The Local 1500 Pension Fund has been around for more than 50 years. To say that a lot has happened between today and the plans creation would be an understatement. The Fund has seen large swings in headcounts more than once, dealing with both fast growth and significant reductions in the number of contributions and active participants. The Pension Fund has also weathered the storm created by multiple market crashes and corrections over the last number of decades. It has, a few times in the past, been able to pay a 13th Pension check to its pensioned participants because times were good, and the cost of living had outpaced the pension checks that our retirees were receiving back then.
Since their inception, Pension Funds have always been reliant on future contributions and investment earnings to help pay all their financial responsibilities. It makes sense when you think about it. How could a Pension Fund just start paying benefits within the first few years of its creation? Where would it get the money? How could it pay all the administrative and/or startup expenses? How much would the monthly contributions have been if they were expected to pay all the benefits up front? Many members don’t realize that the monthly contributions made on their behalf alone aren’t nearly enough to fund the years of benefits that you collect when you retire. There are many variables that can impact a member’s actual monthly pension amount, but let’s try to look at a quick, simple, example to better illustrate why our Pension Fund assets have to be invested to pay the benefits promised.
This example assumes a member with exactly 30 years of Pension Credits, all earned after 8/31/2002, no surviving spousal option taken, and a retirement date that is 1st of the month after the members 65th birthday. I’m also going to use the Employer contribution rate as of 1/1/2020 for the whole 30 years of service, even though the monthly contributions from 2002 – 2020 were much lower and the rates after 1/2020 would more than likely be higher. It’s just a simple illustration to try and make a point so there isn’t any benefit in making it too involved. Now let’s look at the numbers…
Effective Date Full-time Contribution Part-time Contribution
January 2020 $381.85 per month $127.74 per month
$4582.20 per year $1532.88 per year
If you take the “per year” numbers above and multiply them by 30 years that equals $137,466 for a full-timer and $45,986.40 for a part-timer. Now remember that each year of service, after 8/31/2002, for a full-time member is worth $60 per month and each year of service, after 8/31/2002, for a part-time member is worth $30 per month. Now you must take the $60 or $30 and multiply that times 30 years to get the monthly pension amount for this example (see below).
Full-time Monthly Pension Yearly Pension Total Paid Break-Even Point
$1,800 a month $21,600 $137,466 6.36 years
Part-time Monthly Pension Yearly Pension Total Paid Break-Even Point
$900 a month $10,800 $45,986.40 4.258 years
In the chart above, the “Monthly Pension” is multiplied by 12 to get the “Yearly Pension”. The amounts in the “Total Paid” column are the Employer contributions (listed on the 1st chart) multiplied by 360 months (30 years). The “Break-Even Point” is how many years of benefits you would receive if the “Total Paid” was the only money available to pay your monthly Pension benefits and there were absolutely zero expenses for the Fund to operate, which is obviously impossible.
There are many expenses the Pension Fund experiences each year that reduce the amount of money available to pay benefits. There are legal fees, accounting fees, consultant fees, insurance, PBGC fees, the cost of printing benefit books and the paperwork used to file your pensions, postage, the salaries and benefits for employees who collect and process all of the monthly contributions sent in on your behalf, rent and administrative costs, checking and bank fees, computers, software and please don’t forget the wonderful Pension Fund employees who are there every day to answer your calls and emails, meet with you in person and process all of your letters, requests for information and eventually your Pension paperwork timely. All these expenses and and we haven’t even invested a dime of the money yet, which by the way also costs money.
Taking the expenses into account and recognizing that most members collect their Pensions for more than 4-6 years when they retire, you can easily see that there is a need to generate more money to pay your benefits. So where does the rest of the money come from? Believe it or not the shift from buying Annuity contracts at Prudential to paying pensions directly from the Fund saved the Fund millions of dollars and has continued to save the Fund millions every year since. Even thought that saved the Fund so much money there is still way more money needed to pay your lifetime benefits. There are several ways that the Pension Fund generates the additional money it needs to pay your benefits and offset its administrative costs.
