20,000 Musicians To Receive “Painful” Pension Cuts To Keep Benefit Fund Solvent

David Robb

Some 20,000 unionized musicians across the country will soon see “painful” reductions in their pension benefits in order to keep the American Federation of Musicians’ $1.8 billion multi-employer pension fund from running out of money within the next 20 years. The reductions are required by federal law because the Fund has now entered “critical and declining” status.

The benefit reductions, which the Fund says won’t kick in until late next year at the earliest, will affect a broad mix of AFM members who work or have worked in the film and television industry under the union’s contract with management’s AMPTP; on sound recordings; at symphonies and operas; on Broadway, and in regional and traveling musical productions.

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Trustees of the Fund informed participants Friday night that it has applied to the US Treasury Department for approval to reduce benefits by an amount sufficient to prevent insolvency. “Although reducing benefits will be painful, the trustees have decided to seek permission to do so because running out of money would leave all participants with virtually no benefits in the future.”

The Fund also said, “There is no practical way that investment returns and contribution increases alone will be able to close the long-term, worsening gap between the money coming in and going out.”

As of March 2019, the Fund had roughly $1.8 billion in assets and about $3 billion in liabilities, which is the value of all the benefits that have been earned by participants for services already performed and that will be paid in the future. That puts the Fund’s funding percentage at 60% – as measured by its assets divided by its liabilities.

This chart shows the declining fortunes of the Fund in recent years:

Valuation Date: 4/1/2017, 4/1/2016, 4/1/2015
Actuarial Value of Liabilities 2,958,237,592  2,866,450,348  2,531,797,223
Actuarial Value of Assets 1,908,814,167 1,976,473,051 2,066,699,976
Funded % 64.5% 69.0% 81.6%

The Fund – known as the American Federation of Musicians and Employers’ Pension Fund (AFM-EPF) – says it can’t recover without reducing benefits because it’s “a mature plan, with the retiree population having grown faster than the active population, which means that benefit payments are growing faster than contributions. While the union has bargained additional contributions into the Fund, it is not enough to avoid running out of money. With every passing month, we have to pay out much more in benefits than contributions bring in.”

See the Fund’s FAQs here.

For the fiscal year ended March 31, 2018, the Fund paid out $171 million in benefits, but received only $68 million in contributions. “This negative cash flow is projected to continue – and worsen,” the Fund said. “Every year, if investment returns don’t make up this shortfall, the Fund has to draw down assets, which leaves less of an asset base on which to generate investment returns the following year.”

The Fund said that “Our actuaries project that for the fiscal year ending March 31, 2033, the Fund would have to earn over a 20% return just for assets to stay flat. It is not realistic to assume that the Fund could consistently achieve investment returns that high.”

The Fund estimates that 40% of its nearly 50,000 participants will be affected by the reductions, including active musicians, retirees, or their beneficiaries, and “deferred vested” pensioners who no longer work but haven’t applied for pensions yet.

Not everyone, however, will receive a reduction, and some will be harder hit than others. Pensioners who are 80 years old and older won’t see their pensions reduced at all, nor will those who receive disability pensions. Those who receive relatively small pensions won’t be affected either, or will be affected the least.

The reductions will fall mostly on younger retirees – current and future – and on those who receive the largest pensions. “A final decision has not been made on every term of the benefit reduction,” the Fund said. “As part of the reduction, the trustees also expect to propose eliminating some of the Fund’s unique benefit features that were instituted when the Fund was in excellent financial condition and could afford them. The trustees are also considering the inclusion of a maximum percentage benefit reduction, so that no participant can have his or her benefit reduced more than this maximum percentage.”

The Fund said it won’t know the total amount of benefit reductions or each person’s individual benefit reduction until just before an application is submitted to the Treasury Department under the Multiemployer Pension Reform Act (MPRA), which provides for strict rules about how much benefits can be reduced.

