Mike Wagner, of JP Morgan, discusses pension plans, pension planning and reform at the first Independent Retired Football Players Summit held at the South Point Resort & Casino in Las Vegas, May 2009.
1. Independent Retired
Players Summit &
Conference
Considerations
in today’s markets for
Multi-Employer pension plans
May 2009
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2. 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.
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3. BERT BELL/PETE ROZELLE NFL PLAYER RETIREMENT PLAN
Fiscal year end March 2007. Total of 10,020 participants.
Bert Bell Plan Asset Allocation
Beginning of year Cas h Equities Mutual Funds Venture Capital
Synthetic GICs Corporate Bonds U.S. Gov't Bonds
Current assets $961,895,197 6.6%
10.6%
Liabilities $1,546,413,280 3.9%
Funded status¹ 62% --- 20.2% 37.2%
Liability Interest Rate Assumption 7.25%
3.8%
Estimated investment return 13.3%
17.8%
NFL Total Plan Assets
Income and Expenses Bert Bell Player Second Career Savings Coaches & Front Office Office Pension Plan Other
Credits (+) Debits (-) 3.6%
4.6%
Employer Contributions $125,904,014
Investment Earnings $95,428,529
21.5%
Benefit Payments $66,106,772 43.1%
Administrative Expenses $9,550,102
Totals $221,332,543 $75,656,874
Net Income² $145,675,669 27.1%
(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
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4. Distribution of funding ratios for Taft-Hartley pension plans
Actual PPA ‘06 zone status of Taft-Hartley pension plans
% of plans–12/31/07
60%
Endangered plans
40% 29%
Critical plans 18% 19%
20% 8% 12% 11%
4%
0%
<65% 65-74% 75-84% 85-94% 95-104% 105-114% 115%+
Funded Status
2008 projected zone status of Taft-Hartley pension plans
% of plans–12/31/08
Critical plans
60% Endangered plans
45%
40% 31%
20% 12% 11%
0% 0% 0%
0%
<65% 65-74% 75-84% 85-94% 95-104% 105-114% 115%+
Funded Status
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
3 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
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zone status beyond the basic threshold, such as the relationship between assets, contributions, and benefit payments.
5. Change of the funding ratio of a typical Taft-Hartley plan since the beginning
of savings and loan crisis in 1989
Savings & Asian Financial Sept 11th Global Financial
Loan Crisis Crisis Attack Crisis
$6,000 Worst 160%
funding Worst
Worst ratio loss funding
funding -4% ratio loss 140
5,000 ratio loss -19%
-14%
120
Value (in $mill)
Funding Ratio
4,000
100
Worst 80
3,000 funding
ratio loss
-41% 60
2,000
— Liability Value 40
1,000 Liab +8% — Funding Ratio
per year 20
— Asset Value
0 0
08/94
08/95
08/96
08/97
08/98
08/99
08/00
08/01
08/02
08/06
08/07
08/08
08/89
08/90
08/91
08/92
08/93
08/03
08/04
08/05
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)
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.
4 (Source: Money Market Directories)
(3) Assumes that contributions are equal to benefit payments, and liabilities grow due to 4
normal cost of 8% per year
6. High dispersion of asset class returns have resulted in significant shifts of
asset allocation
Dramatic divergent performances … … Led to over-allocation to FI and alternatives
Benchmark returns1 as of December 31, 2008 and March 31, 2009 Asset allocation of an average Taft-Hartley 1,2 (%)
12/31/07
12/31/08
2008 YTD 03/31/09
60 YTD 03/31/09
11%
50
1% 1% 48
n/a
0%
-3% -2% 41
38
-11%
-14% -10-15% -10-20%
-19% -10-25% 29
-37%
-43% 12 11 11
-53%
US Equity Intern'l Emerging US Invest Hedge Real Private
Equity Markets Treasuries Grade Funds Estate Equity
Equity Credit
Equity Fixed income Alternatives
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. 5
Indices do not include fees or operating expenses and are not available for actual investment.
