Last updated on 01/08/2018

Status of the Plan

What is the Plan's funded status today?

The Plan is in critical status and has been since 2010. We currently have a rehabilitation plan that incorporates reasonable measures available under the law to address our situation. Although we advised that it was possible that the Plan would be in critical and declining status for the year beginning April 1, 2017, better than expected investment returns for the fiscal year ending March 31, 2017 kept the Plan in critical status.

Funded status is formally measured by the Plan's actuaries once a year. The projections of our funded status as of March 31, 2017 showed that the Plan would be able to pay benefits for 20 years. So, the Plan is not in critical and declining status (which only applies when a plan is projected to be insolvent - run out of money - within 20 years). See related FAQs.

If we are not critical and declining, does that mean we're "safe"?

Though Plan status is critical for year beginning April 1, 2017 and has been since 2010, avoiding critical and declining status doesn't mean the Plan is healthy. High investment returns were extremely helpful in keeping us out of critical and declining status for this fiscal year. But we can't overlook the fact that in the fiscal years ending March 31, 2016 and 2017, contributions covered only 42% of our benefit payments. That means we had much more money leaving the Plan in the form of benefit payments than money coming in through contributions, making us reliant on investment returns to fill the gap. Over time our assets haven't kept pace with the growth in our liabilities.

How did the Plan get where it is today?

The Plan was well funded for 40 years. Because of the Plan's strong funded status, benefits were increased over time. Each increase applied to past and future service (even for retirees) and these benefit levels became guaranteed for all past and, once earned, future service. But, even after the last increase in 2000, the Plan's assets of $1.7 billion exceeded its liabilities of $1.3 billion, which means enough money was expected to be in the Plan to cover the amount predicted to go out - with some to spare.

In fact, as recently as April 1, 2007, our funded percentage was 107% - again more than was needed to cover the Plan's liabilities. Then, the financial crisis and subsequent recession hit.

Over the 18 months from its peak at the end of September 2007 through March 2009, the Plan's assets declined by nearly 40% or about $800 million. (Some have misunderstood that to mean the Plan's investment returns were negative 40% over a 12-month period but that was not the case. First, the 40% decline in assets was over 18 months. And the loss was due to a combination of factors - not just investment returns; see the first FAQ under Investments for a detailed explanation.) A year later, we were in what the Pension Protection Act of 2006 defined as critical status or in the red zone.

The Trustees took a series of actions after the dot-com bubble burst and the 2008-2009 financial crisis, including lowering the benefit multiplier four times and limiting early retirement benefits. As required by law, we also adopted a rehabilitation plan in April 2010. Under the rehabilitation plan, employers had to increase their contributions. The rehabilitation plan also reduced or eliminated adjustable benefits - benefits that cost the Plan more than normal retirement benefits (such as early retirement subsidies) or are paid out more quickly than normal retirement benefits (such as lump sum payments).

However, these changes were not enough because (other than some of the adjustable benefits) they could only apply to benefits earned in the future, whereas the overwhelming majority of the Plan's liabilities relate to benefits already earned. And, as the population changes (with active participants declining and retirees increasing), the Plan has the challenge of more money flowing out in benefit payments than it receives in contributions, making it even harder to recover.

What happened over the last few years? It seems like such a dramatic change. Only a few years ago you said we were OK until 2047 and suddenly we are close to being critical and declining. (See related FAQs for more information on critical and declining.)

In the last few years, we said we were "solvent" through 2047 and, more recently, through the next 20 years (the periods of actuarial projections). That meant we weren't projected to run out of money over those periods. Unfortunately, solvent doesn't mean healthy.

We have been concerned for a few years about the downward trend in the long-term projections. However, we know that much like extended weather forecasts, long-term financial projections are uncertain. We believed, with strong investment returns, that there was time for the Plan's downward trend to reverse itself.

The Plan's investment returns for calendar year 2016 were strong compared to U.S. pension plans overall - it outperformed 97% of them. But, for the fiscal year ending March 31, 2016 - the period that matters for measuring the Plan's funded status - we ended up with investment returns of essentially zero (consistent with the market at that time).

For that fiscal year, we needed a 5.5% return just to cover the money that is constantly leaving the Plan in the form of benefit payments. And, compared to our long-term assumption of 7.5% annually, a flat return puts the Plan even farther behind.

On top of that, last year, the actuaries changed the assumptions that the Plan uses about how long people live. While everyone knows people are living longer and the assumptions reflect that, it appears that mortality in the country as a whole (and our Plan's mortality) is improving even more than the actuarial community previously anticipated.

It turned out that investment returns for fiscal year ending March 31, 2017 were better than expected, so it remains the case that the Plan is not projected to run out of money in the next 20 years. However, while helpful, this has not been enough to fix the Plan or reverse its downward trend.

The Trustees developed the December 2016 letter not because they were required to send it, but because they wanted to provide a direct communication that clearly explained the Plan's financial situation to participants, beneficiaries, and employers. The Trustees had received a number of questions and, seeing the downward trend continue, wanted to provide information about the funded status and the challenges facing the Plan.

