This content is from: Corner Office
Can the Teamsters Save Union Pensions?
Hit by declining membership and market breakdowns, multiemployer pension funds are in dire need of help.
As Pamela Gaskill walked through San Francisco's blighted Tenderloin district one day in 2000, she had an epiphany.
Observing impoverished residents of single-room-occupancy hotels, she realized she had no financial resources for her own retirement. Gaskill, a slender, weathered woman who has driven trucks since the late 1970s, thought, This is what happens if you dont have a pension. People end up in a tiny little room with nothing.
Unlike other full-time workers enrolled in traditional pension plans or even 401(k)s, Gaskill, who drives a 65-foot 18-wheeler for Oakland, Californiabased Rock Transport, received no benefits in her years as an independent trucker. After she joined Rock Transport in 1989, she tried unsuccessfully to negotiate benefits. Then Gaskill and her partner, Dennis Holocher, another Rock driver, decided to push for union representation a daunting task. The drivers were scared, she recalls. They thought if we went union, the company would fold or let us go. In 2002, after a year of organizing, Rock Transport employees joined the Western Conference of Teamsters. Best of all, they also became members of the unions pension fund.
Having a retirement benefit changed the way Gaskill viewed her work. I called my dad so hed be proud of me because now I had a real job, she says. Gaskill succeeded Holocher as shop steward after he retired.
Gaskill and Holocher were lucky. They are among the nearly 583,000 participants in the largest multiemployer defined benefit plan in the U.S., the Western Conference of Teamsters Pension Trust. The WCTPT is the best funded of 194 pension funds jointly sponsored by employers and local or regional units of the International Brotherhood of Teamsters. Theyve been conservative in their investments, professional in their management and fortunate in their economics, says Joshua Gotbaum, director of the Pension Benefit Guaranty Corp. (PBGC), the federal agency that insures both single and multiemployer pension funds.
Today the WCTPT is a $35 billion fund that receives contributions from more than 1,400 employers, ranging from small companies with fewer than 50 workers to major corporations like Coca-Cola Co., Safeway supermarkets and United Parcel Service of America.
Although the American labor movement dates to the late 19th century, the creation of pension funds for union members took more than 50 years. The multiemployer pension plan was designed to allow union workers truck drivers, vegetable packers, floor sweepers, construction workers to build retirement nest eggs despite frequent job changes. Founded in 1955 as a multiemployer plan for Teamster members in 13 western states, the Western Conference pension plan, like many others, was fully funded for decades. Then a series of legislative initiatives, including trucking deregulation and the Multiemployer Pension Plan Amendments Act, both passed in 1980, as well as demographic and technological change, put many trucking companies out of business. As union shops disappeared, the number of active union members fell. And two financial crises in a decade blew a hole in the idea that multiemployer funds could continue to operate as they always had.
Thanks to careful fund oversight and a diversified membership, the WCTPT was able to fend off some of these blows. But even the strongest pension fund could not remain untouched by market breakdowns like the dot-com bust and the 200809 crisis. As a result, WCTPT trustees, shocked by successive multibillion-dollar losses, decided to break their long silence and add the funds voice to efforts to fix a struggling system for 10.4 million union members.
For a long time, says Charles Storke, the WCTPTs lead attorney and a partner at San Francisco law firm Trucker Huss, the attitude of Western Conference officials was We should tend to our own knitting without regard to what else is going on in the world. Michael Sander, the funds administrative manager and a partner at Seattle-based Northwest Administrators, agrees: Weve been dark for so long, theres nothing youre going to find if you google us. Circumstances have changed, and we need to carry the banner.
But can the WCTPT save itself and the unions multiemployer pension model? It wont be easy. Multiemployer plans face problems deeply rooted in the decline of American labor unions in a global, postindustrial world. The unions, after all, still offer traditional defined benefit plans, which many employers have dropped in favor of less expensive, less risky defined contribution plans. The market outlook remains deeply uncertain, demanding sophisticated investing skills. And the politics of saving multiemployer pensions, particularly in a bitterly divided Congress, are problematic at best.
