Traditional defined benefit plans provide retirees with a guaranteed lifetime pension. However, workers participating in these DB plans have fallen from 38% to 20% between 1980 and 2008. Steve McCourt, the co-CEO and Managing Principal at Meketa Investment Group, shares some insight into the Great Resignation and the shifting demographics in the workforce.
Some highlights from Defined Benefit Plans and the Case of the Disappearing Demographics:
02:29 – The Fuzzy Math Problem
06:42 – Could We See a Rolling Series of ARPAs?
10:17 – Not a Blunt Hammer
16:34 – Is Blockchain Technology on the Horizon for Defined Benefit Plans?
If you'd like to read or view the Meketa white paper, Cryptocurrencies: Bitcoin, Blockchain, and Institutional Investors click HERE
This is the World of Multiemployer Benefit Funds with Traci Dority-Shanklin. We believe in demystifying retirement solutions, upholding retiree dignity, and contributing to economic stability through union organizing, pension reform, and legislative activism. In short, we're devoted to busting myths about the labor movement. If you're interested in the enduring power of labor, well, you've landed in the right place. Experts and activists will share their insights and expertise and stories. Time is short, so let's get started.
Traci Shanklin 0:35
For those of you just joining the podcast, I am continuing my conversation with Steve McCourt. We have been talking about the impact that the coronavirus pandemic and lockdowns have had on defined benefit plans. Steve McCourt is a Managing Principal and the Co-Chief Executive Officer of Meketa Investment Group. He serves as the lead consultant for several institutional funds with public, Taft-Hartley, endowment, and nonprofit plan sponsors. His consulting work includes investment policy design, strategic and tactical asset allocation modeling, asset-liability modeling, investment education, and investment manager analysis.
Traci Shanklin 1:15
The American Rescue Act, or ARPA was passed back at the beginning of 2021. And for our listeners, ARPA, created a special financial assistance program or SFA. This industry loves acronyms. The SFA basically contained 90 billion in funds to rescue some of the failing and distressed defined benefit plans, which is estimated to protect the benefits of 3 million people in over 250 multiemployer pension plans that were severely underfunded. The Pension Benefits Guaranty Corp, the PBGC is tasked with reviewing and approving applications and distributing the SFA to the multiemployer pension funds seeking assistance, so there's been 20 eligible plans that have submitted applications to the PBGC for review. In December, the PBGC announced the approval of the first two multiemployer plans to receive SFA. And by the time this episode airs, I'm sure a couple more funds will also be approved. Has Meketa worked with any plans that are seeking SFA?
Steve McCourt 2:26
Yep, we've got a handful of plans that are either have applied or in the process of applying.
Traci Shanklin 2:29
And how have you, I guess, your experience been with the application process?
Steve McCourt 2:36
The investment consultants don't get involved in the actual application for the process where we get involved is discussion at this point around the investment strategy, if and as the pension fund receives ARPA funding, and that's sort of a little bit in limbo, right now. Because there's not full clarity on kind of what the rules will be based on kind of what most people think the PBGC will decide on how these funds can be invested. Any relief funding that comes from Treasury as a function of this legislation to a pension plan will need to be invested exclusively in investment-grade bonds. And the interesting challenge with that is the way the legislation was written, as I'm told, the funding is intended to last through 2051 based on a discount rate of 5% on the funding. Well, in today's bond market, you can't get a 5% return on investment-grade bonds. The expected return is closer to two and a half or 3%. So, there's been a really interesting kind of mathematical challenge of trying to find a solution for allowing pension plans to invest the funding more aggressively to get a rate of return that matches the 5% that was used in developing ARPA.
Steve McCourt 4:00
But, the counterbalance to that is from a political perspective, no politician wants to hear five years from now that taxpayer-funded relief for Taft-Hartley plans was invested in equity assets that were down 20% in the next five years. And again, yet another challenge created by our very low-interest rate/high valuation environment that we're in right now. So, we've been working with plans on different ways to think about investment policy/investment strategy within the constraints of how that funding may be able to be used. And so, a lot of it, of course, relates to the part of the pension plan, the assets, the pension plan, that are legacy assets, that policy can be shifted around to have a higher expected return, as you have all of these conservative fixed-income assets that you have in your plan now that's being funded through Treasury.
Steve McCourt 4:50
So, how that math is going to work out? How the balance is going to work out? How the Department of Labor looks at it? It's still a very open question. What's a prudent fiduciary supposed to do with this Treasury funding? What's a prudent fiduciary supposed to do with the legacy part of their portfolio? These are all open questions that right now nobody has the answer to, but that's the sort of dialogue we're having with our clients right now that are - that are applying or preparing to apply for financing.
