Federal Spending Bill Brings Multiemployer Pension Changes in Through the Back Door

It never seems to fail -- Congress needs a way to spend money or make a bill budget-neutral and pensions are the ugly stepsister. I expressed my opinion on this just last month. So, what did they do this time? Our legislators appear to have found a different stepsister this time in multiemployer pensions. I'll talk more about what happened later, but first I'll provide some background for people who aren't as familiar with multiemployer plans. For those who like names, the new law is known as the Multiemployer Pension Plan Reform Act of 2014 (MEPPRA, until someone gives me a better name).

Multiemployer pension plans were authorized by the Taft-Hartley Act. In such an arrangement often found in industries where individuals may perform jobs for a variety of different employers (construction, trucking, mining, etc), employers contribute a negotiated amount of money per unit (hour worked, mile driven, etc) of work. Unlike single-employer plans, multiemployer plans are run by a group of trustees evenly balanced among collective bargaining units or unions and management. Benefit levels are theoretically set when the trustees determine that the plan's assets are sufficient to support an increase. And, once employers choose to participate in a multiemployer plan through the collective bargaining process, it may be difficult to exit as withdrawing sponsors are subject to significant payments known as withdrawal liability.

The first really significant changes to multiemployer rules came into being with the Multiemployer Pension Plan Amendments Act in 1980. The rules were largely unchanged until our legislators saw fit to treat well funded multiemployer plans differently from more poorly funded plans in the Pension Protection Act of 2006 (PPA). PPA introduced the colored zones dependent theoretically on a plan's level of danger of not being able to support its own benefit promises.

So, what does MEPPRA do and what level of concern should participating employers have? As is often the case these days, one of the primary purposes of MEPPRA is to protect the Pension Benefit Guaranty Corporation (PBGC), the governmental agency that protects private pension benefits.

One of the most important tenets of ERISA-covered pension plans has been that benefits accrued by a participant cannot be reduced by plan amendment. This has long been one of the sacred cows of defined benefit plans (DB). Under MEPPRA, certain very poorly funded plans may be able to reduce accrued benefits of participants including those who are already retired and are receiving benefits. Such reductions are subject to a "rejection vote" by plan participants (active and no longer active), but in the case of "systemically important plans" (those where the PBGC projects it will be on the hook for at least $1 billion), the Treasury Department can override the vote of plan participants.

At the same time, premiums paid to the PBGC on behalf of each plan participant will double next year from $13 per participant to $26, further demonstrating PBGC's influence on our legislators. And, in a move that I think could bring further controversy when the rule is applied, the PBGC will have the ability to "facilitate" mergers of two multiemployer plans in order to improve their aggregate funded status.

Consider that last provision. As an example, let's say that there are two widgetmakes multiemployer pension plans and that the one for workers in states with at least four vowels in the names of those states is poorly funded while the one for workers in more vowel-challenged states is pretty well funded. In an effort to improve the aggregate funding, the PBGC comes in and facilitates a merger of the two plans. As a worker, how would you feel if you were suddenly in a poorly funded plan when you had not been previously. Perhaps the reason is that the people in the other plan have much better benefits than you do. So, the previously responsible management of your plan will be bailing out the less responsible management of the other plan. That might just make you want to say "Hmm" or perhaps something worse.

There are a number of other changes that are highly technical related to funding and to withdrawal liability (the amounts that an employer who chooses to cease participating in the plan must pay in order to get out) calculations, but these are quite complex and far beyond the scope of most readers. And, in case you were wondering, reading about those calculations will not bring chills of excitement.

All that said, what should an employer do to react to the passage of MEPPRA? There is no perfect strategy, but for employers participating in reasonably well funded plans (green zone), there should not be much that is needed. For the remainder (red zone or yellow zone) of plans, however, employers may need to weigh their options. They might consider doing some or all of the following:

• Review all of their collective bargaining agreements that cause them to be participating sponsors of multiemployer plans. Pay particular attention to the size of the plan and the plan's current zone status.
• If withdrawal from the plan is an option, request a withdrawal liability calculation to see how painful that strategy might be.
• Consider the pros and cons of remaining in the plan as part of the company's overall risk management strategy.
• Consider engaging an independent actuary (not affiliated with the plan's actuary) to assist with any strategy decisions. To the extent that the company is contemplating a strategy that could potentially inflame relations with one or more unions, it could make sense to engage this actuary through counsel.

