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Cypen & Cypen
March 27, 2014

Stephen H. Cypen, Esq., Editor

1.  GLOBAL PENSION FUND ASSETS HIT RECORD HIGH IN 2013:Assets at U.S. institutional pension funds increased 12% in 2013 to a record $18.9 trillion, according to a Towers Watson study. Global institutional pension fund assets in the 13 major markets grew by 9.5% during 2013 (compared to 6.9% in 2012) to reach a new high of almost $32 trillion. The growth is the continuation of a trend that started in 2009, when assets grew 18%, and in sharp contrast to a 22% decline during 2008, when assets fell to around $20 trillion. Global pension fund assets have now grown at an average of over 6.7% annually since 2003. Growth in assets helped to strengthen pension fund balance sheets globally during 2013, with 10-year figures showing the U.S. grew its pension assets by 27% to reach 113%. The ratio of global assets to global gross domestic product is at its highest level since the research began. Pension assets now amount to around 83% of global GDP, a large rise from the 76% recorded in 2012 and substantially higher than the 57% recorded in 2008. One interesting factoid: about 20% of assets in the U.S. were allocated to alternative investments; equity allocations for U.S. pension funds increased from 54% in 2008 to 57% in 2013.

2. TW PENSION 100 -- YEAR-END 2013 DISCLOSURES OF FUNDING, DISCOUNT RATES, ASSET ALLOCATIONS AND CONTRIBUTIONS: During 2013, aggregate funded status for defined benefit pension plans in the Towers Watson Pension 100 climbed from 77% to 89%. (The TW Pension 100 consists of sponsors of the 100 largest U.S. pension programs among U.S. publically traded corporations, ranked by Pension Benefit Obligation.) Assets in these plans continued to grow and higher interest rates reduced plan liabilities for the first time in years. The results are based on just reported pension disclosures from the Securities and Exchange Commission 10-K filings of pension plans with December fiscal year-end dates. The gap between the projected benefit obligation and plan assets veered from an $82 billion surplus in 2007 to a record-high $296 billion shortfall at year-end 2012. The most substantive decline in the shortfall was seen in 2013, a year that ended with liabilities exceeding assets by $126 billion. By year-end 2012, four consecutive years of declining interest rates had pushed plan liabilities 42% higher than the December 2007 aggregate liability. That growth declined to 28% by the end of 2013. During 2013, assets grew by 4%, while plan obligations declined by 9%. The pension deficit declined from $295.5 billion in 2012 to $125.9 billion in 2013 -- a decrease of $169.6 billion or 57% -- the lowest pension deficit since the financial crisis. The average funded percentage was 91.2%, up considerably from 77.9% at year-end 2012.

3. RETIREMENT CONFIDENCE REBOUNDS…FOR THOSE WITH RETIREMENT PLANS: Americans’ confidence in their ability to afford a comfortable retirement has recovered somewhat from record lows of the past five years, according to the 24th annual Employee Benefit Research Institute Retirement Confidence Survey, but it does not appear to be founded on improved retirement preparations -- and it may be limited to those with retirement plans. The longest-running survey of its kind in the nation finds that 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). However, in the aggregate, reported worker savings remain low, and only a minority appear to be taking basic steps to prepare for retirement. This increased confidence is observed almost exclusively among those with higher household income, but confidence was also found to be strongly 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. The increase in confidence between 2013 and 2014 occurred primarily among those with a plan (an increase from 14% very confident in 2013 to 24% in 2014 for those with a plan), compared with level readings among those without a plan (10% very confident in 2013 and 9% in 2014). The possible reason for improved confidence is the rising stock market and property values. 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). 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%) of 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. Among other major findings:

  • Workers appear to be aware of the need to bolster savings.Twenty-two percent say they need to save between 20-and 29% of their income and another 22% indicate they need to save 30% or more.
  • Most workers have not ever tried to estimate their retirement needs. Only 44% report they or their spouse have tried to calculate how much money they will need to have saved by the time they retire so that they can live comfortably in retirement, a level that has held relatively consistent over the past decade. Workers who have done a retirement savings needs calculation tend to have higher levels of savings.
  • Workers with some sort of retirement plan, whether through their employer or an IRA, have significantly more in savings and investments than do those without a plan. The large majority (73%) of those who indicate they and their spouse do not have a retirement plan say their assets total less than $1,000, compared with 11% of those who have a plan.
  • Few seek financial advice, fewer take it. Roughly 1 in 5 workers and 25% of retirees report they have obtained investment advice from a professional financial advisor who was paid through fees or commissions. Twenty-seven percent of workers who obtained advice say they followed all of it, but more only followed most (36%) or some (29%). Retirees are more likely to report following all of the advice (38%).
  • Workers remain far more likely to expect to work for pay in retirement than retirees are to have actually worked. The percentage of workers planning to work for pay in retirement now stands at 65%, compared with just 27% of retirees who report they work for pay in retirement.

4. GASB WILL NOT DELAY IMPLEMENTATION OF PENSION STANDARDS: Business Wire, Inc., reports that the Governmental Accounting Standards Board voted unanimously not to delay implementation of GASB Statement No. 68, Accounting and Financial Reporting for Pensions. The requirements of Statement 68 are effective for periods beginning after June 15, 2014. The request for an indefinite delay in implementation date came from stakeholder groups that asserted such a delay was necessary until related auditing procedures have been implemented for a sufficient period. Concern was expressed that governments in multiple-employer pension plans will receive a modified audit opinion on their financial statements in the interim. Other individuals, organizations, and stakeholder groups requested that the implementation date of Statement 68 not be changed. Some of these groups urged GASB and other organizations to find a solution that does not involve a delay in implementation.

5. DETROIT PENSION FUNDS HANGING TOUGH: The funded level of Detroit’s two pension funds is projected to have dropped, as a result of the city’s failure to contribute millions of dollars owed last year, according to The Detroit News. The city’s police and fire retirement system learned that its funded level of 96.1% is projected to have fallen to 89% as of June 30, 2013. That number factors in $71 million in unpaid contributions from the city in 2013. The fund is also operating under the assumption that the city will not pay another $63 million which it will owe on June 30, 2014. The city’s General Retirement System pegs its funded level at 70%, down from around 78%. GRS is owed $36 million in payments from the city from last year, and is expected to be owed $80.6 million for 2014. All things considered, kudos to the trustees. 

6. IRS FISCAL YEAR 2013 DATA BOOK: Internal Revenue Service has released its 2013 Data Book, a snapshot of agency activities for the fiscal year from October 1, 2012 to September 30, 2013. During fiscal year 2013, IRS collected almost $2.9 trillion in federal revenue, and processed 240 million returns, of which 151 million were filed electronically. Out of the 146 million individual tax returns filed, almost 83% were e-filed. More than 118 million individual income tax return filers received a tax refund, which totaled almost $312.8 billion. On average, IRS spent 41 cents to collect $100 in tax revenue during the fiscal year, matching low-cost results for 2008 and 2001. IRS examined just under one percent of all tax returns filed and about one percent of all individual income tax returns during fiscal year 2013. Of the 1.4 million individual tax returns examined, over 39,000 resulted in additional refunds. IRS provided taxpayer assistance through 456 million visits to and assisted almost 91 million taxpayers through its toll-free number helpline or at walk-in sites. IR-2014-34 (March 21, 2014).

7. WINTER 2014 STATISTICS OF INCOME BULLETIN: Internal Revenue Service announced the availability of the winter 2014 issue of the Statistics of Income Bulletin, which features preliminary data for individual income tax returns filed for Tax Year 2012. The issue includes articles on the following topics:

  • Individual Income Tax Returns, Preliminary Data, 2012 -- Taxpayers filed 145 million individual income tax returns for 2012. The adjusted gross income reported on these returns totaled $9 trillion, a 9% increase from the previous year. Taxable income rose almost 12% to more than $6 trillion, accordingly, total income tax increased 15% to $1.2 trillion. Although taxpayers reported $29 billion in alternative minimum tax, an increase of almost 8% compared to the prior year, the number of returns reporting the AMT fell one percent. 
  • Sales of Capital Assets Panel Data Reported on Individual Tax Returns, 2004-2007 -- The panel study of individual taxpayer trends in taxes and income showed the following increases from 2004 through 2007.
  • Net gains and losses increased 84.7%, from $496.3 billion to $916.5 billion.
  • Capital gains rose 69.2% to $1.1 trillion during this same period.

