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Cypen & Cypen
APRIL 3, 2008

Stephen H. Cypen, Esq., Editor


In September 2007, an arbitrator ruled that the City of Erie must restore its Deferred Retirement Option Program to police officers (see C&C Newsletter for October 11, 2007, Item 6). The city’s appeal of that ruling is pending. Now, the Pennsylvania Labor Relations Board has ordered the city to restore the DROP to its firefighters. (The DROP was implemented in 2004 for police officers and firefighters, but the city council eliminated it for both groups in December, 2007.) The PLRB said the city was guilty of an unfair labor practice by failing to negotiate with firefighters before eliminating the DROP. reports that the city is expected to appeal ... again.


The Society of Professional Asset-Managers and Record Keepers data reveal that defined contribution assets surpassed the $10 Trillion mark in 2007, an increase of 8.7% over 2006. Employer-based DC plan assets grew 9%, while assets in IRAs increased more than 10%. Even defined benefit plan assets rose by 8.4%, as a result of increased funding levels and positive investment returns. Assets in employer-based DC plans reached nearly $5 Trillion at year-end 2007, and represented 50% of the overall DC market. Private sector plans, at nearly $4.3 Trillion, made up 86% of all employer-based DC assets, while total assets in public sector employer plans increased almost 10% over 2006, reaching $670 Billion. The majority of private sector assets ($2.9 Trillion, or 66%) were in 401(k) plans, which grew by 12% compared to a year earlier. Individual retirement plan assets equal $5.2 Trillion at year-end; most ($4.3 Trillion) in IRAs. IRA growth primarily reflects increasing distributions out of employer-based systems into rollovers, which were $2.7 Trillion, or 57%, of all IRA assets at year-end 2007. provided this detailed review of the SPARK data. Remember, these data do not reflect 2008 performance.


The City of New York has won a victory on the insurance costs of defending against thousands of claims of respiratory and other illness suffered by construction workers, police officers, firefighters and others who responded to the catastrophe on September 11, 2001. A federal judge in Manhattan has ruled that Lloyd’s of London and other insurers are responsible for $100 Million in defense costs already incurred and what could be at least twice that amount in future costs. Under the Air Transportation Safety and System Stabilization Act, the city cannot be liable, in the aggregate, for more than the greater of its insurance coverage or $350 Million. The judge was required to fix that coverage and decide who among the carriers, and in what sequence, should bear costs of defending the lawsuits, and pay the liabilities or losses that might be incurred. In ruling against Lloyd’s and the other carriers in what he termed as “a clash among insurance carriers,” the judge found their arguments to be “simplistic and without merit.” WTC Captive Insurance Company, Inc. v. Liberty Mutual Fire Insurance Company, Case No. 07 Civ. 1209 (SD NY, March 19, 2008).


In a dissolution of marriage case, the former wife introduced into evidence a document from the former husband’s employer entitled “estimated pension benefit,” showing that the former husband was entitled to about $74,000 lump sum pension payout on November 1, 2034. The lump sum amount assumed that the former husband would continue his employment with the company until 2034, when he would turn 65. The former husband introduced into evidence another document from his employer, which provided a present estimate of the pension of approximately $18,000. The employer’s retirement plans administrator confirmed that a current payout would be considerably less than $74,000, but also stated that no early payout was possible. In calculating the equitable distribution, the trial judge credited the former wife with one-half of the estimated $74,000, which would be paid in 2034. On appeal, the district court reversed: the trial court should have reduced the pension benefit to present value before determining the former wife’s equitable share as a lump sum. (Query: Although the issue apparently was not raised by either party, should not the $18,000 figure have been further reduced because early payout was prohibited?) Ascherman v. Ascherman, 35 Fla. L. Weekly D885 (Fla. 2d DCA, March 28, 2008).


Watson Wyatt’s 2008 Global Pension Asserts Study covers eleven markets, with total pension assets in these countries of just under $25 Trillion (82% of the gross domestic product of these economies). The countries are Australia, Canada, France, Germany, Hong Kong, Ireland, Japan, the Netherlands, Switzerland, the United Kingdom and the United States. These countries have grown their pension assets over the last ten years at a compound annual rate of 7.1%. Pension funds now have a global average of about 56% equities, 28% bonds and 16% other assets (estimated at 5% in cash and 11% in alternative investments). The funds carry approximately a 20% overweighting to equities and a significant underweighting to bonds relative to global capital market opportunities. The current allocation to equities supports an investment goal of around 1.5% - 2.0% per annum over bonds. Most funds have higher goals sourced from the premium return from active investment management. Watson Wyatt suggests that these goals have been increased recently and commonly would be in excess of a further 1% per annum. Pension funds must accept the significance of the zero sum gain argument: that while excellent governance can deliver such a premium, in aggregate, funds will not capture such a return, with increased investment costs making the picture rather more problematic. The United States has total assets in excess of $15 Trillion, compared to $7.8 Trillion ten years ago. Japan is a distant second, at $3 Trillion (up from $1.9 Trillion in 1997).