7. Behavior of a typical Taft-Hartley plan through different financial crises
Performance from the start of the crisis until its worst point(1,2) The Taft-Hartley plan is
120% Asset Return Liability Return Funding Ratio
110% assumed to begin with 100%
95.6%
100%
90% 85.6%
80.6%
funding ratio at the
80% beginning of each crisis
70% 59.5%
60%
50%
40% The asset allocation(3) is
30%
20% 9.4% 9.4% 10.1%
typical of a Taft-Hartley plan
8.7%
4.5%
10%
0%
(59% allocated to a
-10%
-6.4% diversified equity portfolio,
-20% -12.4%
-30% 29% to a diversified fixed
-40%
Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis
-34.5%
Global Financial Crisis
income portfolio and 12% to
Sept 1990 Aug 1998 Sept 2002 Feb 2009
alternatives)
Performance from the start of the crisis until its end (1)
120% 109.8%
The portfolio is not
110%
100% 94.0% rebalanced throughout each
85.1%
90%
80%
crisis
70% 62.4%
60%
50% Out of the four financial
40%
30%
15.9%
24.1% crises analyzed, the current
20% 13.0% 10.1% 10.8%
8.9%
10% crisis has the lowest funding
0%
-10%
-6.4%
ratio of 62.4%
-20%
-30%
-40% -30.9%
Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis Global Financial Crisis
Aug 89 – Jun 91 Jul 97 – Jan 99 Sept 01 - Nov 02 Dec 07 – Current(2)
Source: eVestment and Datastream
(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
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proxied using the NCREIF index for direct real estate. The real estate allocation as of Q1 2009 is assumed to be -17.5%
8. Behavior of a typical Taft-Hartley plan through different financial crises
Performance from the start of the crisis until its worst point(1,2) The Taft-Hartley plan is
120% Asset Return Liability Return Funding Ratio
110% assumed to begin with 100%
95.6%
100%
90% 85.6%
80.6%
funding ratio at the
80% beginning of each crisis
70% 59.5%
60%
50%
40% The asset allocation(3) is
30%
20% 9.4% 9.4% 10.1%
typical of a Taft-Hartley plan
8.7%
4.5%
10%
0%
(59% allocated to a
-10%
-6.4% diversified equity portfolio,
-20% -12.4%
-30% 29% to a diversified fixed
-40%
Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis
-34.5%
Global Financial Crisis
income portfolio and 12% to
Sept 1990 Aug 1998 Sept 2002 Feb 2009
alternatives)
Performance from the start of the crisis until its end (1)
120% 109.8%
The portfolio is not
110%
100% 94.0% rebalanced throughout each
85.1%
90%
80%
crisis
70% 62.4%
60%
50% Out of the four financial
40%
30%
15.9%
24.1% crises analyzed, the current
20% 13.0% 10.1% 10.8%
8.9%
10% crisis has the lowest funding
0%
-10%
-6.4%
ratio of 62.4%
-20%
-30%
-40% -30.9%
Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis Global Financial Crisis
Aug 89 – Jun 91 Jul 97 – Jan 99 Sept 01 - Nov 02 Dec 07 – Current(2)
Source: eVestment and Datastream
(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
7 proxied using the NCREIF index for direct real estate. The real estate allocation as of Q1 2009 is assumed to be -17.5%
7
9. 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 Green Yellow
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
8 measurements will impact the fund’s zone status beyond the basic threshold, such as the relationship between assets, contributions, and benefit payments.
8
10. The past year has been tough for Taft-Hartley pension 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 issues
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
9 http://www.nccmp.org
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11. Issues faced by Taft-Hartley/Multi-Employer pension plans
Investments Benefits Administration
Deteriorating Funded Status Benefit adjustments Personnel Turnover/
and Potential need for a Compensation
“Funding Improvement” or Defined Benefit vs. Defined
“Rehabilitation” Plan Contribution Employer bankruptcies /
withdrawal from plan
Contribution negotiation Allocation decisions (e.g.
healthcare vs. pension) Declining active participants
Rebalancing vs. expanding retirees
Actuarial decisions (e.g.