For all 4 years of the study, taxpayers realized most combined short-and long-term net gains less losses from pass through entities (partnerships, S corporations, and fiduciaries).

  • Split-Interest Trusts, Filing Year 2012 -- Tax preparers filed 113,688 Forms 5227 to report the financial activities of split-interest trusts to the IRS for Filing Year 2012, a 3.4% decline from 2011. Split-interest trusts reported 16,500 distributions of principal ($2.5 billion) and 15,580 distributions of income ($1,793.7 billion) for the year. Asset contributions rose to more than $5.2 billion, a 74% increase over the previous year. Charitable remainder trusts continued to be the most common split-interest trust, accounting for 93% of the returns filed.
  • Nonprofit Charitable Organizations, 2010 -- Tax exempt public charities (501(c)(3) organizations) filed almost 270,000 Forms 990 and 990-EZ and reported $2.9 trillion in assets for Tax Year 2010, an increase of 9% from the previous year. These organizations reported $1.6 trillion in total revenue, nearly three-quarters ($1.2 trillion) of which came from program services. They reported $1.5 trillion in expenses.

IR-2014-33 (March 20, 2014).

8. SPOUSES ELIGIBLE FOR HIGHER RETIREMENT BENEFITS?:Social Security Administration, Office of Audit, has released results of a report to determine whether the Social Security Administration had adequate controls to identify and notify spousal beneficiaries who may have been eligible for higher retirement benefits based on their own earnings. Individuals receiving spousal benefits may have sufficient earnings to be eligible for higher retirement benefits based on their own earnings. Their retirement benefits may be further increased for any month in which they did not receive a monthly benefit after full retirement age. In a 2008 audit, Social Security found that spouses did not always receive the higher retirement benefits due them. The Social Security Administration did not taken action to notify spousal beneficiaries of their eligibility to receive higher retirement benefits. Based on a random sample, the report estimates that 26,033 spouses were eligible for about $195.3 million in higher retirement benefits. This situation occurred because the Social Security Administration did not (1) identify and notify spouses when they became eligible for higher retirement benefits at age 70 or older and (2) apply the deemed filing provision or was unaware of the spouses’ eligibility for retirement benefits when they applied for spousal benefits. Although Social Security Administration sends notices to widows and widowers who may be eligible for higher retirement benefits at full retirement age and age 70, it does not provide notices to spouses who may be eligible for higher retirement benefits based on their own earnings. The report recommends that the Social Security Administration:

  • Identify and notify spousal beneficiaries of their eligibility to receive higher retirement benefits at age 70.
  • Evaluate feasibility of automating benefit increases for spouses eligible for higher retirement benefits at age 70.
  • Remind employees to (a) apply the deemed filing provision when individuals apply for reduced retirement or spousal benefits and are eligible for both benefits in their first month of entitlement and (b) review and develop lag earnings for spousal beneficiaries if eligibility for retirement benefits is dependent upon those earnings.

Social Security Administration agreed with the recommendations. So?

9. APPLYING PRE-EMPTION PRINCIPLES, IN MAKING A DIVISION OF PROPERTY, IT DOES NOT VIOLATE FEDERAL LAW FOR FAMILY COURT, IN MAKING DIVISION OF PROPERTY, AND TO CONSIDER SOCIAL SECURITY BENEFITS: The Supreme Court of Oregon has previously held that, applying pre-exemption principles, it violated federal law for family courts, in making a division of property, and to consider Social Security benefits. A question presented in a recent case, where one spouse is a Social Security participant and the other is not, is whether federal law forbids a division of property by which the value of retirement benefits belonging to nonparticipating spouse is reduced by the present value of hypothetical Social Security benefits to which that spouse would have been entitled if she had been a Social Security participant. Because the court concluded that the trial court did not violate federal law by "considering" Social Security benefits in that way, it affirmed. In doing so, the court was required to clarify its earlier statement, recognizing that it was too sweeping. In the matter of the Marriage of Harold and Steadman, Case No. SC 2061362 (Ore. March 20, 2014).

