Investment returns - generally good but not every single year and not enough to overcome the other challenges described here.
It takes more than strong returns in most years to build back losses in a pension plan because other important factors are at play:
- Starting in fiscal year ending March 31, 2010, the Plan experienced gross annual returns of 32.0%, 12.8%, 2.2%, 8.8%, and 8.3% - an annual 12.5% average. This meant we had a $500 million increase in market value of our assets in the five-year period ending March 31, 2014.
- The next two fiscal years were not as kind. Market value of our assets was dampened by lower returns, with a gross annual return of 5.2% for fiscal year ending March 31, 2015 and an essentially flat return for fiscal year ending March 31, 2016.
- While a gross annual return of 12.0% for fiscal year ending March 31, 2017 kept the Plan out of critical and declining status for at least one more year, it did not fix the larger funding issues.
- Over the eight years ending March 31, 2017, the Plan's gross annual investment return averaged 9.8%, which is good but not good enough.
Contributions - covered only 42% of our benefit payments during the fiscal years ending March 31, 2016 and 2017.
In addition to strong investment returns, we need a strong base of contribution income. Our Plan pays more benefits than our peers relative to contributions we receive, which covered only 42% of benefits paid out for our fiscal years ending March 31, 2016 and 2017. Other similarly-sized entertainment industry funds showed contributions covering between 72% and 193% of their annual benefit payments for their fiscal year ending 2016. And this gap between contributions and benefit payments for our Plan is getting wider, despite recent increases in contributions.
Actuarial assumptions - while we know people are living longer, recent actuarial studies show it's even longer than anticipated
Our liabilities (money needed to pay future benefits) increased by almost $300 million for fiscal year ending March 31, 2016, largely from an update to assumptions that predict how long participants will live, based on recent studies from the Society of Actuaries. We know people are living longer (and the actuaries assumed they would) but the studies showed even longer lifespans than previously anticipated. While this is good news personally, it creates difficulties for a pension plan. Unlike a 401(k) where payments continue only until the balance is depleted, pension benefits are designed to continue for the participant's life. Longer life expectancies mean much higher liabilities.
Benefit payments continue - as they should.
Money is continuously flowing out of the Plan as benefits are paid, which is exactly what a pension plan is designed to do. When there's a market downturn, 401(k) plans can bounce back more easily because money isn't regularly flowing out. Pension plans with strong contributions can bounce back more easily than this Plan because money coming into those plans cover a larger portion of what is flowing out.
Putting it all together - the investment base is smaller
From 2004-2017, annual benefit payments increased by $77 million while annual contributions increased by only $22 million.
With benefit payments increasing and contributions declining as a percentage of benefits paid, each year we're left with less of an asset base to generate investment returns. "It takes money to make money" applies here. The larger your asset base, the more money you can generate with positive investment returns.
As a result, even several years of good investment returns weren't enough to fix the Plan.