Our Pension Pain: AFM Pension Fund announces a recovery plan. But what does it mean for musicians?

The following article first appeared in the April 2010 issue of Allegro, the newspaper of the New York City musicians’ union (AFM Local 802). It is reprinted with permission. Email the author at Allegro@Local802afm.org, or for more background, see www.Local802afm.org.

Musicians are hurting right now, perhaps more so than at any other time in recent history. The Great Recession is affecting almost every aspect of the lives of our members. Unfortunately, this includes our pension fund as well.

First, the good news – or, we should say, the not-so-bad news.

The first thing to know is that everyone’s pension is legally protected. Anyone who is drawing an AFM pension now will not see their pension cut – that’s guaranteed by law. The only exception to this would be if the fund actually went insolvent. But the AFM Pension Fund is not on the road to insolvency. In fact, the fund’s actuaries have predicted that the fund should remain solvent for at least the next 40 years, and, when the economy recovers, the fund should regain its health.

That’s the extent of the good news for the moment. The bad news is that the AFM Pension Fund is in red, or critical, status, according to a benchmark that Congress established in the Pension Protection Act of 2006. This means that the fund is required to create a “rehabilitation plan” to strengthen itself.

The plan includes two major provisions.

First, for those who retire in the future, certain benefits will be less than they used to be. Secondly, the pension fund will require employers to inject some money into the fund.

Let’s talk about both of these separately.

But before we do, it’s important to stress that the reason for this pension crisis has to do with the overall crash of the stock market. Everyone’s investments have tanked. From April 1, 2008 to April 1, 2009, the AFM Pension Fund lost about $800 million. To put it another way, in one year’s time, the fund lost almost a billion dollars.

There was no financial mismanagement and no “Bernie Madoff” lurking behind the wings. Our fund is in the same boat as thousands of other pension funds all over the country, and indeed the world.

As to what caused the stock market crash in the first place, that’s beyond the scope of this article, but members should know that we support greater financial oversight of banks and the trading market. Risky investments like “derivatives” and bundled mortgages must be better regulated. Taxpayers shouldn’t have to pay for Wall Street’s gambling. We must do our best to prevent a crash like this from occurring again, if it’s in our power as a society. It affects everyone’s bottom line.

Lower payout

As stated above, musicians who are already drawing a pension will not see any cuts at all.

For those who want to retire in the future, the news is a bit harsh. As of Jan. 1, 2010, the pension “multiplier” was cut to $1. The multiplier determines pension payout. A $1 pension multiplier means that for every $100 you earn in pension credits after Jan. 1, 2010, the pension fund will pay you $1 per month if you retire at age 65.

Let’s say you’re a 20-year-old musician who just started playing union gigs this year. Over the next 45 years, you occasionally sub on Broadway, perform with some freelance union orchestras, and do a smattering of other union music work. You eventually build up total pension credits of $100,000, which might be considered a middle-of-the-road pension figure. That $100,000 will earn you a monthly pension payment of $1,000 per month, or $12,000 per year, starting at age 65. Now consider that in 2003, before the pension plan started reducing the multiplier, your pension would have been $55,800 annually. The difference between a $12,000 annual pension and a $55,800 annual pension is quite stark. That’s the effect of this crisis.

Of course, when the economy recovers, the union will vigorously push the pension fund to raise the pension multiplier again, so the future remains an open book.

Early retirement cuts

Another cut is that early retirement benefits earned before 2004 are being reduced. (In our pension fund, “early retirement” means if you retire between 55 and 64.)

Let’s say you retire early, at 55. Previously, for the pension contributions you earned prior to 2004, you would have actually earned more money between age 55 and your death than if you had retired at age 65. That is, the total amount of money you received was greater because the pension fund actually subsidized early retirees.

So why didn’t everyone retire early? The catch is that if you retire early, you have to give up any tenured chair you may currently hold. And of course, your monthly check is lower at age 55 than it would be at age 65. But over time, you earned more pension.