The United States Department of Labor, Bureau of Labor Statistics, has just issued “Employee Benefits in State and Local Government - September 2007.” Eighty-nine percent of workers in state and local government had access to employer-sponsored retirement benefits in September, 2007. Almost three times as many workers had access to defined benefit plans (83%) than to defined contribution plans (29%). Nearly all workers (96%) who had access to a defined benefit retirement plan chose to participate in it, whereas only 63% of workers with access to defined contribution plans chose to enroll in them. Eighty-seven per cent of workers had access to medical care plans, a percentage greater than access to dental care (55%) and division care (38%). The findings are from the National Compensation Survey, which provides comprehensive measures of occupational earnings, compensation cost trends and details of benefit provisions. Results of the NCS can be found at USDL:08-04-08 (March 25, 2008).


Some fifty hedge funds, representing $18.6 Billion in assets, closed in 2007, with roughly one-third of them pursuing one strategy: long/short equity. According to, Hedge Fund Daily reports that multi-strategy funds accounted for the single largest group of shutdown assets with $7.3 Billion. In contrast, there were “only” eighty three hedge fund closures with assets totaling $35 Billion in 2006. More than half of the ten biggest shutdowns involved wrong bets on leverage credit positions. The top three largest closures in terms of assets were multi-strategy funds. So far in 2008, there have already been $3.9 Billion in hedge fund closures. Hang on to your socks.


Municipal pension plan sponsors say they expect their investment portfolios to outperform the market by 146 basis points on an annual basis over the next five years, according to Greenwich Associates. Municipalities relying on this type of performance to fund pension plan liabilities should look closely at historic investment results and consider if other, non-investment actions will be required to meet future obligations. On an overall basis, the average solvency ratio of public pension plans in the United States increased modestly to 87% in 2007 from 86% in 2006. However, those gains are attributable entirely to advances made by state funds, which saw average solvency ratios increase to 85% from 79% year-over-year. Municipal fund solvency ratios, on the other hand, declined to 87% from 89% over the same period. In addition, a sizeable share (more than 30%) of municipal pensions have solvency ratios of 79% or less. These current solvency ratios reflect the state of public pensions following several years of relatively strong investment performance. The blended rate of return on investments held in public defined benefit and cash balance portfolios increased to 14.8% in 2007 from 10.1% in 2006. Those figures include the 15.8% blended return reported by state funds in 2007 and the 14.5% reported by municipal funds. Municipal pension plan sponsors, along with other U.S. institutions, seem to believe that the investment environment will remain favorable in spite of the ongoing credit crisis and well-documented worries about the risk of U.S. recession. From 2006 to 2007, municipal pension plan sponsors increased their expected rates of return on every major asset class except equity real estate: U.S. equity (to 9.3% from 9.0%); hedge funds (9.5%/9.1%); international equity (11.1%/10.1%); and private equity (13.0%/12.6%). Municipal pension plan sponsors’ apparent confidence in the resilience of the market seems to stem in large part from the belief that growth outside the United States will continue to drive the global economy and investment returns. Municipal funds expect international equity investments to generate annual returns of 11.1% for the next five years, up from 10.1% in 2006 and 9.2% the year before. By comparison, municipal funds expect domestic stocks to deliver 9.3% annual returns over the same period. If it is true that international markets will drive global growth and outperform domestic investments in coming years, municipal funds seem well positioned in terms of portfolio allocation. Municipal funds currently allocate 22.0% of total assets to international and global equities -- an allocation that easily exceeds the industry average of 17.9% among all U.S. pensions. Conversely, U.S. pensions, as a whole, allocate 41.7% of assets to domestic stocks; mutual funds have pared down U.S. equity allocations to 32.7% of total assets. Municipal funds have also become active investors in alternative asset classes, allocating 6.2% of assets to equity real estate, 3.7% to private equity and 1.4% to hedge funds. In some ways, municipal funds’ out-performance expectations might reflect political realties more than market fundamentals. There are real questions about the ability of many municipal plan sponsors to fund their pension liabilities. However, admitting to these problems would require politicians to address shortfalls through some combination of benefit reductions and tax increases. Because many of the politicians currently responsible for these funds will not be in office to deal with future consequences of underfunded plans, they have little incentive to take the political hit, and plan sponsors in general have little incentive to question projections that seem to suggest that the status quo is working. The stewards of the country’s municipal pension funds have a responsibility to ensure that decisions affecting a plan’s ability to make payments promised to public workers are firmly rooted in reality.