As you can see from these FAQs, we are committed to more frequent, comprehensive communication. An official report about our Plan's status on April 1, 2017 will be communicated to participants in June 2017. Please register at afm-epf.org to get alerts about new information posted to the site along with other features.

Will my benefit multiplier be lowered this year?

We do not anticipate making any changes in the multiplier for fiscal year April 1, 2017-March 31, 2018.

I've heard that the Fund's actuaries updated their mortality assumption for participant life spans as of March 31, 2016. Why was this change made and what was the impact?

Our plan actuaries typically review and adjust the assumption for participant life spans (and other assumptions) every five years. These assumptions were most recently updated as of March 31, 2016. The update to the mortality assumption resulted in an increase in liabilities of more than $200 million.

The Fund's updated life expectancy assumption is based on recent studies by the Society of Actuaries. These studies found that people were living longer than the actuarial community had previously assumed. As participants live longer, they collect benefits longer as well, which resulted in the liability increase as of March 31, 2016.

It is, of course, no secret that people are living longer, and our actuaries' previous assumption did reflect that. However, the Society of Actuaries concluded that life spans for all Americans had been improving even more than previously anticipated. The assumption reflecting this improvement had to be incorporated into our assumptions and contributed to the overall increase in the liabilities.

How does the benefit multiplier work?

A participant's monthly pension benefit (when taken in the form of a single-life benefit at normal retirement age) is computed by multiplying the amount of contributions paid to the Fund on a participant's behalf for each benefit period described in the following table (rounded to the nearest $100) divided by 100 and multiplied by a specified dollar amount based on your age —the "benefit multiplier" (multiplier)

[Contributions (rounded to the nearest $100) divided by 100] x Multiplier = Monthly Benefit

Before 2004, the multiplier was set at $4.65 for retirements at age 65, the Plan's normal retirement age. Over the following six years, the Trustees lowered the multiplier four times, eventually to its current level of $1.00 for covered employment on or after January 1, 2010. So, the multiplier varies based on the time period in which contributions were earned and the age of the participant at the pension effective date:

What are the advantages of participating in a pension plan such as the AFM-EPF versus a 401(k) or 403(b) plan, if the benefit multiplier remains at $1.00?

Even though the current $1.00 multiplier is lower than in the past, the AFM-EPF pension plan still has important advantages over a defined contribution plan, such as a 401(k) or 403(b) plan. A retired participant receives pension benefit payments monthly for the rest of his or her life (and a reduced amount is received by the participant's beneficiary, if the participant elects a joint and survivor benefit). In contrast, payouts from a 401(k) or 403(b) plan are much less insulated from market fluctuations, and therefore provide less predictability and stability. And, unlike a pension benefit, once funds in a 401(k) or 403(b) plan are fully withdrawn, that source of retirement income ceases — regardless of how much longer a person lives.

What is a pension fund's "discount rate" and what is its significance?

Actuaries use a "discount rate" to calculate a pension fund's current or "accrued" total benefit liability, which is the value in today's dollars (present value) of all of the benefit payments that are expected to be made in the future based on what has been earned by participants to date. The accrued total benefit liability is then used to determine the Plan's funded percentage, which is the ratio of assets to liabilities. The funded percentage is one of the tests that determines the Plan's "zone status" (e.g. endangered, critical, critical and declining), which is reported to participants annually.

The "present value" of a pension fund's benefit liability can be described as the amount of money a fund needs to have now, assuming a specific rate of return on investments, in order to fulfill its full pension obligation to participants in the future. A lower discount rate results in a higher present value/liability, which produces a lower funded percentage. (If you anticipate a lower return on assets, you will need more dollars today to pay out the same benefit in the future.)

Actuaries for multiemployer funds (like AFM-EPF) generally use a discount rate based on the expected rate of return for that particular fund's investment strategy over an extended period of 50 years or more. Multiemployer fund actuaries are required by law to "offer (their) best estimate of anticipated experience under the plan." In contrast, single-employer funds are required by law to use a "market-based" discount rate that is based on the returns of various fixed-income securities issued by government or corporate entities.

Are the Plan's actuaries considering changing the way they calculate the discount rate?

Actuaries for multiemployer funds (like AFM-EPF) generally use a discount rate based on the expected rate of return for that particular fund's investment strategy over an extended period of 50 years or more. Multiemployer fund actuaries are required by law to "offer (their) best estimate of anticipated experience under the plan." Our Plan actuaries have advised that they will continue to follow this standard actuarial practice regarding the discount rate used to determine plan liabilities.

It is important to note, however, that changing AFM-EPF to a market-based discount rate now would have no impact whatsoever on the Plan's projected date of insolvency or our efforts to prevent insolvency. The discount rate doesn't affect when the Plan will run out of money to pay benefits.


Critical and Declining Status

What is critical and declining status?

Congress passed a law (known as the Multiemployer Pension Reform Act of 2014 or MPRA) that created a new funded status for multiemployer plans, called critical and declining status. For a multiemployer Plan, that status means the Plan would be projected to become insolvent (run out of money) within 20 years. The law then permits reductions to retiree and active benefits in order to save the plan, even if those benefits are fully vested.

