Mike Wagner Presentation on Pension Plans

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Mike Wagner, of JP Morgan, discusses pension plans, pension planning and reform at the first Independent Retired Football Players Summit held at the South Point Resort & Casino in Las Vegas, May 2009.

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Mike Wagner Presentation on Pension Plans

  1. 1. Independent Retired Players Summit & Conference Considerations in today’s markets for Multi-Employer pension plans May 2009 0
  2. 2. Disclaimer The assumptions made throughout this presentation are for illustrative purposes only. They must not be used, or relied upon, to make investment decisions. The assumptions are not meant to be a representation of, nor should they be interpreted as JPMorgan investment recommendations. Allocations, assumptions, and expected returns are not meant to represent any JPMorgan portfolio. Please note all information shown is based on assumptions; therefore, exclusive reliance on these assumptions is incomplete and not advised. 1
  3. 3. BERT BELL/PETE ROZELLE NFL PLAYER RETIREMENT PLAN Fiscal year end March 2007. Total of 10,020 participants. Bert Bell Plan Asset Allocation Beginning of year Cas h Equities Mutual Funds Venture Capital Synthetic GICs Corporate Bonds U.S. Gov't Bonds Current assets $961,895,197 6.6% 10.6% Liabilities $1,546,413,280 3.9% Funded status¹ 62% --- 20.2% 37.2% Liability Interest Rate Assumption 7.25% 3.8% Estimated investment return 13.3% 17.8% NFL Total Plan Assets Income and Expenses Bert Bell Player Second Career Savings Coaches & Front Office Office Pension Plan Other Credits (+) Debits (-) 3.6% 4.6% Employer Contributions $125,904,014 Investment Earnings $95,428,529 21.5% Benefit Payments $66,106,772 43.1% Administrative Expenses $9,550,102 Totals $221,332,543 $75,656,874 Net Income² $145,675,669 27.1% (1) Funded status at beginning of year; takes into account gross assets versus liabilities (2) Adding next income to beginning of year net assets yields end of year net assets Sources: Schedule H of Form 5500 (available at www.freeERISA.com), Money Market Directories 2
  4. 4. Distribution of funding ratios for Taft-Hartley pension plans Actual PPA ‘06 zone status of Taft-Hartley pension plans % of plans–12/31/07 60% Endangered plans 40% 29% Critical plans 18% 19% 20% 8% 12% 11% 4% 0% <65% 65-74% 75-84% 85-94% 95-104% 105-114% 115%+ Funded Status 2008 projected zone status of Taft-Hartley pension plans % of plans–12/31/08 Critical plans 60% Endangered plans 45% 40% 31% 20% 12% 11% 0% 0% 0% 0% <65% 65-74% 75-84% 85-94% 95-104% 105-114% 115%+ Funded Status Source: Segal Survey Fall 2008, based on 344 plans. Actual PPA’06 data assumed to represent 12/31/07. 2008 zone data projected by JPMorgan based on Segal Survey 2007 results, assuming no change in liabilities and -26.9% 2008 investment performance as per the asset allocation of a typical Taft-Hartley pension plan. Asset values assume that contributions = service cost = benefit payments. The fund zone status identified about is based on the basic threshold: red “critical” plans 3 are <65% funded, yellow “endangered” plans are <80% funded, and green plans are >80% funded. Please note that other measurements will impact the fund’s 3 zone status beyond the basic threshold, such as the relationship between assets, contributions, and benefit payments.
