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Transcript of Comparing Union Sponsored and Private Pension Plans
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Comparing
Union-Sponsored andPrivate Pension Plans:How Safe Are Workers’Retirements?
DIANA FURCHTGOTT-ROTH
AND ANDREW BROWN
Hudson Institute
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Comparing
Union-Sponsored andPrivate Pension Plans:
How Safe Are
Workers’ Retirements?
Diana Furchtgott-RothAndrew Brown
Hudson InstituteSeptember 2009
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© 2009 Hudson Institute
ISBN 978-1-55813-167-5
This report is an update o the Summer 2008 study, entitled Union vs. Private
Pension Plans: How Secure Are Union Members’ Retirements?
Hudson Institute is a nonpartisan policy research organization dedicated to
innovative research and analysis that promotes global security, prosperity, and
reedom. We challenge conventional thinking and help manage strategic tran-
sitions to the uture through interdisciplinary and collaborative studies in de-
ense, international relations, economics, culture, science, technology, and law.
Through publications, conerences, and policy recommendations, we seek toguide global leaders in government and business. For more inormation about
Hudson Institute, visit our website at www.hudson.org.
Diana Furchtgott-Roth is a senior ellow at the Hudson Institute. She directs
the Center or Employment Policy, whose purpose is to explore undamentally
sound economic policies that encourage economic growth and employment cre-
ation. She is the editor o Overcoming Barriers to Entrepreneurship in the Unit-
ed States (Lexington Books, 2008). From 2003 to 2005 Ms. Furchtgott-Roth
was chie economist at the U.S. Department o Labor. She received her B.A. in
economics rom Swarthmore College and her M.Phil. in economics rom Oxord
University.
Andrew Brown is an independent economist. He has provided research or
the Small Business Administration and the Hudson Institute. He was previously
a research assistant with the Hudson Institute Center or Employment Policy,
where he analyzed pension data or the 2008 paper Union vs. Private Pension
Plans: How Secure Are Union Members’ Retirements? He graduated with hon-
ors rom Swarthmore College with a B.A. in economics and mathematics.
The authors are grateul or the research assistance o Astha Shrestha. The
views expressed in the paper are those o the authors alone, and do not necessar-
ily refect those o any other party. The authors take responsibility or all errors.
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Table o Contents
I. Introduction 1II. Executive Summary 1
III. What are Pensions? 4
IV. Trends in Pension Coverage 7
V. Sources o Inormation on Pension Plans 10
VI. General Health o Pension Plans in the United States 11
VII. Why Union Plans Tend to Perorm More Poorly 16
VIII. Small Plans 19
IX. Rank-and-File Versus Ofcer Pension Plans 21
X. Underunded Pensions and the Employee Free Choice Act 23
XI. Political Spending 25
XII. Eight Case Histories 28
Service Employees International Union 28
E.I. DuPont 29
International Brotherhood o Teamsters 30
Plumbers and Pipeftters 32
Southern Caliornia, Arizona, Colorado and Nevada Glaziers 33
United Auto Workers 34
Sheet Metal Workers 35
UNITE Here Fund Administrators, Inc. 37
XIII. Conclusions 39
Appendix I: How Do Pensions Work? 42
Appendix II: The Pension Protection Act 45
Appendix III: Data 46
Bibliography 47
Endnotes 50
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List of Tables and Charts
Chart 1 – Number o Pension Plans over Time 7
Chart 2 – Number o Pension Plans Sponsored by Single Employers over Time 8
Chart 3 – Number o Multiemployer Pension Plans over Time 9
Chart 4 – Average Ratio o Assets to Liabilities or Large Defned Beneft Plans 11
Chart 5 – Percent o Large Defned Beneft Plans That Are Fully Funded 12
Chart 6 – Percent o Large Defned Beneft Plans In Endangered Condition 13
Chart 7 – Percent o Large Defned Beneft Plans in Critical Condition 13
Chart 8 – Percent o Underunded Plans Paying At Least Minimum Annual Charges 14
Chart 9 – Percent o Plans in Critical Condition Paying At Least Minimum Annual Charges 15
Chart 10 – Percent o Large Defned Beneft Pensions Making Additional Contributions Because o Funding Defciency 15
Chart 11 – Average Annual Payment To Correct Funding Defciency 16
Chart 12 – Percent o Large Single Employer Defned Beneft Plans That Are Fully Funded 17
Chart 13 – Percent o Small Defned Beneft Plans That Are Collectively Bargained 20
Chart 14 – Percent o Large Defned Beneft Plans That Are Collectively Bargained 20
Chart 15 – Average Number o Participants in Small Defned Beneft Pension Plans 21
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S e p t e m b e r 2 0 0 9 1
pension plans have provisions to ensure that
they remain sufciently unded to pay the
generous retirement benefts that unions ad-
vertise as part o the union benefts package?
This paper oers explanatory background
inormation on pensions, including sources
o inormation, reporting and disclosure re-
quirements o Congress and the U.S. Depart-
ment o Labor, and data and analysis that il-
luminate the causes o the underlying problem
o underunding. The study goes on to ana-lyze the general health o pension plans in the
United States and, in particular, documents
eight case histories that illustrate issues in
pension unding. It also examines the role po-
litical interests may play in union membership
and pension unding, and it analyzes the link
between legislation now pending in Congress,
the Employee Free Choice Act, and under-
unding o pensions. The paper will present
evidence o the disparity between union andnon-union pension plans, and call on union
members to recognize their leaders’ responsi-
bility to close that gap.
With union membership down to
only 8 percent o private sector
workers—or 12 percent o em-
ployed wage and salary workers—unions are
doing their best to recruit new members. The
advertised benefts o joining a union sound
appealing: unions claim time and time again
that their members are more likely to have
health insurance, defned beneft pension
plans, and higher wages.
What unions do not tell prospective re-cruits is that there is a widespread pattern
o poor perormance among collectively-bar-
gained defned beneft pension plans. They
perorm poorly when compared to plans
sponsored unilaterally by single employers
or non-union employees. And pensions spon-
sored by unions that cover many employers
(multiemployer plans) are worse than pen-
sions oered by a single employer under a
collective bargaining agreement with a union.This disparity raises an important question:
is the promise o a union-run pension plan a
valuable one? To put it another way, do union
I. Introduction
II. Executive Summary
Unions recruit new members by claim-ing that their members are more
likely to have health insurance, de-
fned beneft pension plans, and higher wages.
However, an analysis o the fnancial status
o individual pension plans shows that col-
lectively bargained pension plans perorm
poorly when compared to plans sponsored
unilaterally by single employers or non-unionemployees.
Pensions are regular payments made to
retired workers rom money that they and
their employers put aside during their work-
ing years. Pensions come in two broad cate-
gories: defned beneft pensions, and defned
contribution pensions. A defned beneft pen-
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H U D S O N I N S T I T U T E2
are more generous than can be aorded, o-
ten seeking pension increases in the ace o
consistent employer complaints about costs.
While union leaders have many incentives to
bargain or increased benefts, they have ewincentives to ensure that these benefts can be
easily paid or. However, this is not the case
with sta and ofcer pension plans.
Our analysis o 30 sta and ofcer pen-
sion plans relating to some o the largest 46
rank-and-fle pension plans shows that of-
cer pension plans may be better unded than
those or rank-and-fle. On average, the rank-
and-fle pension plans had 79 percent o undsneeded to cover their obligations. Nine o the
pensions were ully unded, while 24 were less
than 80 percent unded. This is in contrast
with the ofcer plans, which were 93 percent
unded on average. While nine o the pensions
were ully unded, eight were less than 80 per-
cent unded.
Labor unions have been ound to have
contributed more than $130 million to the
2008 Senate, House and presidential electioncycles. While there is nothing wrong with
unions seeking to inuence election cycles, it
is important to note where this money came
rom and who decided how to spend it. The
SEIU has been explicitly demanding that its
membership fnance its political agenda. Po-
litical spending, by law, is supposed to come
rom voluntary contributions, not the dues
that members are required to pay. I unionsdivert dues money to political activity, union
members may discover that their dues were
earmarked to support candidates they oppose.
Eight union pension unds are analyzed
as examples. The Plumbers’ board o trust-
ees has kept their contributions above normal
costs, but they have regularly been using cred-
sion promises a specifc monthly stipend or a
retiree’s lietime, calculated using the number
o years worked and some measure o work-
ers’ earnings over that time. A defned con-
tribution pension sets up personal investmentaccounts; typically, the employee can make
some choices about how the money in his ac-
count is invested.
Data or 2006, the latest ull year o data
available, show that union-negotiated pen-
sion plans are consistently worse than their
non-union counterparts. Among large plans –
plans with 100 or more participants – 35 per-
cent o non-union plans were ully unded, ascompared to 17 percent o ully unded union
plans. While a pension plan need not neces-
sarily be ully unded at any given time to be
stable, the Pension Protection Act o 2006
considers unds with less than 80 percent o
their needed assets to be in “endangered” sta-
tus. While 86 percent o non-union unds had
80 percent or more unds needed to pay ex-
pected costs, only 59 percent o union unds
met the unding threshold. Similarly, whileonly 1 percent o non-union plans had less
than 65 percent o required assets, also called
“critical” status in the 2006 Act, 13 percent
o union plans were critical.
The problems with collectively bargained
pension plans extend even to smaller plans.
O non-union plans, 61 percent were ully
unded, compared to 25 percent o union
plans. Both union and non-union small planswere about as likely as their larger counter-
parts to have unding ratios below 80 percent.
Fiteen percent o the small union plans were
in critical condition, more than twice the ra-
tio o small non-union plans.
Union leaders have contributed to this
problem by negotiating or pension plans that
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S e p t e m b e r 2 0 0 9 3
orcing them to take account o their insecure
positions and to make eorts to rebuild since
2008.
However, the real problem is the opacity
o union pension fnancing and the lack o ac-
countability required o union leaders. Union
members have ew assurances that the trustees
o their pension unds are truly acting in their
best interest. The continued poor status o
union-run pension plans suggests that union
trustees are not adequately working towards
ensuring that rank-and-fle members have the
stable fnancial utures they deserve.
its to put o needed contributions towards
shortalls. Although the Sheet Metal Workers’
leadership successully lobbied or more ben-
efts beore 2008, they were not able to secure
them, leading to reductions in many “adjust-
able” benefts. The South Carolina, Arizona,
Colorado & Southern Nevada Glaziers, Ar-
chitectural Metal & Glass Workers pension
plan administrators made poor investment
choices, leading to investment losses.
Until the passage o the Pension Protection
Act o 2006, it was difcult to ensure that
contributions matched liabilities. The Act has
exposed more than 300 poorly unded plans,
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H U D S O N I N S T I T U T E4
Pensions come in two broad categories:
defned beneft pensions and defned contri-
bution pensions. A defned beneft pension
promises a specifc monthly stipend or a re-
tiree’s lietime. This sum is oten calculated
by using the number o years worked and
some measure o the worker’s earnings over
that time. The worker may or may not con-
tribute to the pension plans, but the employer
always contributes.
A defned contribution pension plan sets upan investment account or each worker. I it is
a “contributory” plan, the worker contributes
part o each paycheck—perhaps our or fve
percent—into the account. The employer may
make so-called “matching” contributions, al-
though the term is something o a misnomer
because the employer’s payment is oten less
than the worker’s, perhaps one-third or one-
hal. The money in the defned contribution
account, oten known as a 401(k) account,is invested and appreciates over time. How
much retirement income the defned contri-
bution account will generate depends on the
amounts invested, choice o asset and how
well it perorms, and years invested.
The sponsor o a defned beneft plan (usu-
ally an employer, but see below) is required to
make payments to retirees at the rate specifed
by the terms o the pension plan. The 1974Employee Retirement Income Security Act
(henceorth reerred to as ERISA) dictated that
sponsors must prepare to meet these uture
obligations by unding them beorehand—
contributing a certain amount o money per
participant every year into a pooled invest-
ment account.
Pensions are regular payments made to
retired workers rom money that they
and their employers put aside during
their working years. (In the United States, the
best-known pensions are the monthly Social
Security benefts that the ederal government
pays. However, they are not unded in the way
that employer pensions are.) As well as Social
Security, some workers have nongovernment
pensions earned during their years o employ-
ment in the private sector; others have pen-sions earned working or state, local or eder-
al government. In addition to these pensions,
many Americans have retirement assets in the
orm o tax-avored savings accounts, such as
Individual Retirement Accounts and 401(k)
plans, some o which have contributions rom
past and current employers. In recent decades,
there has been a steady decline in the number
(and proportion) o private employers that o-
er pensions that promise a specifc monthlyretirement beneft.
All types o pensions can be considered
deerred compensation— that is, a part o a
worker’s earnings not paid immediately. In an
age when workers were expected to work at
one company or most o their working lives,
this was a useul tool to encourage company
loyalty and get workers invested in staying
on or many years. For workers, the promiseo regular retirement income was attractive,
and so they would work or an employer or
decades, sometimes keeping a job that they
ound disagreeable or barely tolerable. Many
pensions are not legally owed to a worker un-
til he has worked at a company or several
years, when the pension becomes “vested.”
III. What are Pensions?
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S e p t e m b e r 2 0 0 9 5
In contrast, participants in a defned con-
tribution plan have a legal claim on the money
they have contributed rom their paychecks to
personal accounts, as well as the investment
return on this money. Workers have some say
over how the money is invested—in bonds,
stocks, or a mixture. Moreover, defned con-
tribution plans are portable; workers take
them when they change jobs. This is an im-
portant consideration in an economy in which
lietime employment is becoming increasingly
uncommon. With portable accounts, workers
are ree to move to more attractive jobs. O
course, there are drawbacks to defned con-tribution plans. Without possibly costly in-
vestment advice, a worker may not have the
expertise to invest his or her account wisely.
And securities market downturns make the
worker’s retirement income vulnerable, es-
pecially i the worker retires when securities
prices are alling steeply, as in the winter o
2008-09.
