First, the Basics…A Pension Primer

Frequently Asked Questions

Volume CIII, No. 12December, 2003

The AFM Pension Fund – the fund that 802 musicians participate in – is changing. Read the details of the pension changes here, along with the President’s Report. But first, check out this story which explains how the fund works – and why it is changing. This report was prepared by Mary Landolfi for Local 16 (Newark) and is reprinted with permission.

The American Federation of Musicians and Employers’ Pension Fund was organized in 1959, initially for recording musicians. It has since expanded to cover musicians in all organized areas of the music industry. The Fund is a Taft-Hartley benefit fund, which is closely regulated by federal law and administered jointly by a board of trustees consisting of seven AFM and seven employer representatives. The trustees determine the monthly pension amount, which is paid for each $100 in contributions, and other pension benefits. They are advised by two nationally recognized legal firms (one representing the employers and one the union). A single actuarial firm produces financial projections for the use of the trustees in determining benefit levels. Decisions are made by block vote of the trustees, meaning that employer trustees vote as one block and union trustees as another. If agreement about any question cannot be reached between the employer and union trustees, the issue is decided by an independent arbitrator. Although in other contexts the trustees may be adversaries, in regard to the administration of the Fund they are bound by their fiduciary responsibility to the Fund and its beneficiaries. There are severe penalties under federal law for any trustee who violates his/her fiduciary responsibility.


How are the assets of the pension fund invested?

Professional investment advisors employed by the trustees invest the assets of the fund in a conservative mix of stocks, bonds and other investments. In theory, when one area of the market is performing poorly, another will do better, thus reducing volatility in the value of the fund. The performance of investments is measured against the Standard and Poors 500 Index, the Lehman Brothers Government and Corporate Bond Index, and other standard indexes. Underperforming investment advisors can be removed by the trustees.

Are the trustees allowed to make loans to the AFM or to employers?

No, that would be a violation of the policies of the fund. Furthermore, federal law only allows loans with the permission of the Department of Labor after strict procedural requirements are met.

What assures musicians that the trustees follow the rules they have established?

Following a series of corporate scandals in the 1970’s, Congress passed the Employee Retirement Income Security Act of 1974. Under ERISA there are penalties assessed against any pension fund which is deemed either over or under-funded. For instance, a 13.5 percent excise tax is assessed against any employer whose pension is under-funded; this tax goes to the IRS and does not benefit the pension fund involved. Other penalties apply to over-funded pensions. As stated above, there are also penalties for trustees who violate their fiduciary responsibilities. These various penalties act as a powerful incentive for the trustees to follow rules and insure that the pension fund does not get out of balance in either direction.

How are benefit levels determined?

The actuaries employed by the fund project both the obligations of the fund to its current and future retirees and the future value of investments which will fund those obligations. The fund assumes that investments will grow by 7.5 percent per year; in the financial industry this is considered to be responsibly conservative. When audited financial reports demonstrate that investments grow by more than 7.5 percent and the actuaries report that projections are growing out of balance in a positive direction, the union trustees propose increases in benefits to absorb excesses. These increases can take the form of higher payments per month for each $100 of contributions or other financial improvements to the plan. If the employer trustees agree, these increases go into effect. When projections show movement in a negative direction, actions are taken to restore the balance and financial integrity of the fund.

I thought the pension fund was doing very well, so why is it necessary to cut benefits now? Should we think about going into another pension fund?

During the 1990’s the performance of the stock market was so positive that the fund was able to greatly expand benefits. Unfortunately, there have been a number of negative events during the last three years. Losses in the stock market, the terrorist attacks in New York City and the economic recession have all had a negative impact on the fund. Moreover, the interest rate cuts made by the Federal Reserve to stimulate the economy have reduced the returns from bonds, so volatility reductions usually expected from asset allocation strategies have not materialized. The employer trustees have asked for reductions which would bring the fund into balance until the year 2014. Union trustees, believing that an arbitrator would agree with the need for cuts, have agreed and proposed cuts to meet this goal. This situation is by no means limited to our pension fund; if you read the business pages of your local paper you have probably seen articles about the restructuring of other pension funds. Rather than opting out of the AFM-EPF, orchestras have been phasing out independent pensions and entering our pension fund in recent years. The cuts now being imposed by the fund may slow this trend, but it would be premature to conclude that we could do better in another plan which would be smaller and possibly more vulnerable to market forces.

But the market has gone up in recent months. Why hasn’t the fund recovered?

The actions which the trustees are taking are based on audited financial reports for the period ending April 11, 2003 and the actuarial projections which flow from those reports. The stock market has performed better recently and it is possible that the financial reports for the next fiscal year will be more encouraging. Having just endured the unpleasant task of reducing benefits, however, it is unlikely that trustees will be easily persuaded to increase benefits soon. Keep in mind, however, that the penalties assessed on over-funded pensions will prevent any unreasonable refusal to increase benefits, if the fund can indeed afford the increase.

I am very close to retirement. Is my pension going to be decimated?

Under ERISA, any benefits which are already vested cannot be reduced. Any changes to the plan will only apply to contributions for wages earned after Jan. 1, 2004. The current monthly benefit rate at age 65 ($4.65 per $100 of contributions) will continue to be paid on the contributions you have already received and the contributions for calendar year 2003. Therefore, if you are close to retirement, it is unlikely that these changes will have any great effect on your retirement income. If you are near retirement, however, you should obtain material specific to your pension account and consult with your own financial advisor before making any final decision.

Would it be a better idea to put all of the pension fund’s assets into fixed investments, like a giant bank account, so that we aren’t exposed to so much volatility?

No. Such a strategy would currently mean even greater cuts, since fixed rate investments like government bonds are currently much lower than the 7.5 percent benchmark used by the fund to predict future fund growth. If the trustees were to decide to use such an investment strategy, the actuarial projections would have to be adjusted downward to meet current interest rates and more cuts would be required.

What happens if, in spite of all the trustees’ best efforts, the fund does go bankrupt?

It is hard to express how unlikely this is. In order for the fund to go bankrupt, some very unlikely and catastrophic scenario would have to take place. For instance, since the assets of the fund are predominately invested in American corporations and government bonds, the assets of the fund could only disappear through a total collapse of the United States economy. This is extremely remote; even with the bear market of the last three years, the AFM-EP Fund was still worth $1.4 billion as of Dec. 31, 2002. Alternately, the actuaries would have to completely miscalculate the financial obligations of the fund to retirees in order for obligations to totally outstrip investments. Given the experience of the fund’s actuaries, this seems equally remote. Also, it is always important to remember that all vested benefits are guaranteed by the Pension Benefit Guarantee Corporation up to the maximums provided under ERISA. In short, in spite of the bad news, we can all still comfortably assume that our pension fund will be there when all the musicians in this and other orchestras retire.