segal’s “Updated Survey of Plans’ Actual Zone Status”. 2008 investment performance of -27% is based on the asset allocation of a typical Taft-Hartley pension plan. Asset values assume that contributions = service cost = benefit payments. Liability for 2007 calculated based on Segal Survey’s projected average industry ratio of 94% and $132bn asset value. The fund zone status identified about is based on the basic threshold: red “critical” plans are <65% funded, yellow “endangered” plans are <80% funded, and green plans are >80% funded. Please note that other measurements will impact the fund’s zone status beyond the basic threshold, such as the relationship between assets, contributions, and benefit payments.
99
The past year has been tough for Taft-Hartley pensi on plans
– Contribution rates under pressure
� The removal of 44,000 UPS full-time Teamsters from Central States will lower pensions for all Teamsters in the future. New UPS pension plan is no longer obligated under contract to make specific hourly payments to this plan
– Increasing number of plans in the “red” zone
� The New England Teamsters and Trucking Industry pension fund is expected to certify its critical status in 2008 after members were notified
– Pension cuts
� The Western Conference of Teamsters pension fund has cut pension accrual rate by 50% (to 1.2% of employer contributions)
� Trustees in the Maryland local 355 pension fund have cut the fund’s annual accrual rate down to 0
� The United Auto Worker plans are expected to accelerate wage reductions, job cuts and loss of benefits, changes already spurred by foreign competition, declining sales and the worst economic conditions
– Increasing bankruptcy and liability withdrawal issu es
� Consolidated Freightways (CF) closed its doors in 2002 while the company owed $400million in withdrawal liability. Conway, the non-union parent company will not pay, claiming it had spun-off CF before it went bankrupt.
– Deteriorating investment performance and outlook
� Central States Fund (CSFP) took a $2.6bn loss during the first 9 months of 2008 while the stock market tumbled even further in the fourth quarter. CSFP had 66% of its assets in stocks, as of September 30, 2008
Source:
http://www.tdu.org
http://www.nccmp.org
1010
Issues faced by Taft-Hartley/Multi-Employer pension plans
� Deteriorating Funded Status and Potential need for a “Funding Improvement” or “Rehabilitation” Plan
� Contribution negotiation
� Rebalancing
� Liquidity Decisions
� Investment Policy / Strategic Allocation
� Excise taxes
� Increasing healthcare costs / Inflation
� Benefit adjustments
� Defined Benefit vs. Defined Contribution
� Allocation decisions (e.g. healthcare vs. pension)
� Actuarial decisions (e.g. amortization extension)
� Personnel Turnover/ Compensation
� Employer bankruptcies / withdrawal from plan
� Declining active participants vs. expanding retirees
� Administrative and operating procedures
� Relationship with employers
� Increasing filing required notices / disclosures
� Declining membership to non-union rivals
Investments Benefits Administration
1111
Keeping the lights on: meeting the immediate liquid ity requirements
Benefit payments
� Monthly benefit payments� Drivers: possible changes to
benefit payments given PPA � Regulation and traffic-light rules
Capital calls(private equity,
real estate)
� Drivers: investment opportunities, operational cash flows, stage of funds
� Today: lack of selling opportunities has drained internal liquidity
Margin calls(portable alpha,
tactical asset allocation, …)
� Drivers: market volatility
� Today: negative performance of equity markets has increased need for futures’collateral
Contributions
� Annual contribution
� Drivers: PPA regulation, change in demographics
� Today: contributions will need to be renegotiated
Sale of investments� Drivers: liquidity, transaction
costs, flexibility with strategic allocation
Investment cash flows (dividends, coupons, real
estate cash flows, distribution…)
� Drivers: structuring of funds, market yields, stage of investments
� Today: higher yields than average for corporates
Liquidity requirements Liquidity sources
� The bulk of liquidity requirements results from ben efit payments
� Liquidity is unlikely to come from alternative asse ts, on the contrary they add to liquidity pressures
� The lack of liquidity from fixed income might requi re additional losses to be recognized due to higher than normal transaction costs
12
13
14
15
16
17
18
19
20
21
22
23
2424
-26.91% -19.96% -21.51% -23.83%
2.26%9.86%
-8.86%
-0.11% 6% 4.22%
US Large CapEquity
US Mid CapEquity
US Small CapEquity
Int'l Equity Cash US FixedIncome
US High Yield Hedge Fund ofFunds
Direct RealEstate
US REITs
17.21%6.47%
-6.97% -8.67%
6.58%15.22%
6.29%
-3.03%
21.52%
-4.27%
-7.84%-19.57% -25.15%
9.56% 6.50%
-11.41%
16.22%7.04%
-27.47%