Traci Shanklin 5:16
Based on the 5% actuarial assumption and the constraints of only investing in the investment grades, do you think that the PBGC, I guess, their final, final rules are due in January 2022; they did issue some interim final rules in July, which is where there's been a considerable amount of back and forth and pushback on it. But, do you think that the BB - PBGC, should focus on reducing the return assumption? Or do you think that it's better if they open up the investment classes to include equities for the SFA funds?
Steve McCourt 5:56
From a public policy perspective, reducing the assumed discount rate would be a more logical and safe path to take. The more risky assets you allow in the pool of assets that these plans are investing, the greater the risk, at some point in the future, some of the funds will have losses in those portfolios. It's just part of how the capital markets work. If the goal of the legislation was to secure benefit payments through 2051, the most safe way to do that would be to reduce the discount rate that's used to 3%. But, of course, what that would mean a significant increase in the amount of money that goes from taxpayers to Taft-Hartley plans that would have its own political challenges to it, of course.
Traci Shanklin 6:42
Do you think ARPA is enough to aid the troubled multiemployer plans? Or do you think that there's still a need for multiemployer pension reform legislation?
Steve McCourt 6:52
It helps. Helps a lot. It -- but if you're talking about entire industry, is there more that can and should be done? Yes, absolutely. I mean, there's, there's a host of plans that aren't going to qualify for ARPA that still are going to be really challenged to operate as going concerns over the next 20 years. There's an open question: are we going to have a rolling series of ARPAs every 10 years or every 20 years to keep defined benefit plans going? It's not a long-term solution to maintaining and building defined benefit plans in the US. It's probably more than a band-aid, but it doesn't really set meaningful, sustainable solutions in the defined benefit arena.
Traci Shanklin 7:31
Do you see any way forward for the plans outside of reform?
Steve McCourt 7:36
From my perspective, Traci, 90% or more of the plans that don't make it, at least based on my experience, they don't make it because of demographics; things outside of their control. The economy changes; there's the trade that the plan covers shrinks so significantly, that it can no longer support with contributions from a smaller demographic. It's very rarely a function of investments, at least historically, there's a lot of trades that are doing really well and probably will do well over the next 20 or 30 years, demographically. They're in industries that are growing; they're seeing their wages go up; they're seeing their fringe packages go up. And they might have a rosy future. But there's -- in a dynamic economy, there's always going to be pockets of the labor market that shrink and pockets that grow. And to the extent that there's defined benefit plans covering industries that are shrinking, we're always going to have this challenge of how to secure those benefits, because defined benefit plans don't really work well when you have four times as many retirees as you have working people. The math just doesn't work.
Traci Shanklin 8:38
Aside from the industry challenges have -- for other funds that maybe could have a future, do have the workers continuing to join, would you say that there's any other plan designs that might become more favorable? I know, there's been a lot of talk in hybrid plan retirement solutions. I've had many conversations on this podcast about them, but do you see any of those gaining traction, whether it's a DC plan, or a hybrid, or a target fund, or some other retirement solution?
Steve McCourt 9:15
Personally, I really haven't. I mean, I hear a lot of the talk about the hybrid plans. Ultimately, any hybrid plan, you know, has to boil down to is it defined benefit meaning the risk of funding the plan is ultimately the employers, or is it a defined contribution meaning the risk of your retirement funding is a function of the employees? So, I think that's still sort of the delineation point, unions and trust funds are looking at different plan designs. There's lots of ways to make DC plans more like DB plans or DB plans look more like DC plans but at the end of the day, it still is DB versus DC. More than half of our Taft-Hartley defined benefit plans will have a supplemental defined contribution plan and annuity fund of some sort. To me, that still feels like the dominant model out there. And the last couple of years of asset prices, improving funded status generally improving across the Taft-Hartley world, it probably relieves some of the pressure of having to make decisions about hybrid plans.
Traci Shanklin 10:17
You talked a little bit about jobless numbers are down. And I think some of those numbers might be slightly elevated because the seasonal holiday jobs, but in general, the last 18 months following the lockdown, US employers are struggling to fill like 10 million jobs. We've recently heard the period called the Great Resignation where American workers were quitting their jobs at an alarming rate and set records. It really appeared to be happening across all jobs sectors, including states and local education, and throughout skill and education levels. Do you see this happening inside the trades? Or do you think that the trades are actually benefiting from this period in people making shifts and career choices?
