Cypen & Cypen
APRIL 5, 2007
Stephen H. Cypen, Esq., Editor
1. WILSHIRE SHOWS SIGNIFICANT IMPROVEMENT IN FINANCIAL HEALTH OF CORPORATE PENSION PLANS:
The financial health of corporate pension plans experienced a substantial improvement in 2006. Defined benefit pension assets for S&P 500 companies grew $132.5 Billion, from $1.112 Trillion to $1.244 Trillion, while liabilities increased $32.3 Billion, from $1.195 Trillion to $1.228 Trillion. As a result, the aggregate funding ratio (assets divided by liabilities) for all plans combined increased from 93% to 101% and an $83.5 Billion deficit at the beginning of the year became a $16.6 Billion surplus. Although 71% of corporate pension plans are underfunded, this number is considerably lower than the 83% reported for the previous year. The median (50th percentile) corporate funded ratio is 91%, an improvement from last year’s 85%. A fourth consecutive year of positive equity returns contributed to the increase in pension assets. The median 2006 investment return was 11.5%, building on returns of 8.5% in 2005, and 10.8% in 2004 and 17.1% in 2003. S&P 500 companies contributed $36.3 Billion into their defined benefit plans last year, which was less than the $46.3 Billion contributed the year before. Aggregate pension benefits from corporate pension plans increased slightly during the past year. Benefit payments totaled $73.6 Billion in 2006, compared to $68.9 Billion during the previous year. Distribution of pension liabilities and assets of S&P 500 companies is relatively concentrated among the largest plans. At the end of fiscal year 2006, over half of the total pension assets and liabilities were held by the 21 and 24 largest plans when ranked, respectively, by asset and liability size. Conversely, the smallest 100 plans when ranked by asset and liability size made up 2.1% and 1.8%, respectively, of the total asset and liability pool. The above results are from Wilshire Consulting’s seventh study covering defined benefit plans sponsored by S&P 500 companies. Wilshire’s practice is to collect data on U.S. pensions from 10-K filings for companies in the S&P 500 at fiscal year-end. All data for fiscal years 2005 and 2006 are based on S&P constituents as of year-end 2006, and, therefore, may differ slightly from the list of companies represented in earlier years.
2. NEW JERSEY DIVERTS BILLIONS FROM PENSION FUNDS:
According to a New York Times story, in 2005 the State of New Jersey put $551 Million, $56 Million or nothing into its pension fund for teachers. The first figure comes from a bond offering statement last year. The second figure comes from an audited financial statement for the fund. However, state officials recently confirmed that the correct amount for 2005's pension contribution was zero, as per an actuarial report. These conflicting numbers are just one indication that New Jersey has been diverting billions of dollars from its pension fund for state and local workers into other government purposes over the last fifteen years, employing a variety of unusual transactions authorized by the legislature and approved by governors from both political parties. For years, the state has acknowledged putting less money into the pension funds than required. The discrepancies raise questions about how much money is really in the New Jersey pension fund, which is the nation’s ninth largest, at $79 Billion in assets. For example, the state recorded investment gains immediately when the markets were up, but delayed recording losses when the markets were down. It reported money to pay for health care costs as “contributions” to the pension fund, knowing that money would soon flow out of the fund. And it claimed fund’s “excess” assets allowed the state to divert required pension contributions to other uses, like financial assistance to poor school districts. Meanwhile, the New Jersey Education Association has sued the state for failing to put enough money into the teachers’ pension fund. The trial in that matter is scheduled for next month. Although state law requires New Jersey’s seven pension plans to be funded according to actuarial standards, the state has passed various amendments that allow smaller contributions or none. Like most states, New Jersey’s constitution prohibits reduction of earned pension benefits. Just another example of “Jersey Boys” at work.
