November 15, 2004
Teamsters Find Pensions at RiskBy MARY WILLIAMS WALSH
In the 1960's and 1970's, the Teamsters' huge Central States pension fund was a wellspring of union corruption. Tens of millions of dollars were loaned to racketeers who used the money to gain control of Las Vegas casinos. Administrative jobs were awarded to favored insiders who paid themselves big fees. A former Teamster president and pension trustee was convicted of trying to bribe a United States senator.
Yet for nearly half a million union members who are expecting the fund to pay for their retirement, those may have been the good old days.
Since 1982, under a consent decree with the federal government, the fund has been run by prominent Wall Street firms and monitored by a federal court and the Labor Department. There have been no more shadowy investments, no more loans to crime bosses. Yet in these expert hands, the aging fund has fallen into greater financial peril than when James R. Hoffa, who built the Teamsters into a national power, used it as a slush fund.
The unfolding situation holds a hard lesson for others with responsibility for retirement money. What may appear as a sensible, conventional approach to investing - seeking a diversified mix of growth and income investments for the long term - can wreak havoc when applied to a pension fund, especially one in a dying industry with older members who are about to make demands of it.
But the kinds of investments that make sense for such a fund - like long-term bonds that will mature as members enter retirement - are not attractive to most money managers, because they generate few fees. Consequently, very few pension funds use such strategies today.
At the end of 2002, the pension fund had 60 cents for every dollar owed to present and future retirees - a dangerous level. In a rough comparison, the pension fund for US Airways' pilots had 74 cents for every dollar it owed in December 2002, just before it defaulted. During the bear market after the technology bubble burst, Central States' assets lost value as its obligations to retirees ballooned, causing a mismatch so severe that the fund had to reduce benefits last winter for the first time in its 49-year history.
"There never were benefit cuts in the 1970's," said Wayne Seale, 52, a long-haul driver from Houston and one of about 460,000 Teamsters participating in the fund. "We were happy. We were being taken care of."
If the pension fund fails, it will be taken over by a government insurance program. In that case, some Teamsters would lose benefits.
Hoffa and his successors had put an extraordinary 80 percent of Central States' money into real estate. Instead of hotels, casinos and resorts, its new managers - first Morgan Stanley and later Bankers Trust, Goldman Sachs and J. P. Morgan - invested the money mostly in stocks, and to a lesser extent, in bonds. At the end of 2002, about 54 percent of the fund's assets were in stocks, somewhat less than the average corporate pension fund, which had about 74 percent of assets in stocks that year, according to Greenwich Associates, a research and consulting firm.
Federal law calls for fiduciaries to invest pension assets the way a "prudent man" would, and the strategy used for Central States would certainly be familiar to wealthy individuals, philanthropic trusts, university endowments and other pension funds. The fund's investment results in recent years closely track median annual returns for corporate pension funds, according to Mercer Investment Consulting.
The assets lost 4.5 percent of their value in 2001 and 10.9 percent in 2002, but gained 25.5 percent in 2003, according to the fund's executive director and general counsel, Thomas C. Nyhan.
Morgan Stanley and J. P. Morgan declined to comment. Goldman Sachs defended its record, pointing out that it had exceeded its benchmarks in a very tough market.
But the Central States situation shows that using stocks or other volatile assets to secure the obligations of a mature pension fund greatly increases the risk of getting caught short-handed in a down market. If that happens it can be nearly impossible to bring the ailing pension fund back. This is what has happened recently to pension funds at United Airlines and US Airways.
"Stocks are not a hedge against long-term fixed liabilities," said Zvi Bodie, a finance professor at Boston University who has long challenged conventional pension investment strategies. "For many, many years, right down to the present day, the dominant belief among pension investment people is fundamentally wrong. Now that's a big problem."
