The criticisms I have of how the AFM-EP Fund trustees are handling the current situation focus mostly on communications. My biggest criticism is how the so-called “road show” that some union-side trustees have given around the country over the past year has presented the Fund’s problems.
There has been a lot of talk - not all from the Trustees, of course - about why the Fund is in the condition it’s in. While the Great Recession has taken pride of place, other factors cited have been decreasing contributions, decreasing pensionable employment in the music business, an aging pool of beneficiaries, fewer musicians being in the AFM, the fact that the Fund is taking in less money than it is paying out in benefits, and a few others. MPS has offered additional explanations, having to do with alleged misconduct and negligence on the part of the Trustees.
The net result of these explanations has been to make the Fund sound rather like a Ponzi scheme - which it most definitely is not. (I’m sure it’s not the Trustees’ desire to make it sound that way.) The fact that few seem to have noticed this concerns me as well; it suggests that not many people involved with this controversy really understand how a pension fund should work. While I am completely convinced that Scott Ballantyne and Tom Calderaro (aka “B&C”) know how pension funds work, even they don’t provide a basic explanation of this that I could find on their site - or at least not one that’s basic enough for people to understand why the Trustees’ explanations for the Fund’s condition miss the fundamental point.
So, to illustrate my understanding of how a fully funded pension plan should work, let me tell you a very long shaggy-dog story.
Once upon a time, there was a happy and democratic union by the name of “The American Federation of Hexanitrohexaazaisowurtzitane Workers." They worked under collective bargaining agreements for various companies that manufactured hexanitrohexaazaisowurtzitane, an incredibly useful and cheap chemical used in the making of all kinds of wonderful things (it isn’t really, but it is a cool word). They had a Taft-Hartley pension plan, naturally called the “American Federation of Hexanitrohexaazaisowurtzitane Workers- Employers Pension Fund” (AFHW-EP Fund for short).
Because everyone in this industry was super-smart, the Fund was run perfectly. It had no expenses, and the combination of contributions and returns on investment of those contributions was perfectly calculated to keep the Fund at a funding level of 100% all the time.
Unfortunately, one day it was discovered, and proven definitively by scientists at Liberty University, that hexanitrohexaazaisowurtzitane emissions, when combined with an atmospheric CO2 level that was just about to be reached, created a perfect funnel in the atmosphere for the transmission of galactic omega rays into the District of Columbia. Such omega rays were known to cause 100% irreversible erectile dysfunction at levels of exposure that would be exceeded within a month of the discovery.
In a triumph of bi-partisanship, the House and Senate immediately sent legislation banning the production of hexanitrohexaazaisowurtzitane to the President, who immediately signed it (after tweeting that hexanitrohexaazaisowurtzitane was all Hillary's fault and she ought to be Locked Up for it). The hexanitrohexaazaisowurtzitane industry immediately collapsed, throwing every single worker who was a beneficiary of the AFHW-EPF out of work.
No more workers, no more contributions to the Fund, no more Fund, right? And then there were lawsuits, and groups such as HWPS (Hexanitrohexaazaisowurtzitane Workers for Pension Security) agitating for the removal of the trustees and their replacement by super-SUPER-smart people, and snarky blog posts by people like me, and all the other paraphernalia of a public controversy.
Actually, not. What really happened was that the Fund continued to manage its assets and pay benefits, and those assets even continued to grow for a while before slowly drifting down to nothing. And all the beneficiaries got their promised benefits. 63 years and 7 months after the ban, the very last beneficiary (the child bride of one of the more junior workers) received a benefit check consisting of all that remained in the Fund’s coffers - and died peacefully in her sleep the next day (unlike the passengers in the car she was driving). The Fund went out of business, in other words, as impossibly perfectly as it had been run for decade upon decade - always precisely 100% funded until the very last day.