How likely is it that our Plan will enter critical and declining status?

At the May 2017 Board of Trustees' meeting, the Plan's actuaries advised the Board that better than expected investment returns for the fiscal year ending March 31, 2017 kept the Plan in critical and not yet critical and declining status for another fiscal year.

It remains likely that the Plan will become critical and declining at some point in the future, perhaps as early as the next fiscal year (beginning April 1, 2018). Whether the Plan will become critical and declining next year will depend on April 1, 2017 - March 31, 2018 investment returns and contributions as well as other results.

How will I know if the Plan enters critical and declining status?

You will be receiving a notice (likely in June) advising you that the Plan is in critical, but not critical and declining, status for the current fiscal year (which ends March 31, 2018). The Plan will remain in that status for the entire fiscal year. The deadline for the Plan actuaries to certify the Plan's status for the following year (which begins April 1, 2018) is June 29, 2018. We will notify you if the Plan enters critical and declining status at that time. The status of the Plan is typically communicated in the summer along with the Annual Funding Notice to participants, beneficiaries receiving a benefit, and employers. These notices will also be posted on the Plan's website.

Will I keep getting my pension check?

Yes. If the Plan enters critical and declining status, you will continue to receive your pension check. Even if the Trustees agree to, and get approval to, reduce benefits - as a last resort to allow the Plan to continue paying benefits - benefits will not and cannot be reduced to zero.

If the Plan enters critical and declining status for the April 1, 2018 fiscal year or later, will my benefit automatically be reduced?

No. If the Plan becomes critical and declining and benefit reductions are necessary to prevent the Plan's insolvency, nothing happens immediately. The reductions would have to be designed on an equitable basis. They would also be subject to an extensive government application process, which includes appointing a retiree receiving Plan benefits to advocate for the interests of retirees, beneficiaries, and vested participants who are no longer working but haven't begun to take benefits. Finally, even if the application were approved by the government, participants would be able to vote on any plan to reduce benefits (although, given the size of our Plan, a vote against benefit reductions could be overturned, or modified reductions could still be imposed by the government).

If we become critical and declining, some benefits cannot be reduced at all, including disability benefits being paid, benefits for retirees age 80 or older, and benefits that are already less than 10% more than what would be paid by the Pension Benefit Guaranty Corporation (PBGC), the federal corporation that insures minimum benefits, if the Plan were insolvent. (See FAQs below for more on the PBGC and the amount of benefits it guarantees.)

If the Plan becomes critical and declining for the April 1, 2018 fiscal year or later, and my benefits are reduced, will they revert to a non-reduced benefit when I turn 80 years old?

No. The benefit you would receive depends on your age when the benefit reductions become effective and they would not revert to the previous non-reduced benefit amount when you reach age 80.

If benefits are reduced, will it be an across-the-board reduction?

If the Plan becomes critical and declining in a future year, there is an extensive process for determining how any reductions would be distributed across the population. The law requires that this be done equitably taking into account various factors; examples are in the law. (See the next FAQ for more details.)

If my benefit is reduced because the Plan becomes critical and declining for the April 1, 2018 fiscal year or later, how much will it be reduced?

The short answer is, we don't yet know. If the Plan becomes critical and declining and the Trustees decide to submit an application to the Treasury Department to reduce benefits, there is an extensive process to determine the overall amount of benefit reductions and how those reductions will be spread across the population.

The overall amount of the benefit reductions is subject to very specific legal rules designed to ensure that a plan makes only those reductions necessary to avoid insolvency. The law requires that the proposed reductions be sufficient for the Plan to be projected to remain solvent for 30 years, but also that they be no larger than necessary to meet that criterion.

The law also requires any reductions to be shared equitably, taking into account various factors. For example, the Trustees might consider whether the benefit reductions should differ for people who received benefits based on a higher multiplier compared to those who received benefits based on a lower multiplier. The Trustees will need to consider carefully how to apply the various equitable factors to categories of participants and come up with a fair plan, which will need to be presented to the Treasury Department for approval. Ultimately, the amount of reductions would be based on the funded status after the Plan enters critical and declining status. Any calculations we perform before that time would not be able to be finalized. Until the Plan actually enters critical and declining status, and a plan of reductions is determined, we will not know with any certainty how benefits might be affected.

While we don't know yet what the level of benefit reductions would be for any particular individual or group of individuals, what we do know is this: Benefit reductions are preferred to the Plan's running out of money (becoming insolvent). The law provides that if an individual's earned benefit is reduced through this process, it cannot be reduced below 110% of what the PBGC (the federal corporation that insures a minimum benefit) would pay if the Plan were to run out of money.

If the Plan enters critical and declining status for the April 1, 2018 fiscal year or later, is there an alternative to benefit reductions?

Benefit reductions are not permitted unless the Plan can demonstrate to the Treasury Department that it has taken all other reasonable measures available, but is still projected to run out of money (become insolvent). So, benefit reductions are really a last resort to avoid projected insolvency, which we believe is worse than reducing benefits.

