Rep. Kaptur, Sen. Brown, Others Seek GAO Inquiry Into Handling of Central States Pension Fund Investments

Questions Prompted by 2008 Pension Investments in Iraqi and Russian Banks,

$1.4 Billion in Risky Mortgage Bonds During Housing Meltdown

WASHINGTON, DC– Congresswoman Marcy Kaptur (D-OH) and Senator Sherrod Brown (D-OH) today released a letter to the Government Accountability Office, the federal government’s investigative agency, calling on a comprehensive “review of the investment decisions of the Central States, Southeast and Southwest Areas Pension Fund.” News reports of the apparent mishandling of the Central States Pension Fund investments, which now threaten the future livelihood of roughly 400,000 retirees, prompted the letter, which was signed by 10 Senators and 41 Members of Congress.

“It’s astonishing to now read about how Wall Street firms hired by Central States invested retirees’ pension funds in Iraqi banks in 2008, right in the middle of a full-scale war in Iraq,” said Kaptur. “Or how they invested in unstable Russian banks, when the economy there is in shambles, or how they sunk $1.4 billion into risky Single-A-rated mortgage-backed bonds in the middle of the housing meltdown. Something is simply wrong, and the GAO will get to the bottom of this.”

In early May 2016 the Department of Treasury rejected the application of the Central States Pension Fund to restructure benefits paid to 277,000 retirees – 49,000 of whom are Ohioans – under terms of Multiemployer Pension Reform Act (MPRA) of 2014. Central States subsequently decided not to reapply with an amended application, which will likely result in the fund’s insolvency within a decade.

The MPRA, the most significant change to pension law in the 41-year history of the Employee Retirement Income Security Act (ERISA), allows certain multiemployer pension plans that are in critical and declining financial status to cut already earned retiree pension benefits while a plan is still solvent. Four other pension funds currently in critical and declining financial status have also filed applications to cut benefits to current retirees, including Cleveland’s Ironworkers Local 17, the second plan to file in late December 2015; a decision on the Ironworkers Local 17 application is expected by August 4, 2016.

The sheer size and scope of a potential insolvency of the Central States Pension Fund, with $16.8 billion in assets and $35 billion in retiree obligations, threatens the financial solvency of the Pension Benefit Guarantee Corporation (PBGC).

The lawmakers’ letter lists a series of questions for the GAO to consider, including but not limited to:

· How did the named fiduciaries, the Independent Special Counsel (ISC), and other relevant parties ensure compliance with the consent decree and Title I of ERISA, ensure the Fund received conflict-free investment advice with reasonable fees, and the Fund operated to protect the interests of participants and beneficiaries? Are there instances where behavior was inadequate or in violation of responsibilities? Were investment decisions free of conflict of interest? If not, please identify such investments, the particular conflict(s) of interest and individuals who participated in these decisions.

· For each year from 1997 to 2015, what was the Central States Pension Fund’s investment strategy, how was this strategy set, who implemented the strategy (including any contracted investment managers), and how did the average annual return on investment under this strategy compare to similarly situated pension funds by asset class? How did the rate of return for each asset compare to standard benchmark indices?

· What was the annual asset allocation of the Fund by asset class by year from 1982 through 2015 (in both dollars and as a percent)? Was the overall asset allocation of the Fund altered in 2008? 2009? 2010-2015? What positions were sold during 2008 and 2009? How were the proceeds from these sales reinvested?

· What was the assumed rate of return on future investments by year and by asset class for the Fund from 1982 through 2015? How was the discount rate used to calculate future liabilities adjusted to reflect the historically low interest rates seen in the past ten years?

· Experts believe factors such as stock market losses, industry deregulation, and employer withdrawals contributed to the current critical and declining financial status of the Central States Pension Fund. How and when did the Fund’s investment strategy respond to these factors and were these actions timely and appropriate given fiduciary responsibilities?

· At any point did the Fund’s investment strategy reflect a greater than appropriate level of reliance on aggressive or alternative investments in violation of Title I of ERISA? For example, the Fund invested $1.4 billion in single-A-rated bonds at the height of the 2008 economic meltdown. If so, what was the purpose of such investments and who directed these investment decisions?

· How much of the Fund’s overall portfolio were invested in credit default swaps, collateralized debt obligations, mortgage-backed securities, insured variable rate bonds or other instruments or asset classes in 2005-2010, by year, by instrument or asset class?

· To what extent have the interests of board members of the Fund’s investment advisors been a factor in the investment strategies or decisions made by the Fund? To what extent have the interests of the Fund’s investment committee been a factor in the investment strategies or decisions made by the Fund? Did these decisions expose fund assets to greater than appropriate levels of risk or volatility?

Kaptur is the author of the Keep Our Pension Promise Act of 2015 (HR 2844),orKOPPA, to repeal the benefits suspension provisions of the Multiemployer Pension Reform Act (MPRA), and is co-sponsored by 51 House colleagues; Brown is a primary co-sponsor of the Senate version of the measure, which has ten cosponsors.

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