Steve McCourt 11:05
I think it really depends. And I think the pandemic really hit different parts of the economy differently. It was not a blunt hammer. It was an event that people's experiences differ quite significantly, depending on where they were, and what their jobs were. But, I would say generally speaking, that the Great Resignation is bound to hit more of the parts of the labor market where people are exhausted and impacted directly by COVID. And maybe wages aren't sufficiently high to support them in the industry right now. I think about grocery store workers. I think about restaurant employees. I think about nurses and administrative staff who work at doctors’ offices, who have to like sit behind a desk and be 100 people who might have COVID every day. I would imagine the Great Resignation is less about quitting work, to do nothing and more about quitting work to do something else. But, I'm sure you've seen this, Traci, as well, there's clearly sort of a mass psychology element to this as well. I think two years at home, not coming into an office, not seeing people gets everyone thinking about, you know, what their career choices are? What they really want to do with their lives? And so, I think, across every industry, there's bound to be people who just decide, I wasn't happy before the pandemic, now's the time to make a change and do something that really makes me happy.
Traci Shanklin 12:31
Has the labor movement seen an increase in workers retiring early, potentially? Because I know that's been cited as one of the reasons for like, the Great Resignation, is that actually people taking early retirement?
Steve McCourt 12:44
I just from my personal experience with some of the trust funds that I work on, there was last year, I would say, some discussion around elevated levels of retirements with the pandemic, and that there always is around recession. I have seen that, but I'm not sure it's any more elevated than you would see in a typical recessionary period. Typically, when people aren't working and they're 63 years old, they often decide, you know, maybe I'll just call it quits now.
Traci Shanklin 13:14
This is probably outside of your area of expertise, but you do have your finger on the pulse of in meeting with the union trustees on a regular basis. And in our last conversation you mentioned the retirement crisis in America and people's anxiety as they plan for retirement. Do you think that due to the convergence of COVID, worker shortages, and then union favorability being at an all-time high, employers will put things beyond higher hourly payback on the negotiating table? I mean, things like healthcare benefits and retirement benefits?
Steve McCourt 13:52
Boy, what an interesting question. I've never thought of that, Traci, but I think the answer has to be, yes. Employers have to come up with more reasons to get people to stick in their careers in their jobs. I think fringe benefits is, is part of that. I think flexible work schedules is part of that. There's a host of things that are non-monetary, that I think labor will demand and companies will accommodate in order to keep the workforce that they have or let alone build it. In a world where schools shut down every couple of weeks and your kids are going to be at home and you can't focus on daycare, it is tough.
Steve McCourt 14:27
I mean, it doesn't matter if you're the mother or the father. Someone's got to deal with it. And society doesn't have a solution. I think childcare is going to be a massive economic issue to solve in the next decade. Because I think people have realized through this that two-income households are -- they work really well. But, if you're going to have rolling pandemics and you're going to have schools and daycare centers have to shut down periodically. It's hard to maintain a rigid work. It was hard before to maintain a rigid work schedule. Now it's even harder. That'd be another thing I'd add to your list is I think employers have more flexibility around childcare around days off to handle childcare generally, that has to be an area of flexibility.
Traci Shanklin 15:12
Yeah, I mean, the way I see it as there is an opportunity if we take the time to better educate union workers on the critical importance of retirement and healthcare benefits, and other to your point fringe benefits, but in a way that can impact the larger conversation, which goes to my next question, as I know, you don't have a crystal ball. And I know this isn't necessarily your area of expertise, but based on your experience in the multiemployer industry, do you think labor organizing can be re-energized by taking advantage of this unique moment in workers, activism, for lack of a better word?
Steve McCourt 15:51
Maybe it's already been on an upward trend the last few years. Like I think with Amazon effect, there's been a greater acknowledgment across society that low-wage jobs are not sustainable for society; let alone the people that are in them. I would imagine that yes, there's going to be there should be more of an opportunity for unions to step in, and help fight for the types of things that labor needs to have in order to make their jobs and their lifestyle sustainable. And maybe that is childcare; maybe it's more flexibility. It's things beyond just the traditional wages and pensions. It'll be interesting to see. But I definitely think there's an opportunity there.
Traci Shanklin 16:34
I want to pivot to a subject that we can't ignore as we look at the investing over the last year, which is cryptocurrency and many investors believe that it will completely revolutionize how all our assets are held and therefore disrupt everything in the financial industry. I know more and more investment consultants are being forced to opine on whether there is a place for it as a diversifier in a pension fund. Before we jump into that, can you give our listeners a high-level definition of cryptocurrency?