THE WCTPT WAS THE CREATION OF TWO CONTROVERSIAL veteran union figures: Frank Brewster, head of the Western Conference of Teamsters from 1953 to 1957, and David Beck, who served as president of the national Teamsters organization from 1952 to 1957, when he was replaced by a tough guy from Detroit named Jimmy Hoffa. Brewster, who in the 1940s conceived of the Western Conference as the first Teamster region, teamed up with Beck to start a comprehensive pension trust with the idea that Social Security alone wouldnt provide sufficient income for retirees.
But Brewster and Beck, who helped modernize the Teamsters union, which received its national charter in 1899 from the American Federation of Labor as a national organization, got caught up in the mid-1950s federal racketeering probes. Although neither was found to have Mafia connections, both were charged with unrelated crimes after being hauled before the Senates Select Committee on Improper Practices in the Labor or Management Field, dubbed the McClellan Committee after senator John McClellan. Both received prison sentences. Brewsters conviction for contempt of Congress for refusing to testify was overturned on appeal. In 1975 president Gerald Ford pardoned Beck, convicted of embezzlement and tax fraud.
Though the two founders created a legacy of retirement benefits for union workers, they left a black mark on the WCTPT in its infancy. Despite the fact that the fund was found free of scandal by the McClellan Committee and later by David Witwer, a history professor at Penn State Harrisburg and author of Corruption and Reform in the Teamsters Union fund officials retreated from dealing with the outside world.
As the WCTPT fund grew, its trustees made decisions that kept the plan well funded. In the 1980s they created a formal funding process with a flexible benefit-accrual formula that allowed them to make adjustments as economic conditions shifted. In the bull market of the late 1990s, the WCTPT set benefits at a peak of 3.65 percent times dollars contributed. After the dot-com bust, trustees dropped accruals to 1.2 percent. An optimistic adjustment brought the number back to 2 percent just before the financial crisis. In good times we can improve benefits, and in bad we tighten our belts, administrative manager Sander explains.
Bad times meant that on January 1, 2009, trustees again took the accrual rate down to 1.2 percent, where it remains today. Its better to keep a steady accrual rate and the plan funded strongly, Sander says. After the crisis the WCTPT used the funds size to negotiate lower asset management fees. The smart managers were clever in how they restructured their fees, says Sander bluntly. The dumb managers did not. And some are no longer with us.
Even at the height of the 1990s bull market, employers never took a contribution holiday, which was common at that time. The Western Conferences early decision, led by Beck, to diversify membership rather than build locals solely with truck drivers also helped. Today about 45 percent of members do not drive trucks.One of the reasons the plan has been strong is we have flexibility to put a variety of employers and employees in it, says longtime Teamster leader Charles (Chuck) Mack, a co-head of the WCTPT. Weve never taken the position We dont want these people in our plan. Truck drivers, food processors, office workers and public employees all negotiate their own benefits and are bound by individual collective bargaining agreements with their employers. The economic circumstances for a food-processing plant wouldnt be the same as UPS, which is more militant and stronger, Mack says.
Perhaps most important, the WCTPT early on took precautions to keep assets away from the Teamsters and organized crime, which in the 1950s and 60s looted assets from the Teamsters Central States Southeast and Southwest Areas Health and Welfare Fund to finance casinos. The trustees initially moved nearly all their assets to Newark, New Jerseybased Prudential Financial to invest in fixed income, real estate and annuities. There they stayed until the early 1980s, when the trustees decided to venture into other asset classes.
After searching for an investment consultant to help with asset diversification, they selected Alan Biller, founder of fiduciary consulting firm Alan Biller and Associates in Menlo Park, California, in 1986. (Biller likes to say he started his company in his garage in 1982.) At that time, 84 percent of the portfolio was in dedicated bonds. In the early 1980s you could buy long bonds with yields of 12.5 to 14.5 percent, Biller recalls. For years the WCTPT restrained Biller from straying from traditional stock and bond portfolios. In 1987 he proposed investing in farmland, but the trustees decided that was too unusual. We discussed it in 1987 and invested in 2011, he jokes. In the early 90s he got approval to build an enhanced equity index portfolio. We were making what we needed, so they didnt need to do much else, he says.
