Emboldened by Bailouts
Government rescues of pension funds lead to opportunistic behavior
At an estimated cost of nearly $100 billion in taxpayer funds, pandemic-era bailouts have negatively affected the management and administration of multi-employer pension plans (MEPPs).
This according to a new study co-authored by Phillip Quinn, an associate professor of accounting and the PricewaterhouseCoopers and Alumni Accounting Professor at the University of Washington Foster School of Business.
The study examines how MEPPs, collectively bargained pension plans that provide retirement benefits for 11 million participants, respond to cash bailouts—particularly after the 2021 American Rescue Plan Act (ARP). When signed into law, this act established the Special Financial Assistance program, which provided cash infusions for certain MEPPs.
“We find that the pension bailout increased plans’ incentives to engage in risk-taking, opportunistic and self-serving behaviors,” says co-author Michael Dambra, an associate professor and Kenneth W. Colwell Chair of Accounting and Law at the University at Buffalo School of Management. “It shifts the consequences of increased risk-taking away from the companies sponsoring these underfunded pension plans and onto taxpayers.”
Riskier assets, bigger benefits, heftier fees
In the first large-scale study of the economic consequences of a pension bailout, Quinn, Dambra and John L. Wertz (PhD 2021), a Foster PhD Program graduate now at Indiana University, analyzed the behavior of more than 1,000 MEPPs from 2018 to 2021—including the first full year after the American Rescue Plan—using data from the Form 5500 Annual Report filed with the Department of Labor.
Each report includes information about the plan, such as its financial condition, operations and participation. The research compared investment allocations and pension administration of MEPPs to collectively bargained, single employer pension plans (SEPPs), which have never received bailout funding.
The study finds that the risks taken in the management and administration of MEPPs extended to increasing investment allocations to riskier assets, increasing future benefit payments for participants, and increasing administrative fees relative to SEPPs after President Biden signed the ARP into law. In addition, the researchers find evidence suggesting that some plans took action to increase the likelihood of qualifying for bailouts.
Notably, they also confirm that increased investment allocations to riskier assets, future benefit payments and administrative fees were concentrated among better-funded MEPPs, which did not receive bailouts.
“With the passage of the ARP, administrators of better-funded MEPPs observed enormous cash infusions for their peers at critically underfunded MEPPs,” notes Quinn. “Seeing these cash bailouts, I imagine administrators of better-funded MEPPs became less concerned about insolvency at their own plans, because now there was a precedent for them to be bailed out as well.”
Temporary relief, long-term dilemma
As pension funding shortfalls remain a problem in the United States, both in the private and public sectors, taxpayers and policymakers need critical data and analyses to find a solution for current and future retirees. Current estimates suggest that public-sector pensions are collectively underfunded by approximately $6.5 trillion.
This research by Quinn, Dambra and Wertz suggests that cash bailouts, while temporarily relieving underfunding issues for affected plans, are unlikely to solve the structural underfunding issues present in both private and public sector pension plans, and may worsen the issue over time.
“The American Rescue Plan provided nearly $100 billion in bailout funding for critically underfunded multi-employer pension plans,” says Quinn. “Our research indicates that better-funded MEPPs, which didn’t receive a bailout, responded to the ARP by increasing risk-taking, general administrative fees and investment management fees. Thus, rather than correcting long-standing pension underfunding issues, the ARP appears to have sparked a firestorm of moral hazard issues that could well worsen underfunding issues.”
“Economic consequences of pension bailouts: Evidence from the American Rescue Plan” is the work of Philip Quinn, Michael Dambra and John Wertz.
Adapted from an original article by Alexandra Richter of the University at Buffalo.