The Writers Guild of America Pension Plan is in the so-called green zone, with its obligations 91.8 percent funded as of 2016. Yet the guild is concerned about the Plan's fiscal health, and is asking the studios and other employers to contribute more to the Plan. That's one of the union's proposals in the current talks with the AMPTP studio alliance, which resume on Monday.
In a recent bulletin to members, the guild cited "the [incomplete] recovery [of losses] from the 2008 market downturn and the outlook for returns over the next several decades." Is the guild right to be concerned?
Yes, said Cary Franklin, an actuary with Horizon Actuarial Services who advises the SAG Plan and has had involvement with the DGA and WGA Plans as well. That 91.8 percent level, standing alone, is not an indication that all is rosy. "You can't look at a snapshot in time," he said. "You have to look at future trends."
The Hollywood Reporter doesn't have the data to capture future trends, but we did look at the recent past. As the graphic shows (click the image above or here for a larger size), the WGA Plan's funding level has been trending decidedly down. Moreover, the WGA Plan's calculation of funding level is based on an assumption that its annual return on investments, called the "discount rate," will be 7.5 percent over a 20-year horizon or longer.
That figure may be slightly optimistic, in light of a Society of Actuaries January 2017 study of multi-employer pension plans that found a weighted average of 7.42 percent for 2014, with a downward trend. Applying a methodology described by actuary Doug Chandler in a Society of Actuaries paper, THR calculates that the 91.8 percent figure would be reduced to 89.1 percent if the investment assumption were a slightly more conservative 7.25 percent, a figure that the DGA Plan adopted in 2011.
Combined with the existing downward trend, that adjusted figure could portend the WGA Plan funding level moving closer towards the 80 percent mark, below which it could be considered an "endangered" plan in the so-called yellow zone. The result could be benefit cuts and/or increased employer contributions.
The WGA Plan is not in those dire straits yet, and may never be. Indeed, about 70 percent of the 13 entertainment industry plans are in the green zone, according to a survey by multi-employer plan advisor Segal Consulting, and the remainder are equally divided between the yellow and red zones, with the latter determined by a 65 percent funding threshold and other factors. But those figures aren't adjusted for differing discount rates.
And is even 7.25 percent a realistic rate, or are optimistic plan trustees and investment professionals overly influenced by the buoyant post-2009 bull market?
Perhaps so. "This is a source of debate among actuaries," said actuary Lisa Schilling, who wrote the Society of Actuaries study. She declined to opine on the specifics of the WGA Plan, but pointed out that different plans have different allocations of assets among stocks, bonds and other vehicles, which affects both risk and return.
Another issue, said Franklin, is that investment consultants are predicting that returns over the next 10 years are likely to be about one percentage point lower than the 20-year figures. That could further depress funding levels, particularly in light of the WGA Plan's unrecouped 2008 losses.
How expensive is the WGA Plan's situation? That depends, of course, on the returns the Plan achieves, and how quickly one is trying to boost the funding level up into the mid-90s and beyond. With assets of about $2.5 billion, that one point drop in returns translates to $25 million less income per year. If returns are lower year after year, say for that 10-year horizon, then the loss obviously increases.
Employer contributions, at 8.5 percent of compensation, are about $110 million per year, so making up the loss by increasing employer contributions $25 million per year would require raising the contribution percentage by 23 percent, or 2 percent (23 percent of 8.5 percent), to 10.5 percent. That would be an outsized increase, since bumps of 0.5 percent or sometimes 1.0 percent are the largest that are usually agreed to in any one contract cycle. (We've simplified some of the math in consultation with Franklin, to arrive at rough figures.)
And, it should be noted, those bumps are accomplished by diverting what would otherwise be part of an increase in basic wages. For instance, the DGA nominally achieved 3 percent increases in each year of its new three-year contract. But more precisely, the wage increase in the first year is 2.5 percent with a 0.5 percent diversion to increase contributions to that union's pension fund. Something similar is likely with the WGA, with diversion for the troubled health plan, the pension plan or even both.