Unions oten advocate defned beneft
plans in part because they preer employ-ers to bear the risk o supporting the rank-
and-fle’s retirement. However, as mentioned
above, defned beneft plans have the eect o
requiring workers to stay at unionized jobs in
the same industry or most o their working
lives, to maximize their retirement income.
Unions that negotiate defned beneft plans
create strong incentives or union workers not
to leave or non-union jobs and to continueto contribute to the defned beneft und. In
other words, defned beneft plans may con-
tribute to union security.
Another important distinction in pension
accounting is the dierences between “single-
employer,” “multiemployer,” and “multiple-
employer” pension plans. A single-employer
The sponsor is meant to invest this money
wisely in order to accumulate enough unds
to pay promised benefts when they come due.
This approach requires companies to predict
how much they will pay into the und in theuture. These calculations, especially the u-
ture value o present contributions, make
managing a defned beneft plan complicated.
A fnancial manager (usually an institution) is
hired to make investment decisions so that the
und will grow enough to meet the sponsor’s
uture pension obligations to its employees.
Defned contribution plans create more
predictable costs or employers, who, in col-lective bargaining contracts, normally agree
to make contributions o a certain size, or to
match employee contributions to a certain ex-
tent.
Upon retirement, holders o defned con-
tribution accounts can purchase “annui-
ties”—contractual promises by fnancial in-
stitutions, oten insurance companies, to pay
a certain amount o money every month or
the rest o the holders’ lives. Or retirees cansimply withdraw the money and consume it at
their own pace. I they buy an annuity, they
eectively transorm their defned contribu-
tion plans into defned beneft plans.
Some people preer defned beneft plans
because an employer is usually liable or the
specifc promised uture benefts. However,
there is usually a risk that a company will ail,
even a big, “blue chip” company like GeneralMotors, which went into bankruptcy in 2009.
Even i employers become bankrupt, the pen-
sion und cannot be used to pay o creditors.
Sometimes, retired workers can expect the
U.S. government’s Pension Beneft Guaranty
Corporation to pay their benefts, in part i
not in ull.
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H U D S O N I N S T I T U T E6
tives1. The union negotiates with each em-
ployer and the board to determine contribu-
tion levels, and the board determines the level
o benefts and manages the und.
Finally, a multiple-employer pension plan
is usually adopted by a parent company to
provide pensions or employees in its afli-
ated companies. Trade associations or other
groups o employers may also choose to orm
multiple-employer pension plans.
The rationale behind multiemployer and
multiple-employer pension plans is that they
allow frms to pool risk among several em-
ployers. Multiemployer pension plans allowworkers to keep their pensions i they change
jobs to another participating company. This
consolidates union pension contributions into
larger investment pools. Multiple-employ-
er pension plans allow parent companies to
transer covered workers between subsidiaries
with minimal paperwork.
plan is sponsored by one frm to support the
retirement o its workers. Single-employer
plans may be adopted unilaterally by private
employers or be created by negotiation with
labor unions. Collectively-bargained single-
employer pension plans are managed by the
employer. While sums to be contributed may
be negotiated, the employer is responsible or
the health o the und, and the employer (or
designated fduciary) makes all investment de-
cisions.
Multiemployer pension plans are created
and sponsored by a labor union in order to
provide retirement income or workers inseveral dierent places o employment. This
requires the union, the sponsor o the plan,
to negotiate with each employer to join and
contribute to the und. They are oten called
“Tat-Hartley plans,” and are managed by a
board o trustees, which consists o an equal
number o union and employer representa-
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700,000
800,000
Number of Pension Plans over Time
100,000
200,000
300,000
400,000
500,000
,
Total Plans
Total DB Plans
Total DC Plans
1 9 7 5
1 9 7 7
1 9 7 9
1 9 8 1
1 9 8 3
1 9 8 5
1 9 8 7
1 9 8 9
1 9 9 1
1 9 9 3
1 9 9 5
1 9 9 7
1 9 9 9
2 0 0 1
2 0 0 3
2 0 0 5
Source: U.S. Department o Labor, “Private Pension Plan Bulletin Historical Tables and Graphs”
http://www.dol.gov/ebsa/pd/1975-2006historicaltables.pd
Chart 1
S e p t e m b e r 2 0 0 9 7
that employers were more generous with their
oerings during this period. But since 1983,
the number o defned beneft pension plans
has allen, while the number o defned con-
tribution plans has increased and stabilized at
about 650,000. (See Chart 1) These changes
were due to shits in the preerences o both
employees and employers.
First, it became more common or em-
ployees to hold several jobs over their lietime,
making defned contribution plans more at-tractive or their portability. Second, employ-
ers began to view the long-term costs and
liabilities o defned beneft pensions as un-
certain and undesirable, and they developed a
preerence or the predictable annual costs o
defned contribution plans.
In 1976, defned beneft plans accounted or
nearly one-third o the 359,980 pension
plans in existence in the United States. By
2006, about 7 percent o the 694,550 plans
registered were defned beneft pensions. De-
fned beneft plans paid benefts to 22 mil-
lion people in 2006, and covered another 20
million current workers. Over the past thirty
years, while the number o total pension plans
has nearly doubled, the number o defned
beneft plans has allen rom a 1983 high o 175,000 plans to 48,600.
These shits occurred or several reasons.
First, workers began to view pension plans as
an integral part o the compensation package.
The growth in both defned beneft and de-
fned contribution plans until 1983 indicates
IV. Trends in Pension Coverage
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Source: U.S. Department o Labor, “Private Pension Plan Bulletin Historical Tables and Graphs”
http://www.dol.gov/ebsa/pd/1975-2006historicaltables.pd
600,000
700,000
800,000
Number of Pension Plans Sponsoredby Single Employers over Time
0
100,000200,000
300,000
400,000
500,000
7 5
7 7
7 9
8 1
8 3
8 5
8 7
8 9
9 1
9 3
9 5
9 7
9 9
0 1
0 3
0 5
Total Plans
DB Plans
DC Plans
1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2
Chart 2
H U D S O N I N S T I T U T E8
In 2006, collectively-bargained defned
beneft plans held approximately $890 billion
in assets. Multiemployer defned beneft plans,
most o them collectively-bargained, had ap-
proximately $340 billion. In light o the vast,acknowledged defciencies in union pension
unding, these assets should be much high-
er. At last count, 157 collectively-bargained
defned beneft plans had reported being in
“critical” status, that is, holding less than 65
percent o the assets needed to pay uture ob-
ligations. Another 146 were in “endangered”
status, generally reecting unds with less
than 80 percent o what was needed2
.Under the Pension Protection Act 2006,
defcient plans are required not only to report
signifcant unding inadequacies but to make
them up with reduced benefts or increased
contributions .
Single-employer plans, especially, have
driven these shits because most plans cover-
ing many frms are multiemployer plans, and
tend to be union-run. Unions avor defned
beneft plans, even i they do sometimes ne-gotiate the creation o a defned contribution
plan. Chart 2 shows that single employers
have strongly embraced the defned contribu-
tion plan as the preerred method o paying
deerred compensation.
Chart 3 demonstrates how these trends
have aected multiemployer pensions. While
it is difcult or a single employer, much less
several, to separate themselves rom a collec-tively-bargained agreement, multiemployer
pension plans have also begun to shit to-
wards defned contribution plans. In 2006,
over hal o the 3,037 multiemployer pension
plans were defned contribution plans.
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Source: U.S. Department of Labor, “Private Pension Plan Bulletin Historical Tables and Graphs”
http://www.dol.gov/ebsa/pdf/1975-2006historicaltables
3,500
Number of MultemployerPension Plans over Time
500
1,000
1,500
2,000
2,500
3,000
Total Plans
DB Plans
DC Plans
0
1 9 7
5
1 9 7
7
1 9 7
9
1 9 8
1
1 9 8
3
1 9 8
5
1 9 8
7
1 9 8
9
1 9 9
1
1 9 9
3
1 9 9
5
1 9 9
7
1 9 9
9
2 0 0
1
2 0 0
3
2 0 0
5
Chart 3
S e p t e m b e r 2 0 0 9 9
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H U D S O N I N S T I T U T E1 0
V. Sources of Informationon Pension Plans
Most pension unds must fle Form
5500 annually with the Internal
Revenue Service and the U.S. De-
partment o Labor. Form 5500 includes in-
ormation about the assets and liabilities o
the pension und; the number o participants;
some details about the pension plan; and the
investment earnings o the pension und.
Form 5500 requires estimates o the val-ue o unds’ assets, liabilities, and the pres-
ent value o all beneft payments. Because o
the complexity o the calculation, companies
are asked to calculate only their “accrued”
liabilities. To do that they estimate the pres-
ent value o all benefts they would have to
pay i they closed at the end o the year and
paid all promised benefts based on service to
that time. That is, i benefts are 1 percent o
wages per year o service, a person who hadworked at the company or 10 years would be
owed an annuity o 10 percent o his wages
each year.
I the ratio o assets divided by liabilities
is greater than or equal to one, the company
would be able to pay all o its promised ben-
efts assuming all actuarial assumptions are
correct. This is an important qualifcation
and will be discussed later. I this ratio is lessthan one, it indicates that the company has
promised to pay more in benefts than it ex-
pects to have when benefts are paid. A ratio
o less than one is the major indication to plan
participants that their pension und—and
possibly their own benefts—are in danger. A
ratio less than one, an “underunded” plan,
reects mismanagement o unds, either inad-
vertent or corrupt.
The Employee Retirement Income Secu-
rity Act o 1974 (ERISA), a law written to
protect defned beneft pension plans, permits
sponsors to delay required contributions, as
long as they adhere to payback restrictions.
However, another provision o ERISA, in-tended to encourage pension sponsors to keep
their plans well-unded, has contributed to
the deterioration o unds.
In any year in which a sponsor pays more
than its required contributions, ERISA allows
the und to gain a “credit” that can be used to
reduce uture payments. That happened dur-
ing the “dot-com bubble” o the late 1990s,
when many pension unds ran up large cred-
its due to unexpected appreciation o theirstock-market assets. Sponsors substituted the
credits or annual contributions. But when the
bubble burst and stocks ell, the unds started
perorming poorly. Then und administrators
used the credits to pay o the debts they ac-
cumulated during the market’s decline, and at
times did not make any contributions to their
pensions, even i their unded ratios had allen
signifcantly.The data used in this study were drawn
rom the Employee Benefts Security Admin-
istration (EBSA) Research File, compiled by
the Center or Retirement Research at Boston
College. We would like to thank the Center
or making these data available or this paper.
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Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data
(2006), Center or Retirement Research at Boston College. 5500-CRR data: Panel o Current and
Usable Form 5500 Data. Chestnut Hill, MA, and Hudson Institute calculations.
Average Rao of Assets to LiabiliesFor Large Defined Benefit Plans
97%
0
20
40
60
80
100
Non-Union Plans
P e r c e n t o f L i a b i l i e s C o v e r e d
86%
Collecvely-Bargained Plans
Chart 4
S e p t e m b e r 2 0 0 9 1 1
counterparts, 17 percent o which were ully
unded (Chart 5). (“Fully unded” means that
assets meet or exceed 100 percent o the value
deemed necessary to pay all projected uture
obligations.)
The 2006 Pension Protection Act, like
ERISA (1974), recognized that a pension plan
need not be ully unded at any moment in
time to be stable. Dips in the stock market
can reduce the unding ratio, requiring sever-al years or recovery, even among well-unded
pensions. Thus, while und managers must
make up shortalls over the course o several
years, there are ew penalties i unding alls
to or below 80 percent o projected liabilities.
At the end o 2006, large defned ben-
eft pension plans3 were, on average,
92 percent unded4. The data came
rom 4,602 large non-union pension plans
and 3,481 collectively-bargained pension
plans. (The threshold or “large” was 100 or
more participants.)
Collectively-bargained large plans, on av-
erage, were 86 percent unded. In contrast,
non-union pensions were 97 percent unded(Chart 4). This suggests systemic underund-
ing among collectively-bargained pension
plans. Non-union plans, 35 percent o which
were ully unded, were more likely to be
ully unded than their collectively-bargained
VI. General Health of Pension Plansin the United States
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Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data (2006),
Center or Retirement Research at Boston College. 5500-CRR data: Panel o Current and Usable
Form 5500 Data. Chestnut Hill, MA, and Hudson Institute calculations.
Percent of Large Defined Benefit PlansThat Are Fully Funded
35%
0
10
20
30
40
Non-Union Plans
P e r c e n t o f D e fi n e d
B e n e fi t P l a n s
17%
Collecvely-Bargained Plans
Chart 5
H U D S O N I N S T I T U T E1 2
out incentives to discontinue this practice, it is
possible that many plans relied on large und-ing credits to keep rom having to make sup-
plemental contributions even when the stock
market ell, pulling down unding ratios.
One way o lending strength to this theory
is analyzing whether plans that were not ully
unded received contributions equal to total
annual charges, generally equal to the sum o
the normal cost (see Appendix) and interest
charges rom unding defciencies. In 2006,only 19 percent o the 2,882 union pension
plans that were not ully unded, 548 plans,
made contributions sufcient to cover their
minimum annual costs. In contrast, 1,079, or
37 percent o the 2,944 non-union pension
plans that were not ully unded, met annual
costs ( Chart 8 ).
However, in 2006, collectively-bargained
pension plans still perormed poorly com-pared to non-union pensions. O union plans,
41 percent had less than 80 percent o their
needed assets, compared to 14 percent o non-
union plans, shown in Chart 6.
Unsurprisingly, the pattern repeats itsel
among the most troubled plans – those with 65
percent or less o their required assets, called
“critical status” in the 2006 Pension Protec-
tion Act
5
. While only 1 percent o non-unionpensions were in critical status, 13 percent o
union pension plans were critical (Chart 7).
