Compliance December 11, 2019

Pension Plan Suit Against Archdiocese Will Move Forward

Among other things, the archdiocese of Newark was accused of filing for "church plan" status to avoid having to fund the pension plan of hospital employees.

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A judge for the state of New Jersey has denied a motion to dismiss a lawsuit against the Archdiocese of Newark alleging mismanagement of a defined benefit (DB) plan for employees at Saint James Hospital.

According to news reports, a promissory estoppel count, alleging that the archdiocese promised to provide lifetime pension payments and that the plaintiffs relied on those promises in deciding to work for the hospital system, was determined by the judge to be sufficiently pled.

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The pension plan was operated under the Employee Retirement Income Security Act (ERISA) following its passage in 1974. In 1988, the Archdiocese notified past and present employees that it planned to terminate the plan, but plan termination was not approved by the Pension Benefit Guaranty Corporation (PBGC) because the plan did not have enough assets to pay all covered benefits.

That’s when, the plaintiffs allege, “the Archdiocese developed a strategy to escape PBGC scrutiny and the protections of ERISA.” In 1990, the Archdiocese sent a letter to the IRS asking it to deem the pension plan a “church plan” under ERISA. The IRS granted the request.

Around 1997, the Archdiocese terminated the pension plan. According to the plaintiffs, though it had $20 million in surplus assets, it did not use that to plug a $2.7 million deficit in the pension plan funding. The Archdiocese transferred the assets of the plan to a non-guaranteed account at Transamerica.

The plaintiffs allege that Transamerica tried numerous times to warn the Archdiocese that it was running out of money to fund pension benefit payments, but the Archdiocese took no action. Transamerica sent a letter to the affected retirees which stated the plan’s assets were diminishing and it anticipated that they would be depleted in approximately five to seven months. Transamerica told the retirees that “once the plan assets have been entirely depleted, no further pension payments will be processed by Transamerica.”

The news reports say that during a hearing about the motion to dismiss filed by the archdiocese, the judge rejected the argument that the former participants’ complaint did not include enough facts to state a claim. He noted that those would “be developed in discovery.”

Unlike Employee Retirement Income Security Act (ERISA) lawsuits that are argued in federal courts, this case is playing out in state court, alleging that the actions taken by the Archdiocese violate New Jersey contract and trust law.

The Markets December 11, 2019

Increased Volatility Projected for 2020, but No Recession

Asset managers also expect modest economic growth to shift investors’ attention to smaller companies, value stocks and cyclical sectors.

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Asset managers seem to agree that they do not expect a recession in the coming year, but they do expect more modest growth in the markets paired with increased volatility—which could shift opportunities to small caps, value stocks and cyclical sectors.

BMO Global Asset Management says that the economic expansion of the past two decades is unlikely to be repeated and that central banks are running out of monetary policy options for the next global economic showdown. The firm’s leaders say that while the U.S. economy has slowed, they do not foresee a recession in the coming year.

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In fact, “given the dovish shift of central banks and reasonable corporate earnings,” BMO remains “broadly positive on equities and neutral on government bonds due to stretch valuations and ultra-low yields,” the firm says in its annual Global Investment Forum outlook report.

In its Solving for 2020 report, Neuberger Berman says it expects increased market volatility in the coming year and the possibility for a recession in 2021 and beyond.

Neuberger Berman expects modest economic growth in 2020, and that this will shift investors’ attention “to focus on  fundamentals and to look more favorably on smaller companies, value stocks and cyclical sectors. Volatility could lead to vast opportunities for liquid alternative strategies, and full equity market valuations could make private market investing more attractive. In fixed income markets, Federal Reserve and European Central Bank rate convergence may make U.S. bonds more attractive and hedging U.S. dollar risk less costly.”

Right in line with these prognostications, Robert Johnson, professor of finance at the Heider College of Business, says, “While I don’t envision a recession in 2020, sluggish economic growth will likely result in lower corporate earnings growth, and with price/earnings [P/E] ratios at the higher end of historical ranges, there is little momentum for expansions in market P/Es. My belief is that equity markets will see a reversion to the mean, with returns in the low single digits in 2020. Given the historically low interest rate environment, I believe that bond returns will be equally anemic in 2020.”

However, Nany Prial, co-CEO and senior portfolio manager at Essex Investment Management, has a more optimistic outlook on earnings: “The improved growth trends that are beginning to appear in the areas of wage increases, consumer spending, housing and global growth should lead to both increased GDP growth as well as higher overall earnings growth. As a result, we would expect that 2020 will be a year where market progress is driven more by earnings growth, as has been the case since 2009, than by continued multiple expansion.”

Likewise, Richard Saperstein, chief investment officer at HighTower’s Treasury Partners, says that while U.S. equity multiples are elevated, they are supported by low interest rates. As a result, he foresees corporate earnings growth in the 5% to 10% range in the coming year. As well, Crit Thomas, global market strategist for Touchstone Investments, foresees the Federal Reserve continuing to ease interest rates, “giving some comfort for the market.”

And like her colleagues, Prial also expects that the rotation from large cap into less expensive smaller cap will accelerate in the new year. “The spread between growth and value remains almost as high as it was at the end of 1989 and 1999,” she says. “This type of dispersion has historically led to a strong cycle of value outperformance as well as small-cap outperformance.”

Furthermore, Prial points to several sectors, most technology related, where she expects continued growth in 2020 and beyond. These include “sustainable energy solutions; the 5G rollout; automated vehicles, cars and houses; technology solutions to health care problems; personalized medicine; financial technology and housing.” She adds: “As the pace of technological change continues to accelerate, new companies and new opportunities will emerge that can drive growth and provide exciting investment areas for our stock-picking-focused portfolios.”

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