Billers total enhanced index portfolio has beaten the S&P 500 net of fees by an annualized 1.3 percent a year over the past 21 years. We dont pay hedge fund fees for hedge funds, and we want full transparency, he says. That policy now includes a global long-short tactical asset allocation fund that has been run by Mellon Capital Management since 2005.
More change came in 2002, when concerns about volatility led trustees to seek greater asset diversification. Biller built a portfolio that included equity and debt, oil and gas partnerships, farmland, timber and other commodities, and infrastructure. Although the Teamsters were early investors in infrastructure, he says, so far its been a disappointment because our managers werent doing greenfield [projects], just up-and-running businesses.
Leery of new asset classes, trustees would check off only on small investments. The first two private equity investments, made in 2005, were $50 million each: one direct, the other in a secondary fund. Today the portfolio comprises a 16.2 percent allocation to alternative investments; 29.4 percent to domestic equity; 10.2 percent to international equity; 30.9 percent to fixed income, including a $5 billion Prudential group annuity; 9.8 percent to real estate; and 3.6 percent to cash and equivalents.
IT'S 80 DEGREES AND SUNNY IN SAN RAMON, California, a quiet suburb in the San Francisco areas East Bay where top WCTPT officials have gathered at fund headquarters to tell their story. The four men file into a conference room tucked into a corner of a two-story, flower-and-fountain-bedecked open-atrium building that takes full advantage of the balmy weather.
The WCTPT, like other multiemployer trusts, uses a fund management model not found at private single-employer or public pension funds. Instead of chief investment officers, multiemployer plans have co-chairmen one union, the other an employer representative. Because the WCTPT is so large, its co-chairmen, Mack and Richard (Rick) Dodge, who retired as a corporate labor negotiator in 2007, are full-time employees. Their side-by-side offices reflect their belief in the collaborative ethos of multiemployer funds.
Mack, 72, joined the Teamsters Oakland-based Local 70 as a part-time truck driver in 1962 while he was a married student at San Francisco State University. After graduation he took labor relations courses at night and won his first union election as a business agent in 1966 at age 24. In 1971 he was elected secretary-treasurer of Local 70; in 1982 he became president of regional Joint Council 7; and in 1996 he won election as Western Region vice president, on the same ticket as Jimmy Hoffas son, James. Mack, who also was appointed director of the Internationals port division in 2003, left all four jobs when he took over as pension fund co-chairman in 2009.
Dodge, also 72, was a longtime labor negotiator in California before joining the WCTPT as an employer trustee in 1996 and becoming co-chairman in 2008. The co-chairmen are joined by Sander, the funds administrator, and Storke, the attorney who represents the fund at hearings on Capitol Hill and at meetings of the multiemployer coalition, the National Coordinating Committee for Multiemployer Plans (NCCMP).
The four men have a vast geography to oversee, stretching from Anchorage, Alaska, to Honolulu and from Albuquerque, New Mexico, to Salt Lake City and beyond. When you have 1,400 employers, bargaining is always going on somewhere in the United States, says Sander, who has administered the fund, with the help of his 300 employees, since 1992.
The topic du jour is survival. Back in 1974 there were 30 food-processing companies, says Dodge, who worked for one himself. Now theres hardly a one. Mack notes the decrease in unionization and the efforts of employers to prevent it. Its a miracle this plan is as strong as it is, he says. Storke explains sector diversification among fund members. [Western] Teamsters havent been particular about who they organize, he says. You didnt get the balkanization of plans that you see in the East and particularly in the Midwest.
The trustees aversion to publicity began to change after the 2001 dot-com bust. As many multiemployer funds struggled, both unions and employers turned to Congress. The result: the Pension Protection Act of 2006 (PPA), which amended ERISA, the comprehensive federal pension law passed in 1974, and required plan officials to project future funding liabilities. If plans fell short, they were legally obligated to take remedial actions like cutting benefits and boosting employer contributions.
As the PPA was being written, the WCTPT trustees realized they had few options for adjusting to mushrooming liabilities. They were hamstrung by their inability to ask for money from their bargaining units between negotiating periods. At the time, it seemed like an astronomical loss [for the WCTPT]: between $5 billion and $6 billion, Storke says. The trustees search for a solution ended in June 2003, when they cut the benefit-accrual rate in half.
