The following information was prepared for the Graphic Communicator by Mathew Wenner, administrator of the GCIU Employers Retirement Fund (ERF):

The pension fund industry, as a whole, is facing a variety of problems due to the poor stock market returns experienced during the past three years. No area of the retirement/pension industry is immune to these poor returns. Although the individual circumstances may vary, the under-funding, (or greatly decreased funding) of future retirement benefits is universal across all pension plan types; in multi-employer and single-employer defined benefit plans (including both traditional and cash balance plans), and in defined contribution plans, such as 401(k)s, profit sharing, and money purchase plans.

How did we get here?

For the first time since Franklin D. Roosevelt was president, the U.S. equity markets suffered their third consecutive year of significant annual declines. Contributing factors include a sharp pull- back in capital expenditures, overvaluation of securities stemming from the technology stock bubble of the 1990s, Sept. 11, 2001, and continuing concerns over terrorism, corporate accounting scandals, a profound loss of investor confidence, and most recently concerns over the war with Iraq.

For example, the returns for the S&P 500 for the past three years were as follows: Year 2000, 9.09 percent: Year 2001, 11.88 percent; Year 2002, 22.10 percent, or an annualized return over the three years ended Dec. 31, 2002 of 14.56 percent per year. For the first quarter of 2003, the S&P 500 Index return was 3.1 percent. The annualized return for the NASDAQ Composite Index for the three-year period ended March 31, 2003 was 33.6 percent per year.

Fortunately, the fixed income markets experienced positive returns over the last three years but not enough to offset the stock market's steep losses. The Lehman Brothers Aggregate Bond Index showed the following returns: Year 2000, 11.63 percent; Year 2001, 8.42 percent; and Year 2002, 10.27 percent, for an annualized return of 10.10 percent for the three year period ended Dec. 31, 2002.

Ironically, the overall fixed income return has been positive, partly due to a decline in interest rates in response to a weakening economy. In any event, over time, the equity markets have still substantially outperformed the fixed income markets, returning 9.3 percent as measured by the S&P 500 for the 10 Years ended December 31, 2002, versus 7.5 percent for the Lehman Brothers Aggregate Bond Index.

Most pension funds maintain diversified portfolios, investing across asset classes (equities, fixed income, and real estate) and within the asset classes themselves. Generally, most funds are fairly equally diversified with perhaps 50 percent to 70 percent in equities versus 30 percent to 50 percent in fixed income, in order to capture the historical out-performance of equities, as mentioned above.

Many funds also have some residual amount, perhaps as much as 10 percent in real estate, as well as some foreign equities or other fixed income as well. But regardless of the exact mix, within those broad guidelines the negative return of equities has reduced most total portfolio returns from minimally positive to minimally negative or more, over the past three years.

For example, pension plans of companies in the S&P 500 lost more than $100 billion on their pension investments in 2002 and ended the year with a $206 billion shortfall, according to an S&P report. Also, 308 of those companies' pension plans were under-funded at the end of last year, compared with 79 at the end of 1999, according to the report. A Wilshire survey of S&P 500 corporate pension plans showed liabilities increased by $105 billion in 2002 to just over $1 trillion, "the worst year ever" for corporate plans – 89 percent are underfunded.

S&P 500 companies' defined benefit assets fell by $106 billion to $892 billion, lowering their funding ratio to 83 percent from 104 percent in 2001. The plans had a cumulative deficit of $177 billion as of Dec. 31, 2002, up from a $34 billion surplus a year earlier. S&P 500 companies, contributions to their defined benefit plans increased nearly fourfold to $41 billion, from $12 billion in 2001, with further increases expected, Wilshire said.

Multiemployer pension funds posted a median loss of 8.2 percent in 2002, more than three times the 2.4 percent loss in 2001, according to a new Segal Advisor's study. A benchmark made up of 55 percent of the S&P 500 and 45 percent of the Lehman Aggregate Bond Index also would have resulted in a loss of 8.2 percent last year. The study also found the plan's median loss on equity investments was 22.8 percent for the year – more than double the 11.3 percent median loss in 2001 – but similar to the 22.1 percent decline in the S&P 500 in 2002. Fixed income investments posted a median gain of 10.1 percent last year, nearly the same as the Lehman Aggregate's 2002 return of 10.3 percent and better than the 8.5 percent median gain in 2001, the study noted.

Any pension plan, or investment strategy, is based on the assumption of some positive return over time. Standard assumptions in the pension industry are for returns from 7 percent to 9 percent for most multi-employer defined benefit plans, to as much as 10 percent or more for many corporate plans. For younger plans, where the number or amount of retirees and benefit payments is much smaller than the contribution amounts for active participants, not meeting the earnings assumptions for a period has less urgency for the plan – there is ample time to make up the missed earnings. For older plans, however, or for a 401(k) plan, for instance, where the participant is closer to retirement age, meeting or exceeding the earnings assumptions becomes a matter of great importance. In fact, for older plans it is the investment earnings that drives a pension plan's funding of current and future benefits. Most plans have had some reserves, so that when earnings assumptions are not met, the plans could absorb the difference.

But where we have now entered an unprecedented time in which the investment market returns have been poor for three consecutive years, many plans have begun to examine what remedies may be available to remain solvent while hopefully waiting for a return to a normal investment cycle. Defined benefit plans have not only had to meet the earning assumptions, but when they have exceeded those assumptions, the statutory rules have required that the plans pay out any excess earnings in the form of improved benefits. Thus, this has reduced the potential reserves that may otherwise have been available for times such as these.

Where do we go from here?

For holders of 401(k)s or other defined contribution plans who are nearing retirement, the only answer may be to work longer. For defined benefit plans, changes may include adjustments to the future benefit accrual rates. Many Taft-Hartley plans have already reduced benefit accrual rates, and many others are in the process of doing so, as the most recent year's investment returns are realized and factored in to those plan's actuarial funding. Additional measures may include the imposition of employer withdrawal liability, where employers who withdraw from participation in a given year are assessed a share of any under-funded benefit liability, proportionate to their share of the total contribution payments.

Other plan changes will also soon have to be made. Single employer plans must fund any shortfall themselves, and many such funding payments are now being made. According to an analysis by Milliman USA of the annual financial statements of corporations with the 100 largest pension funds, most of those defined benefit plans have become less than fully funded, due to the declining equity markets and interest rates. Surplus assets declined by $172 billion last year, with asset losses in the past two years wiping out all the gains from the 1990s. According to the study, only 13 of these 100 companies still had surplus assets at the end of 2002, down from 40 in 2001. The 100 companies reported a combined pension deficit of $157 billion in 2002, up from a $15 billion deficit a year earlier. As a result, those corporations have had to more than triple their pension contributions in 2002, to $33.6 billion from $9.2 billion in 2001.

The trustees of the GCIU Employer Retirement Fund have taken several steps to preserve this plan's funding. Among these has been the adjustment to the future accrual of participant's benefits, effective Jan. 1, 2002, to a rate of $410 in contributions for each current service credit, from $260 previously. Additionally, the plan has imposed a withdrawal liability assessment for any employers who withdraw from the fund on or after Jan. 1, 2002. A copy of the letter regarding the withdrawal liability was sent to all participating employers and local unions in December 2002. As with other plans as mentioned above, other changes may also soon have to be made.

Historically, the best posture has been to remain well diversified and to hold through the variability of returns, versus attempts at market timing. Going forward, the trustees will continue to do their best to protect the benefits of the plan's participants by prudently taking the steps available to them.