But those diversions are not without a cost, on both sides. For the studios, a diverted 0.5 percent (as a contribution to benefit plans) costs almost 1.5 times as much as an undiverted 0.5 percent paid as part of a wage increase. That's because the wage increases only apply to wages that are at scale or some multiple of scale, such as scale plus 10 (110 percent of scale, with the extra 10 percent to cover the agent's commission) or twice scale. In contrast, that same 0.5 percent as a benefit contribution applies to all wages, up to certain caps that are much higher than scale.
Ironically, writers, directors and actors are also adversely affected by the diversion - if they're scale workers. If scale for writing a draft of a movie were currently $100,000 (it's actually a bit higher, but let's keep the math simple), then for a writer at scale, a 2.5 percent wage bump ($2,500) is $500 less than a 3 percent bump.
Even though the diverted funds are helping keep the benefit plans afloat, the scale writer is going to be unhappy at the loss of income. Plus, people who are being paid at scale are less likely to qualify for a pension or perhaps even for health care, so the diversion doesn't benefit them as much. They may simply be seeing lower wages without any benefit at all.
In contrast, a writer who gets $300,000 per movie isn't affected by increases in scale wages (wage floors), but does qualify for benefits, so that scribe can be happy knowing that there was a diversion to the benefit plans - albeit from less fortunate colleagues. That kind of redistribution is termed "regressive" by economists.
Contrast and Compare
How does the WGA Plan compare to its entertainment industry peers? We'll look at fiscal health alone, ignoring member-friendly topics like benefit levels and ease of eligibility. Those things, in fact, are in tension with fiscal health, because the more generous a plan is, the greater the demand on its assets - and thus, the less well-funded it is, all other things (such as total assets) being equal. And, the more parsimonious a plan, the more well-funded.
After all, if you don't make many expensive promises, you don't need as much cash to stand behind your word.
In terms of fiscal health, the WGA Plan appears be to be less robust than the DGA's, which was 100.8 percent funded in 2015 with only a slight downward trend and based on a more conservative 7.25 discount rate.
But the WGA Plan appears to be doing significantly better than the AFTRA (86.5 percent funded) and IATSE (MPI) plans (80.8 percent), both of which assume an 8 percent discount rate. That cheery assumption is shared by only a tiny fraction of other multi-employer plans across the country, according to Schilling's study.
The Plans' optimism may be based on riskier (and thus potentially more rewarding) asset allocations, or some other factors. But it's noteworthy that average expected long-term returns have declined since 2012 across most asset classes, according to a 2016 Horizon survey.
It might appear that the WGA Plan is also doing better than the SAG Plan, which is 82.8 percent funded with a 7.5 percent discount rate, but Franklin said that the SAG Plan's future trends actually bend upward, while the WGA Plan is trending down. Said Franklin, "the WGA Plan … is doing worse than the SAG Plan."
Adjusting the discount rate assumptions to 7.25 percent would put the SAG and AFTRA plans at the 80 percent threshold of the yellow zone, and the IATSE plan well into dangerous territory at about 74 percent.
An authorized representative of the IATSE-affiliated Motion Picture Industry Pension and Health Plan (MPI or MPIPHP) said that the Plan's calculations showed it in the green zone for the indefinite future. She had no comment on the discount rate assumption. Nor did a SAG Plan spokesperson, and it was not immediately possible to reach the AFTRA Retirement Fund.
In any event, the apparently challenging status of the AFTRA plan may complicate efforts to merge the SAG and AFTRA plans. The unions merged to form SAG-AFTRA in 2012, and the health plans merged almost four years later, on Jan. 1 of this year. Combining the pension plans will be tougher still, if for no other reason than the complexity of pension plans generally.
But that's a matter for another day. In the short term, the focus is on the writers, who will have to decide how hard they'll push for funds to repair a pension plan that isn't broken - or broke - but that could use some patching.
4/9/2017 11:39 a.m. PT: Updated to correct that the WGA Plan is doing worse than the SAG Plan, and other miscellaneous corrections.