Steve McCourt 17:10
Cryptocurrency I would limit to Bitcoin and all the associated similar stores of value that are created by the blockchain technology. The other element that a lot of advocates of cryptocurrency blend in is digital assets, which is a broader definition that would include any asset that is digitized and sold using blockchain technology. Even within those two definitions, there's a lot of shades of grey that people will use. To date, we've not seen a lot of interest from trust funds on cryptocurrency. I think, mainly, trustees are fairly skeptical. In the ERISA world, it's unclear how the Department of Labor would look at cryptocurrency.
Steve McCourt 17:52
From an investment standpoint, cryptocurrency has had nice returns in the last decade, but it's also quite volatile. So, when consultants and other sort of practitioners look at asset allocation, it's not clear what expected return you would appoint to cryptocurrency. But certainly, it's very clear what the volatility is. And the volatility in the crypto crisis is, is much, much higher than other investable asset classes. That being said, even if you don't allocate to cryptocurrency directly or address it in your policies, increasingly it's finding its way in portfolios. It's a part of many venture capital portfolios in which trust funds invest. It's a part of some hedge fund portfolios in which trust funds invest, even though most funds are not looking at it at a policy level at this point, it is seeping its way into the investment framework.
Traci Shanklin 18:45
I'm curious when you say you're seeing it in other in portfolios, is it traditionally, I mean, this is my limited understanding of it, but is it being used as like a currency hedge or a diversifier?
Steve McCourt 18:59
No, usually, some hedge funds or venture capital funds may own crypto directly as an investment in their portfolios, but most of the exposure is through underlying companies that they may own. So, you increasingly see companies that are in the industry of technology that enables Bitcoin or other currencies. They have a whole business model built around it, so you know what they're going to own some Bitcoin, too. It's indirect exposure in that sense; it's not owning the Bitcoin directly. It's owning companies who in turn have Bitcoin on their balance sheets.
Traci Shanklin 19:34
In the research I did, mining things like Bitcoin is extraordinary complex. And for our listeners, it uses many supercomputers to compute and complete these complex mathematical equations. And running these supercomputers uses an enormous amount of electricity, and so I'm just wondering if there's any concerns that investing in crypto undermines any of the ESG, the environmental, social, and governance policies that funds might have in place?
Steve McCourt 20:05
It definitely would most of our public pension fund clients have some ESG policy requirements. And so, for them, that's yet another hurdle that crypto would have to pass before they made meaningful investments in it. And it is certainly a factor that all trustees should be aware of. Most crypto mining happens in China and other developing countries where electricity generation is the dirtiest. The electricity used is huge, and it's the most inefficient form of electricity that that's being used to mine it.
Traci Shanklin 20:42
I know Meketa did a white paper on cryptocurrency, which we will link in our show notes. And it was clear in reading it to your point that the volatility in the space has limited the looking at it as a standalone investment. But, to your point, it has found its way in. Well. Is there anything else that you'd like to add, Steve?
Steve McCourt 21:04
Yeah, I would just I'd want to wish everybody a happy 2022. I'll do my part to send positive vibes into the universe to get this pandemic behind us. I think we're all anxious to kind of get back to more normalcy throughout the year. And, Traci, we want to thank you quite a bit for your questions, and also the opportunity to be on your podcast.
Traci Shanklin 21:24
Well, thank you. I really appreciate you being part of the conversation. And I always appreciate your highly informative insights and your time, so thank you very much for being with me today. If you've enjoyed today's podcast, please consider supporting us with a voluntary contribution at www.patreon.com/multiemployer funds. That's www.patreon.com/multiemployer funds. Or you can subscribe to us and leave us a five-star review on your favorite podcast platform. We are available on Apple Podcasts, Spotify, Google Podcast, and many other podcast platforms. And of course, you can always find us on our website at www.multiemployerfunds.com. That's www.multiemployerfunds.com. Here, you can find our entire podcast library and join our newsletter. Thanks again for joining the conversation where listeners connect with leading experts throughout the multiemployer world. Be part of the change.
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Sisu Partners LLC hosts the World of Multiemployer Benefit Funds podcast which contains content and discussions that are prepared for informational and educational purposes only. No listeners should assume that any discussion on this podcast serves as the receipt of, or substitute for, personalized advice from an investment professional as the information provided on the podcast is not intended to be investment legal or tax advice. The company is not an SEC-registered investment advisor and does not solicit clients or raise capital for money managers. Sisu Partners offer securities through XT Capital Partners, LLC.