Cypen & Cypen
FEBRUARY 22, 2007
Stephen H. Cypen, Esq., Editor
1. FAMED EDITOR SAYS PENSION CRISIS IS FINALLY OVER:
No fewer than three separate studies were published recently, essentially saying that the pension plans of larger employers are either fully or nearly fully funded (see C&C Newsletter for January 25, 2007, Item 2 and C&C Newsletter for January 25, 2007, Item 3), according to Nevin Adams, Editor of plansponsor.com. For several years, we have been struggling with the impact of the so-called “perfect storm” on pension plans. This catchy phrase was borrowed from the film of the same name and refers to the unusual combination of several forces of nature to create an exceptionally powerful storm across a very large area. The so-called perfect storm for pension plans also resulted from a rare confluence of factors: a slumping investment market, a “vacation” from funding that many plans took during a period when soaring investment returns made such actions unnecessary and an unprecedented decline in the interest rate of the 30-year Treasury Bond (after it was decided to stop issuing that security). In the intervening years, plan sponsors have benefitted from investment returns that exceeded projections. Also, plan sponsors have returned to the process of making regular, or even extraordinary, contributions to their programs. Finally, there is a return to something like a normal interest rate environment, coupled with use of a blended rate, rather than an artificially-distorted 30-year Treasury. Since the last storm broke, many plan sponsors have chosen to freeze or terminate their traditional pension plans. The above factors may have made their programs financially untenable. Still, Adams wonders how many were set on that path for no reason more valid than the relentless pillorying of the funding crisis in the media. In his humble opinion, the concerns expressed were always overblown. Bravo, Nevin.
2. NEW TWIST ON OLD INVESTMENT INSTRUMENT:
According to a piece in Yahoo!Finance, a new version of the “tontine” investment vehicle may help individuals without traditional pension plans manage their retirements by decreasing the odds that they will outlive their finances. The tontine-hybrid was developed to address the specific dilemma retirees face when they must decide how quickly to withdraw and consume their investments. If they draw down their savings too fast, they risk spending all of their savings before they pass away. Drawing down too slowly means potentially foregoing a higher standard of living and dying with a significant pool of remaining assets. The tontine-hybrid described in a recent CFA Institute Financial Analysts Journal could be developed into a product if the laws are changed to legalize tontines. Tontines, which were first developed 350 years ago, are investment pools that pay dividends only to the surviving members of the pool The tontine-hybrid is similar to an anuity in that it provides a life income to a participant, and it allows retirees to diversify their life expectancy risks. However, because it does not require an insurance company guarantee, the tontine should provide higher payments than purchased annuities. The tontine-hybrid is different from the typical mutual fund in that the participant’s assets remain in the investment pool when the participant dies. Those assets will fund payments to participants who live longer than average, allowing the tontine-hybrid to provide annuity-like payments. Tontines can be sold directly to investors, or the vehicle could be embedded in cash balance type pension plans. This type of solution could help address the significant investment and budgeting challenges faced by retirees without defined benefit plans.
3. JUST WHAT IS A TONTINE?:
Apropos of the above piece, Wikipedia defines “tontine” as a “secret sharing algorithm which allows n people to share secret data, such that any k of them can reconstruct it by combining their keys.” Huh? Actually, a tontine is an investment vehicle that combines features of a group annuity, group life insurance and a lottery. The scheme is named after Neopolitan banker Lorenzo de Tonti, who is generally credited with inventing it in France in 1653. Some sources claim that similar schemes already existed in Italy, but there is no dispute that the popularity of the form was due to Tonti. The basic concept is simple. Each investor pays a sum into the tontine. The funds are invested and each investors receives dividends. As each investor dies, his or her share is divided among the surviving investors. This process continues until only one investor survives. Originally, the last surviving subscriber received only the dividends: capital reverted to the state upon his or her death and was used to fund public works projects, which often contained the word “tontine” in their name. In a later variation, the capital would devolve upon the last survivor, effectively dissolving the trust, and it is this version that is often been the plot device for mysteries and detective stories. While once very popular in France, Great Britain and the United States, tontines have been banned in Britain and the United States because of the incentive for investors to kill each other, thereby increasing their shares. Nevertheless, there are underground organizations in the United States that still use the tontine, and ownership of a business of property by joint tenancy with right of survivorship has much the same effect. We wonder if the Florida Lottery has thought of this one.
4. 8TH ANNUAL TRANSAMERICA RETIREMENT SURVEY:
The Transamerica Center for Retirement Studies is a collaboration of experts assembled by Transamerica Retirement Services. The Center, which conducts the annual Transamerica Retirement Survey, has released its 8th annual edition. For the past seven years, the Center has conducted a national survey of U.S. business employers and workers regarding their attitudes toward retirement. The following, from the executive summary, deal only with the part involving workers:
5. QUOTE OF THE WEEK:
“When choosing between two
evils, I always like to try the one I’ve never tried
before.” Mae West
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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.