Recently there has been a lot of concern all across the
country about the condition of defined benefits plans similar to the plan that
Local 689 has in place. Defined Benefits Plans are being curtailed, closed or
benefits reduced. In light of this it is
important to take a look at the condition of the Transit Employees Retirement
Plan.
The TERP is currently about $800 million dollars
underfunded. Funding for the plan has
been a contentious issue since the fund was established in 1945. Up until the early 1980’s the fund was mostly
invested in government bonds with relatively low rates of return. In the early 80’s two things happened:
1.) The Trustees
began to invest money in the stock market in the hope of increasing the return
on the investments.
2.) In 1983,
management agreed to fully fund the plan. Employee contributions were stopped
and in return the union agreed to forgo a wage increase for that year. Also as
part of the deal, a 30 year amortization period was agreed on for the unfunded
liabilities at the time. Because of higher returns on investments, Metro’s
contributions began to decrease until in 1997 they went to zero. At that time
the plan actuary recommended a new funding method so that Metro’s contributions
would continue, but both the union and management passed on the issue in the
1998 and 2001 CBA negotiations. Finally in the 2004 negotiations, a new funding
was agreed on and contributions at about 5% of wages contributed by Metro
began.
Then in 2008, as the financial crisis began and the value of
our investments plunged, Metro’s contribution was supposed to increase
dramatically. Metro demanded relief (they forgot all the years they had
contributed nothing). The union then agreed to a new 30 year amortization of
the deficit.
Can the plan recover? It is not likely under the current
funding method and amortization table. Why? Our assumptions about returns on
investments are too high. A 7.75% return
is not achievable in the current global economy. Competition from China, India
and the EU are driving down profits for everyone. Not achieving assumed returns leads to an
increasing deficit over time and higher contributions for Metro. Another 15 to20% drop in the stock market
could push our plan over the cliff.
The 2012 CBA in which the participants in the plan began to
contribute to it did not address the funding issue. The agreement shifted the cost of funding the
plan from Metro to the participants. It
did not provide any increase in funds for the Plan. In other words, Metro‘s contribution was
decreased by the amount participants put into the Plan.
What needs to be done to fix the problem and guarantee promised
pension benefits for current and future workers at Metro? First the assumption
on returns needs to be changed to a more realistic number. Metro is opposed to this because it would
increase their contribution to the plan. Second, the amortization table of the
unfunded liability needs to change to a 10 or 12 year rolling schedule. This
means every year the plan actuary would calculate the unfunded liability and
set out a payment plan for bringing the up to full funding in the allotted
time.