Stay tuned. I'm sure it won't be long before pensions get to be an ugly stepsister once again.

Frightening Data on DC Plan Ownership

According to an article in this morning's News Dash from Plan Sponsor, fewer families had an individual account retirement plan (defined contribution or IRA) in 2013 than in 2010. However, on the bright side, average account balances have increased over the same period.

What do we learn from this? It's difficult to know for sure, but as is my wont on my blog, I'm going to take a shot at working it out.

Why are average account balances up? Well, the equity markets have performed pretty well over the last few years. Combine that with the fact that there has been time for additional contributions to those accounts and this makes sense. When we combine this, however, with my rationale for the prevalence of accounts decreasing, it may look troubling.

That the number of families with individual account retirement plans is decreasing suggests underlying issues with the economy. What I suspect is that many long-term unemployed or under-employed have had to liquidate accounts that they had a few years ago in order to survive. People laid off from jobs have taken distributions rather than rollovers to live on. I suspect that more often than not, these have been total distributions from smaller accounts. By eliminating some of the smaller account balances, the average and median accounts have grown in size.

That only about 50% of families have individual retirement accounts and only about 65% have any retirement plan at all is not good news for our future economy. How will the remaining 35% live? Moreover, among those 65%, will they have enough to survive in retirement?

The way it looks to me is that for people who are able to fully utilize their 401(k) or other retirement program for their entire working lifetimes, retirement may be comfortable. But this data suggests that this will be a substantial minority. For the rest, the retirement system is failing us.

30 years ago, defined benefit (DB) plans were the bulwark of the corporate retirement system. After years of Congressional meddling, many employers consider DB plans to be impractical. At the same time with further emphasis on individual responsibility, the burden of providing a retirement benefit has been shifted largely to employees.

If you are good at Googling or Binging, you can easily find projections from lots of smart people showing that a good 401(k) plan will be sufficient for responsible employees to retire on. In my opinion, most of these projections are deficient. You just don't see projections that consider leakage including:

• Unemployment for a meaningful period of time
• The necessity to take a job for a short or long time that does not have a savings plan
• Increased cost-shifting of all benefits to the employee which may reduce an employee's ability to save
• High-deductible health plans which force employees in many cases to pay significant amounts out-of-pocket for health care

This data is frightening. The retirement system is severely broken. Too many times, the public policy behind the retirement system has been abused by tax policy. We are left with retirement plans being a toy for Congress to make bills seemingly budget neutral. 

The ability to retire is part of the 21st century American Dream. This data suggests that the retirement part of the dream may be just that -- a dream.

Not pretty ...

Possible Delay of Pay Ratio Regulations -- Practical or Political?

Right before Thanksgiving, the House Committee on Financial Services sent a letter to the Chair of the SEC asking that guidance on the so-called Dodd-Frank Pay Ratio rule (Section 953(b)), and therefore implementation as well be delayed. The letter called this implementation a low priority. No similar correspondence has come from the Senate or any of its committees.

Gee, what a surprise that is. House committees are controlled by Republicans currently while Senate committees are in the hands of Democrats for few more weeks. Dodd-Frank was another bill and then law praised by Democrats and loathed by Republicans. The letter points out that the law does not specify a time by which the SEC must promulgate a rule on this issue. Additionally, the letter tells the SEC that the pay ratio disclosure has little value and that knowing the pay ratio for publicly traded companies back in the 2006-2008 timeframe would have done nothing to avert the financial crisis.

Let's regroup for a moment. For those who don't know, Section 953(b) of the Dodd-Frank law requires that registrants disclose a single number -- the ratio of the pay of the median-paid employee in the company to that of the CEO. Pay for this purpose is pay as defined in the executive compensation section of the proxy. I have argued that while such relative information may be useful to some that this calculation is the wrong one and needlessly burdensome. Last year, the SEC issued a proposed rule on the pay ratio calculation. While it provides a means of simplification for many companies, companies that do take advantage of the sampling techniques proposed will not find them simple by any means.

So, is the single number valuable? I don't think so. If one insists that such a comparison is valuable, then to me, it would be far more instructive to show CEO compensation and a chart of commonly held jobs within the company showing a compensation range for actual or hypothetical full-time employees(if no full-time actual employees exist for such job classifications) for each of those jobs alongside the CEO compensation.

