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Cypen & Cypen
NEWSLETTER
for
MAY 10, 2007

Stephen H. Cypen, Esq., Editor

Never Forget - September 11, 2001

1. PENSION POLICY AND PUBLIC RETIREMENT SYSTEMS:

Writing in Contingencies, James A. Beirne, former Assistant Chief Actuary for New York City, asks “Who determines public pension policy?” Leaders in government and business determine public policy as part of the governmental process. Legislators introduce pension bills that have a direct impact on benefits to employees, retirees and employers. The state legislature expands and contracts retirement programs after discussions with individuals who have knowledge and experience in economics and politics. Because New York has some of the older and larger retirement systems, a study of a few pension commissions could provide some insight into how pensions and public policy work. State and local governments are employers that struggle to control compensation costs, especially pension contributions. Thirteen million employees and 6 million retirees and beneficiaries participate in U.S. public retirement systems. The number of participants exceeds the population of most countries in the United Nations. As of 2005, the U.S. public retirement systems had accumulated approximately $2.3 Trillion in assets. Given this magnitude, any significant change in benefits has a profound effect on taxpayers in terms of funding pension costs. Some state legislatures have enacted laws that created pension commissions to study the subjects of retirement, income after retirement, disability and death benefits and the retirement needs of public employees. Who cares about public pension policy? And why? At least two groups of people care: public employees and other taxpayers. Legislatures create pension commissions with broad powers to analyze the impact of pension benefits on state and local employers’ finances and to evaluate the effectiveness of these benefits and the recruitment and retention of employees. Studying the background and events that led to a pension commission and its report -- as well as the social, economic and political climate of the period -- is helpful in understanding public pension policy. Nevertheless, translating a commission’s recommendations into law becomes the next hurdle, and one that elected officials warn is probably a more difficult phase of the policy process.

2. MEASURING RISK IN THE HEDGE FUND SECTOR:

Hedge funds -- private investment partnerships that are not directly regulated -- have grown in importance in recent years. Total assets under management of hedge funds are currently estimated at $1.5 Trillion, and the funds contribute more than half of average trading volume in equity and corporate bond markets. While the funds are major liquidity providers in normal times, their use of leverage trading strategies has raised concerns about their liquidity effects in times of market stress. Indeed, the collapse of the hedge fund Long-Term Capital Management in 1997 seemed to confirm fears that heavy losses by hedge funds have potential to drain significant liquidity from key financial markets. Writing in the Federal Reserve Bank of New York’s Current Issues, Tobias Adrian says that these ongoing concerns about hedge fund vulnerability, coupled with the rapid growth of funds, underscore the importance of understanding risk in this sector. A key determinant of hedge fund risk is the degree of similarity between trading strategies of different funds. Similar trading strategies can heighten risk when funds have to close out comparable positions in response to a common shock. For example, many funds had to close out positions during the LTCM crisis to meet margin calls and satisfy risk management constraints. A comparison of the current rise in correlations with the elevation before the 1998 event, however, reveals a key difference. The current increase stems mainly from a decline in volatility of returns, while the earlier rise was driven by high covariances -- an alternative measure of comovement in dollar terms. Because volatility and covariances are lower today, the current hedge fund environment differs from the 1998 environment. The author is an economist in the Capital Markets Function of the Research and Statistic Groups.

3. COMMERCIAL INSURANCE PREMIUMS REFLECT CONTINUATION OF 2006 TRENDS:

According to a new survey from Risk and Insurance Management Society, Inc., the first quarter of 2007 reflected a continuation of the same commercial insurance pricing trends reported in 2006. Directors and officers (D&O) continues to be a highly competitive line. In the first quarter of 2007, D&O decreased by 7.7% and by more than 12% in the last two quarters of 2006 combined. The year 2006 was a banner one for the insurance industry with some insurers reporting record profits. Because there is apparently no separate insurance pool for governmental funds, hopefully they will get some relief in their insurance premiums. RIMS is a nonprofit organization dedicated to advancing the practice of risk management, a professional discipline that protects physical, financial and human resources.