“MPRA contains something many people refer to as the ‘Goldilocks rule.’” The Fund said. “The Goldilocks rule requires that proposed benefit reductions be sufficient to ensure that a fund is projected to remain solvent for at least 30 years. However, the reductions can’t be any larger than are necessary to remain solvent. The Goldilocks rule tries to strike a balance. The government does not want plans to reduce benefits unless the reductions are expected to protect the plans’ solvency. On the other hand, reducing even a portion of people’s pensions can have a huge impact on their lives, so the government rightfully wants to make sure plans only make reductions that are absolutely necessary. This means that there is a very specific allowance for reducing benefits, and the Fund must prove to Treasury that we are reducing them only by that amount.”

The calculation of whether the Goldilocks rule is met is based on financial information for the calendar quarter before the MPRA application is filed. “What that means,” the Fund said, “is that we can’t know the exact amount of the reductions until that time.

As of March 31, 2018, the Fund had 20,602 active participants; 15,328 retirees and/or beneficiaries, and 14,177 “deferred vested” pensioners.

“As with other professional entertainers,” the Fund said, “wages vary greatly among musicians, with a small number of very high earners and a much larger number who earn significantly lower wages. Because contributions are based on wages, this disparity is reflected in the range of benefits earned across the participant population.” According to the Fund, only 5% of participants earn annual pensions of more than $40,000, while 78% receive less than $10,000 a year.

Annual Benefit Amount % of Participants
Less than $10,000 78%
$10,000-$20,000 10%
$20,000-$40,000 7%
$40,000+ 5%

The beleaguered AFM pension fund suffered a $122 million shortfall in 2016, and was hit the next year with a class action suit that accused the trustees of having made a series of risky investments that endangered the pensions of thousands of musicians. The suit, which is still pending, sought the appointment of an independent fiduciary to administer the plan and the management of its investments.

And last December, the leaders of the AFM’s New York local – the union’s largest local – were voted out of office, in part over concerns about the health of the pension plan.

Like many multi-employer pension plans, the AFM’s was hit hard by the recession and market downturn of 2008. But the musicians’ plan was hit harder than most, losing 40% of its value in just 18 months. The lawsuit claimed that the plan’s trustees and investment committee tried to make up for this staggering loss by investing in questionable stocks.

The AFM’s pension plan is the only entertainment plan that’s in “critical and declining” status, but it’s far from alone nationwide. According to a study released last week by the Milliman actuarial firm, more than 120 multi-employer pension funds covering some 1.3 million participants are in “critical and declining” status.

According to the Treasury Department’s MPRA website, 25 funds have applied to reduce benefits, including pension plans covering thousands of truck drivers, machinists, ironworkers, bricklayers, laborers, carpenters, roofers, auto workers, plasterers and sheet metal workers across the country.

A recent report on the status of the $4 billion Motion Picture Industry Pension Plan – which covers members of Hollywood’s IATSE locals and Teamsters Local 399 –said that its funding percentage has now dipped to 66.8%, bringing it closer to “critical” status. That’s a new low for the MPIPP, which fell from 80.8% in 2015, to 76.8% in 2016, to 67.4% in 2017. The Plan’s actuary, however, projects that it will be back to 80% funded by 2026 and 100% funded by 2032.

“The plans are secure, the funding is stable, your retirement is safe,” trustee Rebecca Rhine, national executive director of IATSE Cinematographers Local 600, said in a recent message to her members. “There is nothing in this report that is unexpected or inconsistent with what was discussed and reported during ratification of the Basic Agreement.”

The decline in the funding percentage, she said, is “the predicted outcome” of implementing a 10% pension increase in 2017. “The pension plan remains in the ‘green zone,’” she added.

The SAG Pension Plan, meanwhile, with $3.7 billion in assets, has also seen declining fortunes in recent years. In the 2016 plan year, its funded level was 80.08%. It fell to 78.18% in the 2017 plan year, and to 76.97% last year, according to its latest report, which said that “The Plan was not endangered, critical, or critical and declining status in the plan year (2018).”

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