An article in the April 2008 issue of International Foundation’s Benefits & Compensation Digest says that when the “perfect-storm” scenario blew scores of fully funded DB plans and surpluses into unfunded territory between the 2000 market crash and subsequent precarious economic conditions, it served as one of many reminders about just how fragile the state of corporate pensions had become. The pension fund ratio had been altered, with a decline in investment returns driving down the numerator (assets) and declining interest rates increasing the denominator (liabilities). It is no wonder there was a nosedive in the funded percentage of DB plans at a time when many plan sponsors became accustomed to the lack of required contributions, and seeing surpluses swell. Would these developments prove to be the death knell of the DB plan concept that had long been predicted? Hardly. But when combined with recent regulatory activity and accounting reform of a substantial nature, plan sponsors have enough significant drivers in place to re-evaluate their corporate objectives and approach to investing. DB plan sponsors had for years taken risks that had few negative consequences, until their plans slipped to an estimated 75% funded status once the perfect storm’s damage was finally assessed across the jagged landscape of private pensions. With the exception of the fourth quarter of 2007, and despite relatively low interest rates, the markets have since rebounded to a point where such concerns largely dissipated. Now that typical funding levels are back up to approximately 95%, sponsors are less inclined to take risks. But it is never too late for DB plan sponsors to stay ahead of the curve by embracing fresh thinking to improve plan management in the face of both regulatory and market pressures. Some of the most popular options include sophisticated investment solutions, plan design strategies (including conversions to cash balance plans or other hybrid designs), and trends as seen in total retirement outsourcing or bundling various DB plan services with a single vendor. DB plans are no longer the nation’s core retirement program. Also, with the status of Social Security perennially tenuous, the metaphoric three-legged stool is increasingly supported by personal savings. The Employee Benefit Research Institute has reported that thousands of DB plans, mostly small ones, were terminated between 1975 and 2004. But recent research from Watson Wyatt has shown that DB plan freezes more than likely have reached their peak. And while plan sponsorship may not be growing, it will not be disappearing anytime soon. The return of respectable funding levels means plan sponsors can be more efficient about the way they design, administer and finance both active and frozen plans.


In a recent retiree health benefits case, the court was asked to determine whether the parties to various labor agreements intended for retiree health benefits to vest, such that any termination of those benefits constituted a violation of Section 301 of the Labor Management Relations Act. The district court grated summary judgment for the defendant/employer, after concluding that the labor agreements in question were unambiguous and established no intent to vest retiree health benefits. Having conducted a thorough review of the record and applicable law, the appellate court arrived at a different conclusion, and vacated the district court’s summary judgment. There are two types of employee benefit plans: pension plans and welfare benefit plans. While pension plans are subject to mandatory vesting, welfare benefit plans are not. Retiree health benefit plans, such as those involved in this case, are welfare benefit plans; thus, vesting occurs only if the parties so intended when they executed the applicable labor agreements. A court may find vested rights under a collective bargaining agreement even if the intent to vest has not been explicitly set out in the agreement. If the rights to health coverage have vested, then unilateral termination of coverage violates Section 301 of LMRA. On the other hand, an employer is free to terminate any unvested welfare benefits upon expiration of the relevant collective bargaining agreement. In determining whether the parties to a collective bargaining agreement intended benefits to vest, basic rules of contract interpretation apply; that is, the court must first examine the collective bargaining agreement language for clear manifestations of an intent to vest. Furthermore, each provision of the collective bargaining agreement is to be construed consistently with the entire collective bargaining agreement, and their relative positions and purposes of the parties. The terms of the collective bargaining agreement should be interpreted so as to avoid illusory promises and superfluous provisions. Retiree benefits are in a sense status benefits which, as such, carry with them an inference that the parties likely intended those benefits to continue as long as the beneficiary remains a retiree. This inference, however, does not create a legal presumption that retiree benefits are interminable. Rather, an inference is created only if the context and other available evidence indicate an intent to vest. When an ambiguity exists in the provisions of a collective bargaining agreement, then resort to extrinsic evidence may be had to ascertain whether the parties intended for the benefits to vest. If an examination of the available extrinsic evidence fails conclusively to resolve the issue and a question of intent remains, then summary judgment is improper. In making its ruling against the employer, the court recognized the overall climate in which the case reached the court: rising health care costs and foreign competition have certainly placed corporations such as the employer in a difficult economic position. However, in the absence of impossibility of performance, it is not the prerogative of the judiciary to rewrite contracts in order to rescue the parties from their improvident commitments. Noe v. PolyOne Corporation, Case No. 07-5068 (U.S. 6th Cir., March 19, 2008).


