1. HOW THE GOVERNMENT IS ROBBING PENSION PLANS: Financial repression arrives not with a bang but with a whimper, says economist Carmen Reinhart in institutionalinvestor.com. Reinhart is speaking out about the newest way Western governments are using financial repression to liquidate their debts, particularly after a financial crisis. They are doing it on the backs of savers, including pension funds. In practice, financial repression can lead to rape and plunder of pension funds. Financial repression consists of very low nominal interest rates combined with captive lending by large banks or pension funds to a government. The low stable interest rate facilitates servicing costs of large public debts. Sometimes modest inflation is added to the mix, resulting in zero to negative real interest rates that reduce government debt. Hence, broadly defined, financial repression is a wealth transfer from savers to debtors using negative real interest rates -- with the government as one of the key debtors. Low interest rates are a fact of postcrash economic life, designed to kick-start greater borrowing. However, these rates tend to be combined with regulatory measures that give preferential treatment to holders of government debt. Governments -- in France, Ireland, Japan, Portugal, Spain and the U.S. -- are taking steps to create captive markets for their debt. The subtle, perhaps unnoticed result is a new form of taxation: financial repression. All elements are in place for more financial repression in the U.S. In the wake of Dodd-Frank, public sentiment is moving against laissez-faire capitalism. What is Reinhart’s advice for pension funds facing this potential onslaught? Awareness is the first step to being able to do something about it. A word to the wise… .
2. THE RISE OF FINANCIAL FRAUD: Center for Retirement Research at Boston College has released a new Issue Brief entitled “The Rise of Financial Fraud.” Individuals save for decades to ensure that they will have financial security in retirement. That security can be threatened or eliminated virtually overnight if an individual who is in or near retirement becomes the victim of a financial fraud, such as a Ponzi scheme or sham investment in high-yield securities. Fueled by the Internet, the incidence of financial fraud is on the rise. Law enforcement officials and fraud experts expect the trend to continue or accelerate as aging baby boomers increasingly become targets. According to the Federal Trade Commission, Americans in 2011 submitted more than 1.5 million complaints about financial and other fraud -- up 62 percent in just three years. But these data do not fully represent fraud’s pervasiveness, because researchers say it often goes unreported to the authorities. Identifying patterns of fraud can be helpful because scams and the con men who perpetrate them, once identified, are more easily recognized by a potential victim. The brief discusses fraud trends and describes some of the patterns. The first section documents the surge in fraud. The second section identifies what is driving this increase. The third section explains why seniors are often targets of fraud. The fourth section defines four major categories of financial-product fraud. The fifth section reports three of the many disguises used by scammers to persuade their targets to purchase investments or financial products. The conclusion is that all Americans, especially older Americans, should learn how to recognize the signs of fraud. Easier said than done. (February 2012, Number 12-5)
3. U.S. PENSION RISK BEHAVIOR INDEX: MetLife has released its fourth annual U.S. Pension Risk Behavior Index. The index is designed to encourage public dialogue around pension risk-related issues for plan fiduciaries. Over the past several years, defined benefit pension plan management has grown increasingly challenging for plan sponsors. A weakened economic environment, persistently low interest rates and an ever-changing regulatory environment have combined to exert more pressure than ever on DB plans. But these challenges have also given way to new opportunities for DB plan management. Over the past four years, the findings of the Pension Risk Behavior lndex study have chronicled plan sponsors’ shift away from an asset- and returns- centric approach to managing their plans toward a more balanced mindset that takes into account both liability and asset sides of the pension risk management equation. Plan sponsors no longer believe they can rely on traditional portfolio diversification alone to meet their future obligations. The 2012 PRBI study reveals that plan sponsors have taken another step in this direction. Plan sponsors for the largest U.S. DB plans are displaying remarkably similar patterns over the past two years in the way they think about and manage a set of 18 business, investment and liability risks to which pension plans are exposed -- and by most accounts that development is positive. First, plan sponsors appear to be building on the balanced attention paid to assets and liabilities that emerged in the 2011 study. At top of the importance rankings are the same two liability-related risks: underfunding of liabilities and asset/liability mismatch, indicating that plan sponsors are more focused on the liability side of pension plan management than ever before. Plan sponsors are also continuing to differentiate among the full spectrum of risk factors by honing in on a handful of risks, paying greater attention to them and demonstrating more consistency in successful management of these risks. Comparability of the year-over-year findings, which are in stark contrast to the findings in the first two studies, suggest that the new, integrated risk framework that showed signs of emerging last year is taking hold more broadly. The four years’ results taken together also chart the changes in how plan sponsors think about pension plan risk. Only the future will tell whether the changes that are reported will endure for the long-term through a full range of market cycles.
4. SEC PROPOSES RULES TO HELP PREVENT AND DETECT IDENTITY THEFT: The Securities and Exchange Commission has announced a rule proposal to help protect investors from identity theft by ensuring that broker-dealers, mutual funds and other SEC-regulated entities create programs to detect and respond appropriately to red flags. SEC issued the proposal jointly with Commodity Futures Trading Commission. The Dodd-Frank Act transferred authority over certain parts of the Fair Credit Reporting Act from the Federal Trade Commission to SEC and CFTC for entities they regulate. The proposed rules are substantially similar to rules adopted by FTC and other federal financial regulatory agencies that were previously required to adopt such rules (see C&C Newsletter for July 9, 2009, Item 3, C&C Newsletter for August 6, 2009, Item 1 andC&C Newsletter for November 19, 2009, Item 4). The rule proposal would require SEC-regulated entities to adopt a written identity theft program that would include reasonable policies and procedures to:
- Identify relevant red flags.
- Detect the occurrence of red flags.
- Respond appropriately to detected red flags.
- Periodically update the program.