  5. 5. Change of the funding ratio of a typical Taft-Hartley plan since the beginning of savings and loan crisis in 1989 Savings & Asian Financial Sept 11th Global Financial Loan Crisis Crisis Attack Crisis $6,000 Worst 160% funding Worst Worst ratio loss funding funding -4% ratio loss 140 5,000 ratio loss -19% -14% 120 Value (in $mill) Funding Ratio 4,000 100 Worst 80 3,000 funding ratio loss -41% 60 2,000 — Liability Value 40 1,000 Liab +8% — Funding Ratio per year 20 — Asset Value 0 0 08/94 08/95 08/96 08/97 08/98 08/99 08/00 08/01 08/02 08/06 08/07 08/08 08/89 08/90 08/91 08/92 08/93 08/03 08/04 08/05 The analysis assumes a 100% funding ratio in 1989(1) The typical Taft-Hartley plan has seen a drastic drop in its funding ratio in the current Global Financial crisis(2) Sourced from Datastream, and eVestment through March 31, 2009 (1) Assumes Taft-Hartley plan began August 1989 with $1,000mm in assets and liabilities (100% funded) (2) Assumes monthly rebalancing of the portfolio, based on the average allocation of assets: 29% to fixed income, 59% to equity and 12% to alternatives. 4 (Source: Money Market Directories) (3) Assumes that contributions are equal to benefit payments, and liabilities grow due to 4 normal cost of 8% per year
  6. 6. High dispersion of asset class returns have resulted in significant shifts of asset allocation Dramatic divergent performances … … Led to over-allocation to FI and alternatives Benchmark returns1 as of December 31, 2008 and March 31, 2009 Asset allocation of an average Taft-Hartley 1,2 (%) 12/31/07 12/31/08 2008 YTD 03/31/09 60 YTD 03/31/09 11% 50 1% 1% 48 n/a 0% -3% -2% 41 38 -11% -14% -10-15% -10-20% -19% -10-25% 29 -37% -43% 12 11 11 -53% US Equity Intern'l Emerging US Invest Hedge Real Private Equity Markets Treasuries Grade Funds Estate Equity Equity Credit Equity Fixed income Alternatives 1 2008 return percentages calculated from representative benchmark returns. All benchmarks sourced from eVestments as of March 31, 2009, except for HFRI Fund of Funds Index (sourced from HFRI), real estate and private equity data (JPMorgan estimates). Other benchmark information is included in appendix. 2 12/31/07 allocations correspond to an average Taft-Hartley allocation, as of 12/31/07 (Source: S&P Money Market Directories). However, note that alternatives are proxied with a HFRI Fund of Fund index (allocation: 5.2%) and MSCI REITs index (allocation: 6.8% ). Further allocations result solely from mark to market of investments, not from rebalancing nor cash in/outflows. 5 Indices do not include fees or operating expenses and are not available for actual investment.
  7. 7. Behavior of a typical Taft-Hartley plan through different financial crises Performance from the start of the crisis until its worst point(1,2) The Taft-Hartley plan is 120% Asset Return Liability Return Funding Ratio 110% assumed to begin with 100% 95.6% 100% 90% 85.6% 80.6% funding ratio at the 80% beginning of each crisis 70% 59.5% 60% 50% 40% The asset allocation(3) is 30% 20% 9.4% 9.4% 10.1% typical of a Taft-Hartley plan 8.7% 4.5% 10% 0% (59% allocated to a -10% -6.4% diversified equity portfolio, -20% -12.4% -30% 29% to a diversified fixed -40% Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis -34.5% Global Financial Crisis income portfolio and 12% to Sept 1990 Aug 1998 Sept 2002 Feb 2009 alternatives) Performance from the start of the crisis until its end (1) 120% 109.8% The portfolio is not 110% 100% 94.0% rebalanced throughout each 85.1% 90% 80% crisis 70% 62.4% 60% 50% Out of the four financial 40% 30% 15.9% 24.1% crises analyzed, the current 20% 13.0% 10.1% 10.8% 8.9% 10% crisis has the lowest funding 0% -10% -6.4% ratio of 62.4% -20% -30% -40% -30.9% Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis Global Financial Crisis Aug 89 – Jun 91 Jul 97 – Jan 99 Sept 01 - Nov 02 Dec 07 – Current(2) Source: eVestment and Datastream (1) Worst case defined as lowest funding ratio across the crisis analyzed. (2) Assumes Taft-Hartley plan begins each financial crisis at 100% funded. Liability assumed to grow due to service cost at 8% per year. Data as of 3/31/09. (3) Asset allocations correspond to a typical Taft-Hartley plan as of 12/31/07 (Source: S&P Money Market Directories). However, note that alternatives are proxied with a HFRI Fund of Funds index. Due to unavailable data, a portion of the alternatives and REITs allocation during the Savings & Loans crisis was 6 6 proxied using the NCREIF index for direct real estate. The real estate allocation as of Q1 2009 is assumed to be -17.5%