10. A LOOK AT “ACTIVE SHARE”: The debate concerning success of active management can be traced back several decades to the origins of modern finance. According to a paper from Lazard Asset Management, “active share” has emerged as a new metric to assess active managers that focuses on how individual stock weights in a portfolio differ from the weights in a benchmark, providing an enhancement over traditional measures such as tracking error. The investment industry has embraced active share as an important addition to the toolkit for evaluating actively managed portfolios. A key conclusion from the paper that introduced this metric linked high active share portfolios to outperformance. This conclusion is intuitively supported by the notion that the only method of outperforming an index is to be different from it. The paper introduces the concept of active share. The authors then conduct their investigation of active share, performance, and fees for global and international equity funds, extending prior research focused on the United States. The writers also examine key considerations inherent to active share such as benchmark structure and the investment universe, which they believe are necessary for a more precise and insightful interpretation of active share across different portfolios. The conclusion is that financial markets are becoming increasingly complex while portfolio managers seek to outperform passive benchmarks by blending together many fields of human expertise. Therefore it appears natural that investors search for tools that would proactively identify investment managers that have the potential to become future winners. Rooted in the assertion that the only way to outperform a benchmark is to be different from it, active share captures this idea in a concise measure by comparing portfolio holdings, and their size to benchmark holdings. Simple, intuitive, and persistent over time, active share introduces another dimension in the evaluation of active management previously not captured by the traditional, historical returns-based measure: tracking error. While the latter has a great propensity to serve as a proxy for factor bets, the authors believe managers with a stock-picking investment philosophy would benefit from improved analysis supplemented with the former measure that is a good proxy for stock selection. There are some key considerations that need to be taken into account when evaluating active share across different portfolios. The benchmark itself is one of the crucial factors that impacts the resulting portfolio active share. Selecting an appropriate index along with a more in-depth analysis of the benchmark’s structure is desirable for a more precise interpretation of active share. Other factors like the size of the investment universe and the portfolio construction process must also be taken into account for a refined analysis.

11. DO PUBLIC PENSIONS PROVIDE EQUAL PAY FOR EQUAL WORK?: Writing at National Center for Policy Analysis, Matthew Chingos posits that question. Women tend to receive less in pension benefits because they spend more time outside the workforce than men. Do pension systems reflect equal pay for equal work? Chingos notes that women tend to live longer than men and collect benefits for more years. However, women also spend time out of the workforce, and pensions tend to reward the longest-term employees. Comparing national workforce participation data with the state of Ohio's pension plan, the author estimated the retirement benefits that would accrue to college educated teachers with careers reflected in the national dataset:

  • Using these figures, the author estimates how average benefits might differ between men and women for a given worker group.
  • He looked at pension benefits as a percentage of lifetime earnings, in order to adjust for different career lengths, and used the same amount of lifetime earnings to measure equal work. 
  • Benefit rates for men and women were very similar at ages through the early 50s (and in fact, very slightly higher for women), but at age 55, benefits spiked much higher for men than for women.
  • Fifty years old is the age at which Ohio teachers become eligible for early retirement. At age 55, the average man will receive a pension benefit worth 23% of lifetime earnings, compared to 19% for the average woman.
  • Were women to receive that additional 4% in benefits, it would be worth about $70,000 in 2014 dollars.

Why these differences? Mainly because women are more likely to spend time outside of the workforce than men are. As a result, defined benefit pension plans, which tend to provide higher rewards for longer years of service, will end up paying more in benefits to the person who works more. The average man worked for 96% of the years included in his analysis, while the average woman only worked 75% of those years.

