Teamsters Find Pensions at Risk


Published: November 15, 2004


(Page 2 of 3)


"Stocks are not a hedge against long-term fixed liabilities," said
Zvi Bodie, a finance professor at Boston University who has long
challenged conventional pension investment strategies. "For many,
many years, right down to the present day, the dominant belief
among pension investment people is fundamentally wrong. Now that's a big
problem."


The record of a second big Teamsters' pension fund, covering
members in the West, bolsters Mr. Bodie's arguments. The Western
Conference of Teamsters fund has long shunned stocks and uses a totally
different investment approach, a portfolio of 20- and 30-year
Treasury bonds and other high-grade fixed-income securities that
are scheduled to make payments when its retirees will be claiming
their money. The Western Conference pension fund was not perceptibly
hurt by the bear market.


If the Central States were a younger pension fund, it could wait
for the stock market to improve and bolster its value. But it already
has more than 200,000 retirees collecting benefits of more than $2
billion a year.


The companies that employ its members currently put in about $1
billion a year. Its trustees, made up of union officials and
company representatives in equal numbers, have contemplated raising
employer contributions, but the unionized trucking sector has financial
problems, and for many companies a higher contribution would be a
hardship. The biggest and wealthiest participating company, United
Parcel Service, has been trying to leave the pension fund
altogether.


The unionized trucking industry was more stable before
deregulation in 1979, and so was the Central States pension fund. In the
1970's, the fund's assets grew by as much as 10 percent a year, according
to some media reports from that period. Luck played a big part in
that success, because the decade was a bad one for stocks and bonds.


Thus, the fund made better returns on its unorthodox real estate
portfolio than it would have on a conventional mix of investments.
The unionized trucking sector was younger, too. And it was
growing, so there was more money available from employees and fewer
pensions coming due.


Starting in the early 1960's, the fund loaned tens of millions of
dollars for investments in Las Vegas casinos, including the Desert
Inn, Caesars Palace, Stardust, Circus Circus, the Landmark Hotel
and
the Aladdin Hotel, according to a history by Edwin H. Stier, a
former federal prosecutor hired by the union as part of its
efforts
to clean house.


The loans in those days typically involved a front man who signed
the papers and a crime family raking off cash behind the scenes.


The loan approval process involved kickbacks, threats and, in at least
one case, a kidnapping. By the time Hoffa disappeared in 1975, the
Central States pension fund had loaned an estimated $600 million
to people connected with organized crime, according to Mr. Stier, who
resigned his union appointment in April after questioning the
union's ongoing commitment to rooting out corruption.


But many of the loans did serve their intended purpose, making
money to pay for Teamsters' retirement benefits. The hotels, casinos and
other real estate projects, not all of which were connected to
organized crime, were generally profitable, according to Mr.
Stier, and before his disappearance Hoffa saw to it that his loans were
repaid.


By 1977, after years of indictments, prosecutions, Congressional
hearings and murders, federal regulators pressured the Central
States trustees to resign and turn over the fund's assets to an
independent money manager. The 1982 consent decree reduced the
trustees' powers permanently, requiring the pension fund to choose
an outside fiduciary from America's largest 20 banks, insurance
companies and investment advisory firms.


The first to be named fiduciary was Morgan Stanley. Its duties
were to pick money managers, to allocate the assets among them and to
advise the new board of trustees on investment objectives and
strategies.


As it happened, Morgan Stanley got the Central States mandate at a
time of explosive growth in the money-management business. A
landmark pension reform law had been passed in 1974, requiring all
companies to set aside enough money to make good on their pension
promises. With assets piling up in trust funds as a result, money
managers were competing fiercely for a piece of the business.


Money managers promised pension funds big returns, and to get the
big returns they began to add riskier assets to pension portfolios
than pension funds had used before. Sleepy bond portfolios were
livened up with stocks. Venture capital, junk bonds, securities of
companies in developing countries and other exotica began to
appear in pension funds.


Continued






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