  8. 8. Behavior of a typical Taft-Hartley plan through different financial crises Performance from the start of the crisis until its worst point(1,2) The Taft-Hartley plan is 120% Asset Return Liability Return Funding Ratio 110% assumed to begin with 100% 95.6% 100% 90% 85.6% 80.6% funding ratio at the 80% beginning of each crisis 70% 59.5% 60% 50% 40% The asset allocation(3) is 30% 20% 9.4% 9.4% 10.1% typical of a Taft-Hartley plan 8.7% 4.5% 10% 0% (59% allocated to a -10% -6.4% diversified equity portfolio, -20% -12.4% -30% 29% to a diversified fixed -40% Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis -34.5% Global Financial Crisis income portfolio and 12% to Sept 1990 Aug 1998 Sept 2002 Feb 2009 alternatives) Performance from the start of the crisis until its end (1) 120% 109.8% The portfolio is not 110% 100% 94.0% rebalanced throughout each 85.1% 90% 80% crisis 70% 62.4% 60% 50% Out of the four financial 40% 30% 15.9% 24.1% crises analyzed, the current 20% 13.0% 10.1% 10.8% 8.9% 10% crisis has the lowest funding 0% -10% -6.4% ratio of 62.4% -20% -30% -40% -30.9% Savings & Loan Crisis Asian Financial Crisis Sept 11th Crisis Global Financial Crisis Aug 89 – Jun 91 Jul 97 – Jan 99 Sept 01 - Nov 02 Dec 07 – Current(2) Source: eVestment and Datastream (1) Worst case defined as lowest funding ratio across the crisis analyzed. (2) Assumes Taft-Hartley plan begins each financial crisis at 100% funded. Liability assumed to grow due to service cost at 8% per year. Data as of 3/31/09. (3) Asset allocations correspond to a typical Taft-Hartley plan as of 12/31/07 (Source: S&P Money Market Directories). However, note that alternatives are proxied with a HFRI Fund of Funds index. Due to unavailable data, a portion of the alternatives and REITs allocation during the Savings & Loans crisis was 7 proxied using the NCREIF index for direct real estate. The real estate allocation as of Q1 2009 is assumed to be -17.5% 7
  9. 9. An overview of Taft-Hartley pension plans 12/31/071 Estimated 12/31/081 Assets $ 132 bn $ 96 bn Liabilities $ 140 bn $ 140 bn Surplus / (Deficit) ($8 bn) ($ 44 bn) Industry funding ratio 94% 69% Funding zone status Green Yellow Average plan asset performance in 2008 (until 12/31/08)1 -27% 1Source: Segal Survey Fall 2008, based on 344 plans which responded to Segal’s “Updated Survey of Plans’ Actual Zone Status”. 2008 investment performance of -27% is based on the asset allocation of a typical Taft-Hartley pension plan. Asset values assume that contributions = service cost = benefit payments. Liability for 2007 calculated based on Segal Survey’s projected average industry ratio of 94% and $132bn asset value. The fund zone status identified about is based on the basic threshold: red “critical” plans are <65% funded, yellow “endangered” plans are <80% funded, and green plans are >80% funded. Please note that other 8 measurements will impact the fund’s zone status beyond the basic threshold, such as the relationship between assets, contributions, and benefit payments. 8
  10. 10. The past year has been tough for Taft-Hartley pension plans – Contribution rates under pressure The removal of 44,000 UPS full-time Teamsters from Central States will lower pensions for all Teamsters in the future. New UPS pension plan is no longer obligated under contract to make specific hourly payments to this plan – Increasing number of plans in the “red” zone The New England Teamsters and Trucking Industry pension fund is expected to certify its critical status in 2008 after members were notified – Pension cuts The Western Conference of Teamsters pension fund has cut pension accrual rate by 50% (to 1.2% of employer contributions) Trustees in the Maryland local 355 pension fund have cut the fund’s annual