Not anymore. Effective Feb. 24, the pension fund completely stopped subsidizing early retirement. Now if you retire early at age 55, all other things being equal, you will receive the same amount of money over time as if you retired at age 65. The incentive to retire early has ended.

For those members who were at the Feb. 17 membership meeting at Local 802, you may have thought that there was still time to retire early under the old subsidies. The pension fund closed that door almost immediately. There is no way to retire early now under the old subsidies.

Those are the big cuts that the pension fund is making to members. There are a few other reductions in benefits that were sent in an official email from the pension fund dated March 1. (We’ve posted a copy at www.Local802afm.org and you can also find it at the pension fund’s Web site at www.afm-epf.org.)

Employers feel the pain

Now let’s talk about how the pension situation will affect employers. Every employer who pays into musicians’ pension – including Broadway producers, the New York Philharmonic, all of the Lincoln Center orchestras, all of the unionized classical ensembles, club date orchestras, and film and TV studios – is bound by the pension fund’s rules and by federal law. These regulations allow the pension fund to charge employers a surcharge in the case of a fiscal emergency. That is exactly what’s about to happen.

The pension fund may charge our employers a surcharge of either 4 or 5 percent in 2010 and 9 or 10 percent in 2011. This means that if an employer makes pension payments of $100,000 per year to musicians, that employer will have to pay an additional $4,000 or $5,000 in 2010 and $9,000 or $10,000 in 2011. (The employer can choose the lower figure if it agrees to put the money directly into musicians’ pensions; otherwise the money would go straight into the pension fund without crediting musicians at all.) More surcharges to employers may be in the distant future, but it’s too soon to tell.

Why doesn’t an employer just say, “To heck with it! I’m not going to contribute anymore to musicians’ pensions; I’m pulling out of the fund!”

First of all, employers have agreed to pay pension; it’s in our contracts. Under labor law, employers must negotiate in good faith. They can’t just unilaterally stop paying pension.

Secondly, there is something called “withdrawal liability” that exists when a plan has an “unfunded liability” like ours now has. If employers want to opt out of our pension plan, they will have to pay their share of the plan’s current unfunded liability. To a large employer, this could mean millions of dollars. It’s cheaper to stay in the fund and wait out the recession.

What it all means

When it comes to financial markets, anyone who tells you they can predict the future should be treated with skepticism. Certainly, all of us dearly hope that the economy recovers soon. It is affecting all of our lives drastically. If the economy recovers soon, then the pension fund’s recovery plan can be modified and softened. If we get a strong stock market again, the pension multiplier can be increased again. Things might start to feel normal.

For the moment, the pension fund’s financial condition means a great deal to the union.

First, it means that the union has less leverage to bargain for better wage increases for musicians. If employers are forced to pay a surcharge or increased pension contributions to the pension fund, then they will cry foul if the union pushes for big wage increases.

The other result is that since our pension fund is paying so low – historically speaking – many musicians may ask, “Why have a pension fund at all? Why not just put money into our own private investments?”

This second question does have some answers.

First, we assume that the economy will recover and that the pension fund will regain its strength. Even if the fund regains just a little bit and the multiplier doubles to $2 from $1, that rate of return beats any private investment that you can think of.

Second, a pension fund is enforced savings. Let’s say that there was no pension fund at all and that union gigs gave you a little cash to invest on top of your performance wages. How many people would actually invest this money? Most of us would spend it if we needed to spend it. A pension fund keeps this money safe for you.

Third, private investments are not guaranteed. You could invest in the stock market your whole life, and on the day that you plan to retire, the market could crash, leaving you with nothing. Our pension fund guarantees you a monthly pension. For those musicians who are retiring now, their pensions are protected under the old rates, which were historically high. Even for new musicians who are just starting to build up pension, those musicians will have guaranteed monthly payments when they retire.

The pension fund is not perfect, but it’s still a lifeline.

Crunching the numbers isn’t easy. Ask the pension fund for a report.