The record of a second big Teamsters' pension fund, covering members in the West, bolsters Mr. Bodie's arguments. The Western Conference of Teamsters fund has long shunned stocks and uses a totally different investment approach, a portfolio of 20- and 30-year Treasury bonds and other high-grade fixed-income securities that are scheduled to make payments when its retirees will be claiming their money. The Western Conference pension fund was not perceptibly hurt by the bear market.
If the Central States were a younger pension fund, it could wait for the stock market to improve and bolster its value. But it already has more than 200,000 retirees collecting benefits of more than $2 billion a year.
The companies that employ its members currently put in about $1 billion a year. Its trustees, made up of union officials and company representatives in equal numbers, have contemplated raising employer contributions, but the unionized trucking sector has financial problems, and for many companies a higher contribution would be a hardship. The biggest and wealthiest participating company, United Parcel Service, has been trying to leave the pension fund altogether.
The unionized trucking industry was more stable before deregulation in 1979, and so was the Central States pension fund. In the 1970's, the fund's assets grew by as much as 10 percent a year, according to some media reports from that period. Luck played a big part in that success, because the decade was a bad one for stocks and bonds. Thus, the fund made better returns on its unorthodox real estate portfolio than it would have on a conventional mix of investments. The unionized trucking sector was younger, too. And it was growing, so there was more money available from employees and fewer pensions coming due.
Starting in the early 1960's, the fund loaned tens of millions of dollars for investments in Las Vegas casinos, including the Desert Inn, Caesars Palace, Stardust, Circus Circus, the Landmark Hotel and the Aladdin Hotel, according to a history by Edwin H. Stier, a former federal prosecutor hired by the union as part of its efforts to clean house.
The loans in those days typically involved a front man who signed the papers and a crime family raking off cash behind the scenes. The loan approval process involved kickbacks, threats and, in at least one case, a kidnapping. By the time Hoffa disappeared in 1975, the Central States pension fund had loaned an estimated $600 million to people connected with organized crime, according to Mr. Stier, who resigned his union appointment in April after questioning the union's ongoing commitment to rooting out corruption.
But many of the loans did serve their intended purpose, making money to pay for Teamsters' retirement benefits. The hotels, casinos and other real estate projects, not all of which were connected to organized crime, were generally profitable, according to Mr. Stier, and before his disappearance Hoffa saw to it that his loans were repaid.
By 1977, after years of indictments, prosecutions, Congressional hearings and murders, federal regulators pressured the Central States trustees to resign and turn over the fund's assets to an independent money manager. The 1982 consent decree reduced the trustees' powers permanently, requiring the pension fund to choose an outside fiduciary from America's largest 20 banks, insurance companies and investment advisory firms.
The first to be named fiduciary was Morgan Stanley. Its duties were to pick money managers, to allocate the assets among them and to advise the new board of trustees on investment objectives and strategies.
As it happened, Morgan Stanley got the Central States mandate at a time of explosive growth in the money-management business. A landmark pension reform law had been passed in 1974, requiring all companies to set aside enough money to make good on their pension promises. With assets piling up in trust funds as a result, money managers were competing fiercely for a piece of the business.
Money managers promised pension funds big returns, and to get the big returns they began to add riskier assets to pension portfolios than pension funds had used before. Sleepy bond portfolios were livened up with stocks. Venture capital, junk bonds, securities of companies in developing countries and other exotica began to appear in pension funds.
These investments could be risky, but the industry argued that losses, even big losses, in one year did not matter because a pension fund was a long-term proposition; over time, the losses would be recouped by even bigger gains. Buoyant markets reinforced this thinking in the 1990's, even though by then unionized trucking was in deep decline, and the Central States' ratio of active workers to pensioners was shifting perilously.
Records for the Central States pension fund are not complete, but they indicate that Morgan Stanley kept pace with industry trends, shifting the fund into stocks, particularly international stocks.
By 1997, more than one-third of the pension fund's assets were invested abroad, records show, far more than the norm for such funds. Greenwich Associates surveyed union pension funds in 2003 and found that international equities made up less than 3 percent of their total assets.
