Pyramis Global Advisors Survey Finds Sustainability of Union Pension Plans Being Questioned

Concerns of Taft-Hartley leaders on multi-employer structure influence their approach and investment positioning in their own plans

SMITHFIELD, RHODE ISLAND – Thirty-seven percent of the nation;s largest Taft-Hartley (union) pension plans do not believe the existing multi-employer pension system will survive current pressures, according to a survey from Pyramis Global Advisors, a Fidelity Investments company. Respondents to the 2013 Pyramis U.S. Taft-Hartley Pulse Poll represent $150 billion in assets, about a third of all assets in Taft-Hartley defined benefit plans, and approximately 2.3 million current members and retirees.

Multi-employer pension plans, which are formed by collective bargaining agreements between unions and companies, have faced significant challenges since the financial crisis five years ago. Survey respondents representing some of the largest plans cite various pressures, such as lower interest rates and investment volatility. Other factors include: declining union membership, rising benefits obligations, legislative challenges, and the departure of sponsoring companies from the system.

Respondents who represent zone plans, or those with a funded status defined by the government as “endangered” (66% to 80% funded), expressed the greatest concern with more than half (53%) believing the current multi-employer system is not sustainable. Among all survey participants, a “wavering commitment of company sponsors” (36%) and “legislative issues” (32%) were cited as top concerns.

“Our survey reflects many of the concerns Taft-Hartley plans have about the sustainability of the multi-employer model,” said Mike Jones, president and CEO of Pyramis. “Over the long term, however, respondents tell us they see a future of different models with changes in the responsibilities of different parties involved in the process. As an institutional asset manager, we want to help multi-employer clients understand these potential changes and what they might mean for the management of their benefits obligations.”

Uncertainty about the future

The Pyramis Taft-Hartley survey found that while many plans have serious doubts about the sustainability of the system, when asked to describe the sustainability of their individual plans, 55% said their plan is “financially strong” and they “expect to operate in the current structure.” Despite this confidence, many plans are making manageable changes in the short term to alter the current structure in an effort to improve contributions. When surveyed on specific steps that would help address structural issues (e.g., raising the retirement age or shifting from a defined benefit plan to another structure), 60% of all plans said they are considering such changes.

Future expectations appear different. Looking out 10 years, one-in-five of all plans said they see no need for change. However most respondents, and particularly those with serious funding situations (“red” zone or “critical” status and “yellow” zone plans), envision either a new system that separates benefits for active members from those paid to retirees or one with greater sharing of investment risk in exchange for a minimum guaranteed benefit.

“I think a lot of the uncertainty among plan sponsors comes from the serious questions about the future of the model,” said Chuck McKenzie, Head of Institutional Solutions for Pyramis. “That said, we find they are taking steps in their investment portfolios to address funding status, and they are also seeking greater assistance and resources in managing their plans.”

Investment implications, plan management

Taft-Hartley plans, which already have one of the largest allocations to alternative investments compared to other types of defined benefit plans, are looking at new and different kinds of investment risk, both as a way to make up funding shortfalls and to manage investment volatility. According to the Pyramis survey, in order to better manage volatility, 53% of respondents said they would diversify further into alternative asset classes such as property, hedge funds, or private equity. When it comes to increasing returns, a quarter of respondents said they would allow their investment managers “more flexible mandates” or the ability to allocate funds among a wider variety of asset classes; 24% intend to use more liquid alternatives (e.g., hedge funds); and 22% said they would increase the use of illiquid alternatives (e.g., private equity).

Respondents are also taking a hard look at their overall plan management and resources. Specifically, 60% surveyed said they have engaged in a more closely aligned relationship with outside entities with 41% adopting a so-called partial fiduciary management arrangement, which provides some assistance with investment policy design, strategic asset allocation, and manager selection. Nearly three-quarters (71%) of respondents said they may seek greater assistance because their investment decision making process is “not equipped” to manage the increasing speed, volatility and complexity of global capital markets.

About the survey

Pyramis Global Advisors conducted its first survey of executive directors and other officers at 102 Taft-Hartley defined benefit plans during April and May 2013. Assets under management represented by respondents totaled more than $150 billion USD. The survey was executed in association with Asset International, Inc. Plan executives responded to an online questionnaire. Survey findings are available at http://www.pyramis.com/us/union

About Pyramis Global Advisors

Pyramis Global Advisors, a Fidelity Investments company, delivers asset management products and services designed to meet the needs of institutional investors around the world. Pyramis is a multi-asset class manager with extensive experience managing investments for, and serving the needs of, some of the world’s largest corporate and public defined benefit and defined contribution plans, endowments and foundations, insurance companies, and financial institutions. The firm offers traditional long-only and alternative equity, as well as fixed income and real estate debt and REIT investment strategies. As of March 31, 2013, assets under management totaled more than $187 billion USD. Headquartered in Smithfield, RI, USA, Pyramis offices are located in Boston, Toronto, Montreal, London, Hong Kong, and Tokyo.