The Trustees have taken a series of actions over the years to improve the Plan's funding status:

  • Reduced the multiplier four times
  • Eliminated certain benefits, such as the early retirement subsidy
  • Froze the maximum benefit limit
  • Required increased employer contributions
  • Following the 2008 financial crisis—changed investment advisors, terminated investment managers and invested in new types of assets with higher return potential
  • Reduced administrative expenses
  • Kept investment fees to a reasonable minimum, including by moving assets into passive index funds where it makes sense to do so

The Trustees continue to explore every possible avenue to protect benefits by maximizing investment returns, facilitating new contribution revenue and keeping a close watch on administrative and investment expenses.

What would happen if the Plan did run out of money (became insolvent)?

In the event the Plan runs out of money (becomes insolvent), the Pension Benefit Guarantee Corporation (PBGC) will supply funding for the Plan to continue paying benefits. However, the PBGC guarantees benefits only up to a certain amount, which is generally lower than what the Plan would have paid after implementing benefit reductions. This is because, even if the Plan is in critical and declining status, benefits cannot be reduced below 110% of the amount guaranteed by the PBGC. Benefit amounts that are smaller than 110% of the PBGC guarantee cannot be reduced at all. (See the FAQ below for more on the PBGC and the amount of benefits it guarantees.)

That's why it's so important for us to keep the Plan going – while there is no doubt that benefit reductions would be painful and difficult, they cannot be worse than (and are often less than) the required reductions that would take place if the Plan ran out of money and participants' benefits were subject to the PBGC limits. And it's important to note that the PBGC limits would apply to all participants including those receiving a disability pension and those over 80 years old.

It's also important to note that the PBGC is projected to become insolvent by 2025. If that happens, then there will be little to no PBGC guarantee to fall back on. In this scenario, if the Plan became insolvent, then all participants' benefits would be reduced to almost nothing.

What is the PBGC? How much of my pension does it insure?

The Pension Benefit Guaranty Corporation (PBGC) is a government corporation that insures pension benefits up to the maximum set by law. The Plan is under the PBGC's multiemployer program, which covers approximately 1,400 plans.

The PBGC's guarantee is based in part on the number of years of service a participant has earned in the Plan. For example, the maximum guarantee for a participant with 30 years of service is $12,870 per year.The PBGC's website contains more detailed information on how the maximum guarantee is calculated.

All insured multiemployer pension plans pay annual, per-participant premiums to the PBGC. These premiums are mandated by law and not based on a plan's funded status. For 2017, multiemployer plan premiums are set at $28 per plan participant. The Plan's required PBGC premiums increased from approximately $400,000 to $1,350,000 in just 10 years (from 2007 to 2017) due to the enormous increases in the per participant annual premium.

What happens if the PBGC goes bankrupt?

The PBGC's multiemployer program is projected to become insolvent by 2025. It is hard to predict what would happen if the PBGC's multiemployer program becomes insolvent. However, without assets beyond what it collects in premiums, its guarantee benefit would likely be reduced to almost nothing.

If the Plan becomes critical and declining for the April 1, 2018 fiscal year or later, is my benefit going to be reduced to 110% of the PBGC guarantee?

Not necessarily. If the Plan becomes critical and declining, the Board may consider reducing benefits to save the Plan. If that happens, by law your benefit cannot be reduced to less than 110% of the amount guaranteed by the PBGC. The actual amount of the reduction might be less. (See the FAQ, "If my benefit is reduced because the Plan becomes critical and declining for the April 1, 2018 fiscal year or later, how much will it be reduced?" for more information.)

Will I continue to earn new benefits if we are in critical and declining at some point in the future?

If you continue to work under a union contract that provides for contributions to the AFM-EPF, you will earn new benefits - whether or not the Plan becomes critical and declining.

How do the age protections in MPRA work for participants age 80 and older and for those ages 75-79?

Participants are fully protected from benefit reductions under MPRA if they are 80 years of age or older.

Participants receive partial protection from benefit reductions if they are between 75 and 79 years of age. These protections are calculated on a sliding scale based on age. The older a participant is, the less his or her benefits can be reduced.

Both of these MPRA protections are determined based on a participant's age on the last day of the month in which reductions are effective. For example, if MPRA benefit reductions are first made effective on May 1 of a year, then the protections are applied based on a participant's age on May 31 of that year.

These same MPRA age protections apply to beneficiaries receiving a survivor benefit at the time that reductions are effective, based on the beneficiary's age on the last day of the month in which reductions are effective.

For beneficiaries not yet in pay status, the age of the beneficiary is not taken into account. Age protections are determined according to a participant's age at the time that reductions are effective. A beneficiary's future benefit will be impacted by the participant's reduction.

For example, if a participant is 80 at the time reductions are effective and his/her beneficiary is 74, then benefits for both the participant and the beneficiary are fully protected from benefit reductions. If a participant is 74 and his/her beneficiary is 80, then benefits for neither the participant nor the beneficiary is protected from benefit reductions.

If the Fund enters "critical and declining" status, what is the timeline and what steps must take place before benefit reductions can go into effect?

