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October 19, 2009

Comments

Robert Levine said:

"It may be that Tom et al. felt that fiduciary responsibility required them to not be very explicit about the potential benefit drop for precisely the reasons that the Fund made lowering the contribution post-Oct. 15 impossible; passing on information that would cause a reduction in contributions could be viewed as an act of fiduciary irresponsibility. And, in fairness, Tom did tell the ICSOM conference some of the background to the multiplier reduction to $2, including the employer-side demand to take it to $1. Someone smarter than I might have picked up the hint that such a reduction was likely coming along."

Robert, like you, I was at the ICSOM Conference and I was startled at Tom’s announcement. Putting aside the fact that you are certainly much smarter than the average bear, in that moment, I was focusing on the fact that what we were hearing was brand new. We were, however being set up for the next announcement. Tom was telling a story which created a far different impression than what we had been told by the Pension Fund Trustees in the notice that had been sent out to all of the Pension Fund participants.

Being given "the new truth" as one of 150 or so people at the ICSOM Conference, when the rest of the AFM hadn't heard any of this does not seem like the best way to fairly inform people. When giving us official notice about the May 1 reduction to $2, the Trustees said in part:

“Accordingly, the Trustees have agreed to change the pension benefit multiplier for contributions earned on and after May 1, 2009 to $2.00 for each $100 of contributions for benefits payable at normal retirement age (generally age 65) in the form of a single life annuity.

The Trustees recognize that benefit reductions have an adverse impact on participants' lives, but, after careful consideration and consultation with the Fund’s actuaries, concluded that this action was necessary at this time”

What they didn’t say was:

“Accordingly, the Trustees, while not in agreement about the degree of reduction now necessary, have agreed, pending a decision by an outside arbitrator, to change the pension benefit multiplier for contributions earned on and after May 1, 2009 to $2.00 for each $100 of contributions for benefits payable at normal retirement age (generally age 65) in the form of a single life annuity.

The Trustees recognize that benefit reductions have an adverse impact on participants' lives, but, after careful consideration and consultation with the Fund’s actuaries, concluded that this provisional action was necessary at this time as we await a binding decision.”

No one could have read the official statement from the Trustees and taken away anything other than the Trustees were all agreed about what needed to be done and they were lock-step in agreement with actuarial recommendations and solutions. The facts as now revealed, show that they were having a dispute so severe that they were deadlocked and going to arbitration. That is something that happens rarely at the AFM-EP Fund.

When I read future announcements from the Fund, I will wonder if I am being giving an accurate assessment or if words are being crafted which create unrealistic expectations. Not being given fair warning is one thing; being misdirected is something even more disapointing.

I repeat my agreement with Robert that more data would go a long way to removing the uncertainty. I don't know what the Fund's actual short-term performance has been, whether it has been making money or losing capital. But remember that even if its capital has been growing recently and if it has been enjoying decent income recently, the regulations require the Fund to "look back" a few years (which happen to be the worst in recent history) at its asset value and project forward 10 years as though it would never get better than in the recent past. It's an extremely conservative approach that is being imposed by the government. Basically, it's "even if you have the money now, you have to pretend that you don't."

I guess that I, perhaps naively, am prepared to accept that the market, combined with ERISA regs, have severely constrained the Fund. I am prepared to accept that there is nothing for the Trustees to gain by artificially or unnecessarily holding down the benefit rate, nor do the ten fund managers gain anything by investing more poorly than anyone else. The Fund can't make and keep a substantial profit without losing its tax status, i.e., it's to the Fund's advantage to pay out as much benefit as it reasonably can.

To repeat my beef, particularly on behalf of locals with pension in their CBAs, is that no advance warning was given so that they could negotiate adjustments to better benefit their members, given the pension downturn. Almost smells like the credit default swaps - someone knew it was a bad deal but hid the fact.

Dear Robert and Ken,

I would also agree that President Lee may be tagged unfairly over some of this. On the other hand, the ways in which President Lee has politicized or squandered Trustee appointments may have had an impact on Pension Fund decisions; be it investment decisions, transparency, etc.. It is impossible to know without more information.

