How Do Unions Make Investments For Pension Plans?
You may be in a union member who rarely, if ever, thinks about how do unions make investments for pension plans. Most employees, on day one, sign on to whatever deal is being offered to them. The deal sounds great. You work hard for a long time. When it's time to retire, a nice, comfy pension check is deposited to your bank account on the first of the month, while you are lounging somewhere in a beach chair sipping a margarita. But, just wait a minute. There's actually a little more to it than that. There's a story here of pension funding, (or not) that isn't often told.
- Most pension plans are underfunded. On average, the asset-to-liability ratio of pension plans (union plans making up the bulk of them) stood at 66% in 2006. (It is difficult to get up-to-the minute data because unions don't report until the end of a year). Take into consideration that this was before the market tanked. Many employers didn't fund their pensions for years after the dot-com bubble of the 1990's. A quirky part of the law allows employers to withhold contributions if they have in fact "overpaid" in previous years. Collective bargaining contracts from year to year usually do not correct for poor market performance, by raising employee contributions, for example. The outlay (payments to current recipients) often doesn't match the contributions currently being paid into the system.
- Pension fund trustees are supposed to invest in accordance with their fiduciary duty. There are guidelines outlined in the 1974 Employee Retirement Income Security Act ERISA that stipulate how pensions funds may be invested. According to these guidelines, all investment decisions have to be calculated to minimize risks and maximize returns. There can be no other purpose. So, for example, the trustee's brother-in-law's bowling alley would not be considered a good calculated risk. Most plans are probably invested with large financial institutions. At this point you're probably really curious. Hey, where's my money?
- Union pensions are protected by the Pension Benefit Guaranty Corporation. That's good news if you are receiving a union pension. The federal government, by law, will not let you go without a pension even if your union pension fund is mismanaged and fails. A big caveat, however, is that the government will only guarantee the individual pension of current retirees up to $12,870 per year. If you are expecting significantly more than that, you could possibly be in for a letdown. There is, at this date, a bill before Congress to increase the guaranteed amount to $21,000 per year.