accrual rate down to 0 The United Auto Worker plans are expected to accelerate wage reductions, job cuts and loss of benefits, changes already spurred by foreign competition, declining sales and the worst economic conditions – Increasing bankruptcy and liability withdrawal issues Consolidated Freightways (CF) closed its doors in 2002 while the company owed $400million in withdrawal liability. Conway, the non-union parent company will not pay, claiming it had spun-off CF before it went bankrupt. – Deteriorating investment performance and outlook Central States Fund (CSFP) took a $2.6bn loss during the first 9 months of 2008 while the stock market tumbled even further in the fourth quarter. CSFP had 66% of its assets in stocks, as of September 30, 2008 Source: http://www.tdu.org 9 http://www.nccmp.org 9
  11. 11. Issues faced by Taft-Hartley/Multi-Employer pension plans Investments Benefits Administration Deteriorating Funded Status Benefit adjustments Personnel Turnover/ and Potential need for a Compensation “Funding Improvement” or Defined Benefit vs. Defined “Rehabilitation” Plan Contribution Employer bankruptcies / withdrawal from plan Contribution negotiation Allocation decisions (e.g. healthcare vs. pension) Declining active participants Rebalancing vs. expanding retirees Actuarial decisions (e.g. Liquidity Decisions amortization extension) Administrative and operating procedures Investment Policy / Strategic Allocation Relationship with employers Excise taxes Increasing filing required notices / disclosures Increasing healthcare costs / Inflation Declining membership to non-union rivals 10 10
  12. 12. Keeping the lights on: meeting the immediate liquidity requirements Liquidity requirements Liquidity sources Monthly benefit payments Annual contribution Drivers: possible changes to Drivers: PPA regulation, Benefit payments benefit payments given PPA Contributions change in demographics Regulation and traffic-light rules Today: contributions will need to be renegotiated Drivers: investment opportunities, operational Capital calls Drivers: liquidity, transaction cash flows, stage of funds (private equity, Sale of investments costs, flexibility with strategic Today: lack of selling allocation real estate) opportunities has drained internal liquidity Drivers: market volatility Drivers: structuring of funds, Margin calls Investment cash flows Today: negative performance market yields, stage of (portable alpha, (dividends, coupons, real investments of equity markets has tactical asset estate cash flows, increased need for futures’ Today: higher yields than allocation, …) collateral distribution…) average for corporates The bulk of liquidity requirements results from benefit payments Liquidity is unlikely to come from alternative assets, on the contrary they add to liquidity pressures The lack of liquidity from fixed income might require additional losses to be recognized due to higher than normal transaction costs 11 11
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  25. 25. Benchmark performance from the start of the crisis until its worst point* Savings & Loan Crisis: Aug 89 – Sept 90 * Due to unavailable data, Hedge Fund of Funds return begins Jan 1990 16.22% 9.56% 6.50% 7.04% N/A -7.84% -11.41% -19.57% -25.15% -27.47% Asian Financial Crisis: Jul 97 – Sept 98 17.21% 21.52% 15.22% 6.47% 6.58% 6.29% -6.97% -3.03% -4.27% -8.67% Sept 11th Terrorist Attack: Sept 01 – Sept 02 9.86% 6% 4.22% 2.26% -0.11% -8.86% -19.96% -21.51% -23.83% -26.91% US Large Cap US Mid Cap US Small Cap Int'l Equity Cash US Fixed US High Yield Hedge Fund of Direct Real US REITs Equity Equity Equity Income Funds Estate Representative index return for asset class (Source: Datastream, eVestment & HFRI) US Equity: S&P 500 US HY Fixed Income: Barclays High Yield International Equity: MSCI EAFE Free- ND US REITs: MSCI REIT US Mid Cap Equity: Russell MidCap Hedge Funds: HFRI Fund of Funds Index US Small Cap Equity: Russell 2000 Real Estate: JPM estimate 24 US Fixed Income: Bar Cap Aggregate Private Equity: Unknown until Q1 2009 24 Cash: Citigroup 3month T-Bill