Advocates of the pay ratio point out companies in the fast food industry. They note that CEOs make many millions of dollars while most fast food workers earn minimum wage or only slightly more. In this case, is the pay ratio valuable? To me, it's not. Running a multi-billion dollar business and defining its strategy to compete and grow has no similarities to monitoring a drive-thru window. Comparing the compensation of two such individuals makes no sense to me.

Currently, the SEC has three Democrats and two Republicans. The Chair is a Democrat. The commissioners still have meaningful Dodd-Frank work to do whether they make 953(b) a priority or not.

I don't know what they will do, but thus far, they have not shown a predisposition to act quickly on ensuring that the pay ratio is disclosed for registrants.

Multiemployer Pension Plan Crisis ... Or Not

Late last week, the New York Times published an article by Floyd Norris, its chief financial correspondent and an economist, on the crisis in multiemployer pension plans. I decided to write about it for a few reasons: 1) it's an interesting topic to me, 2) my strong impression is that the crisis is is not quite as the picture painted in the article, and 3) to go with the article, I think it's important to give some background and education.

I preface by saying that I do not generally work in the area of multiemployer plans, but then neither does Mr. Norris nor most of the people cited in his article.

Multiemployer (ME) pension plans are defined benefit (DB) plans. They meet the general tenet of DB plans in that they promise a benefit to plan participants at retirement rather than simply a pool of money segregated for that participant. But, there are lots of differences between ME plans and what most of us would think of as traditional (single employer) DB plans. Here are some of them.

• ME plans are collectively bargained.
• As the name suggests, these plans are generally maintained by more than one employer, usually in the same or related industries. The rationale is that a worker can be used by multiple businesses while all the time accruing a single pension.
• What is negotiated at the most basic level is the level of contributions that each employer will make. For example, a negotiated contribution might be 20 cents per hour worked or 25 cents per 1,000 miles driven.
• ME plans are managed, so to speak, by their trustees, joint committees having equal representation from labor unions and from management.

The article notes that the Pension Benefit Guaranty Corporation (PBGC), the governmental agency that insures pension benefits, believes that it will run out of money in its ME fund in the very foreseeable future. This could be the case (I have no reason to doubt the PBGC's forecasts) as two of the largest plans (those of the United Mine Workers and Central States Teamsters) are nearing the point where they will have insufficient assets to pay benefits to retirees.

What the article does not point out, however, is that the large majority of ME plans are really pretty well funded. Generally, ME plans have been managed responsibly and as a result, most of those plans do not face similar dangers.

When the Employee Retirement Income Security Act (ERISA) was signed into law in 1974, ME plans were not even covered by the PBGC. It wasn't until 1980 when the Multiemployer Pension Plan Amendments Act (MEPPAA) became law that such a fund was established for ME plans. And, even then, it was thought (I don't know any of the logic which may have been very good at the time for these thoughts) that the likelihood of ME plans needing PBGC coverage was small. So, as PBGC premiums for single-employer plans continued to increase, premiums for ME plans stayed low.

From my viewpoint, the reason for this might have been that it is up to the plan trustees to assure that the level of benefits provided to ME plan participants not be such that plan assets would be insufficient to pay such benefits. However, I have heard it said by people working in the ME arena, that in some of the larger, less funded plans that the strategy used amounted to a death spiral which is now approaching that death.

What happened?

As we know, plan assets have some years where their underlying investments perform well and some where they don't. So, when assets did perform well, and this is oversimplified a bit, the plans appeared to be better funded than they had been and therefore able to support higher levels of benefits for plan participants. In some plans, the trustees granted such increases. But, we all know that not all years provide excellent investment returns. When the plans were suddenly less well funded, benefit levels did not decrease. Further, and the United Mine Workers represent a good case study for this, when the ratio of active workers to retired participants decreases (similar to the US Social Security system), sources of assets may no longer be sufficient to support benefits. [This is a great reason to fully fund benefits for an individual participant on a reasonable actuarial basis by the time that participant leaves employment, but that's for another rant.]

What Mr. Norris does not point out in his article is that most ME plans are not in danger of needing PBGC protection. And, for the two plans in question, one might posit that they dug their own graves, so to speak. That is, they offered levels of benefits that the plans were not able to sustain over the long haul. Some ME actuaries have told me that the trustees who engage them for valuation services and for consulting advice have not necessarily followed that advice. 