Liquidity Decisions amortization extension) Administrative and operating
procedures
Investment Policy / Strategic
Allocation Relationship with employers
Excise taxes Increasing filing required
notices / disclosures
Increasing healthcare costs /
Inflation Declining membership to
non-union rivals
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12. Keeping the lights on: meeting the immediate liquidity requirements
Liquidity requirements Liquidity sources
Monthly benefit payments Annual contribution
Drivers: possible changes to Drivers: PPA regulation,
Benefit payments benefit payments given PPA Contributions change in demographics
Regulation and traffic-light rules Today: contributions will need
to be renegotiated
Drivers: investment
opportunities, operational
Capital calls Drivers: liquidity, transaction
cash flows, stage of funds
(private equity, Sale of investments costs, flexibility with strategic
Today: lack of selling allocation
real estate)
opportunities has drained
internal liquidity
Drivers: market volatility Drivers: structuring of funds,
Margin calls Investment cash flows
Today: negative performance market yields, stage of
(portable alpha, (dividends, coupons, real investments
of equity markets has
tactical asset estate cash flows,
increased need for futures’ Today: higher yields than
allocation, …) collateral
distribution…) average for corporates
The bulk of liquidity requirements results from benefit payments
Liquidity is unlikely to come from alternative assets, on the contrary they add to liquidity pressures
The lack of liquidity from fixed income might require additional losses to be recognized due to higher than normal
transaction costs
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25. Benchmark performance from the start of the crisis until its
worst point*
Savings & Loan Crisis: Aug 89 – Sept 90
* Due to unavailable data, Hedge Fund of Funds return begins Jan 1990
16.22%
9.56% 6.50% 7.04%
N/A
-7.84% -11.41%
-19.57%
-25.15% -27.47%
Asian Financial Crisis: Jul 97 – Sept 98
17.21% 21.52%
15.22%
6.47% 6.58% 6.29%
-6.97% -3.03% -4.27%
-8.67%
Sept 11th Terrorist Attack: Sept 01 – Sept 02
9.86% 6% 4.22%
2.26% -0.11%
-8.86%
-19.96% -21.51% -23.83%
-26.91%
US Large Cap US Mid Cap US Small Cap Int'l Equity Cash US Fixed US High Yield Hedge Fund of Direct Real US REITs
Equity Equity Equity Income Funds Estate
Representative index return for asset class (Source: Datastream, eVestment & HFRI)
US Equity: S&P 500 US HY Fixed Income: Barclays High Yield
International Equity: MSCI EAFE Free- ND US REITs: MSCI REIT
US Mid Cap Equity: Russell MidCap Hedge Funds: HFRI Fund of Funds Index
US Small Cap Equity: Russell 2000 Real Estate: JPM estimate
24 US Fixed Income: Bar Cap Aggregate Private Equity: Unknown until Q1 2009
24
Cash: Citigroup 3month T-Bill
26. Benchmark performance throughout each crisis
Savings & Loan Crisis: Aug 89 – Jun 91
*Due to unavailable data, Hedge Fund of Funds return begins Jan 1990
23.60%
14.75% 14.94% 16.88% 12.81%
7.87% 2%
0.41% N/A
-18.36%
Asian Financial Crisis: Jul 97 – Jan 99
48.12%
25.89% 26.91%
16.43%
9.64% 9.98% 8.20% 10.16%
-0.25%
-8.82%
Sept 11th Terrorist Attack: Sept 01 – Nov 02
25.95%
9.33%
2.54% -0.83% 3.55%
-4.06%
-15.79% -10.07% -11.77% -16.07%
US Large Cap US Mid Cap US Small Cap Int'l Equity Cash US Fixed US High Yield Hedge Fund of Direct Real US REITs
Equity Equity Equity Income Funds Estate
Representative index return for asset class (Source: Datastream, eVestment & HFRI)
US Equity: S&P 500 US HY Fixed Income: Barclays High Yield
International Equity: MSCI EAFE Free- ND US REITs: MSCI REIT
US Mid Cap Equity: Russell MidCap Hedge Funds: HFRI Fund of Funds Index
US Small Cap Equity: Russell 2000 Real Estate: JPM estimate
25 US Fixed Income: Bar Cap Aggregate Private Equity: Unknown until Q1 2009
25
Cash: Citigroup 3month T-Bill
27. 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
26 Source: Milliman August 2006 article “Congress Enacts Major Multiemployer Pension Reform”, NCCMP,
26
28. 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 Zone
– Generally above 80% funded
Yellow 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 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 less
than 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
27 Source: Milliman August 2006 article “Congress Enacts Major Multiemployer Pension Reform”, NCCMP,
27