The WCTPT rebuilt its portfolio, booking $32.7 billion at the end of 2007. Then the financial crisis arrived, wiping out a devastating 28 percent of pension assets. By the end of March 2009, only $23.3 billion remained.
That shock caused Anthony Lock, who at the time was the funds union co-chairman, to begin attending meetings of Washington-based NCCMP, which lobbies on behalf of 1,385 multiemployer pension plans, members and contributing employers. Mack took over after Lock died in March 2009.
The WCTPT became an active participant in NCCMP activities. The fund also hired its own lobbyist, Holly Fechner, a partner at Washington-based Covington & Burling and a former staffer for U.S. senator Edward Kennedy; she helped write the multiemployer provisions of the PPA.
Then the trustees decided they needed to demonstrate not only that a well-run multiemployer pension could cope with economic pressures but that it was time to seek universal solutions for multiemployer plans.
Today the situation is dire. The number of multiemployer plans projected to become insolvent has more than doubled in the previous decade. Nearly 200 plans, or about 15 percent, are at risk of failure, potentially affecting nearly 2 million people. Among them: the Central States the second-largest Teamster pension plan and the United Mine Workers of America 1974 Pension Plan. Both are projected to run out of money in the next ten to 20 years.
Meanwhile, the federal pension safety net created by ERISA the PBGC faces its own crisis. At the end of 2012, the PBGC multiemployer insurance program had a $5.2 billion deficit, with assets of $1.8 billion and booked liabilities of $7 billion in 49 insolvent multiemployer plans. An additional 61 plans have terminated and will run out of money in the next few years, and 46 more will terminate within the next decade.
As if that werent enough, the PBGC itself is headed toward insolvency if nothing is done to fund it more effectively or alter its structure. Director Gotbaum did get a premium increase recently, but only for single plans, and employers are unhappy about it.
The decline in members and employers has taken its toll on organized labor. Today newer employers routinely seek to bar union membership to contain costs and retain control over labor. Teamster trucking membership nationally has dropped to about half a million in an industry that claims anywhere from 3.2 million drivers (according to the Bureau of Labor Statistics) to 5 million (according to the U.S. Department of Transportation). A special problem of multiemployer pensions is that when an employer drops out of a plan, it must make a withdrawal liability payment. These payments can be enormous: UPS paid $6.1 billion to exit the Central States in 2007, though it still has 30,000 workers in the WCTPT. The rule has kept many employers from signing up workers. In fact, when all employers but one drop out, that last man standing has to pay all of its former competitors pension liabilities.
The drop in union membership means fewer active workers pay into funds as rising numbers of retirees draw on them. The WCTPTs ratio is better than some, but todays 200,000 active members are less than half the 462,000 in 1980.
Despite the Teamster funds relative success, continued uncertainty about the status of pensions has caused mounting anxiety within the rank and file. Sanders says WCTPT members used to ask him, What do I get? Now they say, Tell me its safe.
BY FAR THE BIGGEST PROBLEM plaguing the WCTPT is the status of the fund after the financial crisis. The PPA required multiemployer plans to obtain an actuarial certification of funded status, using a color scheme: green zone for safe, yellow zone for endangered, red zone for critical. Yellow- and red-zone plans have to take actions to correct their underfunding.
For several years green-zone certification was just an academic exercise. At the end of 2008, 76 percent of multis were in the green zone, but by the end of 2009 that number had crashed to 20 percent. The WCTPT itself fell from a 97.1 percent funding ratio in 2008 to 85.1 percent in 2009 still above the 80 percent level that marked the yellow zone but headed in the wrong direction.
At that point, attorney Storke says, the Teamsters and staff started thinking about legislative relief. Projections showed that the WCTPT would return to health given enough time. The fund created a scenario-projection program to test various funding, investment return and return-smoothing combinations. The findings pointed to the need to extend fund loss amortization beyond the 15 years stipulated by the PPA, with additional smoothing.