If the Fund enters "critical and declining" status for the plan year beginning April 1, 2018, participants will be notified by no later than July 29, 2018.

If the Trustees submit an application to reduce benefits under MPRA, the Treasury Department has up to 225 days to review the application. If Treasury approves the application, Treasury will send ballots to all participants by U.S. mail within 30 days so participants can vote on whether benefit reductions should be implemented.

If the participants vote in favor of the application, then benefit reductions will be implemented. If the vote is opposed to the application, Treasury will then determine whether the Fund is "systemically important," meaning that the Fund would require more than $1 billion in assistance from the Pension Benefit Guaranty Corporation (PBGC) if benefit reductions aren't implemented. If the Fund is deemed systemically important, then Treasury must override a negative vote and implement benefit reductions (although Treasury has the authority to modify benefit reductions in that case).

Based on the size of the AFM-EPF and its amount of underfunding, it is likely that the Fund would be considered systemically important.

Under MPRA, benefit reductions may not go into effect until nine months after the date that the Fund submits its application to Treasury. Treasury has also advised that a plan that may be systemically important should make the effective date for benefit reductions at least 12 months from the date of application.

What can I do as a participant and AFM member to help the Fund?

AFM members can help the Fund by continuing to pursue work engagements covered by a union collective bargaining agreement and ensure that those engagements are reported to the Fund. All such covered employment, including single engagements covered by an LS-1, helps direct more contribution payments into the Fund.

Some Fund participants have discussed the idea of holding benefit concerts to raise money for the Fund. Innovative ideas such as this would be a welcomed source of supplemental revenue. These concerts need to be organized by agreement between an employer and an AFM local, so participants may reach out to those parties to arrange that. The Fund has information on its website to help employers and AFM locals set up the proper documentation.

Some of my benefits were accrued when the multiplier was higher than $1.00. Can the Trustees retroactively reduce those benefits to align with the current $1.00 multiplier?

Under the Employee Retirement Income Security Act (ERISA), pension funds may not reduce accrued benefits payable at age 65 unless they are in "critical and declining" status.

The Fund Trustees did lower the multiplier four times between 2004 and 2010, but each of these changes only affected future service. The previous, higher age-65 multipliers remained the same for benefits earned while those previous multipliers were in effect.

If the Fund enters "critical and declining" status, unless other options become available under the law, the Trustees expect to submit an application to reduce accrued retirement benefits under MPRA. At this time, it is impossible to say how much benefits would be reduced or how those reductions would be spread across Fund participants.


Investments

Why did we lose 40% in investment returns when other funds lost 25% in 2009?

We didn't; the Plan lost 29% in investment returns for the 12 months (fiscal year) ending March 31, 2009. We've tracked the misunderstanding back to the Plan's December 2016 letter from the Board that said Plan assets declined by 40% over 18 months. Some have read this to mean the Plan's investment returns were negative 40% over that period but that was not the case. The decline in assets was due to a combination of factors, not just investment returns. (See related FAQs for further explanation.)

Why did we lose more in the financial crisis than other pension plans?

The Plan lost 4.6% more (-29.3% net of fees compared to -24.7% net of fees) than the median U.S. pension fund for the 12 months ending March 31, 2009. The underperformance was driven by fixed income losses, particularly in high-yield bonds.

The December letter said we lost approximately $800 million over the 18-month period in 2009. Please explain those losses in more detail.

Here is the breakdown of the loss between September 30, 2007 and March 31, 2009 (18 months):

Decreases:
Investment gains/losses ($780M)
Benefit payments ($156M)
Investment fees ($15M)
Administrative expenses ($20M)
Increases:
Contributions $84M
Interest and dividends $77M
18-Month Total ($810M)
What are the Trustees doing to get the best investment returns?

Trustees are pulled in two seemingly opposing directions when it comes to Plan investments. On one hand, the Trustees want a high return on the investments to ensure the assets grow at least enough to pay benefits in the future. On the other hand, often the higher the return the Trustees seek, the more investment risk they must take.

The goal is to devise an asset allocation that finds a balance between risk and return and, within that balance, maximizes returns and minimizes risks. Our current asset allocation includes the following: equities (domestic, international developed, emerging markets, private equity); bonds (investment grade, high-yield and emerging- market debt); Treasury inflation-protected securities (TIPS); real estate, natural resources, and infrastructure.

What action did the Trustees take to increase investment returns and what was the result?

Following the 2008-2009 financial crisis, the Trustees took action to increase the Plan's investment returns, which was essential to the Plan's long-term viability. The Trustees:

  • Changed the investment advisor to Meketa Investment Group (the current investment advisor)
  • Terminated eight investment managers by March 31, 2011
  • Invested in new types of assets (with higher return potential)

Since the 2008-2009 financial crisis, the Plan's gross annual investment returns averaged 9.8%, which is good but not enough to fix the Plan.

  • 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 eight years, the Plan's gross annual return averaged 9.8%, which is good but not good enough.
My 401(k) Plan is doing well. Why isn't the Plan?