The most obvious is investing in the stock markets, real estate, bonds, commodities and other investment vehicles. There are several members out there that think that the way they manage their personal investments is the way the Pension Fund’s investments should be handled. Unfortunately, that’s just not a possibility. Although the goals are the same, to generate income, the manor in which the Pension Fund must handle its investments is significantly more conservative than what the lion’s share of independent investors can or may do. Either way, our Pension Fund operates with an assumed rate of return of 7.25% per year. Any year that that ROI isn’t achieved creates a shortfall and any year where a ROI of more than 7.25% is achieved it increases the amount of money available to pay benefits or helps offset a shortfall from a previous year.
Another source of money used to pay vested Pension benefits comes from contributions that are received on behalf of members that do not stay long enough to vest their service. Since 1999, anyone who completes 5 years of service or more must have their pension service vested. Basically, in our Fund, that means you will have a pension to collect at age 65 (or later if your 5-year anniversary is after you turn 65). Before 1999, you needed a minimum of 10 years in our Pension Fund before you were vested. What that meant to the Fund was that a large amount of money that was unassigned in 1998 became assigned and allocated overnight in January of 1999. It also meant that the number of additional contributions that would remain in the Fund by unvested participants would now be significantly reduced. The cost of doing business for the Pension Fund had just gone up.
Our Union and our Pension Fund grew steadily throughout the 1990’s and 2000’s. The number of Union Employers and the number of stores they operated were on the rise. At our high point Local 1500 represented over 23,000 members and although not all those members were around long enough to be participants in the Pension Fund, there were literally thousands more Pension contributions coming in every month back then. This made the long-term forecasting for the Fund look strong and gave the Board of Trustees at the time the ability to raise the monthly accruals from less than $35/$17.50 for every year of service to the current benefit levels of $60/$30 for every year of service. This was very expensive to do but the membership and number of monthly contributions was on the rise and the markets were relatively strong, except a few obvious major exceptions during those two decades so it made sense. Additionally, during the same time period, the Employers monthly contributions were also reduced because we were over 100% funded.
Currently we represent approximately 18,200 members but not all of them are in our Pension Fund. Coupled with the fact that in both 2017 & 2018 the Pension Fund did not reach its investment goal of 7.25%, the Fund has now been certified in the “Red Zone” or “Critical Status”. So, the cost of doing business for the Pension Fund has gone up once again. Unfortunately, in this case we are faced with fluctuating market conditions, about 5,000 less monthly Pension contributions, and the ever-changing legislative landscape. So, changes for our Pension Fund are not only inevitable, but necessary. The Board of Trustees are doing everything in their power to come up with a plan for the Fund that protects every dollar of benefits earned by the participants, can pay all its expenses and remains solvent for decades to come.
We fully recognize that there is no good way to announce or discuss changes to a member’s retirement vehicle, but it is what we will eventually have to do. Once the rehabilitation plan has been completed and the changes have been agreed to by the Board of Trustees, we will be holding area meetings to explain where we are currently, where we are heading in the future and what the impact is on every participant, past, present or future. While your Employers have made significant contribution increases over the last few years, the amount of additional money that they would have to contribute to continue with the current plan structure without making changes is way beyond reality.
As we have said many times in the past, and even more so since the “red zone” certification letters were mailed out, our goal is to protect you, our members, and all the Pension benefits that you have earned throughout your years of service. Unfortunately, this has been a slow and difficult process so far, so your patience is necessary and appreciated. The entire Board of Trustees feel that we have the best advisors guiding us through this process. Both the Union and Management Trustees stand ready to make the best decisions possible to get everyone through these changes and to help move you comfortably into the future.
Hopefully this article helps explain a little better where we are and how we got here. As always, we are here to answer any questions that you may have, but until the rehabilitation plan is completed and approved there isn’t going to be much new information.