That’s the difference between a pension fund and a Ponzi scheme. A Ponzi scheme will collapse instantly when new money stops flowing in, because the benefits promised far exceed what can be paid for by the money paid in by its victims. When the new money stops, most of the victims are left with nothing, because the incoming money simply went to pay off earlier "investors" instead of actually being invested.
By contrast, a pension fund that is 100% fully funded will always have sufficient money in the Fund’s accounts to fully pay for all benefits earned, when those benefits are due, by the contributions paid into the Fund and the returns on investing those contributions - regardless of future contributions, future returns, and future benefits earned. It needs no new contributions in order to honor its promises to its existing beneficiaries.
Unfortunately, in the real world, hexanitrohexaazaisowurtzitane is a highly “energetic” explosive that that no sane person would have anything to do with (it becomes more stable with mixed with TNT). And, in the real world, no Fund manager can have sufficient insight into the future to invest pension contributions so that their Fund remains exactly 100% funded all the time. To be fully funded at all times in this world means that, for long periods, the Fund will appear to be significantly overfunded, in order to be able to cope with the inevitable financial reverses that face any financial entity over the long term.
The task for the trustees of such a Fund is to make sure that the benefit level is set so that 1) the Fund never falls below 100% funding; and 2) that the beneficiaries get a fair benefit for the money paid into the Fund under the CBAs that their union has negotiated for them. If, for example, there had been $1 billion left in the AFHW-EP Fund after the final beneficiary check had been sent, the Fund could be considered to have failed the second criterion. That money would essentially have gone to waste (or perhaps to the survivors of the last beneficiary's passengers), as it didn’t go to the beneficiaries over the life of the Fund.
The AFM-EP Fund trustees - and MPS, for that matter - are not wrong in believing that increasing contributions to the Fund will improve its financial condition. But this is because the multiplier of $1 per $100 contributed is so low that it overfunds the benefit the contributions pay for. Much of that new money actually goes to covering the underfunding of past contributions.
This is not really fair to current workers (although, of course, many of them also have significant accrued benefits as well, which perhaps makes it less unfair, as it increases the odds that those benefits will be paid). Nor does it increase anyone’s willingness to join the Fund, or even to remain in it. That’s why I don’t believe it’s a sustainable solution.
It’s easy to talk about raising the contribution levels agreed to in the various CBAs with our employers. But I’ve been at the table for a number of negotiations here in Local 8. I have yet to hear an expression of interest by anyone in those negotiations in raising the contribution percentage. Managements view it as money thrown away, and musicians view it as money they could get in their pockets now - that would otherwise be thrown away. This is short-sighted - but completely understandable given the low multiplier and the uncertainties about the Fund’s future.
I think it’s very important to remember that potential solutions to the problems of the Fund - whether decreasing accrued benefits, increasing contributions, improving how the Fund’s assets are invested, or decreasing administrative expenses - are only potential solutions. They are not why the Fund is in trouble. And those solutions can’t change why the Fund is in trouble, because the cause of its problems lies in the past - specifically, in that period during which the multiplier was increased beyond the level that was sustainable over the very long term.
As I see it, that period was the mid-80s through the end of the century. As B&C view things, it was somewhat earlier, likely due to their very conservative view of what interest rate assumptions should underly the multiplier. But, regardless of the exact period, at some point between the late 1970s and 20 or so years later the Fund’s benefit structure went off the rails in terms of long-term sustainability. I told a narrative in my previous post about why that might have happened. B&C have a somewhat different narrative, but the two are not mutually exclusive. (B&C’s version involves no more negligence than does mine, which is to say none at all.) MPS’s narrative of misconduct by the current trustees, however, has nothing to do with reality - even if the trustees made serious mistakes in recent years, which is not something I regard as proven on the basis of what I’ve seen to date.
Past mistakes involving the multiplier can’t be un-made. They can be fixed, but it’s going to be difficult and painful. Doing so will be marginally easier if we all talk about the Fund’s problems with an understanding of what went wrong, though, and if we don't confuse solutions and causes.
Comments