Pension Fund Bailout |
Last week, President Biden announced a bailout of $36 billion of the Central States Pension Fund, primarily affiliated with the Teamsters Union. The diminished investment returns on the Fund’s assets were projected to reduce retiree payouts to 50%-60% of current levels. The largest pension fund bailout to date, the $36 billion stimulus will provide approximately $100,000 to each pension fund beneficiary over time. Biden used his executive authority to recapitalize the Fund under the $1.9 trillion American Rescue Plan, passed by Congress in 2021 to assist the economy’s recovery from the Covid-19 pandemic. A provision of the Rescue Plan aimed to prop up troubled defined pension fund plans, nearly all affiliated with unions.
Did the pension fund shortfall have anything to do with Covid-19? No…although Biden and Union executives would argue otherwise. The problem is largely due to the extreme low level of interest payments on bonds since the 2008 financial crisis (pension funds typically are heavily weighted toward bond investments). Stock positions have held up well over the past decade, increasing significantly after 2015, with a pullback in 2022 and the Central States Fund also invested through advisors in commercial real estate, a sector which has been a winner over the past few years. The actual shortfall is attributed to the low interest rate environment, mistakes made by the trustees in their investment allocations and strategies, as well as underfunding contributions by the union members.
Many other large defined benefit pension funds are also facing this dilemma. Most fund trustees have targeted an annual 7%-8% return on their investment portfolio, which has not been attainable with the lower interest rate environment. Investment returns on real estate have now peaked and the stock market continues to exhibit volatility, so pension funds have even more pressure to maintain benefit payments. In fact, annual benefit payments have already been reduced in some defined benefit plans. Pension funds in Europe are especially vulnerable, as government regulations required 100% fund investment in sovereign bonds, whose interest rates were negative for the past 8 years.
The Pension Fund Guarantee Corporation (PFGC) was founded in 1974 to provide payments to beneficiaries when a fund becomes insolvent or bankruptcy of a corporation overseeing a pension plan. Over the past few years, the PFGC has experience occasionally deficits, with obligations exceeding assets. However, through the American Rescue Plan, the PFGC has already allocated $10 billion to assist other trouble pension programs and is expected to provide at least $75 billion more over time.
Currently, most employees are not covered under a defined pension fund and a significant percentage of workers have no pension benefits at all. Now, those US taxpayers have effectively picked up the tab for the rescue of the Central States Pension Fund and other defined plans through the PFGC. Is that fair?
Related Articles -
Pension funds, pension benefits, bailouts, American Rescue Plan, Pension Fund Guarantee Corporation, ,