RegulationApril 2, 2020

Musicians Pension Settles Lawsuit Over ‘Risky’ Investments

Trustees accused of acting like ‘drunken gamblers’ pay nearly $27 million, deny wrongdoing.

Reported by Michael Katz

The trustees of the American Federation of Musicians and Employers’ Pension Fund have agreed to pay just under $27 million to settle a nearly three-year-old class action lawsuit that accused them of making overly risky bets with the pension plan’s assets.

According to the settlement, the defendants will pay $26.85 million, which represents the vast majority of provable damages that likely would have been won at trial, according to the plaintiffs. The defendants continue to deny all claims against them and do not admit any fault in the settlement.

“The settlement represents an unambiguous victory for plaintiffs and all AFM pension plan participants,” the plaintiffs said in a memorandum in support of the settlement, adding that “it largely achieves all the goals sought by plaintiffs in this litigation, which was focused on the excessive risks the trustees took in connection with setting the plan’s asset allocations from 2010 through 2017.”

According to the legal complaint, the plaintiffs said the plan underperformed its peers because its trustees had set an asset allocation policy that underweighted public equities during an unprecedented bull market, while overweighting higher risk and worse-performing assets. The plaintiffs said the plan only had 18% of its assets in US equities, compared with a median holding of 33% by its peers. At the same time it had 27% in international equities, compared with a median of 10% for its peers.

The settlement imposes on the trustees new governance provisions designed to deter them from taking what the plaintiffs called “wild and excessive” investment risks. It also requires the trustees to appoint a neutral independent fiduciary trustee for the pension plan for four to five years. The independent fiduciary trustee will serve as a non-voting member of the pension plan’s board of trustees and as a member of the plan’s investment committee. That trustee will have complete access to relevant information and will participate in all board meetings related to the plan’s investments, including asset management and allocation.

The settlement also requires the trustees to replace Meketa Investment Group as the plan’s outsourced chief investment officer (OCIO) monitor. The trustees retained Meketa as the plan’s investment consultant from 2010 through 2017. The plaintiffs said in the settlement that the “decision to hire Meketa was a disaster” and that the trustees’ decision to retain Meketa as OCIO monitor “reflected their continuing breaches of duty, bad judgment, and resistance to retaining advisers with the requisite degree of independence.” The trustees are required to replace Meketa with a new OCIO Monitor pursuant to a request for proposals (RFP) process approved by the plaintiffs.

Although the settlement signals an end to the litigation, both sides claimed victory and continued to take verbal jabs at each other.

“For more than two years, patently false claims have besmirched our pension plan while the trustees have been doing everything possible to steer it toward financial stability,” the plan’s trustees said in a statement following the settlement. “During that entire time, the plaintiffs, Musicians for Pension Security (MPS) and the politically motivated individuals behind it have tried to capitalize on that lawsuit to advance their self-serving agenda.”

The trustees said they agreed to the settlement because at least $17 million in proceeds from the settlement would be paid by the plan’s fiduciary insurers, and “none of the current or former trustees who are defendants are paying a dime.” They added that “the alternative was to drag on this sideshow and allow the available insurance to be further consumed by legal fees and expenses.”

Musicians for Pension Security members shot back at the trustees and called for the court records to be unsealed “so we can all see the evidence for ourselves.” In the pension’s complaint, it said the trustees had made “disastrous risky asset allocations” and that they ignored warnings about the risky nature of the investments and “doubled and tripled down like drunken gamblers chasing losses.”

Earlier this year, the pension plan applied to the US Treasury Department to reduce earned benefits under the Multiemployer Pension Reform Act (MPRA). The plan has been certified to be in “critical and declining” status and is projected to run out of money within 20 years.