Central States secures PBGC infusion of cash

Money can't solve all problems, that's a given. But for the leaders and members of the Teamsters Central States, Southeast & Southwest Areas Pension Fund, Chicago, which for decades had been facing mounting financial problems and looming insolvency, money was what they needed.

After years of uncertainty, benefits cuts and dwindling hope, money was what they got — to the tune of $35.8 billion.

"I was elated," said Thomas C. Nyhan, Chicago-based executive director of the Central States Pension Fund when he heard news that the Pension Benefit Guaranty Corp. approved $35.8 billion in federal assistance to the plan. "It was a ray of hope in an otherwise 20 years of futile efforts to try to get something to fix the plan."

President Joe Biden on Dec. 8 announced that PBGC had approved the funding under the Special Financial Assistance Program. The Central States award was by far the program's largest. Created by the American Rescue Plan Act that Democrats passed in March 2021, the program was designed to shore up struggling multiemployer pension plans through 2051. The PBGC estimates the total cost of the program will range from $74 billion to $91 billion.

The Central States Pension Fund covers more than 350,000 union workers and retirees who were facing estimated benefit reductions of roughly 60% in the next few years, according to a White House news release.

The pension plan had a funding ratio of 18% with $57.2 billion in projected benefit obligations as of Jan. 1, 2021, according to the plan's most recent Form 5500 filing. As of Dec. 31, 2021, the plan had $10.1 billion in assets, the filing showed.

"The amount of this award is going to be life-changing for a lot of people," Mr. Nyhan said. "A lot of our retirees obviously rely on their pension along with Social Security."

Under the program, a multiemployer plan is eligible for assistance if it satisfies one of four criteria: it has been in critical and declining status in any plan year beginning in 2020 through 2022; it has had its benefits suspended as of March 11, 2021; it is in critical status, has a modified funding ratio below 40%, and has a ratio of active-to-inactive participants of less than 2-to-3; or it became insolvent after Dec. 16, 2014, but as of March 11, 2021, has not been terminated.

"The impending insolvency of the Central States Plan spelled financial disaster for many," said Secretary of Labor Marty Walsh, who served as chairman of the PBGC's Board of Directors, in a news release in December. "This is a pivotal event for the SFA program. Now, with federal financial assistance funded by the Biden-Harris administration's American Rescue Plan, participants in the Central States Plan will have secure and dignified retirements for many years to come."

Central States received the special financial assistance funds Jan. 12. Just about all of the money will be invested in fixed income, Mr. Nyhan said.

"Our plan is to have very little or no investment in equities and to maintain primarily a cash match philosophy as to our asset allocation for the majority of our assets and to maintain everything in corporate or governmental fixed income," he added.

Under a PBGC final rule that went into effect in August, special financial assistance funds can be invested in up to 33% "return-seeking assets," such as public equities, equity funds that invest primarily in public shares, and bonds. The other 67% of SFA funds must be invested in investment-grade fixed-income products.

In October, BlackRock Inc. took over as the plan's named fiduciary, giving it the authority to select other investment managers and to purchase or sell investment assets under their control. BlackRock replaced Northern Trust Investments Inc., in the role.

"When it became apparent that we were going to receive a very large infusion of assets as a result of the special financial assistance, we thought that it was an appropriate time to do an RFP and to see what other managers might be out there," Mr. Nyhan said.

BlackRock won the RFP because of their scale, experience, investment philosophy and fees, Mr. Nyhan added.

"We thought they were a good fit for the pension fund," he said. "We've maintained our relationship with Northern Trust — they were a good partner and remain a partner on the health and welfare side of the plan which is a $10 billion commitment to them."

A BlackRock spokeswoman said in an email that the firm doesn't comment on clients' investment portfolios and specific investment strategy, but in a statement, Mark McCombe, San Francisco-based senior managing director and vice chairman at BlackRock, said the firm is "honored to have been selected for this historic mandate, and to ensure continued retirement security for the nearly 360,000 hardworking Americans who are participants in the Central States Pension Fund."

With the influx of cash, Mr. Nyahn said the plan is "very confident we're going to get to 2051 and probably well thereafter as a result of this award."

Charles E.F. Millard, New York-based former director of the PBGC from 2007 to 2009, said in an email that Central States, "like the others that receive SFA funds, should be on solid ground for the next 30 years. Hopefully, that gives the plan sufficient time to make whatever changes might be needed to ensure its solvency after 2051."

Broadly, Republicans on Capitol Hill do not support the PBGC's Special Financial Assistance Program and think it's a misuse of taxpayer money.

"It is clear that the multiemployer pension system is broken," said Rep. Virginia Foxx, R-N.C., chairwoman of the House Education and the Workforce Committee, in a statement to Pensions & Investments. "The trustees who allowed these multiemployer pension plans to slide into dramatic levels of underfunding and, in many cases insolvency, have not been held to account for their actions."

Ms. Foxx said these plans "cannot be trusted to provide the benefits they promised to workers and their families" and that the PBGC has "succumbed to pressure from the left and is providing plans with SFA in excess of what was authorized" by the American Rescue Plan Act.

When asked about criticism of the plan's management, Mr. Nyahn said he doesn't think reforms to the plan's governance are necessary for Central States.

"The plan is going to be managed in the most conservative way possible," he said. "Our health and welfare fund is wildly successful — how did the same group manage that one so well and the retirement one so poorly? I just chafe at this idea that some reform was necessary before we provided relief to these retirees. I think it's a red herring."

Mr. Nyhan said the plan was on rocky financial footing for so long because the number of active members compared with retirees has inverted. In 1982, roughly 70% of Central States members were active workers while today the number of retirees is about five times greater than active workers, he said.

The plan's fate was sealed, Mr. Nyhan said, when United Parcel Service Inc., Atlanta, which represented 30% of Central States' active workers, left the plan in 2007. Under the negotiated terms of withdrawal, UPS agreed to pay $6 billion to the plan. The money was transferred to Central States on Dec. 31, 2007, "which was not a particularly good time in the market cycle to receive that infusion of capital," Mr. Nyhan said.

"After 2008, it became abundantly clear that there was no set of circumstances — benefit reductions, contribution increases — that could be realistically achieved that could stave off the eventual insolvency of the fund," he added. "It was like a tsunami. You could see it as clear as day."

But now, with an influx of $35.8 billion, the waters have calmed at Central States.

After years of financial troubles, the Central States Pension Fund is now infused with hope — and $35.8 billion.