4. EFFORTS TO CONTROL EMPLOYER-SPONSORED HEALTH AND RETIREMENT BENEFITS:

Many U.S. workers receive health and pension benefits from employers, and the cost of these benefits represents a growing share of workers’ total compensation. Employers have made changes to control these rising costs, contending that these changes will allow them to remain competitive, particularly in an increasingly global market. Some advocacy groups are concerned that workers may receive reduced benefits or incur additional costs as a result of employers’ cost-control strategies. Moreover, they contend that these changes may disadvantage certain groups of workers, such as sicker, older or low-wage workers. The United States Government Accountability Office was asked to examine the practices employers are using to control costs of benefits. To evaluate changing employer benefit practices and their potential implications, GAO examined: (1) current and emerging practices employers are using to control costs of health care benefits; (2) current and emerging practices employers are using to control costs of retirement benefits; and (3) employers’ workforce restructuring changes. GAO found that many employers have already changed health benefits, often to control costs. The share of employers offering health benefits has declined from 2001 to 2006, due mostly to an 8 percentage point drop in the share of small employers offering benefits. Many employers that offer health benefits have required workers to pay a higher share of the out-of-pocket cost and some have recently introduced consumer-directed health plans, which trade lower premiums with significantly higher deductibles. Similar to coverage for active workers, an increasing share of retiree health benefits costs is being shifted to retirees and many employers have terminated benefits for future retirees. GAO also found that trends in retirement benefits that have emerged over the last several decades are continuing. Active participation in defined benefit plans fell from 29 million in 1985 to 21 million in 2003, as employers terminated existing plans or froze benefits for active employees. At the same time, active participation in defined contribution plans rose from 33 million in 1985 to 52 million in 2003, as employers increased their offerings of these plans. Benefits experts stated that employers’ decisions on what type of retirement plans to offer reflect their preference for benefit cost control and predictability in funding and accounting. Employers’ decisions to offer defined contribution plans require workers to assume more responsibility for their retirement planning; however, a growing number of employers are attempting to increase retirement savings by automatically enrolling workers and offering investment advice, for which recent legislation provides additional flexibilities. Prior to issuing its report to the House Committee on Education and Labor, GAO reviewed studies of employer benefit trends; interviewed representatives of business, government, labor and consumer advocacy and research organizations; and reviewed and analyzed data from surveys of employee benefits. GAO-07-355 (March 2007).

5. DEPARTMENTS PUSH FITNESS TO REDUCE FIREFIGHTERS’ RISK:

The Ventura County (California) Star reports on a study that found many firefighters suffer fatal heart attacks on duty. For firefighters, fitness is a matter of life or death. To save others’ lives, they need the strength to hike upstairs and hillsides in more than 50 pounds of gear. To protect their own, they need hearts that can pump their way from a dead sleep to the full sprint of a structure fire. Nationwide, a firefighter’s risk of dying from a heart attack is as much as 100 times greater than normal while responding to a fire, which may be partly because many firefighters, especially volunteers, lack adequate fitness, according to a study released by the New England Journal of Medicine. Since 1944, six Ventura County firefighters have died of heart attacks while on active duty, and most local departments count several victims of heart disease among their number. But fire departments in Ventura and Los Angeles Counties are among a minority of departments around the nation that established fitness programs, and no local firefighters have died while responding to fires in recent years. Local fire departments have been advocating fitness in their ranks for decades, and since 2000 many have embraced elements of the Wellness-Fitness Initiative, promoted by the International Association of Firefighters and Fire Chiefs. Designed to identify and correct weaknesses that could lead to injury, the program focuses on voluntary physical fitness and medical programs. The Los Angeles County Fire Department now employs several fitness professionals, and gives its firefighters an annual battery of blood tests and cardiology checks. In the past three years, those tests have found 42 cases of early stage coronary artery disease. The program has reaped monetary as well as health benefits. The department estimates it has avoided as much as $1.27 Million in workers’ compensation costs over the past three years.