Unlike your 401(k) plans (which a number of participants have compared to the AFM-EPF), this Plan had to earn 5.5% on its investments in the fiscal year ending March 31, 2016, just to break even because of the large amount of benefits paid each year. This gap between the money coming in and going out (also known as negative cash flow) has gotten bigger over time as the Plan's population has changed dramatically. The number of musicians working under union contracts that provide for contributions to the AFM-EPF has declined while our retirees have increased. As a result, the Plan paid out $150 million in benefits in the 2016 fiscal year, while it received only $63 million in contributions during that year. Fewer union musicians and union engagements mean fewer contributions. In fact, the annual contributions received in fiscal year ending March 31, 2016 covered only 42% of the benefits paid in that year. And this gap between contributions and benefit payments for our Plan continues to grow. This negative cash flow creates a significant hurdle in trying to improve the Plan's funding.

If investment returns have been generally strong since the financial crisis, why didn't they fix the Plan?

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.

From 2004-2017, annual benefit payments increased by $77 million while annual contributions increased by only $22 million.

Putting it all together - the investment base is smaller

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.

Are we getting good advice on our investments?

The Plan currently uses 25 professional investment managers with proven long-term track records to manage the assets. To facilitate their oversight of investments, the Trustees have established an Investment Committee composed of five management Trustees and five union Trustees. The Investment Committee relies heavily on the Plan's independent investment consultant and fiduciary to assist the Committee when it selects and monitors each of its investment managers and develops the asset allocation. The investment consultant is responsible for reviewing the Plan's asset allocation, and for providing ongoing advice and specific recommendations to the Committee and the Trustees with respect to overall performance and the performance of the individual managers.

Why do we need 25 investment managers?

Pension funds reduce risk and have the potential to enhance their expected returns by diversifying their investments across multiple asset classes (types of investments). Our Plan is no exception. When you diversify, it is prudent to rely on an expert in each particular asset class. If we have larger allocations to a particular asset class, we hire multiple managers in that asset class so we aren't putting all our eggs in one basket and for strategic reasons, such as hiring managers who have styles that complement each other.

The number of managers is in line with other entertainment industry pension plans with similar asset levels.

Why are the investment fees so high? How do our investment fees compare to those of similar funds?

When you look at the dollar amount of the fees, they may seem high; however, investment management fees are paid as a percentage of the assets under management and those fees vary by asset class. So, one good way to evaluate investment fees is to compare the percentage AFM-EPF pays for each asset class to the percentage other plans pay. In every class, the Plan's active investment manager fees are lower than average, based on Greenwich Associates' most recent (2016) survey of union pension funds. Here are a few examples from the survey:

Investment Expenses as a Percentage of Assets
AFM-EPF Other Union Pension Funds
US Equity 0.471% 0.516%
International Equity 0.674% 0.723%
Emerging-Market Equity 0.594% 0.747%
Active Bonds 0.253% 0.395%
Private Equity 0.845% 1.308%
Real Estate 0.982% 1.010%

Comparisons for each asset class demonstrate that the Plan's investment fees are, in fact, quite favorable.

How does the Fund's fiscal year differ from others in our industry and how do these differences affect comparisons to other funds' investment performance?

The Fund's fiscal year begins on April 1 and ends on March 31. Other funds have different fiscal years, while some use the calendar year as their fiscal year. When comparing investment performance between different pension funds, it is important to look at performance over the same 12-month periods of time. We have accounted for any differences in fiscal years when making investment performance comparisons between funds in the FAQs and elsewhere on the Fund website.

Registered participants on the Fund's website have access to the most recent investment advisor calendar quarter report that includes investment returns for the Fund's fiscal year and other trailing periods.

How can I learn more about the Fund's investments, investment returns, investment advisors and the private equity firms being retained by the Fund?

The Fund makes a variety of resources available with information on investments. For instance, participants can access a copy of the Fund's most recent Form 5500 annual report filed with the U.S. Department of Labor, as well as an annotated presentation that the Fund's Trustees, professionals and staff delivered to union membership meetings and conferences in 2017.

Fund participants may also view the most recent calendar quarter report prepared by the Fund's investment advisor that shows investment performance of each of the investment managers over various time periods, as well as the Fund's aggregate performance. Forms that participants may submit to request additional plan documents are also available for download. These resources are available by registering and logging into the participant portal to access the Financial Information page.

The Fund has publicly stated an intent to streamline its investment strategies. What does that mean exactly and what is the status? Why is this a good thing?

The Fund's Trustees recognize the need for both expert advice and the ability to respond quickly to often rapidly changing conditions in the financial markets. We recently made the decision to streamline our investment structure and process by shifting to an OCIO (Outsourced Chief Investment Officer) model, in which the Trustees engage a third-party to oversee day-to-day decisions for the Fund's investment portfolio.

We have engaged the firm of Cambridge Associates, LLC to serve as the Fund's OCIO, acting within parameters established by the Fund's Investment Committee and Board of Trustees. Meketa Investment Group will now serve as Independent Monitoring Fiduciary for the OCIO.

We expect that, over the long-term, this approach will lead to higher investment returns after fees.

General

If the Plan isn't healthy, why are we hanging on to it?