In September 2009, WCTPT officials packed up their scenario slide show and took it to Washington. With help from lobbyist Fechner, they tried to educate congressional staffers about the WCTPT and multiemployer plans. If other Teamster plans fail, its going to affect us, says Storke, who spent lots of time in Washington in 2009 and early 2010, often accompanied by Mack, Dodge or Sander. In the Teamster community, if one employer cant fund pension obligations, that can affect other plans for employees who work for the same company.
The lobbying resulted in the Pension Relief Act of 2010, which spread fund losses further into the future. But longer-term solutions were needed. In response, NCCMP began a series of meetings that produced a three-pronged plan, called Solutions not Bailouts, created to preserve plans, remediate problems and design new kinds of funds.
The WCTPTs trustees have been hoping that improving financial markets will keep them comfortably in the green zone. If someone had told me 40 years ago that the first thing I would do when I got up in the morning is look at the markets, I would have accused them of being a capitalist swine, chuckles Mack.
The $35 billion portfolio is overseen by a 14-member investment committee cochaired by Robert Wrightson, a 40-year veteran of corporate finance at Consolidated Freightways, now known as Con-way. His Teamster co-chairman, Rome Aloise, who was appointed as a trustee in 1998 by Mack, his brother-in-law, is a contract negotiator for the national Teamsters. He replaced Mack as a vice president and as Joint Council 7 president when Mack took the pension job, and hes also secretary-treasurer of Teamster Local 853 in San Leandro, California. Under ERISA and the formation of the Taft-Hartley Act the enabling legislation for multiemployer plans youre legally required to take off your employer-employee hat when working together on the pension trust, Aloise says, adding of employers: In their mind, its their money. But in our mind, its our members money.
Although he represents employers, Wrightson is quick to defend pensions. Im a big believer in defined benefit plans, he says. It gives the employee much more security as he looks toward retirement. His fellow employer trustee, Joseph Hodge, has been on the committee for 21 years because, he says, I see the value of having consistency in this pension plan. Hodge, who retired in 2005 as Coca-Colas regional director of human resources for California, Nevada and Arizona, used to negotiate 22 separate contracts with Teamster units. The WCTPT, he says, is a very well-run business model in which the union trustees and employer trustees take their fiduciary responsibility very seriously.
As the funds investments grew in complexity, the trustees at the end of 2012 gave consultant Biller discretion to hire and fire managers. Its a move thats becoming common, says Seth Almaliah, a multiemployer investment consultant with Segal Rogerscasey in New York. We mostly listened and rubber-stamped his decisions, says Mack, adding, We had a lot of discussion on what oversight has to be. Biller and the investment committee steered the fund to an annualized 8.4 percent return over the 20 years ended in December 2013. That helps when the funds professionals defend the 7 percent return assumption used to determine the present value of future liabilities, a calculation familiar to multiemployer and public pension funds that are not required by law to use a bond rate.
This has led to a debate between single-employer actuaries and those in the multiemployer and public pension arena. Jeremy Gold, an independent consulting actuary based in New York, is an outspoken defender of using the single-employer discount rate a measure based on the corporate bond rate mandated by the Governmental Accounting Standards Board to determine future liabilities. WCTPT fund administrator Sander disagrees, pointing to the perpetual nature of the fund, its long-term returns above 7 percent and its employers staggered labor-agreement renewals. Gold counters: Todays Teamsters are getting the benefit of a guarantee they didnt pay for. Theres a real risk transfer. He contends that young union members will be saddled with future liabilities that arent paid for.
Moodys Investors Service and other rating agencies side with Gold. Whereas the WCTPT reported a 90 percent funded ratio at the end of 2012, Moodys, using the bond calculation, reported a 66.7 percent ratio.
The funds ten-year return of 6.2 percent compares a bit less favorably with the Wilshire Trust Universe Comparison Service (TUCS) average of 6.65 percent for all Taft-Hartley plans. Its healthy 15.6 percent performance for 2013 beat returns for all master trusts in TUCS but was overshadowed by the 17.82 percent return by its Taft-Hartley brethren, many of which are failing despite impressive performance.
Still, the WCTPT has been able to meet its pension obligations with room to spare. In 2013 the fund paid out $2.4 billion in pension benefits to retirees, took in $1.4 billion in contributions a 3.5 percent increase over 2012 and earned $3.4 billion in investment income.
