The AFM-EPF and the Multiemployer Pension Crisis
Last Updated on 07/05/2018
The United States currently faces a worsening multiemployer pension crisis. One recent report estimated that 114 multiemployer pension plans across the country will become insolvent over the next two decades. These plans cover nearly 1.3 million people and they are underfunded by more than $36 billion. The American Federation of Musicians and Employers’ Pension Fund (AFM-EPF, “the Fund”) is not immune to the forces driving this crisis.
How have the Trustees responded?
The AFM-EPF, like many other multiemployer funds, was a robust, healthy pension fund through the late 1990s. In fact, our Fund was actually overfunded, meaning that assets exceeded liabilities (promised benefits to participants for service already performed). Simply put, the Fund had more money on hand than it was projected to need to pay out benefits in the future. In 1999, the AFM-EPF was 139% funded.
Because of this overfunding, the Fund’s actuaries at the time advised the Trustees that the Fund could afford to increase the benefit multiplier. Based on this advice, the Trustees approved several multiplier increases. By January 1, 2000, these increases resulted in a $4.65 multiplier for retirements at age 65, the Plan's normal retirement age. As was the case for multiplier increases going back at least to 1981, these increases applied not only to benefits that would be earned in the future. They also applied to benefits that all participants had already earned in the past, including for retirees. (Click here for a full explanation of how the multiplier affects participants’ benefits.)
At the time these decisions were made, the Trustees were advised by their experts that the Fund could afford the benefits that it was promising. But the Fund, like so many others, was hit by a combination of negative developments in the first decade of the 2000s. First there was the dot-com bubble burst, and then, just as it had recovered from those investment losses, the 2008-2009 international financial crisis hit. By the end of that crisis, the Fund had a huge gap between its liabilities and its assets.
Following the dot-com crash, the Trustees lowered the multiplier in 2004 and again in 2007. And after the financial crisis, the Trustees lowered the multiplier twice more to its current level of $1.00 in 2010. However, under the law at the time, the Trustees were not allowed to reduce benefits that participants already earned. Therefore, the $4.65 multiplier could only be reduced for benefits earned going forward. Thus, these reductions had a relatively small impact, given that the multiplier increases in the 90s had been applied to all past service. The Fund is still obligated, by law, to pay benefits earned under the higher multipliers, including the $4.65 multiplier that is applied to all Credited Service prior to 2004.
There has been some positive news since the financial crisis. This includes annual employer contributions to the Fund increasing from $51 million in 2010 to $67 million in 2017. It also includes strong investment returns overall since 2009. However, because the Fund experienced a significant loss from the financial crisis, those returns were based on a much smaller amount of assets.
Unfortunately, the AFM-EPF doesn’t get the full value out of strong investment returns, because, despite the increase in employer contributions, annual benefit payments continue to far exceed those annual contributions.
Annual benefit payments have increased as more and more participants retire. At the same time, there has been a decline in the number of musicians working under contracts requiring employer contributions, including those who choose non-union employment.
Thus, for the fiscal year ending in March 2017, while the Fund paid out $158 million in benefits (an increase of $77 million over 2004), it received only $67 million in contributions (an increase of only $22 million over 2004), creating a negative cash flow of $91 million for that fiscal year. As a result, the Fund needed a 6.25% return that fiscal year just for assets to stay flat.
This negative cash flow is projected to continue—and worsen. Every year, if investment returns don’t make up for this shortfall, the Fund has to draw down assets, which leaves less of an asset base on which to generate investment returns the following year. Cash flow is projected to reach negative $159 million for the fiscal year ending March 31, 2023 and negative $200 million in 2028. The Fund is projected to need an 8.7% return to break even in 2023, and a 12.7% return to break even in 2028.
Investment returns since the financial crisis have been strong, but because of the severe negative cash flow, they have not been strong enough to make up for the Fund’s loss in the financial crisis and for the Fund to climb back to financial stability.
The Fund has been in “critical” status since 2010, which, simply put, means that it faces a significant funding shortfall between assets and liabilities. For the fiscal year ending March 31, 2017, the Fund had $1.8 billion in assets and $3 billion in liabilities. So, our present unfunded liability is $1.2 billion, and it is projected to increase.
The Fund is projected to enter “critical and declining” status in the near future, which would mean it is projected to become insolvent within 20 years. A pension fund becomes insolvent when it has run out of money to pay benefits.
The Trustees will not know until sometime after fiscal year ending March 31, 2019 whether the Fund will be in “critical and declining” status for the fiscal year beginning April 1, 2019. The Fund’s actuaries will conduct an analysis to certify the Fund’s status by the June 28, 2019 deadline.
The Fund’s Trustees—then and now—have taken a series of strong, necessary remedial actions to address the Fund’s situation.