There are several reasons why the Trustees believe that the Plan remains important to participants:

  • The Trustees believe that having guaranteed income in retirement helps foster the goal of having Plan participants live and work with dignity.
  • Pensions provide lifelong income because they are paid as a monthly annuity. A pension should be only a piece of a retiree's income - one of the three legs of the stool along with Social Security and personal savings. It's very difficult for individuals to manage a lump sum so it lasts appropriately throughout retirement; they end up running out of money or they have money left over from lowering their standard of living in retirement.

Pensions share the risks. When investment returns are poor, it's not good for the Plan, but we share the responsibility for restoring the funding. If your savings disappear in a downturn, you're on your own.

What action have the Trustees taken to address the Plan's financial situation?

The Trustees have taken specific action over more than a decade to attempt to reverse the trend:

  • Changed the investment advisors (Also see the FAQ, "What action did the Trustees take to increase investment returns and what was the result?")
  • Changed the asset allocation to generate more income and changed investment managers that were not performing to expectations
  • Reduced the multiplier numerous times
  • Eliminated the early retirement subsidy
  • Reduced what was a high maximum benefit
  • Reduced administrative expenses where possible.
Are our administrative expenses high?

Our administrative expenses are actually in line with other large pension plans in the entertainment industry. The table below shows that we fall right in the middle of our peers. Since each plan has its own fiscal year end, for this analysis we used the fiscal year (shown in parentheses in the table) that contained as much of calendar year 2015 as possible.

First, it's important to remember that our Plan was the only stand-alone pension plan in this group for the fiscal year shown. All other entities administered a health fund and in most cases other ancillary funds among which general administrative expenses are shared. When comparing administrative expenses below, we adjusted the Form 5500 numbers to account for that. We also removed PBGC premiums, depreciation and professional fees to make this more of an "apples to apples" comparison.

Being in the middle of our peers is an accomplishment because we run a far more complicated Plan than many of our peers – we have thousands more collective bargaining agreements and interact with thousands more employers than most.

Fund Name (Fiscal Year) Expenses
Screen Actors Guild - Producers Pension Plan (12/31/15) $24,579,312
Producer-Writers Guild of America Pension Plan (12/31/15) $11,063,943
Motion Picture Industry Pension Plan (12/31/15) $10,727,344
AFM-EPF (3/31/2016) $10,101,627
Directors Guild of America - Producer Pension Plan Basic Benefit Plan (12/31/15) $8,958,566
AFTRA Retirement Plan (11/30/15) $7,841,966
IATSE National Pension Fund (12/31/15) $4,420,282

When you compare our Plan's administrative expenses to six other similar entertainment industry plans, we have the lowest expenses per number of CBAs, the second lowest per number of employers and the third lowest per number of participants.



What are you doing to reduce expenses?

The Fund has a formal, comprehensive budgeting approval and monitoring process in place. Each year we take a close look at where we're spending money and explore additional ways to reduce expenses, streamline, and gain efficiencies. The following are some examples of how we've reduced our expenses:

  • We saved $600,000 annually on rent starting in 2014 by moving our offices to less expensive office space.
  • We created an internal compliance audit department in 2011 to perform primarily record company audits in-house. We eliminated $800,000 in annual outside audit costs and to date have collected over $5 million from these audits, with more on the way.
  • Production and distribution of individualized annual statements to over 50,000 participants are one of the more expensive items, so we are always examining ways to lower the cost. We reduced the annual cost of producing and mailing annual statements by a total of $130,000 from fiscal year 2012 by rebidding the firm that prints, packages, and mails the statements and by using digital distribution where possible. We saved an additional $120,000 in fiscal year 2017 compared to 2015 by redesigning the process to bring the bulk of production in-house and further maximizing digital distribution.

We will continue to look for ways to improve our efficiency and reduce our expenses.

What does the Fund Office do?

The primary function of the Fund Office is to administer benefits defined by the Plan Documents, including compliance with regulatory authorities. In addition, the Fund Office performs recordkeeping of investment transactions along with all other accounting transactions, which are audited by the Plan's independent Certified Public Accountants. The Fund Office does not make plan design or investment decisions - those responsibilities rest with the Trustees.

The following may give you a sense of the degree of support required for a large, complex Plan like ours. The Fund Office:

  • Maintains current databases for over 5,500 employers and 3,700 collective bargaining agreements and historical databases back to AFM-EPF inception in 1959.
  • Processes over 25,000 contribution checks annually (representing approximately 55,000 engagements with total contributions of more than $60 million). These contributions result in over 675,000 engagement records to be included in the earnings accounts of approximately 60,000 participants.
  • Completes nearly 14,000 pension estimates and processes an average of 1,200 new pensioners each year. Currently pension benefits are paid to over 14,000 pensioners and beneficiaries monthly.
  • Maintains participant data so accurate that less than 1% of the over 50,000 annual covered earnings statements distributed annually are returned with bad addresses.
  • Fielded approximately 8,000 phone inquiries and responded to approximately 1,600 emails in the last fiscal year.

