Chicago Pension Law Struck Down by Court | Chief Investment Officer

A circuit court judge has ruled that a 2014 law that altered the Park Employees’ Annuity and Benefit Fund of Chicago was unconstitutional because it reduced benefits by increasing the retirement eligibility age and lowering cost-of-living increases and disability benefits.

The judge also ordered that the Chicago Park District return the higher retirement contributions workers made between Jan. 1, 2015 through March 23, 2018.

“There is no dispute between the parties, and the court agrees, that the challenged amendments to the pension code enacted by Public Act 098-0622 are unconstitutional under the pension code, and, therefore, are void,” wrote Judge Neil Cohen in his ruling.

The Illinois state constitution states that “membership in any pension or retirement system of the state, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

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Additionally, the Illinois Supreme Court ruled in Heaton v. Quinn in 2015 that “if something qualifies as a benefit of the enforceable contractual relationship resulting from membership in one of the state’s pension or retirement systems, it cannot be diminished or impaired.”

Cohen cited both the section of the state constitution, and the Illinois Supreme Court ruling in his decision.

As a result of the ruling, the fund has to refund all participants contributions that exceeded 9%, and active employees should see their contribution revert to 9%, according to the Service Employees International Union Local 73, which filed the lawsuit. The fund has 60 days to send to the union its calculation of back pay owed to the participants, and on completion of the union’s review, the Park District will issue reimbursements to participants.

The fund said it expects the payments will be issued by July 31. It said it will also restore any reduced duty disability benefits retroactively, with pre-judgment interest to any employees who received a reduced duty disability benefit. The fund anticipates issuing those payments by June 30. The next status hearing before the court is set for July 18.

The pension is only about 39% funded, or $611 million short of what it needs to make future benefit payments, Sarah Wetmore, research director of the Civic Federation budget watchdog group, told the Chicago Tribune. That is up from the $507 million and 44% funded level in October 2015 when the lawsuit was filed.

“It puts into question the sustainability of the fund going forward.” she said.

Park District CFO Steve Lux said the decision was “detrimental for the thousands of former and current employees who depend on the fund for their livelihood,” according to the Tribune. “We still hold firm in our belief that pension reform is critical to ensuring the financial security for our retirees.”

However, the union applauded the ruling in a release, saying that “employees will have the same rights to retire and enjoy cost-of-living benefits in retirement as they had before the law was passed.”

Tags: Park Employees’ Annuity and Benefit Fund of Chicago, Pension, Steve Lux

US and UK corporate pension deficits are moving in opposite directions as American funds increased their liabilities in March, while British funds have shed theirs so far this year, according to consulting firm Mercer.

Due to losses in the equity markets, the estimated aggregate deficit of pension plans sponsored by S&P 1500 companies was $286 billion at the end of March, a $24 billion increase from $262 billion at the end of February, Mercer reported. As a result, the estimated aggregate funding status fell 1% in March to 87%.

During the month, the S&P 500 index decreased 2.7%, and the MSCI EAFE index, which tracks the equity market performance of developed markets outside of the US and Canada, decreased 2.2%. Meanwhile, typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 5 basis points to 3.92%.

“March snapped a streak of funded status gains dating back to August 2017,” said Matt McDaniel, a partner at Mercer. “During this period, interest rates and equity valuations have both risen markedly. Plan sponsors should look to see if their pension policies are aligned for current market conditions.”

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Mercer estimates the aggregate funded status position of plans sponsored by S&P 1500 companies based on each company’s latest available year-end statement, and by projections to March 31 in line with financial indices. The estimates include US domestic qualified and non-qualified plans, along with all non-domestic plans.

The estimated aggregate value of the pension plan assets as of the end of February was $1.97 trillion, compared with estimated aggregate liabilities of $2.23 trillion. When accounting for changes in financial markets through March 31, changes to the S&P 1500 constituents, and newly released financial disclosures, the estimated aggregate assets were $1.95 trillion at the end of March, compared with liabilities of $2.23 trillion.

“While the drop in funded status for March was small,” said McDaniel, “history has shown us it is a question of ‘when’—not ‘if’— funded status volatility will return.”

While the pension deficits rise in the US, the story is different on the other side of the Atlantic, as Mercer also reported that the deficit of defined benefit pensions for the UK’s 350 largest listed companies declined sharply during the first three months of the year, falling by £4 billion to £72 billion ($101.5 billion).

The continued drop in accounting deficit was attributed to a reduction of pension liabilities, as a result of rising corporate bond yields, which has outpaced a drop in asset valuations. Liabilities have fallen £19 billion to £838 billion, while asset valuations have lost £15 billion to £766 billion in the first quarter of 2018.

“The quarter saw very significant asset and liability swings, with recent declining asset valuations creating cause for concern,” Le Roy van Zyl, a partner at Mercer, said in a release. “In response, we continue to see schemes opting for strategies that protect themselves from the most adverse outcomes, whilst retaining some upside potential.”

Mercer said its data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the same approach companies have to use for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts.

“The continuing decline of asset valuations serves as an important reminder of the very real risks facing pension schemes,” said Alan Baker, chair of Mercer’s defined benefit policy group. “Trustees and sponsors must actively monitor and mitigate the risks they’re running, to ensure their exposure is in line with their risk appetite.”

Tags: corporate defined benefit, Mercer, Pension, UK Pensions, US Pension