`Zombie' Pension Plans Need Autopsies, Financial Watchdog Says

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By David B. Brandolph

May 19 — The finances of the Central States pension fund, like those of other dead or dying “zombie” pension plans, need to be investigated, a financial watchdog said.

When money managers, investment consultants and pension plan actuaries are hired to run a multiemployer pension plan's finances, these consultants “never say their expertise will lead to that plan's failure,” Edward Siedle, president of Florida-based Benchmark Financial Services Inc., told Bloomberg BNA May 17. Benchmark investigates potential wrongdoing by plan investment managers.

So “when these `experts' get it wrong,” and a fund fails despite receiving such alleged investment acumen, “an investigation is needed to see if these experts should be held accountable,” he said.

Siedle, a former Securities and Exchange Commission attorney, said all zombie plans and their hired financial advisers should be investigated for possible malfeasance, excessive fees, conflicts of interest and other fiduciary duty breaches. If it became standard practice for those engaging in fiduciary breaches to be held accountable, such behavior would be significantly reduced, he said.

Due to numerous red flags, Siedle said that the Central States, Southeast and Southwest Areas Pension Fund in particular needs a forensic investigation to determine why it's facing insolvency in what the fund says is 10 years or less.

On May 6, the Treasury Department rejected Central States' petition to cut benefits, saying the investment return assumptions were too optimistic and that therefore, the fund failed to show that the proposal would help it avoid insolvency (89 PBD, 5/9/16).

The decision was the department's first under the law that authorized financially troubled multiemployer pension plans to cut benefits—and the process for seeking approval of such cuts—the Multiemployer Pension Reform Act of 2014, also known as the Kline-Miller Act.

The fund's retirees, many of whom were facing cuts of up to 70 percent, greeted the rejection as a victory. The fund said May 19 that it wouldn't submit a new proposal and would push for congressional action to help it avoid insolvency (see related article in this issue).

In the aftermath of Treasury's decision, retiree groups, along with the Pension Rights Center and International Brotherhood of Teamsters, said they will be redoubling their efforts to push Congress to pass the Keep Our Pension Promises Act (H.R. 2844, S. 1631) or similar legislation. KOPPA, sponsored in the Senate by presidential candidate Bernie Sanders (I-Vt.), would repeal the MPRA's benefit cutback provisions and shore up the Pension Benefit Guaranty Corporation's financially beleaguered multiemployer pension plan insurance program. That program provides a safety net of benefits to retirees when their plans fail.

The call for a legislative solution has been echoed by the fund's executive director and general counsel, Thomas C. Nyhan, who said that absent the benefit suspensions sought by the fund, Congress needs to find a solution to keep the fund solvent.

Investigation Option

For retirees of Central States and other plans facing insolvency, a forensic investigation may be more productive and more likely to succeed than lobbying Congress, Siedle said. If wrongdoing is found, those responsible can be made to compensate the fund for the damages they caused, he said.

If those responsible for running a pension fund know they will be held accountable for their actions, the potential for wayward behavior would likely be reduced, fewer plans would be heading to insolvency, and the PBGC would likely be much stronger, Siedle said.

For example, he has often seen a “money grab when pension plans are faltering,” he said. Trading costs and management fees go up in such situations, Siedle said. “If you want that practice to stop, it must be clear that the plan's failure will be examined,” he said.

Those in charge of a plan will always say there's no need to investigate and that there's nothing to be gained, he said. However, there's no substitute for having an investigation by a knowledgeable industry insider—someone who knows what's best for the plan, about Wall Street practices, and how to monitor and assess the fund's investment performance and fees paid, he said.

Absent an investigation, “no one knows whether a fund died a natural death” or due to “foul play or overcharging,” he said.

In the case of Central States, Siedle said there have been ample red flags indicating that mismanagement or other wrongdoing could have occurred. The investments of the fund's $20 billion portfolio were turned over to a Wall Street firm management decades ago. Such management has been part of a court process overseen by the Department of Labor and a federal district court judge. There's no way to know if such oversight was effective, he said.

Managing and monitoring a pension plan isn't something of which a federal judge has any special knowledge, Siedle said. When someone is sick, a medical specialist is needed to determine the causes and possible remedies. Siedle said the same rationale applies when a pension fund, such as Central States, is failing: A specialist is needed.

Other Calls for Probe

Siedle is by no means the first to question how the 400,000 member-strong Central States fund, having been managed for decades by top Wall Street firms such as Goldman Sachs and Northern Trust, came to be a financial basket case.

In March, Reps. Marcy Kaptur (D-Ohio) and Rick Nolan (D-Minn.) called for an investigation into the fund's finances (45 PBD, 3/8/16).

Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Judiciary Committee, earlier asked the Government Accountability Office to look into the Department of Labor's oversight of the fund and its investments, which the agency is required to do under a 1982 consent decree between the fund and the DOL (22 PBD, 2/3/16).

The fund's financial demise has been attributed to a combination of factors. These include trucking industry deregulation resulting in fewer contributing employers and fewer workers needing contributions on their behalf. In addition, the stock market decline in 2008 and early 2009 is said to bear some responsibility.

When lawmakers called for an investigation of his fund in March, Central States' Nyhan told Bloomberg BNA that an investigation wasn't needed.

Hiring Investigator

Siedle said that the fund's participants could easily raise the money to hire an independent investigator through crowd sourcing or other means.

Ken Paff, national organizer for the Teamsters for a Democratic Union in Detroit, told Bloomberg BNA on May 17 that he “would love to have an investigation” into Central States' finances. However, he questioned how any investigator could obtain the information needed for such an examination, since that belonged to Central States and the firms it hired to manage the fund.

Karen Friedman, executive vice president and policy director for the Pension Rights Center in Washington, told Bloomberg BNA on May 17 that she agreed that something went wrong with the fund's investments and that it's important to understand what happened.

However, she said that she preferred that any investigation be done by an executive branch government agency or by Congress. Nevertheless, she said this was something that some of the fund's retirees could pursue, provided that their main focus remains the pursuit of a legislative solution.

In response to the concern about gaining access to Central States fund financial information, Siedle said that Paff was “missing the fact that a lot of needed information is available publicly and that much information is available online through regular reports” from the court overseeing the fund.

“It's always a challenge in getting the information, and it's not possible to get everything,” but someone who is an expert in knowing how pension plans work and how plan investment advisers interact with plans can “connect the dots” to figure out what actually happened with the fund's finances, Siedle said.

To contact the reporter on this story: David B. Brandolph in Washington at dbrandol@bna.com

To contact the editor responsible for this story: Jo-el J. Meyer at jmeyer@bna.com