6. SURVEY FINDS MORE THAN HALF OF WORKERS DO NOT USE ALL VACATION TIME:

Employers seem to appreciate their employees’ need for flexibility, as more than three-quarters of the workforce rates their employer favorably when it comes to allowing them to take extra time for personal matters. According to a study from the Hudson Employment Index, virtually the same number (80%) of workers also say their bosses are very or somewhat accepting if they need to stay home when they are under the weather. While workers say their company is flexible when it comes to providing the time for personal matters, it appears many are hesitant to take full advantage of their allotted time off. In particular, among workers who get some vacation time, more than half do not use all of it, including 30% who say they take less than half of their days off. In addition, one in five workers only plan on getting away for long weekends this year without taking a full vacation. Finally, 30% of workers have felt that they had to play hooky and call in sick when they were not actually ill. On top of accommodating workers’ personal needs on a day-to-day basis, managers need to make sure employees are taking sufficient time away from the office. Modern technology makes staying in constant contact very easy, so it takes some effort for people to disconnect. However, the benefit of employees taking that time often comes through in improved job satisfaction and greater productivity. Nearly half of employees receive more than 11 vacation days each year. Nearly the same proportion indicate that their company designates a certain number of days for sick, personal and vacation time, while 28% are provided with a bank of time to use as they see fit. The survey was based on a national poll of about 2,100 U.S. workers conducted last month.

7. HUSBANDS AND WIVES APPROACHING RETIREMENT HAVE DIFFERENT UNDERSTANDINGS:

Fidelity Investments has announced the results of new research that tested whether married couples headed into retirement have the same level of knowledge about their finances and agree on basic retirement planning issues. The results show that although couples generally agree on which retirement products they own, they often differ on their plans and expectations for retirement. In fact, Fidelity found that in more than 30% of couples, husbands and wives have completely different answers when asked at what age they will retire, their expected lifestyle in retirement and whether they intend to continue working in retirement. Fidelity conducted the research with 500 married couples, composing baby boomers and older pre-retirees, born between the years of 1937 and 1964. When asked which income sources they were would rely on most in retirement, the majority of couples agreed that workplace savings plans, pensions and Social Security would top the list, but few husbands and wives (39%) agreed upon which potential category would be their primary source of income. Many couples (58%) failed to give matching answers when asked who their spouses would turn to for financial guidance in the event of their death. Adding to the confusion, one in five couples could not even agree on whether they use the services of a financial advisor to help them plan for retirement.
8. A LITTLE REFRESHER COURSE ON INTERNATIONAL EQUITY INVESTING:

It has been a while since we’ve done anything on international equity investing (see C&C Newsletter for December, 1998, Item 1 and C&C Newsletter for March, 1999, Item 5). Investors who wish to invest directly in international securities have historically encountered various obstacles in implementing the international portion of their asset allocation. Investors would face limited transparency on their investments; expensive currency conversions and custody costs; varying settlement processes and procedures; and confusing tax implications on the investments. Often U.S. investors, whether individuals or institutions, would find it difficult directly to access foreign markets through conflicts with their investment policies or back office operations. The diversification benefits of foreign investments are tangible, given that the combined size of the U.S./Canadian equities market contains 10,000 listed securities; international investing would add a further 39,000 foreign listed names to the investable universe. American Depositary Receipts were created to address these issues and allow all U.S. investors a degree of access to foreign companies. The first American Depositary Receipt was created by JP Morgan in 1927 to allow American investors ability to invest in the British retailer Selfridge’s. Since then, the ADR market has grown to encompass many of the world’s largest and best-known companies. ADRs are issued by various banks as a certificate representing a specific number of shares of a foreign stock and are traded on the U.S. exchange. Sponsored ADR programs, more prevalent than un-sponsored investor driven programs, are where foreign companies deposit their foreign ordinary shares with a custodian bank, which in turn, offers ADRs to U.S. investors. All ADRs are not created equal, as there are several stratifications that offer varying degrees of liquidity and information transparency. ADRs are issued at various levels, within which foreign companies are held to different degrees of uniformity with U.S. conventions. Level I, the simplest and most prevalent form of ADR, does not require companies to register with the SEC or follow full United States Generally Accepted Accounting Principles, and are traded in the “Pink Sheets” over the counter. A Level II and III ADR, by contrast, is listed on an exchange, and requires registration with the SEC and adherence to GAAP requirements. Level III ADRs are a public offering of fiduciaries to investors, while Level II ADRs are a sale of shares already issued. There are also various private placement (Rule 144a) ADRs that are typically not available to non-institutional U.S. investors. Global Depositary Receipts, which are typically a dual U.S. and London listing, generally fall into the Rule 144a category. Lastly, there also exists an instrument called a “New York Share,” which allows an investor directly to purchase equity of a foreign company, rather than through an intermediary custodian. The primary benefit of an ADR is that investors are unencumbered from operational issues that arise when purchasing a foreign equity on foreign exchanges. Other benefits of owning ADRs are the tax implications and considerations when purchasing ADRs versus ordinary shares. ADRs pay all dividends in U.S. dollars, rather than the underlying foreign currency. ADR investors do not incur foreign income tax, which could be owed to a foreign country when an investor purchases an ordinary share on a foreign exchange and receives income in the form of dividends. ADR investing is not without its drawbacks. Criticism of the ADR market is often centered on the belief that the available investment universe of ADRs is insufficient to fulfill an international equity mandate. ADRs are not offered for many leading non-U.S. companies, and do not represent the full range of investment options offered by a country or industry. Currently, ADRs are offered from 2,186 companies in 74 foreign markets, covering developed and emerging markets and across all continents. While being able to access 74 markets may appear to allow for significant diversification, investors will generally have access to only the 460 Level II and III ADRs. Both counts are dwarfed by the possibilities allowed on local exchanges, where in those 74 countries nearly 39,000 companies are available for investment. It should also be noted that access to all 39,000 foreign listed names is not possible, as liquidity in foreign exchange controls and regulations might limit ability of a U.S. investor to access those markets, but the increase in opportunities is significant relative to ADRs. ADRs also do not allow an investor much in way of choice when attempting access to some of the fastest growing emerging markets. Many companies from emerging markets have only Level I programs, which, will limit a company’s cost of compliance with U.S. Securities Regulations and U.S. GAAP. China, with nearly 1,400 listed companies on its various exchanges, has only 38 Level II/III ADRs. The universe is limited even further in India, with 5,800 listed companies on its exchanges, but only 13 Level II/III ADRs. Most nonqualified investors wishing access to these markets must either purchase the Level II or III ADRs, access a country fund or exchange traded fund or attempt to find U.S. companies that derive earnings from operations in these countries. Got all that?

9. EBRI 2007 RETIREMENT CONFIDENCE SURVEY:

The 17th Annual Retirement Confidence Survey from Employee Benefit Research Institute suggests that American workers may be slow to recognize how the U.S. retirement system is changing, and those who are aware of these changes may not be adapting to them in ways that are likely to secure them a comfortable retirement. The RCS finds pension plan changes by employers have left nearly half of workers less confident about the benefits they will receive from a traditional pension plan, but that those expecting a decline in retirement benefits often fail to react constructively. Moreover, although Americans will increasingly rely on 401(k) retirement savings plans and other personal savings and investments to fund their retirement security, data suggest that many may not follow professional investment advice when it is offered to them. Additional findings in this year’s RCS include:

  • Nearly half of workers report that recent changes to the employer pension system have made them less confident about the money they can expect to receive from a defined benefit pension plan. Seventeen percent of workers have personally experienced a reduction in the retirement benefits offered by their employers within the last two years. Of these, only one-third report they are saving more as a result.
  • Many workers are counting on employer-provided benefits in retirement that are increasingly unavailable. Only 41 percent of workers indicate they or their spouse currently have a defined benefit pension plan, yet 62 percent say they are expecting to receive income from such a plan in retirement.
  • More than half of workers indicate they would be likely to take advantage of professional investment advice offered by companies that manage employer-sponsored retirement plans. However, two-thirds of these workers say they would probably implement only some of the recommendations they receive and 1 in 10 think they would implement none of them.
  • One-quarter of workers and more than one-third of retirees report they have long-term care insurance to help pay for care they might need in a nursing home, assisted living facility or at home. Estimates of private long-term care insurance policy use show that 10 percent of Americans age 65 and older had private long-term care insurance in 2002, suggesting that many are counting on coverage they do not actually have.
  • Three-quarters of workers say that when it comes to withdrawing money from their savings and investments in retirement, they will try to strike a balance between making their savings last as long as possible and maintaining their standard of living. Most will use relatively simple strategies to do this, taking what they need to cover their expenses or leaving their savings untouched for as long as possible.
  • Despite the longstanding increase in the eligibility age for Social Security, only 18 percent of workers are aware of the age at which they can receive full retirement benefits from Social Security without a reduction for early retirement.
  • Many workers, particularly older ones, continue to be uncomfortable using the Internet to help manage their finances.
  • The percentage of workers who report they have saved money for retirement remains level at 66 per cent. Likewise, the percentage of workers currently saving for retirement (60 percent) and the percentage who report having attempted to calculate their accumulation needs for retirement (43 percent) remain level.
  • Almost half of workers saving for retirement report total savings and investments (not including value of primary residence or defined benefit plans) of less than $25,000. The majority of workers who have not put money aside for retirement have little in savings at all: Seventy percent of these workers say their assets total less than $10,000!
  • The RCS continues to find that one-quarter of workers are very confident about their financial security in retirement, while 43 percent are somewhat confident. However, at least some of those who say they are very confident may be overconfident: 24 percent of very confident workers are not currently saving for retirement, 43 percent have less than $50,000 in savings and 37 percent have not done a retirement needs calculation.

All in all, pretty scary.

10. RUNNING A SUCCESSFUL BUSINESS:

To run a successful business, execute the fundamentals. From Business Start Ups, here are ten:

  • Develop a business plan you can put in action. No plan, no lasting success.
  • Be a salesperson first. Sell your customers, sell your banker, sell everyone.
  • Treat your customers like gold.
  • Don't run out of money.
  • Be a tough but fair employer.
  • Establish long-term relationships with everyone. Offer friendship and genuine help before you think “sale.”
  • Network, network, network.
  • Remember the boomerang rule: Whatever you do comes back to you.
  • Sweat equity is essential. Be willing to work long hours at first -- or don't start.
  • Establish and maintain a positive mental attitude.
  • Have a very rich spouse. (We made that one up.)

11. QUOTE OF THE WEEK:

“Don’t let yesterday use up too much of today.” Will Rogers


12. DON BELLANTONI DIES AT 50:

After a brief illness, Donald F. Bellantoni died at home on May 3, 2007. Don graduated from St. Francis College in Brooklyn, New York, and at time of his death was managing partner at the CPA firm of Koch Reiss and Company in Hollywood, Florida. We knew Don for many years and shared several clients. He was a skilled professional and a friend to all public employees. We will miss his warm smile and gentle manner. Don leaves his wife, Ann, and three young children. Funeral services were held on Monday, May 7, 2007. Rest in peace, Don. You deserve it.


Copyright, 1996-2007, all rights reserved.

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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