Reducing the Multiplier and Implementing a Rehabilitation Plan
Right after the dot-com disaster, the Fund’s Trustees reduced the multiplier for future service and eliminated early retirement subsidies for future service. They subsequently reduced the multiplier three more times until it reached $1.00 in 2010. Later that year, when the Fund was certified to be in “critical” status, Trustees took new steps, some of which are only available to “critical” status plans. Those steps included the following:
- Adopted a rehabilitation plan that reduced or eliminated certain benefits, such as the early retirement subsidy for pre-2004 service.
- Froze the maximum annual pension benefit, so that it didn’t continue to increase with the legal limit.
- Mandated a 9% increase in employer contributions.
Improving Investment Returns
The Trustees have also taken and continue to take decisive actions intended to maximize investment returns:
- In 2009, they changed the Fund’s investment advisor, and by March 2011, had terminated eight investment managers in an effort to reduce fees and improve returns.
- The Fund invested in new asset classes with higher return potential, including increased international stock holdings, TIPS, emerging market bonds and private equity.
These strategies were developed based on expert advice from Plan professionals, who advised that the Fund faced a deeply concerning outcome if it did not produce higher returns.
What does the future hold?
The Trustees have also kept investment fees to a reasonable minimum. In 2016, the Fund’s active managers’ fees were lower than those for the average union pension fund in every asset class. Trustees also reduced investment fees by moving assets into passive index funds where that made sense.
In the eight years since the end of the financial crisis, the Fund’s average annualized return is 9.8% before fees and 9.3% after fees. That’s good, particularly since, in three of those years, the Fund didn’t make its 7.5% assumed rate of return, and our international stock holdings did not achieve the expected higher returns until very recently.
In late 2017, the Trustees shifted to an Outsourced Chief Investment Officer (OCIO) model. Under this model, the respected firm of Cambridge Associates was engaged to oversee day-to-day decisions for the Fund's investment portfolio, including the selection of asset managers. Cambridge will act within parameters established by the Fund's Investment Committee and Board of Trustees. This new model is expected to provide the Fund with an excellent combination of access to best-in-class investment managers and the ability for the Fund to better adapt to rapidly changing markets and the growing complexity of investment decisions, prudently balancing risk and reward.
AFM Generating Increased Contributions
The American Federation of Musicians (“AFM”) has been actively generating increased contributions into the Fund, including those associated with new media. It has also negotiated new sources of “unallocated” contributions—such as digital streaming— that aren’t attached to benefits for any particular participant, and therefore increase the Fund’s assets without also increasing liabilities. The AFM continues to encourage participants to seek and file covered work engagements that generate additional pension contributions.
The Trustees have also successfully worked with Fund staff to reduce administrative expenses in recent years. From 2009 through 2016, annual administrative expenses (excluding staff personnel costs, PBGC premiums, professional fees and depreciation) actually declined on average by 3.8% per year as a result of moving to a new office with lower rent, performing employer compliance audits in-house, and slashing production and mailing costs. Staff personnel costs increased only a modest 2.16% annually (comparable to the consumer price index) from 2009 through 2016, despite an increase in the Fund staff’s health care premiums (over a period when health premiums generally increased on average by over 25%).
So, how does the AFM-EPF stack up against other large entertainment industry funds with some similar characteristics? Based on an apples-to-apples comparison, the AFM-EPF fares very well compared to similar large entertainment industry funds, based on the number of employers, collective bargaining agreements and participants in each fund. A comparison is shown here on the FAQ page.
It should be noted that, when evaluating administrative expenses, a comparison to other funds is not always the best barometer, due to each fund’s unique nature and circumstances. Those comparisons can also be misleading when one cherry-picks particular numbers or doesn’t adjust to make the comparison apples-to-apples. To produce a useful comparison, one has to adjust expense figures from the different funds’ “Form 5500” annual reports to remove depreciation, PBGC premiums, and professional and investment fees. Comparisons must also account for the fact that, unlike other funds, the AFM-EPF does not have a related health or other fund with which to share administrative expenses.
Further, all multiemployer pension funds experienced sharp increases in premiums paid into the federal Pension Benefit Guaranty Corporation (PBGC), which is supposed to be the backstop for insolvent pension plans. Premium payments increased because the PBGC is itself projected to become insolvent in 2025, due to the national multiemployer pension crisis. Premium payments to the PBGC, which are reflected in our publicly reported administrative expenses, 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 PBGC premium expense was $167,000 in 2005, $600,000 in 2014 and $1,350,000 in 2017. This per-participant premium is mandated by law for all multiemployer funds and is not based on the funding status of a fund.
Unfortunately, all actions taken with regard to benefits, investments, contributions and expenses have been insufficient to dig out of the deep hole created by the 2008-2009 financial crisis, significant demographic shifts and huge liabilities from protected benefits earned in the past.
