Tuesday, August 10, 2010

Weak Math

(Chart from the Motion Picture Industry Pension and Health Plan via VFX Soldier.)

The MPIPHP is, besides being a pension and health plan covering 110,000 participants and their dependents, is a large trust fund. As I write, it's got $4.2 billion in it ....

Over twenty years, the trust funds have returned over 8% per year, even with an investment mix of 62% bonds, 38% stocks and real estate. (Having thirty investment advisors looking after the money stash has apparently helped.) It's been fairly consistent over a long period of time.

Lately, however, the sailing has been choppy. So far this year (2010), investment returns have been 2%. Given the times in which we live, this isn't awful, but it's waay below the returns that Plan actuaries expect. It's also below the 8% projections the accountants and negotiators use when figuring out where the Plan will be in 2011, 2014, or 2024. Either the 8% number gets hit ... or calculations have to be changed.

And what that ultimately means is, either the employers and/or unions have to kick in more money, or parts of the MPIPHP have to be changed. (Usually it's a combination of both.) But there are rules. Under federal regulations, the Industry Pension Plans have to be funded first, then the Medical Plans for active and retired participants get whatever remains of the cash flow. So what happens is, the pension plans are relatively stable, and the health plans -- being the last in line for money -- have to be "adjusted" every three years when contracts are renegotiated.

So, if you're a health plan participant who's wondered why medical costs go up and coverage goes down every thirty-six months, now you've got your answer. Over the past decade, Plan outgo has exceeded Plan income each and every year, and to close the gap contract negotiators have hammered out changes to lower health coverage costs: medical co-pays have grown larger, out-of-pocket costs for pharmaceutical drugs have gone up, hospital deductibles have risen. Etcetera.

Weak math, unfortunately, but with medical inflation running 9.5% per year and Plan income flat or negative, the only math there is.


Anonymous said...

here it comes. the rules of the road are changing yet again, and that pipe dream pension in the sky gets whittled away again by the actuaries. the old eating up the young.

VFX Soldier said...

The Dow Jones Industrial Average & S&P 500 have about a 0% return this year.

Some 401k are down about 10-15% this year.

The alternative is to keep the money in a mattress and not invest at all. The best this will give you is the inflationary return of about -3% each year.

To somehow blame old people for the diminishing returns as the above post states is ridiculous. Health care costs have been rising worldwide.

and the studios? Well their profits have been doing great this year. Want to bash the guild? Be my guest. Iger, Murdoch and the rest of the gang don't send thank you cards:


Anonymous said...

_So far this year (2010), investment returns have been 2%.

In the midst of the collapse of western economic fundamentals, this spells trouble for any pension scheme. Trouble.

Steve Hulett said...

I'm old enough to remember the stagflating seventies. Stocks went nowhere for sixteen years (1966-1982).

There's a reason that careful investors allocate assets between stocks, bonds and real estate. Nobody can successfully predict where the markets are going.

But allow me to note that there's relatively little problem with the Motion Picture Industry Pension Plans, since they're funded before anything else. It's the health plan that presents the challenge.

Anonymous said...

Comparison to economic downturns beyond WWII is misleading. What we are going through has so little in common with 66-82 that is barely worth mentioning. Pensions are going to get hit/getting hit like everything else. They are no less immune simply b/c they are 'pensions' and fall under a different set of legal precedents. Nothing evaporates more quickly with economic and monetary paradigm changes than legal precedent. Flush all that you know down the toilet. You weren't born the last time this kind of economic calamity happened.

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