3. CALM BEFORE THE LIABILITY STORM?:
New research from Greenwich Associates suggests that the U.S. asset management industry is on the brink of revolutionary change, as pension plan sponsors look beyond their historic focus on asset growth and investment returns to more holistic strategies for funding pension liabilities. This shift, which could portend radical disruptions for the investment management industry, is being driven by the confluence of two powerful trends: underfunding and accounting reform. Underfunding poses a well-documented danger to defined benefit pension plans -- a threat that will only grow as the U.S. workforce ages. Simultaneously, the transition to mark-to-market accounting rules in the United States is reducing the ability and willingness of corporate plan sponsors to tolerate market volatility within their pension plans, and thereby their ability to generate much-needed investment returns. Plan sponsors in both the public and corporate sectors have begun investigating a series of investment and management strategies, some new and some not-so-new, that are designed to achieve a combination of increasing investment returns, limiting portfolio volatility and managing liabilities down over time. According to results of Greenwich Associates’ 2006 U.S. Investment Management Research Study, the departure from traditional pension management practices is most evident in the increasing popularity of innovative products and techniques, such as liability-driven investment strategies, absolute return strategies, portable alpha and net-long approaches such as 120/20 and 130/30 strategies. Indeed, thanks to these conditions, average funding and solvency ratios improved over the past 12 months. Even if such favorable market conditions persist, plan sponsors will continue to seek a different risk/return trade-off in their portfolios and new approaches and products will continue to gain adherents. Simply put, the two forces driving this change -- underfunding and accounting reform -- are not going away. About one-third of U.S. plan sponsors told Greenwich Associates that they have adopted new strategies in response to the emerging investment and regulatory environment and almost another third say they plan to implement new strategies to address these new conditions over the next two years. When asked which strategies they have implemented, more than 20% of these plan sponsors cite absolute return strategies. Over 10% say they have implemented portable alpha strategies and an almost equal proportion say they are using efficient portfolio strategies utilizing derivatives or other synthetic instruments. Fewer than 5% have immunized liabilities. Greenwich believes that we are seeing the beginning of a trend that could have profound ramifications for defined benefit pensions, and by extension, the investment management industry, in years to come.
4. FIDELITY ESTIMATES $215,000 NEEDED TO COVER RETIREE HEALTH CARE COSTS!:
Fidelity Investments believes that rising health care costs could consume as much as 50% of retirees’ future Social Security benefits. A 65-year-old couple retiring in 2007 will need approximately $215,000 to cover medical costs in retirement, according to Fidelity Investments’ latest health care cost estimate. This figure is a 7.5% increase over the 2006 estimate of $200,000. The retiree health cost estimate is calculated annually by Fidelity Investments. Since the estimate was first computed in 2002, the number has risen a total of 34%, with an average annual increase of 6.1%. The 2007 estimate assumes individuals do not have employer-sponsored retiree health care coverage and includes expenses associated with Medicare Part B and D premiums (32%), Medicare cost-sharing provisions -- co-payments, co-insurance, deductibles and excluded benefits (35%) -- and prescription drug out-of-pocket costs (33%). The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. Since many retirees rely on Social Security as their primary source of income in retirement, Fidelity also calculated the impact that a $215,000 health care liability would have on a retiree’s Social Security benefit. It found that a 65-year-old worker today, who is earning $60,000 and decides to retire at the end of the year, should expect that 50% of his pre-tax Social Security benefit will be used to pay for personal health care expenses in the next 16 to 18 years.
5. MORE INDIVIDUALS 50-AND-OVER RECEIVE PRIVATE PENSIONS THAN PUBLIC ONES:
Employee Benefit Research Institute’s newsletter for March 2007 contains a piece entitled “Retirement Annuity and Employment-based Pension Income Among Individuals Age 50 and Over: 2005.” In what seems to fly in the face of conventional wisdom that public employees retire earlier than private ones, data show that 15.7% of men and 10.3% of women receive pensions or annuities from private-sector sources versus, respectively, 8.6% and 7.1% from the public-sector. (A total of 25.5% of Americans age 50 and over receive pensions or annuities from all sources.) The data also show that the mean (average) annual income from the public-sector is almost double that of the private-sector.