One possible reason or the superior per-
ormance o non-union plans is the use o
unding credits to reduce mandatory pay-
ments to pension plans, a practice discussed
above. While the Pension Protection Act held
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Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data
(2006), Center or Retirement Research at Boston College. 5500-CRR data: Panel o Current
and Usable Form 5500 Data. Chestnut Hill, MA, and Hudson Institute calculations
Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data
(2006), Center or Retirement Research at Boston College. 5500-CRR data: Panel o Current
and Usable Form 5500 Data. Chestnut Hill, MA, and Hudson Institute calculations
Percent of Large Defined Benefit PlansIn Endangered Condion
14%
0
10
20
30
40
Non-Union Plans
P e r c e n t o f D e fi n e d
B e n e fi t P l a n s
41%
Collecvely-Bargained Plans
Percent of Large Defined Benefit PlansIn Crical Condion
1%0
5
10
15
Non-Union Plans
P e r c e n t o f D e fi n e d
B e n e fi t P l a n s
13%
Collecvely-Bargained Plans
Chart 6
Chart 7
S e p t e m b e r 2 0 0 9 1 3
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Percent of Underfunded PlansPaying At Least Minimum Annual Charges
37%
0
10
20
30
40
Non-Union Plans
P e r c e n t o f D e fi n e d
B e n e fi t P l a n s
19%
Collectvely-Bargained Plans
Chart 8
Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data
(2006), Center or Retirement Research at Boston College. 5500-CRR data: Panel o Current
and Usable Form 5500 Data. Chestnut Hill, MA, and Hudson Institute calculations
H U D S O N I N S T I T U T E1 4
The situation was worse or plans in
critical condition. Among 438 union pen-sion plans in critical condition, only 24, or 5
percent, contributed enough to meet annual
costs. O the 54 non-union plans in critical
condition, 21, or 39 percent, were in the same
situation (Chart 9).
Under the 1974 law, some pension
plans in poor condition would have to
make additional contributions. In 2006,
19 percent o non-union plans had to makeadditional contributions, and 20 percent
o union plans had to make such contri-
butions (Chart 10). However, on average,
union plans were orced to make contri-
butions close to twice the size o those o
non-union plans, $4.9 million compared to
$2.5 million (Chart 11).
Compared to 2005, pensions in 2006
ared worse as a whole. Union pensions were88 percent unded in 2005, and non-union
pensions 98 percent unded on average, mak-
ing their 2006 showings small but noticeable
losses. Both union and non-union pension
plans saw a 2 percentage point drop in the
number o pensions that are ully unded.
Non-union pensions were hal as likely to be
in critical condition in 2006 as in 2005, while
the 13 percent o critical union pensions were2 points higher than 2005 union pensions.
One would expect, in a year o stock mar-
ket gains, or pensions to improve in health.
It is thereore distressing to see their health
deteriorate, and especially or the increased
likelihood or union pensions to be in critical
status.
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Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data
(2006), Center or Retirement Research at Boston College. 5500-CRR data: Panel o Current and
Usable Form 5500 Data. Chestnut Hill, MA, and Hudson Institute calculations.
Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data
(2006), Center or Retirement Research at Boston College. 5500-CRR data: Panel o Current and
Usable Form 5500 Data. Chestnut Hill, MA, and Hudson Institute calculations.
Percent of Plans In Crical CondionPaying At Least Minimum Annual Charges
39%
0
10
20
30
40
Non-Union Plans
P e r c e n t o f D e fi n e d
B e n e fi t P l a n s
5%
Collecvely-Bargained Plans
Percent of Large Defined Benefit PensionsMaking Addional ContribuonsBecause of Funding Deficiency
19%
0
5
10
15
20
Non-Union Plans
P e r c e n t o f F u n d s
20%
Collecvely-Bargained Plans
Chart 9
Chart 10
S e p t e m b e r 2 0 0 9 1 5
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Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data (2006),
Center or Retirement Research at Boston College. 5500-CRR data: Panel o Current and Usable Form
5500 Data. Chestnut Hill, MA, and Hudson Institute calculations.
Average Annual PaymentTo Correct Funding Deficiency
2.5
0
2
1
3
4
5
Non-Union Plans
M i l l i o n s o f D o l l a r s
4.9
Collecvely-Bargained Plans
Chart 11
H U D S O N I N S T I T U T E1 6
negotiate with several dierent employers
(which is the case when a union sponsors a
multiemployer pension plan), this problem
may be exacerbated. The data suggest thisexplanation has merit. O multiemployer pen-
sions, 6 percent were ully unded in 2006. In
contrast, 33 percent o multiple employer and
31 percent o single employer pensions were
ully unded.
Unortunately or this hypothesis, the dis-
parity between union and non-union plans
As noted above, union pension plans
are more commonly underunded
than are non-union plans sponsored
unilaterally by employers. One possible rea-son or the disparity is that collectively-bar-
gained pension plans are not usually renewed
annually. As a result, annual contributions
by employers (and possibly employees) may
not respond quickly to market downturns
or other unexpected drops in pension und-
ing ratios. Furthermore, when a union must
VII. Why Union Plans Tend to Perform More Poorly
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Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data (2006), Cen-
ter or Retirement Research at Boston College. 5500-CRR data: Panel o Current and Usable Form 5500
Data. Chestnut Hill, MA, and Hudson Institute calculations.
Percent of Large Single Employer DefinedBenefit Plans That Are Fully Funded
35%
0
10
20
30
40
Non-Union Plans
P e r c e n t o f D e fi n e d
B e n e fi t P l a n s
23%
Collecvely-Bargained Plans
Chart 12
S e p t e m b e r 2 0 0 9 1 7
bers when they renew collective contracts. It
makes their re-election more likely. But lean-
ing on employers to ensure that the pension
plan is kept well-unded takes much work
or little visible eect—and may well work
against winning richer benefts by underscor-
ing their cost to the employer. It sounds much
more proactive or union leaders to deliver ex-
panded pension benefts or to protect benefts
rom employer-initiated cuts than to protect
already-earned benefts.
exists even within dierent employer groups.
Among single employer plans, 35 percent o
non-union plans were ully unded, compared
to 23 percent o single employer union plans.
(Chart 12)
There are other possible explanations or
the poorer showing made by union pensions.
One involves the incentives o union ofcers,
what might be called internal trade union
politics. Union leaders like to achieve ex-
panded uture pension benefts or their mem-
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H U D S O N I N S T I T U T E1 8
ree index o pension health. While optimism
is commendable, union leaders’ tendency to
project rosy utures or pension plans leaves
rank-and-fle members unaware when or how
their pensions may be at risk. And without
that understanding, union members have no
metric by which to judge the management by
their leaders o their pension plan.
This is a problem because a secure retire-
ment is one o the primary enticements to join
a union. Many o the major national unions
advertise that union members are more likely
to have better retirement plans, explicitly de-
fned beneft retirement plans, than workerswithout a union. This promise would be ar
less persuasive were potential union members
to understand that a pension is not guaran-
teed just because it has been created.
In act, looking at union communications,
it is clear that union leadership prioritizes
raising benefts over securing them. Nowhere
is this clearer than in criticisms o the Pension
Protection Act. The Teamsters, or example,
criticize ull unding requirements as this pro-vides a legal reason or employers to reuse to
increase pension benefts6. Unions requently
lambaste their employer opponents or op-
posing increased beneft plans, usually listing
their proposals as “reasonable” or “aord-
able.” But it is rarely in a union’s interest to
say that it is pushing or reorms o uncertain
cost that employers may not be able to aord.
The act that unions oten push or beneftincreases in the ace o employer protests o
unreasonable cost lends weight to the argu-
ment that they place more importance on the
promised level o benefts than on the actual
security o those benefts.
There are advantages to defned beneft
pension plans, but these benefts are contin-
Union leaders also may not want to ad-
vertise to members that saeguarding pension
plan unding requires eort. It is part o trade
union doctrine that defned beneft plans are
sae. For the leadership to acknowledge that
it must struggle to sustain adequate unding
suggests that the annual contributions are in-
adequate to assure rank-and-fle members a
stable retirement. The implication that larger
contributions are needed may apply to em-
ployees, i the plan is contributory, as well as
to the employer. Or it might imply that the
plan should become contributory. It might
even be inerred by the membership that theleadership has bargained or gold-plated ben-
efts that are unrealistic. In sum, conronting
under-unding is a headache or union lead-
ers and the path o least resistance is to avoid
such engagement.
Finally, employers may be more disposed
to grant pension beneft increases than wage
increases because the ormer are largely uture
costs. Union leaders understand that and may
tilt their demands in that direction, especiallyi the employer is in straitened circumstances
and cannot aord to raise wages.
It should be noted frst that all o these
reasons listed are hypotheses. There appears
to be some evidence to support them, and
they are plausible given the current environ-
ment, but we cannot actually determine what
drives a union leader’s decisions.
But while not all o these proposed causes
or disparity between non-union and collec-
tively-bargained pension plans are due to out-
right malice or incompetence, they still merit
concern. Annual reports are as a rule optimis-
tic about the uture o a pension plan, oten us-
ing the plan’s accumulated assets as a context-
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S e p t e m b e r 2 0 0 9 1 9
o small pensions may be more likely to know
and have contact with their union representa-
tive, giving them greater opportunity to seek
and maintain accountability. One can, there-
ore, expect small plans in general to do bet-
ter than larger pensions.
O non-union small plans, 61 percent were
ully unded, compared to 25 percent o union
plans. Both sets outperormed large plans in
this respect, but, taking account o underper-
orming unds, neither did well. Both union
and non-union small plans were about as like-
ly as their larger counterparts to have und-
ing ratios below 80 percent. Small and large
union plans were nearly three times as likely
to be poorly unded as were non-union pen-
sions. Worse yet, 15 percent o small union
plans had unding ratios below 65 percent—
more than twice the ratio or small non-union
plans.
gent on the plans being ully unded. Union
rank-and-fle members need to understand
the complexity o defned beneft pension
plans, and hold their leaders responsible or
maintaining stable unding ratios. Certainly it
is in employers’ best interests to rerain rom
increasing benefts during negotiations, but
they also have a stake in ensuring the benefts
they pay are sustainable. Short-term business
gains, or example, are no justifcation or in-
creasing benefts, in part because it is much
harder or a business to rescind increased ben-
efts during down times than to not increase
them in the frst place.
But more important than acknowledging
the possibility that employers may at times be
accurate about the easibility o union beneft
plans, rank-and-fle workers must recognize
the difculty in keeping a defned beneft pen-
sion stable, and properly place responsibility
or that task. Employers are responsible or
making the contributions stipulated in their
contracts, and, since they also serve as trust-
ees, they need to make sure that the plan is
stable. It is the union leaders’ responsibility to
negotiate stipulations that enable the pension
plans to remain stable.
VIII. Small Plans
Like businesses, pension plans are oten
analyzed by size. Small plans, those
covering 100 or ewer people, make
up the majority o defned beneft pension
in the United States, or 25,720 out o a totalo 33,803. Labor Department data rom the
2006 Forms 5500 showed that o these small
plans7, 827, or 3 percent, were collectively bar-
gained, as opposed to the 43 percent o large
pensions that are collectively bargained (See
Chart 13 and Chart 14). These 827 union
plans were, on average, larger than non-union
pension plans. Small union plans covered on
average 69 workers, while non-union pen-sions covered an average o 13 people apiece
(Chart 15).
Small plans enjoy a natural advantage with
respect to unding. The ewer people the plan
must cover, the more likely it can accurately
predict uture obligations and adequately pre-
pare to meet them. Furthermore, benefciaries
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Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500
Data (2006), and Hudson Institute calculations
Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500
Data (2006), and Hudson Institute calculations
Percent of Small Defined Benefit PlansThat Are Collecvely Bargained
3%
0
1
2
3
P e r c e n t o f P l a n s
Percent of Large Defined Benefit PlansThat Are Collecvely Bargained
43%
0
10
20
30
40
P e r c e n t o f P l a n s
Chart 13
Chart 14
H U D S O N I N S T I T U T E2 0
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Average Number of Parcipants inSmall Defined Benefit Pension Plans
12.6
0
20
40
60
80
Non-Union Plans
N u m b e r o f P a r c i p a n t s
68.6
Collecvely-Bargained Plans
Chart 15
Source: U.S. Department o Labor Employee Beneft Security Administration Form 5500 Data
(2006), and Hudson Institute calculations
S e p t e m b e r 2 0 0 9 2 1
How do these pension plans or union
leadership and sta compare to the pension
plans or the rank-and-fle?
It is not possible to perorm an analysis o
all sta pension plans. While Form 5500 pro-
vides inormation to indicate whether a plan
is collectively bargained or not, and indicates
One would hope that smaller union plans
would be better o than those run by large,
national unions, but it appears that the en-demic problems with collectively-bargained
pension plans extend even to smaller plans.
A local union negotiating a pension or 100
workers ought to be easy to hold accountable
or plan perormance, but the data suggest it
is not so. Even small plans are ar too otenin unstable fnancial condition, to the possible
uture detriment o the covered workers.
IX. Rank-and-FileVersus Ofcer Pension Plans
Many unions have separate pension
plans or rank-and-fle members
and or the sta and ofcers o
the union local and national organization,
because many union ofcers and sta are em-
ployees o the union, not o an employer with
whom the union bargains.
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H U D S O N I N S T I T U T E2 2
unded. Eleven o those 24 were less than 65
percent unded, and our were listed by the
Department o Labor as being in critical con-
dition.
The 30 ofcer unds were on average 93
percent unded. Nine were ully unded, and
eight were less than 80 percent unded. O the
eight, two were less than 65 percent unded.
These data suggest that sta pensions may be
better unded than rank-and-fle pensions.
There are two hypotheses already dis-
cussed that oer an explanation or the dis-
parate unding rates o rank-and-fle and of-
cer pension plans. Most ofcer pension plansare perks o the job, not collectively bargained
but dictated by the union’s bylaws. Further-
more, they are single employer pension plans.
Both o these distinctions have biases towards
better unding.