The losers in this story are likely the people who have done nothing wrong. Plan participants, as a group, tend to do their jobs and assume that that their pensions will be paid. It is not the fault of a coal miner in the UMW plan that the industry fell on hard times. And, that long haul trucker in the Central States plan probably has no idea how his pension plan works, but he does expect that when he retires that he will get the benefits that he has been guaranteed. 

A joint business and labor group developed a plan designed to rescue the ME system without bailouts and without saving the PBGC. It was controversial in that it violated one of the most sacred tenets of ERISA -- thou shalt not reduce benefits that have already been earned. However, for any plans that go under, benefits in excess of the PBGC maximum guaranteed benefit may be reduced. And, if the PBGC runs out of money, even benefits less than that limit will likely be reduced. 

The situation is more complex than I describe. ME rules are quite complicated. But, I reiterate that the crisis appears to be limited to a relatively small percentage of plans, and according to the joint business and labor group could be solved by reducing benefits only in those plans that promised benefits that it could never have expected to support for the long term. Anything like that, however, would require Congress to pass a bill and the President to sign it.

Oh well ...

On Surveys, Data, and Other Common Misconceptions

Every so often, I feel the need to talk about things that are wrong. Well, perhaps I do that more than every so often, but I do it to varying degrees. Here I am going to focus mostly on surveys and their data. I'm not going to cite anything in particular, though, so you'll just have to trust me that  I am not making it up.

I have seen the data from lots of surveys that purport to tell us what are the most important elements to making a job desirable. I have read all sorts of things about mentoring, how green the workplace is, whether the health benefits are good, and the amount of focus put on learning and development among other things. These are all very important, but ...

When someone leaves a job voluntarily, ask them why they left. I have very rarely heard someone say they are leaving to go elsewhere because the new company has a great mentoring program, they are a green company, the health benefits are better, or the focus is on learning and development. Far more often, I have heard one of these:

• I got a big pay raise
• I hated my boss and I had to get away
• I hated my job and or the company I was working for
• I was in a dead end job
• I don't have to travel as much
• I get to travel more

What this tells me is that something about the surveys is just wrong. And, I don't think it is the inability of the people who report the results to accurately compile or report the data. I think it falls under GIGO.

GIGO, you say? What is that?

Garbage in, garbage out!

Surveys as a group, are horribly constructed. Correction, it would be an improvement on most surveys if they were horribly constructed. Most are worse than that.

If we consider job/pay/benefits related surveys, what would you think of a question like this: "How important to you are your health benefits?" Well, of course, they are very important.

So, since everyone says they are important, this gets construed as being one of the keys to hiring and keeping good employees. But, you rarely hear about employees choosing a particular employer or failing to because of the particular health benefits. The question has always been whether they offer health benefits. Very few people ask specifically what they are, how much they will pay for them, or what is included or excluded.

We could say similar things about retirement benefits. You need to have a 401(k) plan to compete. But, if it's a bad plan, nobody ever leaves specifically because of that. Yet, if you were to read survey data and reports, you would think that the quality of a 401(k) plan was a top 3 attraction and retention tool. I will say, however, that employees will think twice before leaving a company with a great retirement program, especially if they have a defined benefit pension plan. It is a retention tool and it is a differentiator.

Okay, rant over for the day. 

PCAOB Expands Purview of Accounting Profession to Review Compensation Arrangements

Unless you are in a field related to accounting or review of public companies, you may never have heard of the PCAOB, or more formally, the Public Company Accounting Oversight Board. It is actually a private-sector, non-profit company that was created by the Sarbanes-Oxley Act (SarbOx or SOx) in 2002. According to SOx, the PCAOB is to, among other things, oversee the audits of public companies. In part, to do so, the PCAOB creates a set of auditing standards that must be approved by the Securities and Exchange Commission (SEC).

Got that?

So, why am I writing about this? Earlier this year, the PCAOB issued Auditing Standard 18. In late October, the SEC approved it. And, so it is.

Auditing Standard 18 (AS18) is a lovely document. It's 223 pages of, and I can't think of a better word for it, stuff carrying the clearly far too brief title, "Related Parties and Amendments on Significant Unusual Transactions and a Company's Financial Relationships and Transactions with its Executive Officers."

Got that as well?