Our actuaries’ projections show that, over the next several years, even if we make our assumed investment return, the Fund’s benefit liabilities will continue to increase faster than our assets (which will ultimately begin to decline). Therefore, our actuaries have advised that our Fund is projected to be in “critical and declining” status at some point in the future. What can be done to address this growing problem?
In 2014, Congress passed the Multiemployer Pension Reform Act (MPRA), which allows multiemployer pension funds in “critical and declining” status to reduce already-earned benefits payable at normal retirement age. Until a multiemployer pension fund enters “critical and declining” status, federal law prohibits fund trustees from reducing these benefits.
If and when the Fund falls from “critical” status to “critical and declining” status, the Trustees must then decide whether to file an application with the Treasury Department for relief under MPRA, which would include benefit reductions for participants, including retirees—except those over the age of 80 and those receiving a disability benefit. Participants between the ages of 75 to 79 would receive partial protection from benefit reductions (Click here for more information on MPRA’s age protections).
Under MPRA, benefits cannot be reduced below 110% of the maximum guarantee provided by the PBGC. The PBGC is a government agency that insures pension benefits. If a participant’s pension fund becomes insolvent, the PBGC is supposed to pay that participant’s benefit up to a maximum level set by law. (For example, the maximum guarantee for a participant with 30 years of service is $12,870 per year—see the PBGC website for more information.) That means, if a participant’s benefit is currently below 110% of the PBGC guarantee, it cannot be reduced under MPRA. It also means that if a participant’s benefit is above that level, even with a “worst-case scenario” under MPRA, the participant’s resulting pension benefit would still be higher than if the Fund became insolvent.
However, due to the national multiemployer pension crisis, PBGC itself is projected to become insolvent by 2025. If the Fund and PBGC both become insolvent, participants’ benefits would be reduced to virtually nothing.
If and when the Fund enters critical and declining status, reducing benefits under MPRA may be the only viable course for the foreseeable future. This is because it will allow the Fund to remain solvent by reducing the high level of benefits that it once could afford, but now cannot, due to the factors already described.
The Trustees are currently working with the Fund’s actuaries to model different ways that benefit reductions could be implemented fairly. However, this modeling is very preliminary, and it is impossible to know now how benefit reductions could be structured. This depends greatly on the state of the Fund if and when it enters “critical and declining” status.
At present, MPRA is the only federal law providing a way for the Fund to avoid insolvency. However, the Trustees have supported and will continue to support legislation that addresses the financial issues facing our Fund, while also treating our participants fairly.
In the past year, a few different legislative proposals have been discussed in Washington, all of which would provide low-interest government loans to multiemployer pension funds in “critical and declining” status. Some of these proposals would require no benefit reductions, and others would require less benefit reductions than would be needed under MPRA.
In November 2017, Senator Sherrod Brown (D-OH) introduced one of these proposals in Congress as the “Butch Lewis Act.” The AFM-EPF’s actuaries have confirmed that the Butch Lewis Act would address the financial issues facing the AFM-EPF by providing the financial support required to avoid insolvency should the Fund enter "critical and declining" status in the future. Therefore, the Fund's Trustees have supported this legislation, and they sent a letter to Congressional leaders in January conveying their support.
While the Butch Lewis legislation was not included in the February 8, 2018 bipartisan Congressional budget deal that was passed and signed by the President, a Joint Select Committee on the Solvency of Multiemployer Pension Plans was authorized to take a comprehensive look at the multiemployer pension crisis and develop legislation to address by November 30 of this year.
As this Joint Select Committee deliberates in the coming months, the Fund’s Trustees will remain actively engaged with this process. In April and May, Union Co-Chair Ray Hair and Employer Co-Chair Chris Brockmeyer met with members of the Joint Select Committee and their staffs to emphasize the urgent need for them to take action this year. The Trustees have also sent a letter to all members of the Joint Select Committee delivering the same message. The Trustees will continue to make clear to the members of the Joint Select Committee that any solution they produce must address the financial issues facing our Fund, while also treating our participants fairly.
The Fund has set up a webpage to help participants contact their own Members of Congress and the Joint Select Committee. Click here to learn more about the Joint Select Committee and how to make your voice heard in Congress. We will alert participants at key moments this year when it is particularly important that Members of Congress and the Joint Select Committee hear from participants.
Again, the Trustees won’t know whether the Fund will be in “critical and declining” status until after the end of the Fund’s fiscal year on March 31, 2019. The deadline for the Fund’s actuaries to certify the Fund’s status is June 28, 2019.
Until that time, the Trustees are exploring every possible avenue for protecting benefits by maximizing investment returns, bringing in new revenue, closely monitoring expenses and supporting legislative proposals that provide relief in a fair manner.