It is enlightening to observe, when looking
at the rank-and-fle plans, that o the 46, 17
are single-employer or multiple-employer pen-
sion plans. These plans are, on average, 96
percent unded, compared to 70 percent und-ing among the multiemployer rank-and-fle
union plans. Nine o these are ully unded,
and only our are less than 80 percent und-
ed. None are in critical condition. While these
statistics can not necessarily be generalized to
the rest o the pension universe, they do indi-
cate that ofcer pension plans are about as
well as single-employer rank-and-fle union
pension plans. This suggests that ofcer pen-sion plans are better than rank-and-fle plans
in part due to the ease with which ofcers can
manage their own pensions.
Union ofcers make many o the business
decisions or the union. They, or someone
they know, are aware o the fnancial status
o the union, and thereore what pension
whether a plan is large or small, ofcer pen-
sion plans cannot be easily distinguished rom
rank-and-fle plans. Few unions provide easily
accessible inormation on the pension plans o
their ofcers, and there is no central resourceor locating and examining them.
However, it is possible to analyze a sample
o sta pension plans, and this is the approach
taken in this study. We examined 30 sta
pension plans relating to some o the largest
46 rank-and-fle pension plans. Rank-and-fle
plans cover employees in the International
Brotherhood o Teamsters, SEIU, UNITE
HERE, UAW, the Communications Workerso America, IAMAW, the Sheet Metal Work-
ers, the United Steelworkers, the UFCW, the
Plumbers and Pipeftters, the Actors’ Equity
Association, the International Union o Paint-
ers and Allied Trades, the AFL-CIO, the Car-
penters, LIUNA, the International Union o
Bricklayers, the Bakery, Conectionery, To-
bacco Workers and Grain Millers, and the In-
ternational Brotherhood o Boilermakers.
Sta pension plans include afliates o na-tional unions such as AFSCME, the Ameri-
can Postal Workers8 and the Graphic Coner-
ence o the Teamsters. Rank-and-fle pensions
or these unions are consolidated in their par-
ent union’s pension. In addition, they include
the International Association o Iron Work-
ers, the International Association o Bridge
Workers, and the International Brotherhood
o Electrical Workers
9
.In 2006, rank-and-fle plans each covered
at least 25,000 active workers, and together
covered over 2.7 million active employees.
On average, the rank-and-fle plans had 79
percent o the unds needed to satisy their
obligations. Nine o the plans were ully
unded, and 24 were less than 80 percent
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S e p t e m b e r 2 0 0 9 2 3
least as the bill was drated, would have the
power to orce newly-unionized frms into un-
derunded pensions. A union might proposesuch an assignment to pump up a plan’s und-
ing ratio. Changes in the bill’s language that
Congress should consider would resolve that
problem.
This legislation originally attracted much
attention because it would have allowed
workers to designate a union as their bargain-
benefts are aordable. This is similar to the
reason that single employer plans are better
than multiemployer pensions. That is, when
a single entity is responsible or determining
pension benefts, its sole responsibility or
benefts and its exibility allow it to better
keep the pension well-unded.
However, unlike a business with a collec-
tively-bargained pension plan, union ofcers
are not constrained by shareholders to keep
large pension defcits rom arising. They are
motivated by sel-interest: they are managing
their own pensions. That gives the ofcers
a greater incentive to ensure that their ownpensions are managed well than they have or
keeping their members’ pensions well unded.
It is not clear that they expend more eort
protecting their own pensions, but the out-
comes suggest that union leaders are more e-
ective in protecting their own utures.
Pay-or-perormance is one o organized
labor’s avorite tools or criticizing manage-
ment. One o their complaints is that among
large corporations, ew incentives exist or
upper management to increase profts. Or-
ganized labor argues that golden parachutes,
vested stock options, and other complex orms
o compensation ensure that most CEOs and
other senior corporate ofcers make dozenso times the average worker’s salary, even in
periods o declining profts or mass layos.
Union leaders say that business leadership
should not be rewarded when ordinary work-
ers are suering.
Union leaders, however, are vulnerable to
the same criticism. Ofcer pensions are rarely
connected to perormance o rank-and-fle
pension plans; ew union leaders’ uture in-comes are threatened when an employer must
cut pensions, or plans all into critical condi-
tion. Note that the 2006 slip in union pen-
sion unding occurred during a year o stock-
market gains. I unions wish to encourage
managers to work in the best interests o their
companies by connecting perormance con-
nected to profts, perhaps the unions ought to
set that example frst.
T
he sorry state o union pensions is one
reason that unions are embracing the
Employee Free Choice Act, EFCA, abill pending in Congress.
I enacted, the bill would require a union
newly certifed as a bargaining agent and the
employer that cannot agree on a contract
within 120 days, to submit to mandatory in-
terest arbitration. Resulting contracts would,
by law, hold or two years. The arbitrators, at
X. Underfunded Pensionsand the Employee Free Choice Act
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H U D S O N I N S T I T U T E2 4
that they must accept, possibly including re-
quiring frms to join underunded multiem-
ployer pension unds. The bill, as pending in
mid-2009, did not speciy eligibility criteria
or appointment to arbitration boards.
Unlike voluntary arbitration, the parties
would not have an opportunity to choose
members o the panel. Nor would they have
recourse to the courts i they were dissatis-
fed with the arbitrators’ decision. With just
a ew lines o legislative language, Congress
would revoke or newly-organized frms and
workers a critical principle o ree collective
bargaining—that employers and unions maywalk away rom a proposed contract they fnd
unsatisactory. Workers could be required to
accept a lower compensation package than
they could get elsewhere, and frms could
be orced into unproductive agreements that
could eventually lead to bankruptcy.
Mandatory interest arbitration would al-
low organized labor to replenish the coers
o its underunded pension plans. That’s why
it has been endorsed by union pension undmanagers. On May 11, 2009, a group o these
investors, including representatives o the
AFL-CIO and the Service Employees Interna-
tional Union pension plans, endorsed EFCA
in a letter to two senior Democrats, Senator
Tom Harkin o Iowa, cosponsor o the Em-
ployee Free Choice Act, and Representative
George Miller o Caliornia, chairman o the
House Education and Labor Committee. “Asfduciaries with broadly-diversifed porto-
lios,” the signatories wrote, “we must be cog-
nizant o these trends and their impact on our
investments.” 10
I an arbitration panel were to require a
frm to join an underunded plan, the frm
could become liable or the pensions o work-
ing agent by checking a card circulated and
retained by the union—hence the name “card
check”—rather than through a secret-ballot
election, as required since the Tat-Hartley
Act. Card check ran into intense opposition
in 2009 because it opened the possibility o
union intimidation. Union ofcers can visit
workers outside the plant or at home, and
they will know who signed and who reused.
(Interestingly, the unions assert that they have
lost secret-ballot elections because o intimi-
dation by management.) Because several Sen-
ate Democrats oppose card check, including
Blanche Lincoln and Mark Pryor o Arkan-sas, Diane Feinstein o Caliornia, and Ar-
len Specter o Pennsylvania, it has reportedly
been dropped rom the bill.
However, the mandatory interest arbitra-
tion part o the bill would remain in any alter-
nate version o EFCA. Unions want manda-
tory interest arbitration because they believe
that the threat o arbitration, ollowed by the
arbitration itsel, will orce employers to o-
er better compensation packages in the initialbargaining. Employers oppose interest arbitra-
tion on the grounds that it could require them
to pay excessive compensation to workers and
impose upon them onerous union work rules,
eventually orcing them out o business. The
contrast between the fnancial position o the
unionized Big Three Detroit auto companies
and the non-unionized oreign-owned trans-
plants shows how unionization aects a frm’scompetitive position.
Binding interest arbitration could have
even more pernicious consequences than end-
ing the secret ballot. It would allow a govern-
ment arbitration board, appointed by the Fed-
eral Mediation and Conciliation Service, to set
compensation packages or frms and workers
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S e p t e m b e r 2 0 0 9 2 5
ingly Democratic, and their campaign contri-
butions reected this preerence.
According to the Center or Responsive
Politics, an organization that compiles Feder-
al Election Commission (FEC) data on cam-
paign contributions, labor unions contributed
more than $130 million to the Senate, House,and presidential races. There are several di-
erent ways or a union to inuence an elec-
tion. One is to fle their union under Section
527 o the U.S. Code, labeling their organiza-
tion a 527 group. Such groups are allowed to
make contributions to inuence national and
local elections, so long as the unding does not
ers, some already retired, o other employers.
This would generate an inow o new cash to
the plan but might harm the fnancial position
o the newly organized frm.
Under EFCA, i a trucking company wereunionized by the Teamsters and could not
reach an agreement with the union, the case
would go to mandatory arbitration. Arbitra-
tors could require the company to partici-
pate in a Teamsters pension und, such as the
Central States Pension Fund, which was 46.6
percent unded in 2006 and is used by many
trucking companies.
Under a multiemployer pension und suchas the Central States und, i some contribu-
tors go out o business then others have to
pay the obligations. This concept is known as
“last man standing.” Only i all the compa-
nies go out o business will the Pension Bene-
ft Guaranty Corporation, a government pen-
sion insurance und, pay retirees a maximum
beneft, now $12,870 or 30 years o service.
With ewer workers joining unions, the
collectively-bargained multiemployer pen-
sion unds are characterized by an increasingnumber o retirees supported by ewer young-
er workers. Many poorly unded pensions are
similar to Ponzi schemes, with new contri-
butions paid out in benefts rather than be-
ing saved or contributors’ retirement. Union
pension unds can survive only through new
contributions. That is why unions will do
anything to recruit new members —includ-
ing orcing workers into underunded pen-sion plans through mandatory arbitration.
But just as workers deserve secret ballots in
union elections, they also deserve the right to
consider judiciously their labor contracts, and
walk away rom those that they deem unat-
tractive or unair.
Rather than ocusing on unding pen-
sions or rank-and-fle workers, some
unions have concentrated their eorts
on politics. For example, in the 2008 elections,
many organizations poured billions o dollars
into the House, Senate, and presidential races,
and many unions were quick to back BarackObama. With his promises o supporting leg-
islation such as the Employee Free Choice Act,
universal health care, and other union agenda
items, he was a clear choice or union leaders.
But he was not necessarily a clear choice or
union members. Certainly, the unions would
have liked their members to vote overwhelm-
XI. Political Spending
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H U D S O N I N S T I T U T E2 6
ary Clinton’s bid. The American Federation
o Teachers spent $4.5 million trying to inu-
ence their members’ votes.
There is nothing inherently wrong with
unions seeking to inuence national elections.The First Amendment guarantees their right
to express their opinion, and unions arguably
have a duty to attempt to sway national poli-
tics in ways that beneft their members.
But looking at SEIU’s contributions o
more than $70 million to inuence 2008 elec-
tions14, or example, one wonders where this
money came rom and who decided how to
spend it. The SEIU Committee on PoliticalEducation (COPE) is unded by SEIU. While
many SEIU members were willing contribu-
tors, the 2008 SEIU constitution tells a dier-
ent story, namely that money to pay or po-
litical “education” does not come only rom
voluntary contributions. In 2008, the ollow-
ing amendment to the SEIU constitution was
adopted:
“Every U.S. Local Union shall contribute
an annual amount equivalent to at least $6.00per member per year, or as determined an-
nually by the International Executive Board,
to support the overall SEIU political educa-
tion and action program…I a Local Union
ails to meet its annual SEIU COPE undrais-
ing obligation, it shall contribute an amount
in local union unds equal to the defciency
plus 50%, or such other amount determined
by the International Executive Board, to sup-port the overall SEIU political education and
action program.”15
When the policy was highlighted in the
press, the union admitted that discipline like
this had always been in place, and that the
amendment had simply ormalized it.16 The
union may suggest that locals encourage vol-
directly advocate one particular candidate.
Aside rom some unions, 527 groups also in-
clude “issue” groups, who seek to inuence
elections based on diering positions on vital
issues, such as abortion rights, gun control,and, o course, labor issues.
Exempt rom many contribution and dis-
closure laws, 527 organizations across the po-
litical spectrum have been criticized or their
lack o accountability. Union-sponsored 527
groups contributed close to $57 million in the
2008 election cycle. The Service Employees
International Union contributed the most,
close to $28 million11
. Seven other union 527groups were among the top 50 contributors.
But this is hardly all o the spending in
which unions engaged to inuence the elec-
tion. Union political action committees
(PACs) made their own contributions, to the
tune o $66.4 million, to congressional and
presidential races12. These PACs contributed
another $6.75 million to national parties; 92
percent o these contributions went to Demo-
cratic candidates or to the Democratic Partyitsel 13.
And this does not cover all costs incurred
by unions to support candidates. Unions are
also allowed to advertise to their own mem-
bers, encouraging them to vote one way or
another. FEC flings are required to identiy
specifc unions’ independent expenditures.
These data are illuminating.
The SEIU spent over $6.5 million in 2008canvassing, producing yers, T-shirts, but-
tons and the like to persuade their members
to vote or Barack Obama. The American
Federation o State, County, and Municipal
Workers spent $12.5 million communicating
to their members about the election, although
much o the money went to supporting Hill-
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S e p t e m b e r 2 0 0 9 2 7
demonstrates SEIU’s commitment to increas-
ing its fnancial weight in the political arena:
“By December o 2009, 20% o every Local
Union’s members should be giving at an aver-
age o at least $7 per month to COPE…Oncea Local has achieved this 20% goal, the Lo-
cal should increase the number o members
giving at an average o $7 or more per month
by at least 10% each year until a majority o
members are giving at this level…”17
The SEIU hopes that it can persuade its
members to donate an average o $16.80 a
year, and eventually achieve a rate o at least
$39 a year. That is, SEIU aspires to talk itsmembership into $78 million o political und-
ing each year18.
The SEIU appears to be the union most
explicitly demanding that its membership f-
nance its political agenda, by writing into its
constitution a requirement that local unions
und its political endeavors. But the money to
und union 527s may come rom local and na-
tional union contributions (union 527s almost
exclusively)19, and thus ultimately rom unionmembership dues. And i there is one certain-
ty looming over the horizon, it is that enact-
ment o the Employee Free Choice Act with
a card-check provision would give unions
the means to rapidly expand their fnancial
bases. SEIU has made the equation explicit:
every union member shall ante $6 a year or
political unding. Other unions have similar
expectations or their members to generatepolitical unds, money to strengthen unions’
political inuence in government at all levels.