  26. 26. Benchmark performance throughout each crisis Savings & Loan Crisis: Aug 89 – Jun 91 *Due to unavailable data, Hedge Fund of Funds return begins Jan 1990 23.60% 14.75% 14.94% 16.88% 12.81% 7.87% 2% 0.41% N/A -18.36% Asian Financial Crisis: Jul 97 – Jan 99 48.12% 25.89% 26.91% 16.43% 9.64% 9.98% 8.20% 10.16% -0.25% -8.82% Sept 11th Terrorist Attack: Sept 01 – Nov 02 25.95% 9.33% 2.54% -0.83% 3.55% -4.06% -15.79% -10.07% -11.77% -16.07% US Large Cap US Mid Cap US Small Cap Int'l Equity Cash US Fixed US High Yield Hedge Fund of Direct Real US REITs Equity Equity Equity Income Funds Estate Representative index return for asset class (Source: Datastream, eVestment & HFRI) US Equity: S&P 500 US HY Fixed Income: Barclays High Yield International Equity: MSCI EAFE Free- ND US REITs: MSCI REIT US Mid Cap Equity: Russell MidCap Hedge Funds: HFRI Fund of Funds Index US Small Cap Equity: Russell 2000 Real Estate: JPM estimate 25 US Fixed Income: Bar Cap Aggregate Private Equity: Unknown until Q1 2009 25 Cash: Citigroup 3month T-Bill
  27. 27. PPA Requirements for Taft-Hartley plans General Funding Changes – Faster Funding: Reduced amortization periods to 15 years for changes in benefits and actuarial assumptions – Deductibility: Raises the deductibility limit to 140% of the plan’s unfunded current liability – IRS relief: IRS required to grant extensions of any existing amortization period for up to five years upon plan’s certified filing Increased plan rules and responsibilities – Traffic light rules: Green zone, Yellow “endangered” zone , Red “critical” zone (see next page for more details) – Need to come up with Funding Improvement Plan if plan is in “endangered” zone or Rehabilitation Plan if plan is in “critical” zone Additional disclosures / penalties – Plan actuary required to certify within 90 days from the plan’s start year if it is in endangered or critical status. Violation will be subject of to a fine of up to $1,100 per day. – Excise taxes – This results from changes passed at the end of 2008 Worker, Retiree, and Employer Recovery Act of 2008 – Allows plan trustees “to freeze” their plan’s 2008 zone status for 2009. Some non-calendar year plans are allowed to look back to their 2007 funding levels. – If the election is made, trustees must send required documents to participants, bargaining parties, DOL, and PBGC no later than 30 days after the election to freeze is made 26 Source: Milliman August 2006 article “Congress Enacts Major Multiemployer Pension Reform”, NCCMP, 26
  28. 28. Traffic Light Rules in detail Certification on plan’s zone status serves to determine the plan’s funding status for the current plan year and project the plan’s funding status for the next six years. Green Zone – Generally above 80% funded Yellow Zone – Plan is either less than 80% funded or has an accumulated funding deficiency in the current plan year or any of the six succeeding plan years – Requires adoption of a Funding Improvement Plan – Imposes funding benchmarks to be met generally over 10 years – Restricts certain benefit improvements Red Zone – Plan meets any of the four following tests: 1) Plan is less than 65% funded and the FMV of assets plus contributions for the current and succeeding size plan years is less than the present value of projected benefit payments and administrative costs over the period. 2) Plan has a funding deficiency in the current plan year or is projected to have one within the following three plan years (four plan years if the plan is 65% funded or less). 3) The PV of active participants’ vested benefits is less than that for inactive participants at beginning of plan year, the PV of anticipated contributions is less than the plan’s normal cost plus interest or unfunded vested benefits, and the plan either has a funding deficiency or is projected to have one within the next four years. 4) Plan assets plus the PV of anticipated employer contributions over the current and succeeding four plan years are less than the PV of benefit payments plus administrative expenses projected over that period 27 Source: Milliman August 2006 article “Congress Enacts Major Multiemployer Pension Reform”, NCCMP, 27
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