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Cypen & Cypen
March 20, 2014

Stephen H. Cypen, Esq., Editor

1. THE PLOT TO KILL PUBLIC SECTOR DEFINED BENEFIT RETIREMENT BENEFIT PLANS: Gary Findlay, involved with public employee retirement plans for more than 40 years, writes that the movement to rid governments of the defined benefit plan culture is nothing new.  Opponents say they want to dismantle and privatize state pension plans and their trillions of dollars of public funds held as investments for retirees, and then take that power and destroy it. Findlay asks “what power?”  It is the power to vote proxies on securities held and take corporate executives and boards to task for behavior that is not viewed as being in the best long-term interest of shareholders? Arguably, if public employees had individual account plans where money managers voted the proxies, it is likely that those votes would be a lot more corporate friendly, particularly, if those managers also have (or would like to have) those corporations as clients. Why are governments seen as such threats?  For one thing, they are regulators -- another thorn in the side of corporations. Reducing the number of regulators and making government service seem less attractive to high quality talent by eliminating defined benefit pension plans fall right in line with eliminating half the government. Corporations, however, are not the only suspects in the attempted murder of public DB plans. These plans are not particularly fee friendly when it comes to business relationships with outside money managers. For example, in 2000, legislations was pending in Florida to allow retirement plan members to move the value of their defined benefit to individual accounts in a defined contribution plan, and to allow new employees to elect participation in a new DC plan. The problem with the state's pension fund was simple: no one is making money off it except the retirees!  A co-conspirator in the Florida legislation was American Legislative Exchange Council. They see their friends in the private sector doing well in their 401(k)s, and they want the same opportunity.  What is a better way to promote pension reform, than the principle of fairness? Why should not government workers get the same type of pension as everybody else? Most companies that offer pension plans switched from the defined benefit to defined contribution model years ago. Therefore just about everyone in state and local government has access to a nicer pension than their peers in the private sector. In 2000, the party line was that public employees should have DC plans so they can be as well off as those in the private sector.  In 2013, the party line switched to public employees should be forced into DC plans so they will be as bad off as those in the private sector. It would be refreshing if they said, “we just want public sector DB plans to go away” rather than trying to justify the position with time specific inconsistent logic. Perhaps they think the widely recognized national retirement income security problem can be solved by having the public sector join the private sector in a race to the bottom. Most likely, however, is the idea that creating private sector pension envy will assist them in their goal of weakening government. Are there other culprits? Yes, it seems that some people do not care much for public education, and would like to see it privatized. Defined benefit plans for our K-12 educators create an obstacle to privatization. It should come as no surprise that the proposed reforms would tilt benefits in favor of short service employees at the expense of those with long service, thus increasing the talent pool from which private schools could recruit.  Enough said on that one. Then come bond rating agencies. Life would be much easier for them if defined benefit plans did not exist. Their approach appears to be to make liabilities seem much larger than would be the case based on reasonable long-term return assumptions. They are adopting an “error on the side of caution” approach by a considerable multiple, which should prevent them from being sued by bond holders, as they are now vulnerable from earlier sub-prime mortgage rating debacles. Not to be left out are the public sector accounting standard bearers, who ran the risk of being stripped of their authority by Congress unless they did something. That lesson was learned from what happened in the private sector accounting standard setters when the federal government established the Public Company Accounting Oversight Board. Their fear was reinforced when federal legislation was introduced that would have required governmental entities to determine liabilities on the basis of a so called risk-free rate in connection with bond offerings.  As an interesting aside, the legislation was supported using what were listed as “run-out dates” determined by a professor and widely reported as when public funds were going to run out of money. Eventually, the U.S. Government Accountability Office reported that the dates were not really that at all, but that rebuke only appeared in a footnote.  When one or more of the reported numbers reference use of a risk-free discount rate, take it with a grain of salt. It is a clear indication that the report can be traced to someone who has a fundamental lack of understanding of defined benefit plan risk.