Yet a more responsible path or unions would
be to make sure that their pension promises
could be ulflled beore turning to the politi-
cal agenda.
untary donations, but under the threat o a
penalty o 50 percent (or higher, i the Inter-
national Executive Board so decides), local
unions come under pressure to mobilize “vol-
untary” contributions o at least $6 a yearrom each member. These contributions can-
not be considered voluntary.
This policy, however, highlights the big-
gest problem with respect to union political
spending. Such spending, by law, is supposed
to come rom voluntary contributions, not
the dues that members are required to pay. I
unions divert dues money to political action,
union members may discover that their dueswere earmarked to support candidates they
oppose.
O course, union leaders can claim that
they know best which candidates, i elected,
will strengthen unions and beneft workers,
but that is a patronizing attitude. Unions
were not created because workers did not
know what policies were best or them. They
were created to unite workers into a collective
bargaining entity with more power than anyone worker could exercise. Any worker has
the right to be upset that union monies are
spent to support candidates that union lead-
ers decide are the best, rather than spent on
the worker’s preerred candidate, or, better,
on representational activities alone.
Federal law prohibits the use o compul-
sory union dues or political purposes. This
is why the SEIU encourages locals to increasevoluntary contributions to COPE, and why
the union constitution no longer states that
COPE unds may come rom local union dues
revenue.
The ollowing language in resolutions
made by SEIU during its 2008 convention
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H U D S O N I N S T I T U T E2 8
and retirees. In contrast, a separate und or
the union’s own employees, numbering 1,305,
participants was 91% unded. Even better, the
pension und or SEIU ofcers and employees,
which had 6,595 members, was 103% und-
ed.”
The SEIU lambasted the article and
claimed that the SEIU National Industry Pen-
sion Fund had achieved high unding levels,
92 percent in 2006, and 96 percent in 200821.
Now, perhaps the union’s internal calcula-tions showed the SEIU pension plan was in
good shape, but in 2009, the SEIU National
Pension Fund reported to the DOL that it was
in critical status—a sign o serious unding de-
fciencies that suggests the SEIU’s arguments
were ignorant at best, and disingenuous or
worse i they were aware o these problems22.
In addition, three o SEIU’s pension unds
were in endangered status as o 2008, and this
year the 1199 Pension Fund declared criticalstatus23.
The Local 32BJ District 36 Building Main-
tenance Pension and the Local 32BJ District
36 Building Operators Pensions cover togeth-
er 7,000 people. And the SEIU 1199 Greater
New York Pension covers another 29,000, or
36,000 in New York in all.
Under the 2006 Act, these workers are
not allowed to win increased pensions in newrounds o bargaining, and in many cases have
to accept lower beneft accrual rates—which
imply smaller annuities than promised and ex-
pected—until the und is ully unded again.
While these endangered plans may cause
hardship or some or many o the 36,000
workers when they retire, the status o the
The ollowing eight case histories illus-
trate issues related to union pension
plans. Until the passage o the Pension
Protection Act o 2006, the Department o
Labor did not have the authority to impose
corrective action on underunded plans. As a
result, a number o weaknesses in union pen-
sions grew to harm rank-and-fle union mem-
bers. There have been instances o outright
wrong-doing—embezzlement, kickbacks, and
similar illegal activities—but ar more harmhas been done by the implicit orms o negli-
gence discussed in previous sections.
Fortunately, some o the issues discussed
in these case histories were addressed in the
Pension Protection Act, to the consterna-
tion o union leadership. These case histo-
ries should act as cautionary tales that teach
union members to be vigilant, to use all the
tools the law gives them to keep a close eye on
their pensions, and their leaders.
Service Employees
International Union
On July 11, 2008, in response to an ar-
ticle published in the July 9 edition o the
New York Sun by Diana Furchtgott-Roth on
the state o union pensions
20
, the Service Em-ployees International Union (SEIU) issued a
blistering press release. The article stated “Yet
in 2006, the SEIU National Industry Pension
Plan, a plan or the rank-and-fle members,
covering 100,787 workers, was 75% unded.
That is, it had three-ourths o the money it
needed to pay beneft obligations o workers
XII. Eight Case Histories
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S e p t e m b e r 2 0 0 9 2 9
1199 Pension Fund in 2007, when it still had
a strong unding ratio, but the national union
leaders that claim credit or keeping the na-
tional plan well-unded did not deem ft to
share this insight with their locals.The end result is stunning in its inequity:
1,000 District o Columbia and Maryland
nurses are acing a ailing pension while the
national pension—not to mention the 102
percent unded ofcer pension plan—our-
ishes. In the uture, beore bragging about
its stability, SEIU should ensure that all o its
workers are reaping the benefts.
E.I. DuPont
1199 Pension Fund (a distinct und rom the
Greater New York plan) endangers the uture
income security o close to 200,000 health
care workers in New York, Maryland, Mas-
sachusetts, and New Jersey. At the beginningo 2007, this und had assets o $8.3 billion,
but in the two years ollowing the last Form
5500 fled by the und, it lost one-third o its
value24. This would be enough to reduce the
unding ratio rom 90 percent to 60 percent,
assuming the one-third loss occurred starting
in 2008. It would be easy to blame this decline
on the economy and the stock market, and it
is true that many pensions lost a lot o moneyas a result o the recession and stock-market
slide. But it is also true that a large number o
well-unded pensions did not lose one-third o
their assets as a result o the recession.
While the SEIU National Industry Pension
Fund bragged about its well-unded plan, a
2007 letter rom the trustees reveals that the
stability was achieved at the cost o cutting
union members’ uture pensions25. The 1199
representatives, however, according to onesource, reused to bring a reduction in uture
pension benefts to the bargaining table when
they entered into negotiations to repair the
ailing plan26. Their desire to protect rank-
and-fle pensions would be admirable, were
they not holding out or a promise they can-
not keep—not without more money that nei-
ther the union nor employers have.
The national union is not responsible orthe unding status o a district pension und.
The leaders o that district, together with the
employers’ representatives, have that respon-
sibility. But the national pension und had
the right idea, cutting uture benefts in the
ace o an international economic crisis. This
sort o advice would have been critical to the
In 2007, the union pension plan or E.I.
Du Pont De Nemours & Co. covered 157,794
people, 31,693 o them current workers. This
plan was negotiated by the International
Brotherhood o DuPont Workers (IBDW),
which represents employees o E.I. Du Pont
and its subsidiaries. In 2007, the plan was109 percent unded, and according to pension
documents is expected to recover rom 2008
losses by the end o 2009.
It is not in any way the best-unded pen-
sion plan in the country, but the DuPont Pen-
sion Plan is well ahead o the curve among
plans o comparable size, and even perormed
better than average in 2008. It is at no risk o
alling into endangered or critical status, andDuPont and the International Brotherhood o
DuPont Workers entered arbitration in May
regarding the continuation o the defned ben-
eft pension plan.
That the DuPont Pension Plan is a single-
employer plan gives it natural advantages in
easing negotiations and ocusing workers’ at-
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H U D S O N I N S T I T U T E3 0
and $20.67 billion in 200729. Given that the
und’s liabilities were more than $44 billion,
orming a nearly $24 billion defcit in 2007,
it is unsurprising that the und declared itsel
to be in critical status when frst required in2008.
However, one o the Central States’ sis-
ter unds, the Western Conerence Teamsters
pension, was in no such difculty and antici-
pates ew, i any problems in the uture. In
2007, its unded ratio was 80 percent, and ac-
cording to the annual unding notice rom the
und’s actuary, it was 97 percent unded in
200830
. It has dropped back to an 85 percentunding level in 2009, but reasonably expects
to be ully unded without any extraordinary
eorts.
So, what is the dierence between these
unds?
The major dierences are three. First, the
Central States Fund is managed by J.P. Mor-
gan and Goldman Sachs, a holdover rom a
court decision made in response to the late
Jimmy Hoa’s mismanagement o Team-ster pension unds decades ago. (Hoa was
president o the international union in 1958-
1971.) The Western Conerence is controlled
by the union and participating employers. It
is tempting or unions and their supporters
to blame the banks or poor perormance,
except that the same problems have plagued
union pensions not controlled by court-ap-
pointed banks.Another dierence is investment strategy,
a ar more persuasive point. Over two-thirds
o the Central States investments are in stocks,
making its und value heavily dependent on
market perormance31. The Western Coner-
ence unds are slanted towards more conser-
vative, diversifed assets. In 2004, the West-
tention on the responsibilities o union and
employer alike to keep the pension well-und-
ed. But single-employer plans are not certain
to do well, even among smaller plans.
According to IBDW, their organizationis unique. All members o the union – rank-
and-fle, ofcers, and even the executive
board – are employees o DuPont or its sub-
sidiaries and spin-o companies27. There are
eight locals in IBDW, and the parent union’s
president can note how local presidents deal
with the year’s challenges individually. When
DuPont considers layos, President Jim Flick-
inger o IBDW is deending his own interestsas well as that o his constituents. And when
the pension plan alls behind on its unding,
every member o union management aces a
real threat to his or her retirement security.
This may not be the perect union para-
digm, but there is a great deal to be said or
the act that its leadership is personally invest-
ed in the well-being o its members.
International
Brotherhood of Teamsters
At the end o 2006, the Central States Pen-
sion Fund covered over 451,000 workers, with
about 155,000 o them current workers. Yet
on January 1, 2008, UPS, the parcel delivery
company, bought out the contracts or 44,000
o those workers, paying the und $6.1 billionand shrinking the number o current workers
covered by the plan to about 106,000. The
cash inusion, however, was not enough, and
the und determined it was in critical status
in 200828. At the end o the frst quarter o
2009, the und had $15.66 billion in assets—
down rom $17.36 billion at the end o 2008
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S e p t e m b e r 2 0 0 9 3 1
maximum $12,870 a year or a worker with
30 years o service37. This was averted only
by the Central States and its contributing em-
ployers developing a rescue plan that involved
reducing uture accruals o benefts, shu-ing health and welare beneft contributions
to the pension plan, and requesting the IRS
to waive minimum unding standards or a
decade38. This waiver was contingent on the
Central States maintaining a stable unding
ratio, which they ailed to do, and the und
applied or a second waiver in 200839.
In 2003, the Western Conerence em-
barked on a similar recovery plan. Poor eco-nomic perormance had caused $5 billion in
losses that required the und to cut accru-
als or uture benefts40. They expected cur-
rent benefts to soon exceed the und’s assets,
which could hoist red ags at the IRS.
When the Western Conerence reduced
uture benefts to protect the plan’s unding
ratio, it was already ully unded41. The actu-
aries knew that uture benefts had to be re-
duced to keep the und’s ratio rom slippingin the uture, and did so to ensure that the
benefts the rank-and-fle had accrued would
be protected.
The Central States, meanwhile, was trying
to portray its und’s critical status as some-
how positive. It argued in a 2008 newsletter
to members that endangered plans are re-
quired to signifcantly increase contribution
rates, develop a strict 10-year recovery plan,and possibly eliminate uture beneft accru-
als42. The “red zone” – reserved or plans in
critical condition – allows a longer recovery
period and does not allow the und to reduce
beneft accruals below the Central States’
current rate. While Central States did not
lie about regulations, this rosy picture was a
ern Conerence trustees held 56 percent o the
und in government and corporate bonds, 39
percent in stock, and 5 percent in real estate32.
The Central States Fund’s latest flings list 1.5
percent o their assets held in “other, primar-ily real estate related” sources33. But this is
a disingenuous statistic, given that Central
States’ und holds 33 percent o its assets in
“fxed income” investments34. According to a
Charles Schwab tutorial, “fxed income” se-
curities include real estate investment trusts35
and GNMA mortgage-backed securities36. It
is thereore uncertain how much o the und is
and was invested in real estate, an ironic stateo aairs given that the current pension struc-
ture came about as a result o Central States’
historical real estate investments maintained
by organized crime.
Arguments have been made that the bank-
managed pension und has a bias towards
high-risk, high-reward investments, rather
than the more conservative, and thus more
stable, investments the Western Conerence
engages in. But saying that the trustees haveno capacity to suggest or require more con-
servative investment strategies is dubious. It
is ar more likely that the trustees have been
in avor o the high-risk strategy in the hope
o high rewards. Ater all, the pensions on the
line are or rank-and-fle members, not the
trustees.
The third dierence between the unds
is one that Central States can’t blame on theeconomy, the fduciary managers, or employ-
ers. In 2001-03, the Central States struggled
with poor perormance and a alling und-
ing percentage. There were serious concerns
that the Pension Beneft Guaranty Corpora-
tion (PBGC) would be orced to take over
the und, reducing guaranteed pensions to a
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H U D S O N I N S T I T U T E3 2
estate deal46. An increase in the unding ra-
tio two years ater replacement o most o the
board o trustees indicated that the und was
not doing as poorly as it might have.
However, at 55 percent, the und was not
doing well. Like many pension unds, ater the
stock market bull market o the late 1990s,
the Plumbers’ pension had a huge “amortized
credit”—an imaginary number supposedly
reecting how much excess money the und
had due to previous contributions above mini-
mum required payments and appreciation o
investments.
Every year, a pension plan accumulatesadditional pension costs due to the additional
year o service achieved by workers. This is
called the “normal cost”, and a pension plan
that ails to acquire at least as much money
over the year is alling behind. When a plan
alls behind in its unding due to poor market
perormance, skipped payments, or similar
events, it racks up debt that must be paid back
in annual payments, much like a mortgage.
When a plan is ahead on unding, it accumu-lates credits that it can use to reduce uture
minimum annual contributions.