The proposed rule would include guidelines and examples of red flags to help funds administer their programs. The proposal will be published in the Federal Register with a 60-day public comment period, and can be accessed athttp://www.sec.gov/news/press/2012/2012-34.htm. Release No. 2012-34 and No. IC-29969.
5. IS GENERATIONAL BATTLE LOOMING OVER LAW FIRM PENSION PLANS: The recession, with its double whammy of retirement investment portfolio declines and slowdowns in law firm revenue, was a wake-up call for firms that fund pensions out of current income, as well as for the broader swath of firms that fund benefits out of firm-run investment portfolios. And the problems created by the sagging economy brought into relief a bigger, looming issue: the ranks of retired partners are swelling just as the number of equity partners -- who are ultimately responsible for funding the pension plans -- is leveling off, according to law.com.
6. NYC COMPTROLLER’S CAMPAIGN TREASURER ARRESTED ON FRAUD CHARGES: The campaign treasurer for John C. Liu, New York City comptroller, was charged with fraud and obstruction of justice as an expanding federal investigation of the comptroller’s fund-raising reached inside his inner circle for the first time. The New York Times reports that the treasurer, Jia Hou, 25, is accused of helping to funnel illegal campaign money to Mr. Liu by using straw donors and impeding investigators’ efforts to gather information about the fund-raising. And, in a troubling development for Mr. Liu, the charges filed suggested that Ms. Hou was taking instructions from Mr. Liu as she was carrying out the fraudulent fund-raising scheme. The arrest came just weeks after a top fund-raiser for Mr. Liu was indicted on similar charges after organizing a fund-raiser, where straw donors were promised reimbursement for their contributions by a donor who wished to exceed the legal limit of $4,950 for individual donations. Looks like two bites at one Big Apple.
7. EX-DETROIT TREASURER INDICTED FOR BRIBERY OF PENSION INVESTMENTS: Jeffrey Beasley, former Treasurer of Detroit, was charged with taking bribes and kickbacks in connection with $200 Million in investments from the $3.4 Billion Detroit Policemen & Firemen Retirement System and the $2.7 Billion Detroit General Retirement System. Pionline.com reports that Beasley, who served on both boards of trustees, conspired with others to accept bribes in the form of cash, travel, meals, golf clubs, gambling money, Las Vegas concert tickets and private-plane flights. Incidentally, the funds lost more than $84 Million from investments associated with Mr. Beasley’s conspiracy. One other factoid: Beasley was appointed treasurer by Mayor Kwame Kilpatrick, who, himself, is awaiting trial on bribery, extortion and fraud charges.
8. MOST MEMORABLE INTERVIEW BLUNDERS: Human Resources professionals have seen it all from job applicants – from chewing gum to texting mid-interview. Hiring and HR managers shared their most unusual interview memories in a recent CareerBuilder survey:
Needless to say, the foregoing candidates did not make great first impressions.
- Candidate brought a “How to Interview” book with him to the interview.
- Candidate asked, “what company is this again?”
- Candidate put interviewer on hold during a phone interview. When she came back on the line, she told interviewer that she had a date set up for Friday.
- When a candidate interviewing for a security position was not hired on the spot, he painted graffiti on the building. (Was he hired as a painter?)
- Candidate wore a Boy Scout uniform and never told interviewers why. (Would you?)
- Candidate was arrested by federal authorities during the interview, when a background check revealed the person had an outstanding warrant.
- Candidate noted promptness as one of her strengths, after showing up ten minutes late.
- On way to the interview, candidate passed, cut off and flipped his middle finger at the driver who happened to be the interviewer. (Seinfeld episode?)
- Candidate referred to himself in the third person. (Definitely a Seinfeld episode.)
- Candidate took off his shoes during the interview. (Guess how the interviewer knew.)
- Candidate asked for a sip of the interviewer’s coffee. (It’s only a sip.)
- Candidate told interviewer she was not sure if the job offered was worth “starting the car for.”
9. ONE INCREDIBLE OBIT: The headline in the New York Times – “John Fairfax, Who Rowed Across Oceans, Dies at 74” – is not particularly eye-catching. But the text is almost incredible. Fairfax crossed the Atlantic because it was there and the Pacific because it was also there. He made both crossings in a rowboat because it, too, was there. For all its bravura, Mr. Fairfax’s seafaring almost pales beside his earlier ventures. At 9, he settled a dispute with a pistol. At 13, he lit out for the Amazon jungle. At 20, he attempted suicide-by-jaguar. Afterward he was apprenticed to a pirate. To please his mother, who did not take kindly to his being a pirate, he briefly managed a mink farm, one of the few truly dull entries in his otherwise crackling résumé, which lately included a career as a professional gambler. Mr. Fairfax was among the last avatars of a centuries-old figure: the lone-wolf explorer, whose exploits are conceived to satisfy few but himself. His was a solitary, contemplative art that has been all but lost amid the contrived derring-do of adventure-based reality television. The 361-day Pacific crossing was an 8,000-mile cornucopia of disaster. The rudder got snapped off. The boat was frequently swamped and at night he could not tell if the boat was the right side up or upside down. He was bitten on the arm by a shark and became trapped in a cyclone, lashing himself to the boat until it subsided. Unreachable by radio for a time, he was presumed lost. Now, get back to your exciting job.
10. GOLF WISDOMS: Any change works for three holes.
11. PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.): “You can always count on Americans to do the right thing — after they've tried everything else.”- Winston Churchill
12. QUOTE OF THE WEEK: “Burnout: Nature’s way of telling you that you’ve been going through the motions, but your soul has departed.” Sam Keen
13. ON THIS DAY IN HISTORY: In 1932, Charles Lindbergh, Jr. (20 months), kidnapped in New Jersey; found dead May 12.
14. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.
15. PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm. Thank you.