Day: July 2, 2014

Pity the Multiemployer Pension Plans

Pity the Multiemployer Pension Plans

Most of the efforts to encourage defined benefit pension plans in the US have been an exercise in wishful thinking. ?Then there are the efforts to discourage defined benefit plans, which came about because the IRS felt that they were losing too much tax revenue to overfunded plans. ?Thanks, IRS… many plans were not really overfunded, but you discouraged a healthy funding of DB plans.

But if things are bad with corporate DB plans, it is much worse with Multiemployer Pension Plans. ?These are plans meant to cover union laborers in a given industry. ?What led me to write this evening were the problems with pensions in the coal-mining industry. ?From the article:

Union miners are among the 10.4 million Americans with retirements tied to?multiemployer?pension plans, the large investment pools considered low risk because they don?t rely on a single company for financing. Two recessions, industry consolidation, and an aging workforce have the multiemployer funds facing a $400 billion shortfall. Dozens already have failed, affecting 94,000 participants.

Strong investment returns helped lift the average funding level of pension plans by three points, to 88 percent, from 2013 to 2014, according to?Segal Consulting, which advises multiemployer trust funds. Yet, more plans were added to the ?endangered? or ?critical? lists that require fund managers to take steps to improve their financial status, including adding cash or adjusting future benefits.

?In 2001, only 15 plans covering about 80,000 participants were under 40 percent funded,? the government pension agency reported June 30. ?By 2011, this had grown to almost 200 plans covering almost 1.5 million participants.?

The pension plan for union miners had about $5.8 billion in liabilities in 2012 and was only 71.2 percent funded at the end of 2013, according to?Labor Department filings.

The trouble with multiemployer plans is that as some employers fail, the remainder of the employers have to pick up the bill for pensions. ?In a declining or cyclical industry, that is a recipe for disaster. ?As a result UPS spent $6.1 billion to exit the multiemployer plan, while still guaranteeing benefits to its own employees. ?The $6.1B was the ransom payment to escape something far worse in an underfunded multiemployer plan.

Though average multiemployer plan may be better funded, the average hides a lot, as there are more people expecting benefits from plans that are dramatically underfunded. ?What’s worse, is that those in multiemployer trusts have a maximum guarantee that is around 30% of what a single-employer plan would receive.

As such, to the degree that unionized industries as a whole suffer, so will benefits to unionized laborers, present and past. ?People need to understand that pensions aren’t magic.

  • Adequate contributions need to be made.
  • Investment returns must be adequate.
  • Benefits promised must be reasonable relative to contributions.
  • Anti-selection should be limited in multiemployer trusts. ?Perhaps employers need to put up extra capital that they would forfeit if they wanted to leave the collective industry pension promises.

As it is, participants in the worst multiemployer pension plans will suffer losses, and the PBGC will guarantee small amounts of the benefits, and that is as it should be, because the ability to drag money out of a shrinking industry is hard, very hard.

So pity participants?in multiemployer defined benefit pension plans. ?A significant portion of them will get far less than they expected.

Book Review: Investing in India

Book Review: Investing in India

51rdhXWu3BL I learned a lot from this book. India is an amalgam of nations inside one country. It is difficult to generalize about investing in India but there are a few themes to follow.

Most companies in India have a dominant shareholder, or family of shareholders. ?As such, though there are some companies like this in the US, the first prism you view any Indian company through is how they treat outside passive minority shareholders, particularly foreign ones. ?If they constantly give minority shareholders the short end of the stick, no matter how attractive the investment, avoid them.

Analysis of corporate governance is paramount, because it is very difficult to take a company over in a hostile manner. ?Assume that the present management will never be changed. ?Does the company still look cheap if the value -destroying management team will remain there?

Analyze capital allocation as well. ?If management?acts like value maximizing businessmen, it could be a good company to invest in. ?If not, avoid.

Structure of the Book

The book is a slow ramp up as far as business goes, talking about culture, politics, economy, and financial structure, before really digging into investing. ?These are good things to learn about, but the amount of time the book dedicates to making practical investment decisions in India is maybe 25% of the book.

The Main Problem

After you read this book, you will realize that without detailed local knowledge, you don’t stand a chance of investing in public Indian companies directly. ?As such, the book is of limited value to most people. ?So, though it is a good book, you probably would not benefit from reading it, aside from learning about Indian culture and government. ?You would have to build up a lot of knowledge about the Indian families who run public corporations in India — which ones are favorable to outside passive minority investors, and which are not.

Aside from that, they mention the website for the book, but it is just a collection of documents for the companies mentioned in the book.

Summary

India is an unusual country with many challenges. ?You will learn a lot about it and its economy reading this book. ?When you are done reading this book, you will likely conclude that investing in Indian companies is best left to local experts like the author. ?The book gives a good framework, but one embarking upon investing in India will need to develop knowledge of which Indian families treat minority shareholders fairly and who do not. ?If you want to, you can buy it here:?Investing in India, + Website: A Value Investor’s Guide to the Biggest Untapped Opportunity in the World (Wiley Finance).

Full disclosure:?The PR flack asked me if I would like a copy, and I said yes.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

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