TDU has obtained the text of a memo from Thomas Nyhan about the effects of the fall in the financial markets and the status of the Central States pension fund.
Below is the text of that memo.
Thomas Nyhan 12/5/2008 2:05 PM
Over the last several weeks I have received numerous inquiries from Central States' employees as to the status of the Pension Fund and my views concerning the recent stock market meltdown. Here are my views.
It's been a little more than a month since the federal government approved its $700 billion economic stabilization package and began unveiling several programs intended to restore liquidity and confidence in our financial system. In recent weeks, this package has been supplemented by coordinated programs and policy actions around the globe. Despite expectations that these global initiatives ultimately will work, equity markets around the world have remained under severe pressure.
Think for a moment what we have witnessed just since September of this year alone: the government takeover of Freddie Mac and Fannie Mae; the collapse of several investment banking giants including Bear Stearns, Merrill Lynch, and Lehman Brothers; the collapse of AIG with the Federal Reserve bailing them out with an infusion approaching $185 billion; the collapse of banking giants Washington Mutual (acquired by JP Morgan) and Wachovia (acquired by Wells Fargo); the near collapse of Morgan Stanley, Goldman Sachs and Citigroup; the Dow ending its worst week on record (10/10/2008) followed by its worst day in 75 years on 10/13/2008. Add to the mix the fact that housing prices have dropped 10% YTD nationally and foreclosures are at record highs. The confluence of events pushed consumer confidence to its steepest decline on record in October putting the brakes on spending for everything from automobiles to holiday gifts. Now we are heading into a global recession with an US unemployment rate now at 6.7% and climbing. The recession is already taking a toll on our contributing employers and reducing the number of our Funds’ active participants as a result of layoffs and bankruptcies. Yellow Worldwide, currently our largest contributing employer representing almost 40% of the participants in the Pension Fund, has asked the IBT to grant across the board wage concessions without which it may not survive the recession. And the fate of our participating employers in the car haul industry may very well depend on whether Congress agrees to bail out the auto industry which itself is on the verge of collapse.
Fortunately, credit markets are beginning to slowly unfreeze. Unfortunately, the thawing process is taking much longer than many originally had anticipated as the effects of massive deleveraging (i.e. the forced selling of equities by hedge funds and investment banks to meet the cash demands related to customer withdrawals and margin calls from their lenders) and a global recession are severely depressing the markets. Since mid-September the equity markets have dropped unlike anytime since the Great Depression. Virtually every asset class other than U.S. Treasury bonds and notes has devalued dramatically. For example as of November 30, the year-to-date return for larger cap stocks was -37.7%, for small cap stocks was -38.2%, for international -48.2%, for emerging markets -57.7%, for real estate -49.0% and for core fixed income 1.45%.
The Pension Fund ended the month of November with a net asset balance of $17.0 billion, a decrease of $9.8 billion since the beginning of the year. This represents a year-to-date investment return of -32.0%. Of course we are not alone. All pension plans- corporate, public and multiemployer plans, 401(k) plans, and university endowments have witnessed similar historic declines in the value of their investments in a relatively brief span of time. CALPERS, the largest pension plan in the United States, experienced a 20% drop in assets in the last four weeks alone.
We are hopeful that the markets will rebound strongly as they have following all past market meltdowns. But while we can hope for the best we can not plan on it. We are currently working with a large consortium of pension plans, corporations and unions in an effort to secure legislative relief from the short term stress occasioned by the dramatic loss of assets and the annual funding requirements imposed by the Pension Protection Act. We are also working with the IRS in order to preserve our amortization extension which is endangered absent a near-term rebound in the market or regulatory relief. I am cautiously optimistic that both legislative and regulatory relief will be granted. What the markets hold for the immediate future is unclear.
Given new market realities and the resulting deterioration in our net asset base, we are beginning to closely examine all elements of our cost structure. For the time being, I have imposed a Fund-wide hiring freeze, and effective immediately all overtime must be approved in advance by Executive. Other items under consideration include the suspension of the recognition of employment anniversaries, a material reduction in the budget for the year-end holiday events, prospective modification of the educational reimbursement program and a review of the exempt employees’ year-end bonus program.
In making adjustments to our cost structure, our highest priority will be to ensure that Fund-wide resources continue being deployed to meet our participants’ current needs and to advance our long-term strategic priorities. Even as we make adjustments, we must maintain the highest quality work standards and continue fulfilling, with excellence, the important commitments we have made to our participants. We will have to make some tough decisions and trade-offs to strike a proper balance. We expect to share our plans with you as soon as they are finalized.
Thomas C. Nyhan
Central States Funds