5 Some Good News and Some Recommendations

The traditional union/employer model is an adversarial one. However, the AFM-EPF has been managed jointly by equal numbers of employer and union Trustees. We feel both sides must bear equal responsibility for the current state of the Fund and we have written this for all parties.

There are some positives or what investors like to call “tail-winds” that will eventually reduce the Fund’s accrued liability. One of them is obviously the $1.00 Benefit Multiplier, which is (slowly) adding more to the “nest-egg” than it is to the accrued liability. The other is the increasing interest rate from the FED. The first will help the capital base and the second will eventually push the discount rate higher. On a darker note, the U.S. life expectancy is now on track to be the same as Mexico’s by 2020, which will also help the Fund, if not individual musicians. We believe the effect of this will be relatively minor.

Milliman publishes a monthly “Milliman 100 Pension Funding Index” which is worth following, even though the AFM-EPF is not included in the “Milliman 100”. In their July 17th PFI, Milliman has projections for 2017-2018:

“Under an optimistic forecast with rising interest rates (reaching 4.04% by the end of 2017 and 4.64% by the end of 2018) and asset gains (11.0% annual returns), the funded ratio would climb to 90% by the end of 2017 and 103% by the end of 2018. Under a pessimistic forecast with similar interest rate and asset movements (3.44% discount rate at the end of 2017 and 2.84% by the end of 2018 and 3.0% returns), the funded ratio would decline to 80% by the end of 2017 and 73% by the end of 2018.”

Note that the figures quoted above are specific to the Milliman 100. The Fund’s ratio would certainly follow a similar course under the same circumstances, but the actual funded ratio value would be lower. We once again note that outside the AFM-EPF discussions, Milliman seems able to appreciate and comment on the importance of the discount rate.

With all these positives there is one enormous caveat: “If we last that long.” The Fund avoided MPRA status this year and as a result could not cut benefits. Given the current trends with the Fund, we are concerned that each year benefit cuts are delayed will only make them larger in the future. While it may be tempting to relax and enjoy what seems to be a grace period, we feel that with each passing day, the situation will only grow worse if no action is taken. We hope that members remain concerned about the situation at the Fund and take action today to help improve the Fund’s finances. Following are some ideas. We need more.

  1. We need new sources of capital that do not increase the Fund’s liability.

    Ray Hair is to be congratulated for getting $20 million in new contributions over three years from the Sound Recording and Motion Picture Fund. This is especially helpful as we understand this does not increase the Fund’s liability. It will certainly help pay the $33 million worth of investment fees the Fund is on track to spend over the same period.

    More sources of income that do not increase Fund liability are very desperately needed. Yearly benefit concerts combined with active fund raising at those events (as well as throughout the year) would help a lot. While Ray Hair has apparently said these are good ideas, it seems the push for these must come from the orchestra conferences and orchestra committees, since we see no action from the AFM or (at present) locals.

    More non-liability producing contributions from employers would be welcome. Since the AFM was an equal party in all these decisions, if they have any spare cash they can feel free to send it along to the Fund. We understand from the IEB minutes that there is some desire to purchase part of a building in Manhattan for the AFM. This is probably going to cost at least $30 million (our estimate). If the AFM has this kind of cash hanging around, they should relocate to Delaware, Arkansas or Texas, and donate the remainder to the Fund. Some feel that such a donation is illegal, but we can only find laws that forbid “commingling” of union and pension funds. This would not be “commingling” and therefore not illegal.

  2. Don’t waste resources on forensic audits, new actuaries and legal actions.

    While we understand (and share) the anger felt by so many, we do not believe there is any reason to suspect foul-play by anyone at the Fund. In all the known cases of financial fraud, the fraudulent organization appeared to be doing very well until, suddenly, it blew up in everyone’s faces.

    A sober assessment of the Fund’s financials would show that over the past decade, there has never been a time when the AFM-EPF appeared to be doing “very well”. It’s true that the situation was not identified early enough and the alarm bells were sounded too late, but there is no evidence of a financial cover-up.

    Actuaries serve their employers. If you spend the money to hire one, you might get an answer more to your liking. History has shown this doesn’t end up well when you go to court or in front of regulators, who also have their own actuaries. We feel that the AFM-EPF actuaries have done as good a job as any other would have.

    Finally, legal actions against the Fund might sound good, but the Fund will then be forced to use our benefit money to defend itself in court. This is not going to end well for us.

    Rather than rehash the past, we would rather save the future. We view all these actions as a waste of the important resources of time, energy and money that would be better spent fixing the Fund’s shaky financial situation.

  3. Cost reductions, in particular, benefit cuts.

    Cost cutting will help, but the biggest expenditure is benefits and unfortunately, that is the cut that will help the most.11 In order to cut benefits, we need to enter MPRA status. While the current Trustees are to be praised for supporting something which is incredibly unpopular politically, benefit cuts would be easier to accept if we saw them pursuing other avenues of capital enhancement, such as benefit concerts or improved investment performance. We also support cost reductions at the AFM-EPF office. Much has been written about this and we have nothing to add to that here.

  4. Improved Investment Performance.

    Our needs here are simple. There seems to be little reason to continue an expensive investment program when a less expensive one, using indexed funds where available, will give the same results.

    If the Trustees wish to continue their search for investors who can “beat the market”, we encourage them to follow Buffett’s advice: find one or two people, give them a very small portion of the Fund to manage and pay them very little unless they do very well. If they do very well, increase the amount they are allowed to manage.

    The performance of any investors working for the fund should be compared to an absolute standard, such as some form of market index, rather than the relative standard the Fund uses today. And compensation should be tied to how well they do, relative to this absolute standard. This is not radical: it is standard evaluation/compensation practice in finance.

    Finally, we think small is beautiful: we know of no example in all the history of investing where market-beating returns were delivered by 5, 10 or 20 investment managers.

  5. Legislative Remedies.

    We don’t support KOPPA. The relief provisions of KOPPA would not apply to the AFM-EPF. Since KOPPA would repeal the MPRA benefit cuts (and provide no relief to us), it would leave us in the same position we are in today.

    We believe that MPRA benefit cuts would only affect 50% of the AFM pension population. The other 50% would be “safe-harbored” and have either lower cuts or none at all. The law was written in this way to prevent working laborers, who typically have more of a say in how unions and pensions are run, from exploiting current retirees. The worry was that we could have a situation where younger workers would have zero benefit cuts, and older retirees would bear the full weight of a pension fund’s problems.

    MPRA reverses this, placing the entire burden on future retirees and those between the ages of 65 and 75. We must question the wisdom of this. For example, a hypothetical 25% cut to benefits that applies to 50% of pensioners could be closer to a 13% benefit cut that applies to all pensioners. A more equitable, less draconian division of benefit reductions than currently exists could be devised that would still protect those over 80 and help out those who are in their late 60’s and 70’s.

11Since both of us have accrued a substantial amount of credits from the 4.65 benefit years, we hope you realize that we do not make this recommendation lightly.