A spokesman for Morgan Stanley declined to comment on the Central States investments, citing a policy of not discussing relationships with past clients. He pointed out, however, that international stocks did relatively well in the late 1990's.
Morgan Stanley was replaced as fiduciary by Goldman Sachs and J. P. Morgan in 1999 and 2000. (Bankers Trust served as fiduciary very briefly.) A spokesman for Goldman Sachs noted that his company inherited many of Morgan Stanley's investments and added, "Over the five years we have managed the fund, our performance has exceeded the relevant benchmarks." A spokeswoman for J. P. Morgan cited a policy of not discussing clients' business.
When the stock market crashed in 2000, the Central States pension fund had big bets on technology and telecommunication stocks, energy trading companies and foreign stocks. Some of these stocks became nearly worthless. But the resulting carnage was not apparent to many rank-and-file Teamsters until last winter, when plan officials announced that benefits would have to be curtailed.
Meanwhile, drivers were making their retirement plans.
Tommy Burke, a U.P.S. driver in Fayetteville, N.C., had been planning to retire in 2005, when he would turn 60, and go into the restaurant business. But when the pension fund reduced benefit accruals, it also began enforcing a rule that pensioners could not re-enter the work force, under penalty of having their pensions stopped. Mr. Burke, frustrated, began to research the pension fund on his own, trying to learn just what had happened. In an annual report for the plan, he was shocked to see a reference to a $77 million uncollectible loan.
"How in the world can you have an unsecured loan in the amount of $77 million?" he asked.
When an official of the pension fund visited his union local hall this year, Mr. Burke put that question to him, but the answer only upset Mr. Burke more.
"He said it wasn't a loan at all," Mr. Burke recalled. "It was shares of stock in a bank in Russia, and it went belly up." Mr. Burke said he didn't understand why pension money had been used to buy something so risky, if the Labor Department and federal court officials were monitoring the pension fund.
The Labor Department does not generally regulate investment strategy, however. It was watching for signs of self-dealing, racketeering or other flagrant abuse. From that perspective, the fund was progressing well.
Some Teamsters say more complete answers lie in the official progress reports for the pension fund, maintained for the federal courts as required by the consent decree. But those are secret. The New York Times and the Teamsters for a Democratic Union, a reform group within the union, have filed motions with the federal district court in Chicago to make the documents public.
The International Brotherhood of Teamsters, which is legally separate from the pension fund, commissioned independent investment and actuarial analyses of the pension fund in November 2002.
But the study's findings have not been released to the membership.
Many rank-and-file Teamsters complain that their questions about the pension fund have been met with bromides about unforeseeable market forces, and about an unusual convergence of stock market losses and low interest rates that is always described as "the perfect storm." They are unconvinced.
"If this was all about the stock market and this 'perfect storm,' why weren't all these funds affected the same way?" asked Pete Landon, a truck driver from Detroit who participates in the pension fund.
The best clues may lie in the Western Conference of Teamsters pension fund. In the 1980's, when the Central States plan was shifting from real estate into stocks, the Western Conference trustees, acting on actuarial projections of future pension benefits, put together its conservative portfolio of high-quality bonds and other fixed-income securities. The bonds were held until they matured.
Such an investment portfolio requires little stock research or trading and consequently generates little fee revenue for money managers, but it has served the Western Conference of Teamsters well. From 2000 to the end of 2002, when the Central States fund lost $2.8 billion, the Western Conference fund gained $834 million.
"I think the most prudent, most basic pension funding theory would be: You put aside assets today to most precisely meet your obligations in the future," said Edward A. H. Siedle, a Florida lawyer who specializes in pension fund audits. "You do not try to beat the market. You do not try to maximize returns. But in this country, the plan sponsor doesn't want to do that. The corporation wants to put the minimum aside today, and invest it with maximum efficiency. That's the trouble."