TODAY A DEBATE RAGES over the future of multiemployer plans. The House Committee on Education and Workforce is writing a new bill, following a raft of hearings. Proposals have been floated to make wholesale changes to the way retirement benefits are structured. Some plans may remain intact; others, desperate to remain solvent, may have to slash benefits.
This is not something that is being treated as politics as usual, says the PBGCs Gotbaum, who has twice testified on multiemployer plans. Plans are doing what they can to preserve themselves: raising contributions and cutting current and future benefits.
The politics are tangled. The committee chairman, Minnesota Republican John Kline, is nearly finished writing a bill that would repeal the long-sacrosanct anticutback rule in ERISA and allow trustees to reduce benefits to keep plans solvent.
That might seem draconian, but the situation is critical. Take Central States, the second-largest Teamster fund. It has $18.2 billion in assets, receives $700 million in annual employer contributions and pays out $2.8 billion a year to retirees. Executive director and general counsel Thomas Nyhan testified before Congress in October that a benefit cut is the only way to salvage something for all the plans members. Pointing to adjustable benefits in the Netherlands, Denmark and elsewhere, he asserted that the U.S. is the only country with a pension anticutback rule that forbids earned benefits from being reduced.
Nyhans testimony echoed NCCMP director Randy DeFrehns campaign to adjust benefits rather than wait until the last dollar is spent. DeFrehn argues that its better for a fund heading toward insolvency to cut pensions by 10 percent than to wait until it fails. If plans could act early and reduce benefits marginally to remain solvent, why does it make sense to become insolvent? he asks. As former North Dakota congressman Earl Pomeroy famously said, A haircut is better than a beheading.
Klines bill would allow green-zone plans to extend their loss amortization period while letting those in the yellow zone make benefit adjustments before its too late. DeFrehn stresses the need to eliminate disincentives to employer participation. Weve almost preserved [multiemployer plans] out of existence because current rules are so tight employers dont want to sponsor them anymore, he says.
Opponents of the bill believe the government should bail out underwater pensions just as it saved the banks in 2008 through the Troubled Asset Relief Program. Some national labor organizations, including the International Brotherhood of Teamsters and the International Association of Machinists and Aerospace Workers, resist a future in which pension cuts are possible. Its a government problem, everybodys problem, says IAMAW president R. Thomas Buffenbarger. We can force this government to take action. But even Buffenbarger has had to compromise: In January he signed off on Boeing Co.s replacement of its defined benefit pension with a defined contribution plan.
The PBGCs Gotbaum has his own idea he wants more money in his agencys coffers. We analyzed what it would take if there was benefit adjustment authority, he says, speaking of the part of the Multiemployer Pension Plan Amendments Act that allows benefit adjustments to plans near insolvency. The PBGC estimates that this could help some 600,000 retirees whose plans would otherwise fail. But, Gotbaum says, that would still leave more than a million without help. His solution: Pay the PBGC 2 percent of the money going to multiemployer plans so it can bail out 2 million retirees.
The WCTPT trustees are well aware of issues threatening Central States. The WCTPT is actively recruiting as many new members as it can, in as diverse an array of jobs as possible, and it no longer matters whether they work in the 13 western states. That was a new concept, says Dodge. We want this to be the plan of choice, adds Sander, pointing to the 1,000-plus new participants added from December 2013 through the end of March 2014.
Were dismayed by the seeming abandonment of the traditional defined benefit plan, a model that works, and were living proof that it works, Sander says. We have 230,000 retirees getting a check every month. If I can replace 65 percent of a truck drivers last wage, its a victory.
For employers who want out, Sanders Northwest Administrators has set up rapid-response teams to speak with unions and employers about the benefits of the pension plan. Weve been pretty successful in getting parties to continue with the plan and new units into the plan, co-chairman Mack says.
The WCTPT is now providing benefits in Indiana, Michigan, New York and Ohio. Unionists like fresh-salad packagers in Californias Salinas Valley have replaced some of the workers lost in the decline of the canned-food industry. In California the hope survives that, like Rock Transport, employers will be won over by workers worried about their futures.
Follow Frances Denmark on Twitter at @FrancesDenmark.