Even if President Lee's political behavior at the Pension Fund only results in a lack of confidence in the Fund, that becomes its own reality and has potential impact. I would like to write about that later.

Meanwhile, a little background.

Investments returns are always cyclical, but the Pension Fund has been going in one direction only for a very long time. I see a trend line that makes me wonder if other shoes are poised to drop. I just don’t feel as informed about the Pension Fund as I would like to be, even when closely following what the Trustees say.

I would love to know if the following excerpts are all based on the same degree of investment/actuarial expertise or just how they were arrived at.

6 years ago
AFM President Tom Lee in November 2003 International Musician announcing reduction to Pension Multiplier and elimination of other Pension benefits effective Jan 1, 2004 (Age 65 Multiplier to be reduced from $4.65 to $3.50):

“We are all hopeful that the market downturn is coming to an end and that in the future the trustees will be able to restore benefit levels and even resume historical patterns of benefit increases.”

2½ years ago
March 15, 2007 Notice from Pension Fund Trustees announcing changes to the Pension Plan Effective April 1, 2007 (Pension Multiplier is set to be reduced from $3.50 to $3.25)

“While we deeply regret having to reduce future benefits, we have done so with the intention of placing the Fund on a very stable financial basis for many years. We are pleased to report that, with the benefit modification and using the updated assumptions, the Fund is now projected to continue to meet the current IRS funding rules through 2041, the longest period over which the Fund’s actuaries have calculated projections.”

8 months ago
Pension Fund Trustees announcing changes to the Pension Plan Effective May 1, 2009 (Pension Multiplier is set to be reduced from $3.25 to $2.00)

“The unusually deep decline in the financial markets during the past year has had a severe impact on the assets of virtually all institutional investors, including the Fund. Because the Fund’s actuaries have advised that these losses have resulted in a significant deterioration in the Fund’s long-term financial condition, the Trustees have decided that immediate action is necessary. Accordingly, the Trustees have agreed to change the pension benefit multiplier for contributions earned on and after May 1, 2009 to $2.00 for each $100 of contributions for benefits payable at normal retirement age (generally age 65) in the form of a single life annuity.

The Trustees recognize that benefit reductions have an adverse impact on participants' lives, but, after careful consideration and consultation with the Fund’s actuaries, concluded that this action was necessary at this time”


Currently
October 15, 2009 Resolution from Pension Fund Trustees announcing changes to the Pension Plan Multiplier Effective January 1, 2010 (Set to be reduced from $2.00 to $1.00):


“WHEREAS, over the past two years the U.S. economy has experienced the worst financial downturn since the Great Depression, resulting in unprecedented losses for virtually all multiemployer funds, including this Fund; and

WHEREAS, the Trustees recognize that reducing the multiplier to $1.00 will cause hardship to participants because future pensions will be significantly reduced if this multiplier remains in place for a long period of time, and are committed to restoring the multiplier as soon as the Fund's financial condition permits them to do so;”

KS: I also agree that symphonic employer representation on the Fund would be a good thing, but that decision is not ours to make, and, frankly, good taste would prevent me, if I were in the position to do so, from suggesting it to the employer trustees. After all, I wouldn't want them making suggestions as to who should be appointed to the union side.

RL: I don' agree. It would perhaps be improper for the union to suggest individuals to be selected as employer trustees. But, given the union's stake in making sure the Fund was run well, and was viewed by prospective signatory employers positively (and many of the big prospects, at this point, are orchestras), it seems proper to suggest that someone from the symphonic industry ought to be involved on the employer side. Obviously the union can't do more than suggest.

I agree with the result, just not the approach. I think the better approach would be for locals to raise this with their orchestra management counterparts, and for ICSOM & ROPA to raise this with ASOL (I forget its new acronym) and encourage the managers push for their representation on the board.

KS: The financial markets "created" unprecedented wealth for investors over the last twenty years, and as we have learned, much of it was based on hot air. Virtually every investor had some stake in that hot air, including the pension fund. Only the real pirates are making any money (e.g., Goldman Sachs recent $3B in profits from currency trading). I only say this by way of reminding ourselves that only those with shameless-to-criminal intent will make money in this climate.