It’s important to remember that the union is not the pension fund. We can’t just tell the pension fund what to do. The pension fund is a separate, legal entity made up of trustees that represent both employees and employers. These trustees vote on how to operate the fund, including whether to raise or lower the multiplier, for instance.

Between 2003 and 2010, the multiplier was reduced four times, from a high of $4.65 to the current low of $1. The pension you earn at any given time is paid at the multiplier that is currently active.

So, if you earned $10,000 in union work in 2003, and $20,000 from union work in 2007, you’ll earn pension based on a multiplier of $4.65 for the work in 2003 and $3.25 for the work in 2007.

The best way to understand this is to request a pension statement from the pension fund. (You’re also mailed one every year.) You’ll see that it breaks down your earnings from various time periods when there were different multipliers in effect. When you receive your annual statement from the pension fund, it will not tell you what your pension would be when you retire.

But you can request such a forecast and the pension fund will crunch the numbers for you.

And it is complex. If you’re married, you automatically receive a lower monthly pension (unless your spouse opts out) because if you die first, then your spouse gets a payment equal to 50 percent of your own pension.

Request your pension statement by writing to the American Federation of Musicians and Employers’ Pension Fund at One Penn Plaza, Suite 3115, New York, NY 10119. You can also call the fund at (800) 833-8065, ext. 1311 or see the fund’s Web site at www.afm-epf.org.

Helpful hint: the fund will most likely request your pension identification number. If you save your annual pension statements, you’ll find this number there. Otherwise, you’ll have to tell the fund that you don’t know your pension ID number and ask if they’ll use your social security number instead. (For privacy reasons, the fund prefers not to work with social security numbers.)

I’m new to the union. How do I earn a pension?

Here’s how the pension fund works. Every time you play a union job – a Broadway show, a union freelance classical performance, a union club date – your employer puts a small amount of money into the AFM pension fund on your behalf.

This money does not come out of your wages. It is a separate payment, and over time it adds up.

Let’s say you’re 20 years old and you’re just starting to play your first union jobs. Imagine that you are able to get an average of 10 union gigs per month. Each job pays $200 in wages and 10 percent pension ($20).

Using these numbers, at age 65 you can expect an annual retirement of about $13,000 a year from the AFM Pension Fund. (That’s assuming that the fund keeps its current rate formula in place. All of us are hoping that the economy will recover soon and that eventually the pension fund’s payout will increase again.)

That theoretical example is for an occasional freelancer. If you manage to win a steady chair on Broadway or in a major union orchestra, your pension could be much, much higher.

Remember that this pension money is guaranteed. If the stock market crashes, you are still guaranteed your monthly check. That’s how this fund – which is called a “defined benefits fund” – is different from a 401(k) savings program.

(The only way you would lose your pension entirely would be if our pension fund went insolvent. No one believes that is likely. And even then, the federal Pension Benefit Guaranty Corporation would guarantee you a minimum monthly pension.)

Vesting

If you are an occasional freelancer, there’s something very important you need to know about our pension fund. To be guaranteed a monthly pension, you first have to “vest.”

To vest in our fund, you need to keep playing union jobs until you earn a total of five “vesting credits.”

If you play $3,000 or more in union work per year, you earn a vesting credit. But you can play as little as $750 in union work and earn a quarter credit. Over time, you can become vested.

However, if you ever stop playing union gigs entirely before you are vested, you can lose all the pension you have built up, and you would have to start over from scratch.

So once you start playing union jobs, it’s extremely important that you keep it up and get vested.

Union work

In summary, the way to build up a good pension is to play union jobs. The steady union gigs include Broadway chairs and positions in union orchestras.

There are also freelance orchestra jobs, club dates, wedding gigs and recording work, all of which can pay pension. What if you can’t get a union gig? Local 802 has an excellent track record of turning nonunion jobs into union jobs. That’s called union organizing. So when you get called for nonunion gigs, call your local. Wouldn’t you like those gigs to pay into your pension?

Finally, there are some creative ways to make your own union gigs. If you perform private house concerts or give clinics, you can write your own union contracts using the union’s LS-1 form. Contact your local for details.