The Fund Office prides itself as a responsive, well-run, professional organization.

Did the Fund Office staff get huge increases in 2009? (The Form 5500 filing shows it.)

No. We've tracked this misunderstanding back to the change in government reporting requirements for the compensation numbers shown on Form 5500 Schedule C. The rules changed in 2009 to expand the definition of compensation to include not just salary but all payments made on behalf of staff - including, for instance, health insurance and other benefit costs, travel reimbursements, and other expenses incurred while performing their job.

Fund Office staff cost increases have averaged only 2.16% a year from fiscal years 2009 to 2016. This modest increase, only slightly more than the consumer price index, includes an increase in staff health care premiums, over a period when premiums rose on average more than 25%.

Will the AFM-EPF be supporting the Keep Our Pension Promises Act (KOPPA) proposed by Senator Bernie Sanders?

The Trustees would strongly support legislative changes that would help the Plan secure participants' pensions without relying only on benefit cuts. Unfortunately, the current KOPPA bill would not accomplish this goal.

Why not? Because a key KOPPA provision would not apply to our Plan. Relief provided by KOPPA pertains only to plans with a certain percentage of their funding problem caused by employers who withdrew without paying their assigned portion of the plan's liability. Because our Plan does not have the required percentage, KOPPA's relief wouldn't be available to us.

KOPPA would also eliminate the Plan's ability to avoid insolvency (running out of money) by reducing benefits. While no one wants to see benefit reductions happen, the option is important as a last resort. Benefit reductions could allow the Plan to continue paying higher benefits than if it became insolvent. As it's written, KOPPA would shorten the life of the Plan.

The Trustees, as well as the AFM, have voiced strong interest in finding a solution to the Plan's problems. Ray Hair and Tino Gagliardi, on behalf of the AFM, met with senior staffers from the offices of Senators Bernie Sanders, Tammy Baldwin, and Al Franken, three Democratic sponsors of the KOPPA bill, to discuss what changes to the proposed legislation might allow the Plan to meet the Trustees' goal: protecting as much as we can for as long as we can.

What role do PBGC premiums play in the Fund's expenses?

Every multiemployer defined benefit pension fund pays premiums annually to the Pension Benefit Guaranty Corporation (PBGC) to insure benefits for participants in the event that their pension fund becomes insolvent. Each multiemployer fund currently pays the same flat rate per participant, regardless of the funded status of the fund.

Our Fund's premium payments to the PBGC rose from $2.60 per participant in 2005 to $12 per participant in 2014. Since then, premiums have more than doubled to $28 per participant in 2017, which is where they will remain for 2018 under current law. The Fund's total annual premium expense was $167,000 in 2005, $600,000 in 2014 and $1,350,000 in 2017. Recent premium increases were largely responsible for a jump in the Fund's total administrative expenses after 2014. Premiums are set by law, and are expected to keep increasing with inflation.

What is the Fund's position on the "Butch Lewis" Act proposed by Senator Sherrod Brown? NEW!

The Fund's actuaries have analyzed the Butch Lewis Act and have confirmed that this legislation would address the financial issues facing the AFM-EPF. Should the Fund enter "critical and declining" status in the future, this legislation would, according to our actuaries, provide the Fund with the financial support required to avoid insolvency.

Therefore, the Fund's Trustees actively support this legislation. In January 2018, the Co-Chairs of the Board of Trustees sent a letter to Congressional leaders to convey our support for the Butch Lewis Act, and to urge them to pass legislation that helps our Fund and treats our participants fairly. You can read this letter here.

The Trustees strongly encourage all participants to contact their Members of Congress and tell them to support the Butch Lewis Act (S. 2147 in the Senate and H.R. 4444 in the House).

To find contact information for your Members of Congress, follow the links below. You can also call the U.S. Capitol at 202-224-3121 and follow the prompts to reach their offices by phone.

Here's how the Butch Lewis Act would work, if enacted as drafted:

  • Multiemployer pension funds in "critical and declining" status may apply to the Treasury Department for low-interest government loans.
  • These loans will provide enough money for a multiemployer fund to pay current retirees and beneficiaries their benefits for life, which will allow the fund to grow back to stronger financial footing.
  • The Act requires that money from the loans be set aside in separate, low-risk investments that match pension payments for retirees and beneficiaries in pay status.
  • Multiemployer funds will pay only interest on the loan for 29 years, and will then be required to repay the full amount of the loan in the 30th year.
  • If the loan will be insufficient for a multiemployer fund to avoid insolvency, a fund can also apply for additional financial resources from the federal Pension Benefit Guaranty Corporation (PBGC). Congress would provide any necessary funding to the PBGC for this purpose.

Bipartisan negotiations are underway in Washington between key Congressional Republicans, Democrats and stakeholders impacted by the national multiemployer pension crisis. Such negotiations are a promising sign, but they may produce changes to the legislation.

The Trustees have expressed to Congressional leaders their strong support for these negotiations. We will continue to advocate for a legislative solution that helps our Fund and treats our participants fairly.



If you have a question not listed here, please Contact Us.




American Federation of Musicians and Employers' Pension Fund