RL: Fair enough. But that doesn't explain why the benefit multiplier has fallen by 80% since its peak, while the markets have not performed nearly that badly. I'm really not suggesting that anything nefarious is going on. But, until adequately explained, it will be mysterious. And "mysterious" is not a sustainable trait for a pension fund.

No argument there. More data would remove the mystery, for sure. But it's also true that ERISA and the IRS hold the Fund to a much higher funding standard than any garden variety investment company.

RL: It may be that Tom et al. felt that fiduciary responsibility required them to not be very explicit about the potential benefit drop for precisely the reasons that the Fund made lowering the contribution post-Oct. 15 impossible; passing on information that would cause a reduction in contributions could be viewed as an act of fiduciary irresponsibility. And, in fairness, Tom did tell the ICSOM conference some of the background to the multiplier reduction to $2, including the employer-side demand to take it to $1. Someone smarter than I might have picked up the hint that such a reduction was likely coming along.

This one I don't buy. We're either all in it together or we are not. If my financial future were at stake, I would not want someone making a decision for me by withholding information I needed. The entire financial and credit market collapse of this past year, which began several years ago, unfolded just that way, while Greenspan, then Bernanke, and our government continued to insist that everything was just fine and continuously fed our "news" agencies misleading false information until it was too late for most people to make informed decisions to protect their positions.

As to process and transparency, I am of two minds. If this was foreseen a year ago, as AFM President I wouldn't want to wait until the last minute and blindside my own people with this, particularly after summer bargaining time has come and gone ... there was, apparently, a window of opportunity in which locals could have been given a heads-up in advance of or during local bargaining, in order to allow their symphony members and employers a chance to re-evaluate and/or adjust their position within the pension fund system. That window was slammed shut on October 15.

It may be that Tom et al. felt that fiduciary responsibility required them to not be very explicit about the potential benefit drop for precisely the reasons that the Fund made lowering the contribution post-Oct. 15 impossible; passing on information that would cause a reduction in contributions could be viewed as an act of fiduciary irresponsibility. And, in fairness, Tom did tell the ICSOM conference some of the background to the multiplier reduction to $2, including the employer-side demand to take it to $1. Someone smarter than I might have picked up the hint that such a reduction was likely coming along.

I also agree that symphonic employer representation on the Fund would be a good thing, but that decision is not ours to make, and, frankly, good taste would prevent me, if I were in the position to do so, from suggesting it to the employer trustees. After all, I wouldn't want them making suggestions as to who should be appointed to the union side.

I don' agree. It would perhaps be improper for the union to suggest individuals to be selected as employer trustees. But, given the union's stake in making sure the Fund was run well, and was viewed by prospective signatory employers positively (and many of the big prospects, at this point, are orchestras), it seems proper to suggest that someone from the symphonic industry ought to be involved on the employer side. Obviously the union can't do more than suggest.

The financial markets "created" unprecedented wealth for investors over the last twenty years, and as we have learned, much of it was based on hot air. Virtually every investor had some stake in that hot air, including the pension fund. Only the real pirates are making any money (e.g., Goldman Sachs recent $3B in profits from currency trading). I only say this by way of reminding ourselves that only those with shameless-to-criminal intent will make money in this climate.

Fair enough. But that doesn't explain why the benefit multiplier has fallen by 80% since its peak, while the markets have not performed nearly that badly. I'm really not suggesting that anything nefarious is going on. But, until adequately explained, it will be mysterious. And "mysterious" is not a sustainable trait for a pension fund.

I agree with Robert's call for more disclosure of the data the trustees used in making this decision. Having said that, I truly doubt that there is anything more to the trustees' decision than preservation of the Fund, taking whatever actions are necessary to stay, or get back, in the "green zone."

I also agree with Robert against laying this decision solely at Tom Lee's feet. The employer trustees have always been conservative, more so than the union trustees, and as the experience level of union trustees has diminished over time (departures of Mark Massagli, Gene Frey, Dave Winstein, Vic Fuentealba, Dave Schwartz, to name a few from the old days) and been replaced with political placeholders, it naturally follows that the more experienced employer trustees will start steamrolling over the union trustees.