2. GFOA BEST PRACTICE ON ACTUARIAL AUDITS: Government Finance Officers Association has issued its Best Practice on Actuarial Audits. Due diligence requires that pension plan fiduciaries and plan sponsors exercise prudence in selecting service providers such as actuaries, and monitor the quality of their work. An actuarial audit is a valuable tool for monitoring quality of actuarial services performed on behalf of the pension plan. An actuarial audit involves engaging the services of an outside actuary (reviewing actuary) to scrutinize the work of the plan’s consulting actuary. Actuarial audits are helpful for several reasons:

  • They enhance the credibility of the actuarial valuation process by providing independent assurance that it was performed in accordance with actuarial standards of practice;
  • They increase public trust in how the pension plan is being governed;
  • They help plan fiduciaries to assess whether the pension plan is meeting its funding objectives;
  • They can lead to the remediation of errors that might otherwise go undiscovered; and
  • They can provide recommendations for improving the actuarial valuation process, including how information is presented in the actuarial valuation report and in other communications.

Actuarial audits are not all the same:

  • In a level one, or “full-scope,” actuarial audit, the reviewing actuary fully replicates the original actuarial valuation, based on the same census data, assumptions, and actuarial methods used by the plan’s consulting actuary. In addition, the reviewing actuary examines the consulting actuary’s methods and assumptions for reasonableness and internal consistency.
  • In a level two audit, the reviewing actuary does not fully replicate the consulting actuary’s valuation, but instead uses a sampling of the plan’s participant data to test the results of the valuation. The reviewing actuary also examines the consulting actuary’s methods and assumptions for reasonableness and internal consistency.
  • In a level three actuarial audit, the reviewing actuary examines the consulting actuary’s methods and assumptions for reasonableness and internal consistency, but does not perform actuarial calculations.

GFOA recommends that public pension plan fiduciaries:

  • Gain an understanding of the types of actuarial audits;
  • Provide for actuarial audits at least once every five years and when a red flag appears, such as
  • Significant and unanticipated changes in asset or liability trends or funded ratio.
  • Computed contribution rates change without adequate explanation.
  • The actuarial methods and assumptions used are not consistent with those approved by the plan’s board.
  • The actuarial methods and assumptions are not consistent with plan objectives
  • Determine the level of actuarial audit most appropriate to their circumstance.  

Often when a new consulting actuary is engaged the new consulting actuary performs a full replication of the previous actuarial valuation to establish a baseline. This practice, when feasible, is highly encouraged.  Makes sense to us. 

3. CONFIDENCE REBOUNDS FOR THOSE WITH RETIREMENT PLANS:  Employee Benefit Research Institute has released its 2014 Retirement Confidence Survey. The following are from the Executive Summary:

  • The percentage of workers confident about having enough money for a comfortable retirement, at record lows between 2009 and 2013, increased in 2014. Eighteen percent are now very confident (up from 13% in 2013), while 37% are somewhat confident. Twenty-four percent are not at all confident (statistically unchanged from 28% in 2013).
  • This increased confidence is observed almost exclusively among those with higher household income, but it was also found that confidence was simply correlated with household participation in a retirement plan (including an IRA). Nearly half of workers without a retirement plan were not at all confident about their financial security in retirement, compared with only about 1 in 10 with a plan.
  • Retiree confidence in having a financially secure retirement, which historically tends to exceed worker confidence levels, has also increased, with 28% very confident (up from 18% in 2013) and 17% not at all confident (statistically unchanged from 14% in 2013).
  • Fifty-eight percent of workers and 44% of retirees report having a problem with their level of debt. Further, 24% of workers and 17% of retirees indicate that their current level of debt is higher than it was five years ago.
  • Worker confidence in the affordability of various aspects of retirement has also rebounded. In particular, the percentage of workers very confident in their ability to pay for basic expenses has increased (29%, up from 25% in 2013). In addition, there have been decreases in the percentages of workers reporting they are not at all confident about their ability to pay for medical expenses (24%, down from 29% in 2013) and long-term care expenses (32%, down from 39% in 2013).
  • Sixty-four percent of workers report they or their spouse have saved for retirement (statistically equivalent to 66% in 2013), although nearly 8 in 10 (79%) full-time workers say that they or their spouse have done so. Here, again, participation in a retirement plan mattered: 90% of workers participating in a retirement plan had saved for retirement, compared with just 1 in 5 of those without a retirement plan.
  • A sizable percentage of workers reports having virtually no savings and investments. Among workers providing this type of information, 36% say they have less than $1,000 (up from 28% in 2013), although those who indicate they and their spouse do not have a retirement plan (IRA, defined contribution, or defined benefit plan) are far more likely than those who have a plan to be in this group (73% vs 11%). Moreover, 68% with household income of less than $35,000 a year have savings of less than $1,000. Of those who have saved for retirement, only 38% report savings of less than $25,000.
  • Cost of living and day-to-day expenses head the list of reasons why workers do not save (or save more) for retirement, with 53% of workers citing this factor.