6. SECURITIES CLASS ACTIONS SETTLEMENTS REACH RECORD DOLLAR LEVEL:
The dollar amounts of federal securities class action settlements reached record highs in 2006, according to two industry surveys reported in law.com. Securities Class Action Services estimates that the total was $18 Billion, about $1 Billion higher than a finding by Cornerstone, whose count topped its 2005 figure by $3.5 Billion -- an increase of more than 300%. While the average settlement sizes have been increasing in the last few years, 2006 stands out from prior years by the sheer magnitude of the amounts. The increase was due largely to a boost in the average settlement size, as opposed to a hike in the number of cases settled. Fourteen cases settled last year for amounts of $100 Million or more, which far exceeded the 2004 and 2005 numbers of, respectively, seven and nine mega-settlements. Despite the dramatic increase, however, 60% of all settlements continue to be under $10 Million.
7. FIREFIGHTERS WHO OPTED OUT OF COUNTY HEALTH PLAN CAN OPT BACK IN:
The Lexington-Fayette (Kentucky) Urban County Government provided health insurance to its employees through a group plan. When an employee retired, he was given the option of continuing to participate in the plan. Prior to 1999, if a retired employee continued to participate in the plan, he was responsible for paying 100% of the premium. A retired employee could opt out of the plan; however, the opt out provision was irrevocable, and, once out, a retired employee could not rejoin the plan. The county subsequently adopted an ordinance providing that it would pay premiums for police officers and firefighters who had retired prior to July 1, 1999. Three firefighters, who had retired prior to July 1, 1999 and had opted out of the plan prior thereto, sued the county, claiming the right to rejoin the plan. After commencement of the litigation, the county enacted a second ordinance, purporting to clarify the 1999 ordinance by limiting employees’ rights to payment of health insurance premiums to those “who did not terminate their participation in the group health insurance plan provided by the Urban County Government before” July 1, 1999. The circuit court ruled that the 1999 ordinance unambiguously gave employees who opted out the right to rejoin and take advantage of the county’s premium payments, but that the clarifying ordinance removed that right. On appeal and cross-appeal, Kentucky Court of Appeals affirmed the first ruling and reversed the second. The first ordinance clearly provided that opt out retirees were covered by the plan, and that the county was responsible for paying premiums associated with that coverage. On the other hand, the second ordinance just as clearly took away that right. However, once the opt out retirees were permitted by the first ordinance to rejoin the plan, the county needed to put forth a rational basis for removing them from the plan. The appellate court found that the county had not provided a rational basis for removing the opt out retirees from coverage and premium benefits provided by the first ordinance, and thus the second ordinance was unconstitutional. (Note, the lower court’s order finding the clarifying ordinance constitutional would have been correct if the county had not adopted the first ordinance permitting the opt out retirees to rejoin the plan.) Johnson v. Lexington-Fayette Urban County Government, Case Nos. 2006-CA-000124-MR and 2006-CA-000191-MR (KY, March 30, 2007), an opinion, for some reason, “not to be published.”