Public employees, teachers and their union representatives showed up in force last month to tell an Alaska state Senate committee that the state should never have traded in its pension plan for a 401(k)-style defined contribution plan. The Associated Press, via the Fairbanks (Alaska) Daily News-Miner, reports that the Senate State Affairs Committee held two days of hearings before moving out a bill that would reinstate the defined benefits retirement plan for newly-hired employees. It would also repeal the two-year-old defined contribution plan giving those hired since the new plan went into effect a choice between the two. The Legislature approved the defined contributions plan in the waning hours of the 2005 legislative session after a bitter row between the House and the Senate. Senate leaders said the switch was key to stopping expansion of the public employees and teachers retirement systems long-term payout shortfall, estimated at more than $8 Billion. House Republican leaders and Democrats from both bodies said the proposal did not address the shortfall and doubted whether the defined contribution system was even a fix. The new system went into effect July 1, 2006 for newly-hired teachers and public employees; those workers already in the system were allowed to keep their pensions unless they chose to switch to the new plans. Another fine mess you’ve gotten us into, Ollie.


The National Association of Government Defined Contribution Administrators was founded in 1980 to fulfill the need for sharing information among government defined contribution administrators. Its first survey began in 1983, and since then has been conducted every two years. The 2008 NAGDCA defined contribution survey covered 119 government defined contribution plans, including thirty-seven state 457 plans, forty-four local government 457 plans, one university 457 plan, four other 457 plans, nine state 401(k) plans, seven local government 401(k) plans, four state 401(a) plans, ten local government 401(a) plans, one university 401(a) plan, one other 401(a) plan and one state 403(b) plan. These plans held $93.4 Billion in assets and had approximately 1.6 million active participants in 2007. Based on the 105 state and local plans reporting eligibility figures, there are 7 million governmental employees eligible to participate in a defined contribution plan. Approximately 1.6 million of these eligible employees made deferrals in 2007. The average participation rate for state and local plans combined is 22.9%. Responding plans show an average employee deferral amount of $3,808. Almost forty-one percent of responding plans report that they now make employer contributions on behalf of participants. The following represents allocation of defined contribution assets by investment category:

  • Equity Funds - 42.5%
  • Stable Principal Funds - 29.9%
  • International Equity Funds - 8.7%
  • Balanced Funds - 6.4%
  • Life Style Funds/Asset Allocation Funds/Target Date Funds - 6.1%
  • Bond Funds - 3.5%
  • Other - 1.9%
  • $ Self-Directed Brokerage Accounts - 1%

(We find it mind-boggling that bond funds represent only 3.5% of total assets. Even when added to stable assets and a portion of balanced/life style funds, clearly fixed income represents well below 50%.) NAGDCA surveys have been an exceptional source of information for its government and industry members, as well as for everyone involved in the broader spectrum of the government defined contribution community. The data are routinely used to aid in structuring plan design, networking among plan members and informing legislators and policymakers of trends in the industry.


Based on the language of Section 943.1395(5), Florida Statutes, the Florida Attorney General found that a “completed report of the disciplinary or internal affairs investigation from the employing agency” as that phrase is used in Section 943.1395(6)(a), Florida Statutes, refers to the report submitted by the employing agency to the Criminal Justice Standards and Training Commission pursuant to Section 112.533(2)(a), Florida Statutes. This statute establishes a procedure for receipt and investigation of complaints by an employing agency. Reading Section 112.533, Florida Statutes, together with Section 943.139, Florida Statutes, would require the employing agency immediately to notify the Commission in writing, on a form adopted by the Commission, of the firing, termination, resignation, retirement or voluntary or involuntary extended leave of absence of the officer. A copy of the completed report of the disciplinary or internal affairs investigation must be forwarded to the Commission for action. Receipt of this information would begin the six-month period during which the Commission must complete its investigation into revocation of the officer’s certification. The Attorney General was also asked whether the Criminal Justice Standards and Training Commission is authorized to take action against an officer’s certification if it has not completed its investigation within the six-month time period provided in Section 943.1395(6)(a), Florida Statutes. Administrative authorities are creatures of statute and have only those powers as are statutorily conferred on them. Their powers must be exercised in accordance with the statute bestowing such powers, and they can act only as prescribed by statute. Section 943.1395(6)(a), Florida Statutes, specifically provides that any investigation initiated by the Commission pursuant to that section must be completed within six months after receipt of the completed report of the disciplinary or internal affairs investigation from the employing agency. Thus, the Attorney General opined that upon receipt of a completed report from the employing agency, the Criminal Justice Standards and Training Commission must complete its investigation within a six month period. He noted, however, Florida courts have held that an agency’s failure to meet procedural benchmarks, such as investigation deadlines, will not prevent disciplinary action unless the delay has prejudiced the employee. AGO 2008-12 (March 18, 2008).


“I guess I should warn you, if I turn out to be perfectly clear, you’ve probably misunderstood what I’ve said.” Alan Greenspan.

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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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