The Plumbers’ board o trustees has, in
recent years, been paying its normal cost, but
has not been paying back its debt accumulat-
ed in previous years. They use accumulated
credits to reduce annual payments on the pen-
sion’s debt, reducing money owed on paper
while the plan still lags in value.The Pension Protection Act lessened the
Plumbers’ ability to use this fnancial sleight
o hand to keep rom shoring up its low und-
ing ratio, but the law came into eect only in
2008, delaying when we will see its eects on
the Plumbers. It is yet uncertain why EBSA
has not recognized the Plumbers as being in
sugar-coated —and sel-serving—way or the
Central States administrators to tell members
that their pension plan won’t be solvent or
more than a decade, while better-o plans
will have recovered aster, not to mention the
act that the plan would still have one-hal or
less o assets needed to pay all obligations.
The Teamsters or a Democratic Union43,
a dissident action within the union, recog-
nized that the administrators were not telling
them enough. This action thought Teamsters
members ought to be able to see what was
being done with their retirement money and
demand accountability or poor perormance.They asked to see the plan’s quarterly fnan-
cial reports, and when that ailed, sued or ac-
cess44.
The problem with the Central States has
been going on or years without stop. Only
the Pension Protection Act, fercely opposed
by the Teamsters, orced the Central States
to take decisive action to shore up its pension
und. The Western Conerence und shows
that it is possible or a plan to remain solvent
even in deteriorated economic conditions. All
it takes is a little oresight, a little restraint,
and a willingness to explain yoursel. The
Central States seems to have none o these.
Plumbers and Pipeftters
In 2008 the Plumbers and Pipeftters Na-
tional Pension Fund (also called the UA Na-
tional Pension) covered over 153,129 people.
In 2008, it had a unding ratio o 55 percent45.
This was a avorable and welcome develop-
ment or a union with problems. In 2004,
most o the board membership was ousted
ater a lengthy lawsuit over a poorly-run real
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S e p t e m b e r 2 0 0 9 3 3
some unathomable reason, the administra-
tors agreed that i the property sold or more
than $44 million, Sardagna would receive 99
percent o the profts above that amount, even
though the union had put $34 million at risk.Furthermore, they agreed to sell the property
only with Sardagna’s consent49.
Had they known o it, this should have
been a warning bell to union members. Not
only was a man totally unconnected with the
union given power over deciding the ate o a
large asset o their pension und, but money
earned by union investments was going to be
lost to an outsider, with the consent o theirunion leaders. These acts alone suggested the
possibility o a corrupt relationship between
Sardagna and union ofcials.
The union itsel, had sta or ofcers made
a diligent inquiry, would have known that
Sardagna’s savings and loan had collapsed
on charges o bad loans and accusations o
raud (or which he was later acquitted). The
act that he blamed the collapse on bad loans
related to the property later bought by theunion pension und ought to have been an-
other warning sign. But under the advice o its
investment manager, William Seay, the pen-
sion trust went ahead with the purchase.
However, when the pension trust was
sued by the Caliornia government to clean
up the landfll, the trustees turned around
and sued the oil companies that they said
were responsible or contaminating it. Theyeventually discovered that their und adminis-
trator, William Seay, who had recommended
the purchase, had been a part-owner o the
land. Moreover, he contributed to unounded
union optimism about the value o the land,
encouraging the union to continue to invest
up to its eventual $34 million despite hety
critical condition, since their 2008 plan sum-
mary admits to a 55 percent unding ratio.
Southern California,Arizona, Colorado
and Nevada Glaziers
The pension trust o the South Carolina,
Arizona, Colorado & Southern Nevada Gla-
ziers, Architectural Metal & Glass Workers
Pension Plan is in poor condition. In 2007, it
had 12 percent o the assets necessary to sup-port present and uture retirees, or a defcit
o about $234 million. In 2008, the frst year
in which such a designation was required,
the pension trust fled “critical status” noti-
fcation with DOL47. The union had plenty
o scapegoats to blame or this poor peror-
mance—and did. Unortunately, the explana-
tions all reected poorly on the union’s lead-
ers’ judgment.
In 1989, two men named Robert Ferranteand Peter Sardagna convinced the Glaziers
pension managers to invest $34 million in
a parcel o land in Carson, Caliornia. The
land, which had previously been a landfll,
was to be cleaned and resold as a shopping
center, and so the pension und could expect
to realize a proft. The administrators contin-
ued to pay Sardagna as an independent con-
sultant until 1995
48
.The union and plan administrators then
agreed to the creation o a tangled fnancial re-
lationship: the Glaziers’ pension plan ormed
a limited-liability corporation to manage the
property and agreed that Sardagna would
aim to earn the pension a 15% return, plus
$6 million (about $10 million in total). For
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H U D S O N I N S T I T U T E3 4
poorly. Unions can easily blame und manag-
ers or poor perormance, but when the und
is ree to choose its own administrators, the
ault lies with the overseers – union leaders
appointed to the board o trustees.
United Auto Workers
The UAW is practically synonymous with
what were the abled Big Three o the Ameri-
can auto industry—General Motors, Ford,
and Chrysler. The trio was considered in the
second hal o the 20th century to be a cor-
nerstone o American manuacturing. That
history explains much o the 2008-09 panic
around the GM and Chrysler’s bankruptcies.
Contract negotiations between UAW and
the automobile companies have always been
tense, in part because o the energy UAW puts
into doing the best it can or its workers.
This history paints a rosy picture o the
union, and or the most part, it is deserved.
While UAW-negotiated wages have beencompetitive with that o Toyota’s U.S.-based
actories, hourly labor costs—wages and
benefts—have run close to $70 at union
plants, compared to about $46 at some non-
union plants, and even lower in the South54.
UAW’s negotiated pension plans were doing
well. In 2006, the UAW Chrysler plan, cov-
ering 52,500 active workers, was 87 percent
unded. The UAW GM plan, covering 80,000
active workers, was 102 percent unded. And
the UAW Ford plan, covering 85,200 active
workers, was 105 percent unded in 2005, the
last year available.
Part o this health came rom the UAW’s
wisely giving concessions to the companies
in 2003, when the Big Three were no longer
clean-up costs needed to make it a viable con-
struction site. I that were not bad enough, he
had once been a limited partner in the origi-
nal owner o the property, and had “long ties”
with Robert Ferrante50.Eventually, the union leaders wised up
and sued Sardagna or ull ownership o the
ormer landfll when he held up a possible sale
o the property to a man hoping to develop
it or a National Football League stadium.
This lengthy litigation ended in the und’s a-
vor, but the opportunity had passed, and the
land’s value is still uncertain as o mid-2009.
In 2005, the union won back $243,945rom kickbacks Ferrante accepted rom a real
estate developer51, and in 2003 Seay was con-
victed on charges o mail raud or deceiving
the union regarding his fnancial interest in
their investments52. The Glaziers fnally sold
the property in 2004 or $30 million, at a
loss, to a development group looking to create
a shopping center and residential area53. It is
possible the site will eventually show a proft,
but the rank-and-fle o the Glaziers will notrealize these gains.
Technically, the wrongdoers in this case
were Sardagna, Ferrante, and Seay. But the
pension trustees saw nothing wrong with their
investment advice and Sardagna’s question-
able fnancial arrangements until the corrup-
tion became ully evident. The trustees were
not skeptical and vigilant rom the beginning,
as their fduciary responsibility required. Theunion leadership gets points or ousting Seay,
and or disentangling itsel rom Sardagna.
But it is the union’s responsibility to appoint
responsible managers to its pension unds, and
to perorm due diligence in ensuring the man-
agers did their jobs. Given Seay’s history, it
appears he managed the other Glaziers’ unds
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S e p t e m b e r 2 0 0 9 3 5
well-unded that union leaders lack. Even pri-
vately-owned companies are orced to answer
awkward questions i they let their pension
unding slip, while publicly-owned companies
could ace losses in market value i a ailing
pension becomes public knowledge. Unions,
however, have a host o scapegoats available
i it looks like their pensions are in trouble.
I companies have much to gain rom
keeping their union pension plans unded,
giving single- employer plans a unding edge,
why do unions preer to get companies to buy
into their multiemployer plans? On paper, a
multiemployer plan sounds like a good idea insome union industries, such as construction,
where workers may change jobs oten. But
that beneft is diminished i the pension plan
isn’t well-unded.
Some unions argue that giving control o
the unds over to the company is worse than
leaving it in the hands o trustees “who are
legally obligated to act in the best interests o
the participants.”58 This is a disingenuous ar-
gument that assumes the same principles o
unding and responsibility do not apply to
single-employer pension trustees. Given re-
cent history o union trusts using their unds
as leverage against corporations that don’t
adhere to their worldview59, one possibility
is that unions are loathe to lose control o
these large unds as tools or their agenda. O
course, that may not be in the union mem-
bers’ best interests.
Sheet Metal Workers
Starting in 2008, the Sheet Metal Work-
ers National Pension Fund began a desper-
ate attempt to rebuild its ailing pension
ush with profts. While UAW has resisted
company proposals to reduce uture pension
benefts, the union, recognizing the compa-
nies’ narrow circumstances, accepted 2004-
2008 contracts with no new costs55.But unlike many o the case studies pre-
sented here, the UAW pension unds are spon-
sored by private corporations. With pension
obligations a part o the auto companies’ bal-
ance sheets, they truly have a vested interest
in keeping the unds aoat. The Big Three
unds are doing well, i not equally so.
Like the Western Conerence o Team-
sters, the GM pension trustees reacted to thestock market uctuations early in the decade
by shiting to a more bond-heavy investment
strategy56. Ford suered more losses ater
2006 because it did not subscribe to GM’s
investment philosophy. Chrysler’s und ater
2006 is a mystery because the company was
bought out by a private equity group which
did not have the disclosure obligations o a
public company. None o these unds has even
reached endangered status.In act, in 2003, GM took it upon itsel to
sell $20 billion o bonds and contribute the
proceeds to its pension und to cover short-
alls, long beore the Pension Protection Act
would have orced the company to notiy its
workers o a possibly critical status57.
This highlights some o the strengths o
single-employer plans mentioned earlier in
this paper. Single-employer plans, like the BigThree’s plans, give employers the responsibil-
ity or maintaining the pension und, while
multiemployer plans have nebulous responsi-
bility, making it difcult to determine who,
i anyone, should make payments i the und
experiences shortalls. Furthermore, com-
panies have an incentive to keep their plans
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H U D S O N I N S T I T U T E3 6
they ailed to put equal eort into securing
those benefts. Because rank-and-fle workers
likely believed that benefts earned could not
be reduced, there was little incentive to devot-
ing energy to matching assets and liabilities—until orced by declining perormance met-
rics. And even then, the leadership dissembled
to conceal the extent o the problem.
In a 2007 letter to the rank-and-fle, chair-
man Michael Sullivan assured his constituents
that “critical” status “does NOT mean that
the NPF [National Pension Fund] is unable
to pay pensions. Rather, it means the actuary
projects that i the NPF did nothing, it would
have a unding defciency within the next ew
years.”64 This statement is grossly misleading.
The Pension Beneft Guaranty Corporation
has assumed control over pension plans better
unded than the Sheet Metal Workers, mean-
ing that to the government, a plan that is 50
percent unded is in danger o being unable to
meet its obligations.65 Furthermore, the claim
that “critical” status simply means the plan
will have a unding defciency in the utureglosses over the und’s severe actuarial def-
ciency at the time o writing.
As a result o its critical status, the und
has had to cut back on many o its “adjust-
able” benefts. The cost-o-living adjustment
was denied to new retirees and rolled back or
those receiving it. Early retirement benefts
were reduced. Lump sums and other optional
orms o payment were eliminated. And, de-
pending on the plan negotiated by individualemployers, either beneft accrual was reduced
to a minimum o 1 percent and certain early
retirement options disallowed, or beneft ac-
crual was to be set at 1.5 percent and annual
contributions increased by 7 percent66.
Union presidents do not like coming to
plan. Covering 136,000 workers, 70,000
o whom were still working, the plan had
slightly more than 50 percent o the assets
required to cover its liabilities60. To comply
with the Pension Protection Act, the SheetMetal Workers, whose pension und was in
critical status, had to develop a 10-year plan
to rebuild its unding ratio and ensure that it
could pay promised pensions.
Like many ailing pension plans, the Sheet
Metal Workers had put much o its assets in
stocks—62 percent in 2007. Naturally, this
let the union vulnerable to stock market
downturns, as its stock holdings lost 39 per-
cent o their value in 2008, according to pen-
sion fnancial documents61. A chart provided
by the union to discuss 2008 perormance
revealed another difculty—the increasing
costs o benefts. Through 2007, beneft costs
increased steadily, while assets lagged in 2003
to 200562. Perhaps more clearly than any other
union pension plan, the Sheet Metal Workers’
plan demonstrates one o the most common
pitalls to a collectively-bargained, union-runpension plan.
Beore 2008, the pension plan oered
a wide variety o extra options: an annual
cost-o-living adjustment to the pension63, a
lump-sum payment option, a subsidized early
retirement plan, a disability payment equal to
maximum possible early retirement benefts,
a 10-year guaranteed payment (that would go
to a designated benefciary ater the retiree’s
death), and others. The sum o these benefts(most especially the cost-o-living adjustment)
contributed to steady increases in the plan’s
required annual benefts payout.
Despite all the promised retirement ben-
efts won by the Sheet Metal Workers’ leaders
through dogged bargaining with employers,
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S e p t e m b e r 2 0 0 9 3 7
Another service created by UNITE-HERE
is the UNITE Here Fund Administrators,
which in 2007, according to its IRS Form
990, “perormed administration work or six
health & welare unds and fve retirementunds.” UNITE Here Fund Administrators
in 2007 charged $33 million or its services,
when it was carrying an employee payroll o
$15 million.
UNITE-HERE should be concerned about
the continuing entanglements o these three
organizations and their inherent conicts o
interest. The frst worrisome sign is that 21
UNITE-HERE leaders, including presidentBruce Raynor and hospitality industry pres-
ident John Wilhelm, are reported as having
a controlling relationship to Amalgamated
Bank. All told, UNITE-HERE holds a 57 per-
cent interest in the bank, and its leadership
earned $428,600 in compensation rom the
bank, an average o $20,400 each.