8. OLDER PILOTS SUE FAA OVER AGE 60 RETIREMENT RULE:
Three USAir pilots have filed a petition for writ of mandamus in the United States Court of Appeals for the District of Columbia Circuit against Marion C. Blakely, Administrator of the Federal Aviation Administration. The pilots, all of whom are currently certified as pilots and have decades of flying experience, are 60 years of age or will turn 60 within the next few months. The writ seeks an order directing the FAA Administrator to issue a decision on each pilot’s pending request for an exemption from a regulation forbidding him from flying as a pilot for his employer after his 60th birthday. A regulation issued by the Administrator provides that no air carrier may use the services of a pilot if that person has reached his 60th birthday, the so-called “Age 60 Rule.” However, the Administrator is authorized to grant exemptions from the Age 60 Rule. The pilots have each filed a request for exemption, but none have been acted upon to date. The pilots have been advised by FAA that (1) in the usual course of business waiver applications are acted on within 120 days of receipt; (2) changes to the regulations are under consideration; (3) no action on waiver applications will be taken “piecemeal” because the regulations may be changed; and (4) it would be September before FAA is likely to finish its internal consideration of changes to the regulations and months thereafter before a rule change, if any, would occur. The Administrative Procedure Act requires that actions must be taken “within a reasonable period of time.” The pilots allege it is unreasonable to withhold action on their applications for waivers until regulation changes, if any, are made. They also allege that it is likely the request for exemption will be granted or, if denied, it would be overturned by the court because there is no scientific basis that pilots over the age of 60 are unfit to fly commercial aircraft, foreign commercial carriers are permitted to fly within the United States with pilots over the age of 60 and the age limit facially violates the Age Discrimination in Employment Act. FAA’s intentional failure to act on the waiver applications threatens the pilots with irreparable harm: once employment is terminated because waivers have not been granted, the pilots’ employer will have no obligation to rehire them. The pilots seek expedited consideration and an order requiring FAA to act on their exemption requests before April 30, 2007. Stay tuned for updates here.
9. HOW BABY BOOMERS NEED INCOME FLEXIBILITY TO LIVE THEIR LIVES THEIR WAY:
Sun Life Financial surveyed 2,000 baby boomers across the United States to understand the anticipated lifestyles and spending patterns of the boomers in retirement. The respondents (1,000 pre-retirees and 1,000 retirees) all have more than $250,000 in invested assets and work with financial professionals in making investment decisions. Sun Life wanted to know whether boomers think their income needs will vary in retirement; what kind of lifestyle baby boomers are looking forward to in retirement; what activities they plan to pursue once retired, and when; and how they plan to fund their desired lifestyles. Sun Life discovered that while lifestyles boomers hope to pursue are as unique as they are, there is one characteristic they share: their income needs will likely fluctuate over time. Just as they have done their entire lives, baby boomers are once again redefining the “desired” lifestyle -- this time for the retirement years, which for them may involve almost anything but retiring. But if boomers are going to have the freedom to do what they want, they will need a new, more flexible approach to retirement income planning:
Long gone are the days when retirees expected modest, unassuming retirements funded by their company pensions. Today’s pre-retirees are eager to experience retirement to the fullest, particularly in the early years. But to make this retirement spending boom possible, they will need to create secure yet flexible retirement income plans that allow them to access the money they need, when they want it. Frank Sinatra’s “My Way” was right on.
10. PBGC MAY BE LOOKING FOR YOU:
Pension Benefit Guaranty Corporation is holding over $130 Million in unclaimed private pension benefits for over 30,000 people owed money from terminated defined benefit pension plans. Individual benefits range from $1 to over $600,000, and average about $5,000. Over the past twelve years, more than 20,000 people have found almost $140 Million in missing pension benefits through PBGC’s pension search program. The online service is free and available 24 hours a day. Check it out through http://www.pbgc.gov. Searches can be conducted by last name, company name or state where a company was headquartered. Incidentally, over 1,600 people in Florida are due more than $7 Million. Happy hunting.
11. 106 AND STILL GOING STRONG:
According to planadviser.com, Jack A. Weil, the nation’s oldest chief executive officer, celebrated his 106th birthday last week. Weil is founder of Denver-based Rockmount Ranch Wear, which makes western shirts with snaps instead of buttons. In a recent interview with the Denver Post, “Papa Jack” offered the following observations:
Yes, indeed, Jack Daniel’s is a much better blood thinner than Coumadin.
12. CAN’T GET NO SATISFACTION?:
From Best Life, here’s how to get satisfaction:
So there, Mick Jagger.
13. QUOTE OF THE WEEK:
“There’s a difference
between a philosophy and a bumper sticker.” Charles
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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.