Benchmark performance from the start of the crisis until its worst point*
* Due to unavailable data, Hedge Fund of Funds return begins Jan 1990
Savings & Loan Crisis: Aug 89 – Sept 90
Sept 11 th Terrorist Attack: Sept 01 – Sept 02
Asian Financial Crisis: Jul 97 – Sept 98
N/A
Representative index return for asset class (Source : Datastream, eVestment & HFRI)US Equity: S&P 500 US HY Fixed Income: Barclays High YieldInternational Equity: MSCI EAFE Free- ND US REITs: MSCI REITUS Mid Cap Equity: Russell MidCap Hedge Funds: HFRI Fund of Funds IndexUS Small Cap Equity: Russell 2000 Real Estate: JPM estimateUS Fixed Income: Bar Cap Aggregate Private Equity: Unknown until Q1 2009Cash: Citigroup 3month T-Bill
2525
25.89%9.64% 9.98% 8.20%
16.43% 10.16%-0.25%
26.91%
-8.82%
-15.79% -10.07% -11.77% -16.07%
2.54%9.33%
-4.06%
-0.83%
25.95%
3.55%
US Large CapEquity
US Mid CapEquity
US Small CapEquity
Int'l Equity Cash US FixedIncome
US High Yield Hedge Fund ofFunds
Direct RealEstate
US REITs
14.75%7.87%
0.41%
-18.36%
14.94% 16.88% 12.81%23.60%
2%
Benchmark performance throughout each crisis
48.12%
Savings & Loan Crisis: Aug 89 – Jun 91
Sept 11th Terrorist Attack: Sept 01 – Nov 02
Asian Financial Crisis: Jul 97 – Jan 99
*Due to unavailable data, Hedge Fund of Funds return begins Jan 1990
Representative index return for asset class (Source : Datastream, eVestment & HFRI)US Equity: S&P 500 US HY Fixed Income: Barclays High YieldInternational Equity: MSCI EAFE Free- ND US REITs: MSCI REITUS Mid Cap Equity: Russell MidCap Hedge Funds: HFRI Fund of Funds IndexUS Small Cap Equity: Russell 2000 Real Estate: JPM estimateUS Fixed Income: Bar Cap Aggregate Private Equity: Unknown until Q1 2009Cash: Citigroup 3month T-Bill
N/A
2626
PPA Requirements for Taft-Hartley plans
General Funding Changes
– Faster Funding: Reduced amortization periods to 15 years for changes in benefits and actuarial assumptions
– Deductibility: Raises the deductibility limit to 140% of the plan’s unfunded current liability
– IRS relief: IRS required to grant extensions of any existing amortization period for up to five years upon plan’s certified filing
Increased plan rules and responsibilities
– Traffic light rules: Green zone, Yellow “endangered” zone , Red “critical” zone (see next page for more details)
– Need to come up with Funding Improvement Plan if plan is in “endangered” zone or Rehabilitation Plan if plan is in “critical” zone
Additional disclosures / penalties
– Plan actuary required to certify within 90 days from the plan’s start year if it is in endangered or critical status. Violation will be subject of to a fine of up to $1,100 per day.
– Excise taxes
– This results from changes passed at the end of 2008
Worker, Retiree, and Employer Recovery Act of 2008
– Allows plan trustees “to freeze” their plan’s 2008 zone status for 2009. Some non-calendar year plans are allowed to look back to their 2007 funding levels.
– If the election is made, trustees must send required documents to participants, bargaining parties, DOL, and PBGC no later than 30 days after the election to freeze is made
Source: Milliman August 2006 article “Congress Enacts Major Multiemployer Pension Reform”, NCCMP,
2727
Traffic Light Rules in detail
Certification on plan’s zone status serves to determine the plan’s funding status for the current plan year and project the plan’s funding status for the next six years.
Green ZoneGreen Zone
– Generally above 80% funded
Yellow ZoneYellow Zone
– Plan is either less than 80% funded or has an accumulated funding deficiency in the current plan year or any of the six succeeding plan years
– Requires adoption of a Funding Improvement Plan
– Imposes funding benchmarks to be met generally over 10 years
– Restricts certain benefit improvements
Red ZoneRed Zone
– Plan meets any of the four following tests:
� 1) Plan is less than 65% funded and the FMV of assets plus contributions for the current and succeeding size plan years is lessthan the present value of projected benefit payments and administrative costs over the period.
� 2) Plan has a funding deficiency in the current plan year or is projected to have one within the following three plan years (four plan years if the plan is 65% funded or less).
� 3) The PV of active participants’ vested benefits is less than that for inactive participants at beginning of plan year, the PV of anticipated contributions is less than the plan’s normal cost plus interest or unfunded vested benefits, and the plan either has a funding deficiency or is projected to have one within the next four years.
� 4) Plan assets plus the PV of anticipated employer contributions over the current and succeeding four plan years are less than the PV of benefit payments plus administrative expenses projected over that period
Source: Milliman August 2006 article “Congress Enacts Major Multiemployer Pension Reform”, NCCMP,
28
29