The UNITE HERE Retirement Fund has
a number o stock holdings, including all o
the common stock o Alico Services Corpora-tion. Alico, in turn, owns UNITE Here Fund
Administrators and the Amalgamated Lie In-
surance Company. It is one thing or UNITE-
HERE to have ounded all o these organiza-
tions, and quite another or UNITE-HERE’s
administration to directly control all o them.
It is a direct conict o interest to have pen-
sion unds invested in related organizations.
And although the DOL determined the ar-rangement was legal, it is decidedly odd that
in 2005 UNITE-HERE sought to purchase
15 percent o Alico’s stock67.
Technically, UNITE-HERE does not di-
rectly control UNITE Here Fund Administra-
tors. Its president, secretary, and vice presidents
are Ronald Minikes, Mark Schwartz, Michael
their members with bad news. The excerpt
rom Michael Sullivan’s early notifcation
demonstrates that. That tendency towards
dissembling carries over into contract renew-
als, when union leaders highlight beneftswon without acknowledging the costs. An in-
creased pension is not simply a victory or a
union. It is an obligation and a trust on the
part o the pension sponsor, oten the union
that won the beneft. The eort put into main-
taining that pension needs to be signifcant,
lest the “adjustable” portions o that pension
be lost.
UNITE Here Fund
Administrators, Inc.
In 1922 the Amalgamated Clothing
Workers, a predecessor to the present-day
UNITE-HERE union, ounded a bank in
Chicago to service the fnancial needs o
blue-collar working people, especially union
members. (The ACW ounded a sister bank inNew York City in 1923.) The Amalgamated
Bank o Chicago’s board is today still heavily
weighted with union leaders and supporters,
and retains connections to its ounding orga-
nization. UNITE-HERE’s relationship with
the fnancial services industry has given it a
leg up in creating fnancial services entities to
serve the union world and the public.
Among these was Amalgamated Lie,ounded in 1943 to oer insurance services
to the UNITE-HERE (then Amalgamated
Clothing Workers o America) unds. While
originally created to serve members o the
UNITE-HERE constituent unions, in 1992,
Amalgamated Lie received permission to sell
its services to the public.
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H U D S O N I N S T I T U T E3 8
why rank-and-fle members are being charged
more than twice the amount the union’s sta
pays or plan administration.
Presumably these relationships have ex-
isted long enough that the ederal governmentwould have identifed any wrongdoing, but
the arrangement still produces a curious set
o fnancial relationships. There is no clear ex-
planation why the sta pension plan is man-
aged by a dierent entity than the rank-and-
fle pension, one that does its job more cheaply
and more eectively68. Non-proft records give
no indication how UNITE-HERE’s adminis-
trators keep separate the interests o their nu-merous fnancial holdings. And nothing sug-
gests how the leaders o UNITE-HERE fnd
time to manage their union and make signif-
cant bonuses rom Amalgamated Bank at the
same time.
The case o UNITE Here Fund Admin-
istrators highlights another problem in the
world o union fnances, especially defned
beneft unds. Even with the level o transpar-
ency required, administrators can easily cloakadministrative and management ees in mys-
tery to keep workers rom understanding just
how their pensions are being managed. And
in complex situations like that o UNITE-
HERE, administrators can generate oppor-
tunities or proft even without resorting to
embezzlement.
Hirsch, and Paul Mallen. However, all save
Ronald Minikes are vice presidents at Amal-
gamated Lie, all earning salaries in excess
or $100,000 or their services. But the direc-
tors o UNITE Here Fund Administrators in-clude such people as Bruce Raynor, Noel Bea-
sley, and Edgar Romney, among other senior
UNITE-HERE ofcers. Many o these same
people are the trustees o the UNITE-HERE
National Retirement Fund, which manages
pensions or the union’s own employees.
Despite the Retirement Fund’s assertion
that “the Fund has a written code o ethics
which covers conicts o interest,” it is hardto imagine that the competing interests o
und administrators, the union, the pension
und itsel, Amalgamated Lie, and the Amal-
gamated Bank have had no eect on UNITE-
HERE’s fnancial status. This is not to say the
und is in dire straits—in 2007, it was 83 per-
cent unded.
But Amalgamated Bank made close to
$2.8 million in 2007 rom investment ees
rom the UNITE HERE Retirement Fund,and the UNITE Here Fund Administrators
took $13 million in ees or managing the
und. The Fund Administrators’ ee amounts
to $47 per participant. In contrast, the sta
pension plan was administered by Alicare,
one o Amalgamated Lie’s companies, or
$129,000, $22 per participant. It is unclear
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S e p t e m b e r 2 0 0 9 3 9
solvent. Furthermore, labor leaders ought to
recognize how benefts inuence overall pen-
sion costs and how this aects unding ratios.
Even modest sweetening o benefts can cause
large increases in uture obligations. In short,
beneft increases are not always in the work-
ers’ best interests. Unsustainable gains in ben-
efts lead to expectations that must ultimately
be disappointed.
Union leaders have ew incentives, how-ever, to take such a proactive, cautious view.
Their own pension plans are oten separate
rom their members’, meaning that a ailed
rank-and-fle pension plan has no personal,
pocketbook impact on the leaders. The sound
condition o union leaders’ pension plans rel-
ative to the condition o rank-and-fle plans
demonstrates that union leaders know how to
properly manage pension plans, and thereore
must have some idea about how they are en-dangering workers’ utures. Furthermore, the
act that ofcer pensions tend to be run by
ofcers themselves lends weight to the propo-
sition that individuals are ar better o when
in charge o their own fnancial uture.
The real problem is the opacity o union
pension fnancing, and the lack o account-
ability required o union leaders. The Pension
Protection Act has exposed more than 300poorly unded plans, orcing them to take ac-
count o their insecure positions and to make
eorts to rebuild. Yet, even with the Act,
bizarre entanglements like those o UNITE-
HERE are possible, and the expenses o some
pension unds are still shrouded in mystery.
The Act has had other positive eects,
Despite their rhetoric, unions cannot
deliver a retirement more secure than
that oered by non-union plans. By
standardized measurements, union-run pen-
sion plans are consistently worse than their
non-union counterparts. As noted above,
while 59 percent o union unds had 80 per-
cent or more o the assets needed to pay ex-
pected costs, 86 percent o non-union unds
did. Unions may promise their members supe-rior benefts, but they do not deliver.
Union leadership has contributed to this
problem by negotiating or pension benefts
that are more than aordable, oten seeking
pension increases in the ace o consistent
employer warnings about cost. Many unions
believe that increasing benefts is more impor-
tant than keeping pension unds ully unded.
Trustees need to make wise, inormed de-
cisions to help pension unds remain stable.Funds with conservative investment strate-
gies, especially those with lower stock and
real estate holdings, have ared ar better than
those with high-risk investment strategies.
But negotiators have to commit themselves
to supporting higher unding ratios, as well,
even though the riskier, more volatile growth
stocks chosen to pay or uture benefts are
also more volatile. The Pension ProtectionAct has gone a long way towards orcing
unions with troubled unds to negotiate or
more aordable benefts, but labor needs to
work more proactively. Ater all, it is cheap-
er to pay now to keep a und rom slipping
than to wait until assets depreciate and some-
one is required to pay again to keep the und
XIII. Conclusions
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H U D S O N I N S T I T U T E4 0
ensuring that rank-and-fle members will have
stable fnancial utures.
Unions are eager to point out the aws
in defned contribution plans, and certainly
the current economic downturn demon-
strates there are aws in these plans. But
defned beneft pension plans have ared just
as poorly, and unlike with a defned con-
tribution plan, workers cannot identiy the
exact loss and its impact on them. Given the
expertise union leaders have shown in man-
aging their own pensions, they could easily
oer advice to workers to help them protect
their utures.Whether workers continue to preer de-
fned beneft plans or push or more defned
contribution plans, it is clear they need to de-
mand more accountability rom union leader-
ship, to ensure that they can achieve the ben-
efts that union leaders promised them.
some lambasted by unions. Struggling plans
cannot increase benefts, and must limit non-
standard pension options, preventing plans
in poor condition rom urther expanding
pension costs. The Act also requires unions
to give participating employers options when
their workers’ pension plans are in trouble.
No union can simply demand an employer
increase contributions to support a agging
pension und.
Yet the law deals only with the symp-
toms o the problem. Forcing pension plans
to bring their accounting back into order is
a good idea, but ails to address the age-oldprincipal-agent problem. That is, union mem-
bers have ew assurances that the trustees o
their pension unds are truly acting in their
best interest. But the continued poor status o
union-run pension plans suggests that union
trustees are not adequately working towards
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Appendices
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H U D S O N I N S T I T U T E4 2
annually. I she has $1,000,000 on the day sheretires, she will have more money than she needsbecause o the 3 percent interest rates.
So she looks at it another way. Say she wereretiring next year, and wanted her bank ac-count to have $50,000 in it. She would need to
invest $48,543.69, because (1.03) x $48,543.69= $50,000. I she wanted her bank accountto have $50,000 in it two years rom now, shewould have to invest $47,129.80 today, because(1.03)2 x $47,129.80 = $50,000.
The bank advises Susan that in its 3 percentretirement plan she must save $12,500 a year, orabout $1,050 a month.
I defned beneft pension plans were this sim-ple, companies would not have so much difcultywith them.
Unortunately, there are a number o compli-cations that make the people who plan and trackthese unds (called actuaries) have much morecalculating to do. Most o this work arises be-cause companies preer to make level payments
every year to stabilize cash ows. There are alsouncertainties that will arise over the years as theemployer’s payroll expands or shrinks, as com-pensation changes and as investment outcomesdeviate rom the original assumptions.
For all o these reasons, a plan may fnd itsel underunded or overunded.
Earnings
Most defned beneft pension und beneftsare a percentage o an employee’s annual earn-
ings. The ormula can be based on “average”earnings, as is Social Security, or it can be basedon the worker’s earnings during his last year orseveral years o work. In either case, it is tremen-dously difcult to predict how much a worker
will earn during his last several years, perhaps 20
Adefned beneft pension plan is a promiseto pay each participant a specifed sumo money during each year o retirement.
Such annual payments (usually divided into 12monthly disbursements) are called an annuity.
Annuities can result rom pension payments
and they can be purchased rom insurance com-panies. Let’s examine how this aspect o fnanceworks. The calculations that ollow are a simpli-fed model o how these plans work in the realworld. Few individuals make these calculations
themselves, but the example is intended to illus-trate a simplifed version o the process that pen-sion actuaries go through.
Imagine a 35-year-old woman (we will callher Susan) who wants an annuity to pay her$50,000 a year ater she retires69. I her bankpromises a at, unchanged interest rate o three
percent, she can plan her retirement income witha air degree o certainty. Susan will frst calculatehow much money she must have earning 3 per-cent to generate $50,000 a year ater she reaches
65. Then Susan will calculate how much a year(or a month) she must pay under her contract to
und the annuity. The younger she is when sheenters into the annuity contract, the more pay-ments she will make, but the lower each annualcontribution must be.
According to the Social Security Administra-
tion, a 35-year-old woman can expect to live ap-proximately 46.22 years, to age 81. Susan wantsto play it sae, so decides to assume that she willlive until age 85. Thus she will need the annuityto provide her payments or 20 years, rom age
65.Susan frst thinks that her annuity account
will need to have $1,000,000 ($50,000 x [85—65]) in it on the day she retires at age 65. Shequickly realizes that this is incorrect. Every year,
the remaining balance in her account will growby three percent, even as she withdraws $50,000
A p p e n d i x I :
How Do Pensions Work?
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S e p t e m b e r 2 0 0 9 4 3
sion payments than workers who die at 70. I lie
expectancy increases over time by one year, the
und’s pension liability increases.
Real Fund Growth
Susan, above, could predict exactly how much
money she needed because she knew that the con-
tractual interest rate was three percent, and al-
ways would be. Defned beneft plans do not put
their money in banks, but invest in a wide vari-
ety o stocks, bonds, and other fnancial products
that give dierent returns on the investment. The
plans must assume that their money will grow at
some rate, but have no guarantee that it will. Thiscreates uncertainty about the uture value o the
und. As some o the experience cited in this pa-
per demonstrates, a defned beneft und may fnd
that it is overunded and can relax contributions,
or that it is underunded and needs to augment
contributions (assuming unchanged promised
pension benefts). In either situation, employers
and unions may have conicting ideas about what
should be done.
Normal Cost
The phrase “normal cost” reers to the annual
expected increase in pension obligations. Nor-
mal cost involves increases based on additional
experience earned by workers, increases due to
increased wages earned, and costs incurred by
adding workers into the pension und. Given the
model’s assumptions, normal cost is easy to cal-
culate. It is the minimum contribution one canmake to a und perorming within expectations
to ensure that the und will have all necessary as-
sets to pay uture obligations. As a result, it is a
good base or determining whether a und is re-
maining stable or slipping in its unding ratio.
years into the uture. So, or many workers, actu-
aries do not know in advance precisely how much
their accrued benefts will be. Actuaries address
this problem by making assumptions about the
percentage growth o an employee’s wages eachyear, and use that number in their calculations.
Experience
It is a common eature or one’s defned beneft
stream to be equal to a percentage o income per
year worked. For example, a retiree whose beneft
is one percent per year and who had worked or
the employer or 10 years would receive 10 percent
o his income, and i he had worked or 40 years,40 percent o his income. This requires actuar-
ies to develop models suggesting how much ex-
perience workers, on average, will have acquired
beore retiring or leaving the company. In other
words, individuals who work or the company or
10 years will earn a much smaller pension than
people who work there or 40 years.
Retirement Age
and Lifespan
I employees are promised the same pension
regardless o when they retire, then a person who
retires earlier costs the company more than one
who retires later. Consequently, pension plans re-
duce benefts or those who retire early and aug-
ment them or those who work beyond normal
retirement.