EBRI Issue Brief #397 (March 2014).

4. RAISING THE SOCIAL SECURITY RETIREMENT AGE: American Academy of Actuaries has released a White Paper on Raising Social Security’s Retirement Age. Social Security is one of our nation’s most successful programs but faces long-term financial issues, as its costs are growing faster than its revenues. While there are many positive aspects to Americans living longer, that trend also increases costs to Social Security as the wave of baby boomers retires over the next 20 years. Social Security is primarily a pay-as-you go system where each generation of retirees is funded by current workers, who expect to receive their own benefits after retiring. The more people contribute into Social Security, the more revenue the program has to make benefit payments. In 1983, Congress pushed back the full retirement age on a sliding scale until it reached 67 for those born in 1960. Thereafter, it remains fixed. Those born after 1960 will live longer on average after reaching their retirement age and thus collect more Social Security benefits than their parents. Proposals have been made to further raise the full retirement age in order to lower Social Security’s cost, and respond to Americans’ lengthening lifespan. As one part of a larger solution to solve Social Security’s long-term financial problems, the American Academy of Actuaries supports raising the full retirement age beyond 67. While Social Security is not in immediate financial distress, the long-term trend shows that the program’s costs will outpace its revenues. Without changes, Social Security’s accumulated trust fund will be depleted in about 2033, at which point benefits will have to be cut, taxes raised, or some combination. Most reform proposals are gradual.  One proposal would raise the full retirement age by one month every two years to match Americans’ rising longevity. Another proposes steeper but still gradual increases further to reduce Social Security’s future costs. However it is accomplished, raising Social Security’s full retirement age makes sense because it corresponds with Americans’ lengthening lifespans and reduces the program’s costs to lessen the burden on the next generation. Low-wage workers and those with physically demanding jobs have shorter-than-average lifespans, and could face disproportionate benefit cuts from a higher retirement age. Also, some workers in physically demanding jobs may not be able to work beyond a certain age. But there are steps that can mitigate these specific effects, including changes to disability rules to benefit specific workers who are unable to perform their jobs after reaching a certain age. According to the American Academy of Actuaries, here are the benefits of raising the retirement age:

  • Strengthens Social Security.
  • Compensates for increased longevity.
  • Preserves the current benefit formula.
  • Increases labor force participation.
  • Preserves intergenerational equity.

5. SOCIAL SECURITY FACTS: Item 4 above, also contains some interesting Social Security facts:

  • 38 million retired workers and dependents, 6 million survivors of deceased workers, and 11 million disabled workers receive Social Security benefits.
  • Expenditures total $736 billion per year.
  • The income is $691 billion from payroll taxes, and $114 billion in interest earnings.
  • Assets equal $2.7 trillion, and will be completely exhausted in about 2033.
  • Deficit through 2086 amounts to $8.6 trillion.

6.  CYPEN & CYPEN FORMS STRATEGIC ALLIANCE: Cypen & Cypen is pleased to announce formation of a strategic alliance with Klausner, Kaufman, Jensen & Levinson. Steve Cypen and Bob Klausner have almost 100 years of public pension plan experience between them, and have agreed to work together to bring additional resources and talents to their respective clients. Cypen & Cypen will maintain an office in Miami Beach, Florida, where the firm has been headquartered since 1946. KKJL is expanding its office in Plantation, Florida, and expects to move to its new facility in September, 2014. Meanwhile, Cypen & Cypen wishes Alison Bieler a rewarding sabbatical, which she has taken in order to spend more time with her family.

7. DATING ADS FOR SENIORS: LONG-TERM COMMITMENT: Recent widow who has just buried fourth husband, Looking for someone to round out a six-unit plot. Dizziness, fainting, shortness of breath not a problem.

8. ADULT TRUTHS: You never know when it will strike, but there comes a moment when you know that you just are not going to do anything productive for the rest of the day.  

9. TODAY IN HISTORY: In 1969, U.S. president Richard M. Nixon proclaims he will end Vietnam war n 1970.

10. 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.

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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.

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