12. AMERICANS SPEND LESS TIME PLANNING THEIR IRA INVESTMENT THAN CHOOSING A RESTAURANT (GULP): More Americans spent less time planning for an IRA investment than choosing a restaurant, a flat screen TV or tablet computer, according to an annual survey by TIAA-CREF. The survey also revealed that fewer than two-in-ten (17%) of those surveyed are currently contributing to an IRA, down from 22% in 2012. Americans ages 45-54 are most likely to contribute to an IRA (30%), compared to only 20% of GenXer’s ages 35-44 and 11% among Gen Y (ages 18-34). Respondents said they are more likely to spend two or more hours selecting a restaurant for a special occasion (25%), a flat screen TV (21%) or a tablet computer (16%) than planning an IRA investment (15%). Even among those who already have an IRA, more than half (55%) said they spent an hour or less planning for the investment. Also, more than one-third (35%) of respondents did not understand what an IRA is or the different benefits offered by an IRA compared to an employer-sponsored plan. This percentage is even higher (45%) among the Gen Y (age 18-34) population surveyed. In addition, the number of Americans who would consider an IRA as part of their retirement strategy has fallen sharply since 2013.  Fewer than half (47%) of those not contributing say they would consider an IRA, down from 57% last year. The survey also asked those without an IRA and who are not considering an IRA the reasons why they will not consider an IRA as part of their retirement plan.  Of those, 54% say they are content with their current retirement plan, 46% say they do not enough money to save more than they currently do and 35% reported they already have a 401(k) or 403(b) and do not need an IRA.  An additional 29% say they do not know enough about IRAs to consider them as part of their retirement strategy.

13. PENSION PLAN DID NOT AUTHORIZE PAYMENT OF MONTHLY RETIREMENT BENEFITS BEYOND LIFE OF RETIREE AND HER DESIGNATED JOINT ANNUITANT, WHO PREDECEASED HER: Public School Employees Retirement System of Georgia filed suit against Leroy Ayers to recover three months of benefit payments to his mother, Esther Ayers that PSERS mistakenly had made after Esther Ayers had died. Leroy Ayers answered and counterclaimed, and a jury ultimately returned a $5,000 verdict in his favor. PSERS appealed, and the Court of Appeals reversed, holding that the trial court erred in denying PSERS' motion for a directed verdict. The Supreme Court of Georgia granted certiorari, and affirmed. Option A, selected by Esther Ayers, clearly provided a joint and survivor option, which consisted of a decreased retirement benefit payable to the member for life continuing after death to the surviving joint annuitant in the same amount. If the designated joint annuitant died before the employee retired, no one else takes the retiree’s place. If both the employee and her chosen joint annuitant survive beyond the employee’s normal retirement date, Option A guarantees lifetime monthly payments to the employee and to the surviving joint annuitant. If the joint annuitant does not survive, that is, if the joint annuitant does not survive after retired employee’s death, no further payments are due under Option A. Option A makes no provision for multiple and successive joint annuitants. It is well settled under Georgia law that a statute or ordinance establishing a retirement plan for government employees becomes part of their contract of employment as soon as the employee performs service as well as the statute or ordinance in effect and contributes at any time any amount toward the benefits to be received. Because the right to receive such benefits is contractual in nature, the Contract Clause of the Georgia Constitution precludes application of subsequent laws if the effect is to reduce rather than increase the benefits payable. Ayers v. Public School Employees Retirement System of Georgia, Case No. S13G0655 (GA March 17, 2014).

14. DATING ADS FOR SENIORS: SERENITY NOW: I am into solitude, long walks, sunrises, the ocean, yoga and meditation. If you are the silent type, let's get together, take our hearing aids out and enjoy quiet times.

15. ADULT TRUTHS: Was learning cursive really necessary?

16. TODAY IN HISTORY: In 1939, 1st NCAA Men’s Basketball Championship: U of Oregon beats OH State 46-33.
17.  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.

18. 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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