Companies keep track o traditional retire-
ment patterns, and try to estimate when their
workers will retire. I workers tend to retire earli-
er, companies will try to increase contributions so
that the employees can make larger payments or
a shorter period. Their estimates are important
or determining how much the company expects
to owe each year.
Liespan is another key variable. Workers
who live to be 90 will receive much more in pen-
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H U D S O N I N S T I T U T E4 4
plan that unction much like mortgages. Each
year, the amortized charges require a certain fat
payment be made to reduce it. A credit enters the
equation when changes in returns or assumptions
exceed expectations. Until recently, credits couldbe used to reduce the payments needed to be made
to cover amortized charges or even normal costs,
enabling a pension sponsor to avoid making any
payments to the und in years when credits were
high enough.
Actuarial Cost
The phrase “actuarial cost” reers to changes
in pension obligations caused by changes in the
underlying assumptions o the actuarial model.
These include changes in expected retirement age,
liespan, and returns on investment. As actuarial
cost oten involves unexpected changes in obli-
gations, it enters pension calculations as a series
o amortized charges—debts held by the pension
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S e p t e m b e r 2 0 0 9 4 5
poorly-perorming unds up to their requiredunding ratio. Both choices reduce credits on the
plan’s books, and thereore increase assets allow-
able or calculating unding percentage.
Further, the Act requires at-risk plans (those
with less than 60 percent unding) to contribute
at least the normal cost each year.
The Pension Protection Act requires multiem-
ployer plans, beginning in 2008, to absorb their
entire unding liability as a 15-year debt. Mul-
tiemployer pension plans with less than 65 per-
cent unding will have to identiy themselves asin “critical” status, requiring the submission o a
plan to the Department o Labor to regain proper
unding status. Plans less than 80 percent unded
are “endangered” and required to adopt a plan
to revise benefts downward. The critical and en-
dangered provisions apply only to multiemployer
plans.
Both programs ollow a similar path: the
sponsor must provide two schedules to all partici-
pating parties. One reduces uture beneft accrual
(not currently-earned benefts), and the other in-
creases contributions. Plans in “critical” status
are specifcally required to develop more complex
action plans so that they can emerge rom that
status within 10 years.
In short, the Act’s central purpose is to re-
quire plans to remain well-unded; it lays down
specifc statutory provisions to prevent lapses.
Starting in 2008, critically-unded union
plans (assets are less than 65 percent o accrued
liabilities) came under stricter scrutiny, as unions
were orced to help employers and workers nego-
tiate a middle ground between decreased benefts
and increased costs.
Congress passed the Pension ProtectionAct o 2006 in response to growing wor-
ries over the defned beneft pensions o
workers across the country. It intended to require
pension sponsors to keep their unds actuarially
sound, in the hope that the statutory requirements
would ensure that no company or union would
make promises to workers they could not keep.
The law prohibits plans that are less than 80
percent unded rom increasing benefts. Further,
it prohibits unds with less than 60 percent o
their expected benefts rom paying benefciariesmore than a monthly annuity payment, that is, no
bonus payments.
Another o the Pension Protection Act’s main
provisions is a requirement that plans keep their
unds fnancially sound, or “on target,” with spe-
cifc provisions to prevent unding lapse. In 2008,
this target was 92 percent o all accrued liabili-
ties; it increases annually to 100 percent in 2011.
The act calls upon pension sponsors to con-
sider their total assets to be nominal assets—the
bonds, equities and real estate the plan owns—re-
duced by their credits or appreciation o securi-
ties that are publicly traded. These modifed as-
sets would be the test o how well unded a plan
is. Pension plans that are less than 80 percent
unded or 70 percent unded using “at-risk” as-
sumptions that mark up liabilities, are orbidden
rom reducing their calculated annual obligation
to pay benefts by applying credits. The sponsor
can otherwise use credits to reduce contributions
to the plan.
Sponsors can discard credits in order to in-
crease the value o their adjusted assets. This
allows them to use past overpayments to bring
A p p e n d i x I I :
The Pension Protection Act
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H U D S O N I N S T I T U T E4 6
percentage or dollar amount o contributions…to und all anticipated benefts, whether earned
or not earned…”71 This is called the “accrued li-
ability”. Another method, the “RPA 94 current
liability” is a standardized measure o benefts
earned to date, using ormalized interest rates.
The accrued liability is calculated with interest
rates chosen by plan administrators; the resulting
value varies with demographics and investment
policy, among other actors.
When comparing the unded ratios between
plans, the RPA 94 current liability is more ap-propriate that the accrued liability because it is
more conservative. The RPA 94 current liability
tends to be larger than the accrued liability, and
thereore leads to lower unded ratios than would
be achieved by using the accrued liability to de-
termine plan beneft costs. This bias, however,
aects all plans, whether union or non-union,
and does not aect the quality o comparisons
between plans. And the Vice President o the Pen-
sion Practice Council o the American Academy
o Actuaries, in a 2006 letter to Moody’s, opinedthat the RPA 94 current liability was likely an
appropriate measure to use in determining un-
derunding o pension plans, bringing into ques-
tion whether this tendency o the measurements
should be considered biased72.
It is difcult to determine a single way to ac-
curately measure assets and liabilities or defned
beneft pension plans, given the great uncertainty
inherent in these values. We have presented the
reasoning behind our choice o variables, and
some o the eects they have on our data.
The Labor Department’s Form 5500 hasseveral options or listing plan assets and
liabilities. How assets and liabilities are
presented can inuence the totals that matter or
determining whether a plan is adequately unded.
There are chiey two ways to calculate the as-
sets o a plan. The frst is to list the market value
o assets at the date a balance sheet or report is
issued. This is called the “current value” o assets.
The other starts with the und’s assumed growth
rate and averages any dierence between current
values and assumed growth over a period o time(usually fve years). This is called the “actuarial
value o assets”, or AVA70.
In this paper, the actuarial value o assets is
used to represent plan assets. Especially in a time
o great fnancial volatility, the asset smoothing
aspect o the AVA prevents a single uncharacteris-
tic year rom signifcantly altering a plan’s status.
As a result, a unded ratio presented in this paper
may show a traditionally well-unded plan to be
well o, even i it has suered in the recession. It
may also show a poorly unded plan to remain inthat status, even i it has experienced unexpected
growth in one year.
One signifcant eect o this methodology
would be that some plans may still be reecting
losses incurred as early as 2001, meaning that
some would not reect gains made in 2006 due
to still-unrealized losses in previous years. (“Un-
realized losses” means that an asset has been re-
tained, not sold, and has a market value below
acquisition cost.)
There are, in general, several ways to calcu-late plan liabilities. The frst is a usually a “level
A p p e n d i x I I I :
Data
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S e p t e m b e r 2 0 0 9 4 7
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H U D S O N I N S T I T U T E5 0
1 “Tat-Hartley” reers to the Labor-Management Relations Act o 1947.
2 DOL EBSA, 2009. This represents only reported endangered and critical statuses. Backlogs in fling and
processing may have prevented certain unds rom being listed.
3 A number o types o plans were excluded rom the study. Frozen plans (those taking no new workers),
plans acquired by the Pension Beneft Guaranty Corporation (those in severe difculty or owned by deunct
companies), cash balance plans (a fxed-interest defned contribution plan), and plans in their frst or last
year o operation were excluded.
4 All reerences to unding use a ratio o the actuarial value o assets held by a given defned beneft pension
plan and the RPA ’94 current liability. For urther explanation o the use o these statistics, see the Appen-
dix.
5 A much larger number o plans are less than 65 percent unded than are in “critical” status. This is due inpart to the act that “critical” notifcations are required only by multiemployer pension plans, and due in
part to delays in status notifcation. Some plans in apparent critical status in 2006 may have improved in
the interim. Still, we will use “critical” to reer to all plans with unding ratios o 65 percent or less, or
consistency.
6 Teamsters or a Democratic Union (TDU), 2006
7 These data reer to plans either fling as a small plan or with 100 or ewer active participants. Frozen plans,
PBGC-run, and cash balance plans were omitted rom the study. Again, those in the frst or last year o
operation were omitted, as were plans covering a single individual.
8 AFSCME and APWU pensions are typically public pensions. Their accounting rules and regulations dier
rom those o private pensions, and so are beyond the scope o this paper.
9 The IBEW Pension Beneft Fund is a “non-qualifed” pension plan. It is a promise o a specifed rate ($4.50
per month per year o service) o payment. Because it lacks certain qualities, the und’s investment earnings
are taxed normally, and the und need not adhere to certain reporting and minimum contribution require-
ments. The most meaningul result o this is that the unding level o this und is not disclosed. However,
or completeness’ sake, we will report that in FY 2006, the plan paid out $101.7 million to benefciaries and
$46 million in contributions rom member dues, and $286.7 million in earnings. The und made $220.8
million over the year, a 12.6 percent gain.
10 Retrieved rom AFL-CIO’s EFCA page, http://www.acio.org/joinaunion/voiceatwork/eca/upload/Inves-
tor_EFCA_Congressional_Letter.pd
11 Center or Responsive Politics, Federally Focused 527s by Industry
12 Center or Responsive Politics, PACs13 Center or Responsive Politics, Business-Labor-Ideology Split
14 This includes the $27 million spent by the union and the $48 million the PAC fled as contributing, both
drawn rom FEC flings.
15 Service Employees International Union, 2008b, Article XV, Sec. 18(a)
16 Wall Street Journal , 2008
17 Service Employees International Union, 2008a, p 38
Endnotes
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S e p t e m b e r 2 0 0 9 5 1
18 Based on calculations using the above commitment statement, and SEIU “ast acts”, http://www.seiu.org/a/
ourunion/ast-acts.php
19 While PAC contributions are oten rom individuals, FEC data show that PACs sometimes receive contribu-
tions rom unions. And unions qualiy as 527 groups, allowing them to contribute union unds or political
purposes.
20 Last retrieved 9 August, 2009, rom: http://www.nysun.com/opinion/holding-up-a-mirror-to-the-
seiu/81472/
21 Service Employees International Union, 2008
22 Retrieved rom EBSA’s Critical and Endangered Status notifcation page, http://www.dol.gov/ebsa/critical-
statusnotices.html
23 1199 SEIU, 2009
24 Massey, 2009
25 Board o Trustees o the National Industry Pension Fund, 2007
26 Massey, 2009
27 IBDW, 2009
28 Central States Funds, 2009, pg 3
29 Central States Funds, 2009, pg 8
30 Bolen, 2009, pg 1
31 Mc Garr, 2009, pg 8
32 32 Western Conerence o Teamsters Pension Plan, 2003, pg 2
33 33 Central States Funds, 2009, pg 9
34 34 Central States Funds, 2009, pg 9
35 Real estate investment trusts (REITs) are companies that own and lease or rent real estate property.
36 Charles Schwab, 2009
37 This is based on PBGC documents regarding multiemployer plans. The plan covers up to $11 per month per
year o service, and 75 percent o accrual rates above $11 per month per year, up to the maximum o $35.75
per month per year, or an annual pension o $429 per year o service. The explanation can be ound here:
http://www.pbgc.gov/practitioners/multiemployer-plans/content/page13111.html
38 Central States, Southeast and Southwest Areas Health and Welare and Pension Funds, 2003, pg 6-10
39 Central States, Southeast and Southwest Areas Health and Welare and Pension Funds, 2008b, pg 12
40 Western Conerence o Teamsters Pension Plan, 2003, pg 2
41 Western Conerence o Teamsters Pension Plan, 2003, pg 2
42 Central States, Southeast and Southwest Areas Health and Welare and Pension Funds, 2008a, pg 543 A rank-and-fle Teamsters organization dedicated to improving benefts and holding Teamster leadership
accountable or their actions
44 TDU, 2008
45 Board o Trustees, Plumbers and Pipeftters National Pension Fund, 2009, p 8
46 McNamara, 2005
47 Moskalenko, 2008
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48 Bronstad, 2003
49 Dolan, 2002
50 Abrahamson, 1998
51 Department o Justice, 2005
52 Christensen, 2003
53 Shearin, 2007
54 Maynard, 2008
55 Detroit Free Press, 2003
56 Walsh, 2008
57 Walsh, 2008
58 TDU, 2005
59 The Georgeson report on corporate governance (see Reerences) shows that in 2008, the IBEW sponsored
a resolution or electing board directors by a majority vote at Washington Mutual. LIUNA sought to sepa-
rate the Chairman and CEO o Walgreen, and to link pay to perormance or Wal-Mart. SEIU sought to“redefne” what an independent Board Chairman is at Bank o America, and sought to separate the Board
Chairman and CEO o Wells Fargo. And the Teamsters sought to link pay to perormance at Allergan (a
health care company). Few o these companies have large union presences, nor are the unions even in the
same industry o the companies whose governance they wish to alter. And all o these proposals ollow a
union narrative o “good corporate governance”, rather than one o improved returns.
60 Sheet Metal Workers’ National Pension Fund, 2009, p 1
61 Sheet Metal Workers’ National Pension Fund and its Subsidiaries, 2008, p 2
62 Sheet Metal Workers’ National Pension Fund, 2009, p 6
63 Benefciaries received a thirteenth payment rom the pension und each year, equal to the percent increase
in cost o living.
64 Sullivan, 2007, p 1
65 Pension Beneft Guaranty Corporation, 2009, indicates assumption o the Precision Custom Components,
LLC pension plans, which were 58 percent and 53 percent unded.
66 Sheet Metal Workers’ National Pension Fund, 2009, p 12
67 Department o Labor, 2005, p 47236
68 “Eectively” indicates that o 2007, the sta plan was ully unded, while the rank-and-fle plan was not.
69 This assumes she intends to leave no money to heirs or other groups, wishing to consume all o her capital
over her lie.
70 I assumed growth is 8 percent, and in one year, growth is 13 percent, assets will be increased by 9 percent
each year on the actuarial value o assets.
71 Segal, 2006, p 2
72 Segal, 2006, p 2
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