Among other things, AS18 asks that auditors, among other things:

1. Read the employment and compensation contracts between the company and its executive officers
2. Read the proxy statements and other relevant company filings with the SEC and other relevant regulatory agencies that relate to the company's financial relationships and transactions with its executive officers
3. Obtain an understanding of compensation arrangements with senior management other than executive officers including incentive compensation arrangements, changes or adjustments to those arrangements, and special bonuses
4. Inquire of the Chair of the Compensation Committee as well as outside compensation consultants
5. Obtain an understanding of expense reimbursement policies with respect to executive officers

All of this is to be done to identify risks of material misstatement.

I understand why all of this is being done. Early in this century, there were a number of corporate scandals resulting from apparently fraudulent misstatement of financials. Many of you remember Enron, WorldCom, and Tyco. This is intended to be one more step to lessen the likelihood of such abuses and to restore faith that corporate America, as a whole, are being good citizens.

We place lots of faith in auditors in this regard. Now, I have friends and acquaintances who are auditors. Some of them are very good and knowledgable. And, this is not intended to say that the rest (the complement of some of them) are not good, but in any profession, some practitioners will always be better than others.

Here, however, the PCAOB and the SEC are either assuming that auditors have sufficient expertise in compensation arrangements to handle this undertaking or that the firms of which they are a part have this expertise internally to which the auditors may refer. At the Big 4, this is probably the case. They have massive staffs and are able to engage specialists to handle such complex questions. How about the next tier of auditing firms? Do they have this expertise? I don't know, but I suspect the answer is sometimes. Let's take it down one more tier. Do those firms have that expertise? Again, I'm guessing, but I suspect that the answer is not very often. And, if we move to the smallest of the auditing firms, I would be inclined to move the needle to rarely, if at all.

Most auditors that I know are nice people. Most auditors that I know are pretty smart. Most auditors that I know are pretty honest. That said, most auditors that I know are being asked here to weigh in on matters in which they have no training and are frankly not likely to have it anytime soon.

What is the answer? I'm not sure. I'm not a fan of more regulation or more government control generally, but perhaps people who engage in review of compensation arrangements of public companies need some sort of licensure. Actuaries need it for many functions that we perform and we are also, as a group, pretty nice, smart, and honest.

I think that the PCAOB and SEC have used their unencumbered power to stretch too far. Perhaps, it's time to rein them in?

Black Friday Sales Down -- It Goes Back to Benefits and Compensation?

I heard it this morning. Black Friday sales were down. Not only were they off last year's huge numbers, they were well below forecast. Many economists and other prognosticators were shocked. Of course, people were going to spend more as they are paying far less for gasoline.

That connection doesn't hold; it never will. People, by and large, make larger purchases, the kind that fuel the Christmas economy, when they feel good about their futures. They do it when their long-term view of their personal economy is optimistic. Today, it's not.

Why not? Yes, fuel prices are down and down significantly. But, take-home pay is not increasing for most people. I think that most people view that fuel prices down are a temporary phenomenon -- a good one, but not one that will last for the long haul. But, take-home pay has been eroded for years now. Across the board pay goes up nearly every year, but not by much. In a good year, it might be a 3% to 4% increase. In a bad year, it's below 2%. At the same time, the employee's portion of the cost of their own benefits is increasing. Have you noticed your health plan? Your deductibles have gone up, your out-of-pocket maximums have gone up and your premiums have gone up by a bigger percentage -- likely significantly bigger -- than your pay. The same can be said about other employee benefits. Either you are paying more or getting less or both.

Does this mean that your employer is evil? They might be, but not because of the scenario described here. Companies have to be competitive in the marketplace. If their cost of goods sold or cost of providing services increases by too much, then their margins will be down. And, if that happens, then those pesky owners, be they the people who started the company or the broad group of shareholders will make less money. They don't like that. In fact, they are in business to make money.

I know; that's not a nice way of thinking about it. But, suppose you started a business. Wouldn't you want to turn a profit? After all, the person starting the business takes a risk. There is point in taking a risk if the reward is not at least commensurate with that risk. If you invest in a company, you expect that company to have increased, not decreased profits. So, the people who run the business cannot afford increases in labor costs that cut into those profits by too much.

Going full circle, employees notice what's in their paychecks. If your employee receives less money in the first paycheck of 2015 than she did in her last paycheck of 2014, it just doesn't matter how big you told her that her raise was. To her, it looks like a pay cut. When she sees a pay cut, she spends less, not more. And, because she is expecting that, Black Friday was not as busy as the stores wanted.