I also agree that symphonic employer representation on the Fund would be a good thing, but that decision is not ours to make, and, frankly, good taste would prevent me, if I were in the position to do so, from suggesting it to the employer trustees. After all, I wouldn't want them making suggestions as to who should be appointed to the union side.

The financial markets "created" unprecedented wealth for investors over the last twenty years, and as we have learned, much of it was based on hot air. Virtually every investor had some stake in that hot air, including the pension fund. Only the real pirates are making any money (e.g., Goldman Sachs recent $3B in profits from currency trading). I only say this by way of reminding ourselves that only those with shameless-to-criminal intent will make money in this climate. The honest ones among us languish. I count the Fund as one of the honest ones. The old $4.65 benefit level had been in place for ten or fifteen years prior to the first cut in 2004, and I doubt that anyone, even from the present vantage point, would suggest that the setting of that rate in the 1980s was reckless or irresponsible. Blame Congress and Bill Clinton, if you're looking for a scapegoat. They're the ones that made this economic monster possible.

As to process and transparency, I am of two minds. If this was foreseen a year ago, as AFM President I wouldn't want to wait until the last minute and blindside my own people with this, particularly after summer bargaining time has come and gone. On the other hand, I also would not want to create the false impression amongst my constituents that they have any voice in the trustees' decision-making, which decisions are made solely from the perch of fiduciary responsibility. But there was, apparently, a window of opportunity in which locals could have been given a heads-up in advance of or during local bargaining, in order to allow their symphony members and employers a chance to re-evaluate and/or adjust their position within the pension fund system. That window was slammed shut on October 15.

Before an orchestra makes a decision on continued participation in the plan or reacts to the current situation it would be helpful to have much more information in order to have a broader view of the entire retirement/pension/investment situation.

Agreed. Part of my frustration comes for the lack of information from the Fund on just why the benefits have been cut so dramatically. It may be that a complete explanation will demonstrate that the Fund's performance, while bad, was no worse than what was happening elsewhere. But an 80% drop in the multiplier since my orchestra came in is pretty bad. The money I have in 403(b)funds hasn't dropped anywhere near that amount since we joined the Fund.

Personally I'd like to see a report from a reputable analyst, paid for by someone other than the AFM or the Fund, that looked at the questions of 1) why such a dramatic drop; and 2) how does the Fund's performance over the past 10-15 years really compare with that of other retirement vehicles.

Does ICSOM have any information about the condition of orchestra's private pension plans during the same time period? I believe that some orchestras were attracted to the AFM-EP fund not only for the higher benefit but also because their private plans were underfunded and experiencing problems. Also, is the current condition of AFM-EP unique among large defined benfit plans or are other plans experiencing similiar problems.

As for alternatives to the AFM-EP, what has been the experience in our industry of 403b plans during the same time period? In my orchestra we have been frustrated with the high fees and disappointing performance of our 403b plans.

Before an orchestra makes a decision on continued participation in the plan or reacts to the current situation it would be helpful to have much more information in order to have a broader view of the entire retirement/pension/investment situation.

Thanks for the clarification.

It's not surprising that the pension fund did not have rank and file symphonic musicians at the table

Actually there is a rank-and-file symphonic musician (Bill Foster) on the union side. But we've pushed for a long time to have our employers represented on the employers side of the Fund trustees as well. Given the amount of money being put into the Fund by orchestras, it's ridiculous that the industry isn't represented amongst the employer trustees.

" Neither seems to have sufficient to achieve the elementary common-sense act of making sure that symphonic employers have a place at the AFM-EPF table. "

It's about process and transparency. Neither seems to have a place in the current AFM administration.
It's not surprising that the pension fund did not have rank and file symphonic musicians at the table, especially in view of the current climate where rank and file recording musicians (RMA) are typically excluded, whenever possible, from any IEB discussions concerning electronic media.
Perhaps this will be a wake up call for ICSOM musicians to pressure their locals to vote for change in 2010. It may be our only hope for survival as a Federation.

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