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Cypen & Cypen
MAY 12, 2011

Stephen H. Cypen, Esq., Editor

1.      CalPERS RELEASES BENEFIT FUNDING TOOLKIT FOR LOCAL ELECTED OFFICIALS: California’s local elected officials grappling with decisions related to pensions now have a resource available to them to help make well-informed decisions. California Public Employees’ Retirement System has produced an “elected official toolkit,” a primer on funding of public employee pension and retiree health benefits.  The toolkit is being distributed to state, local and federal officials to help them understand how public employee retirement benefits work, and to assist them in developing sound public policies on the issue. The toolkit features sections on:   

  • Retirement Plans -- Includes a comparison of defined benefit pension plans and 401(k)-style defined contribution retirement plans, how defined benefit pension plans provide employers with human resources management tools and a description of CalPERS’ defined benefit pension plan. 
  • Funding Retirement Benefits -- Focuses on actuarial funding basics of defined benefit plans along with sample valuations and explanation of pension discount rates and liabilities. 

The toolkit is being distributed to key state legislators and relevant committee staff, local government administrators and elected officials such as city council members, county supervisors and special district board members.  CalPERS is also providing copies to key members of Congress and congressional staff who work on employee benefit issues. The toolkit will also be used as a resource at CalPERS-sponsored workshops and training sessions for public employer and public employee organizations. Any Trustee would do well to download a copy of the 41-page document at

2.      CEO PAY JUMPED 11% IN 2010: Chief executives at the biggest U.S. companies saw their pay jump sharply in 2010, as boards rewarded them for strong profit and share-price growth with bigger bonuses and stock grants.  The median value of salaries, bonuses and long-term incentive awards for CEOs of major companies surged 11% to $9.3 Million, according to a study of proxy statements conducted for The Wall Street Journal. The rise followed a year in which pay for the top boss was flat at these companies. Viacom Inc. CEO Philippe P. Dauman topped the list. He received compensation valued at $84.3 Million, more than double his 2009 pay, thanks largely to equity awards in a renewed contract.  Dauman was followed by Larry Ellison of Oracle Corp., at $68.7 Million; Leslie Moonves of CBS, at $53.9 Million; Martin Franklin of Jarden Corp., at $45.2 Million; and Michael White of DirecTV Group Inc., at $32.7 Million.  The Journal measured CEO pay by total direct compensation, which includes salary, bonuses and the granted-value of stock, stock options and other long-term incentives given for service in fiscal 2010.  That figure excludes the value of exercised stock options and the vesting of restricted stock.  The survey covered the 350 biggest companies that filed proxies between May 1, 2010 and April 30, 2011.  

3.      CONVERTING SOCIAL SECURITY TO DC ACCOUNTS MAKES NO SENSE: The U.S. Social Security Administration made a grant to National Bureau of Economic Research as part of the SSA Retirement Research Consortium. The research resulted in “A Matter of Trust: Understanding Worldwide Public Pension Conversions.” One of the most far-reaching shifts in fiscal policy during the past two decades around the world has been fundamental restructuring of public pension systems.  Some 27 countries spanning five continents have converted at least part of their pay-as-you-go defined benefit public pension systems to systems based on funded, defined contribution accounts; reforms appear to be imminent in several more countries.  Still, more countries like the United States have seriously debated converting their public pension systems, as well. These conversions are potentially the most significant public policy reform during the past century. At first glance, such claim might seem to be a stretch; there have been many large public policy changes during the last hundred years. But their gains likely pale in comparison to pension reform. Computer simulation analysis suggests that moving the United States Social Security system from a pay-as-you-go financing to a full funding could produce as much as a 70 percent increase in the size of capital stock.  As a result, the potential (full) lifetime income of the poorest two-percent in society could rise by over 20 percent through increased wages even if progressivity of the Social Security system itself were not protected.  These potential gains are much larger than those associated with fundamentally reforming the US federal income tax, as well as most other types of fiscal reforms, including free trade. While pension fund conversions from defined benefit to defined contribution plans in the private sector have been largely motivated by labor market mobility, this explanation does not hold for public pension systems since they are already portable across employers.  In fact, public plan conversions seem fairly puzzling at first.  In a deterministic setting, the traditional public DB pension systems could, in theory, be designed to be as efficient as newer DC plans.  In presence of economic and demographic uncertainty, however, traditional plans more easily allow for inter-generational risk sharing.  Financial literacy, moral hazard and adverse selection seem only to buttress the case for the traditional design.  So why have so many countries moved, or in process of moving, away from unfunded DB plans toward at least partially funded DC plans?  Adding to the puzzle is that these reforms have taken on numerous shapes and sizes around the world, and typically have been larger in developing countries.  Indeed, these countries also face less severe demographic problems relative to many developed countries. One central theme emerges from the study: public pension conversions reflect a fundamental mistrust in ability of government to provide secure retirement services.  The exact nature of the distrust, though, differs between developing and developed countries. In developing countries, where reforms have been largest, distrust in government provision of public pensions is conditioned on previous downward movements in benefits, misuse of retirement resources and other risks and inequities in the former public pension systems, as well as projections for the future.  In particular, workers in many developing countries do not trust the government to run even a strict pay-as-you-go system.  Personal funded DC accounts, therefore, give workers access to a more transparent storage mechanism.  While personal accounts can be subject to their own political risks, they provide workers with an easier way of monitoring government behavior.  The concomitant increase in the level of funding is not the primary object of reform itself.  Rather, the increase in funding is a necessary byproduct of securing safer retirement income through personal accounts. Personal retirement accounts probably would have been created even without reference to demographic concerns. In sharp contrast, in developed countries, where reforms have been smaller, previous downward benefit adjustments and inequities, while existing, have been less important. Instead, the primary objective in many developed countries is to pre-fund future benefits since many of these countries face more severe demographic problems.  However, the government is not fully trusted properly to save or invest resources that are needed to pre-fund some future benefits.  So, in developed countries, creation of personal accounts is a byproduct of attempts to increase funding.  If these countries faced no demographic pressures, the incentive to create personal accounts would be greatly reduced. The piece also (1) critically analyzes previous attempts to explain conversions to personal accounts, (2) presents a simple model of pension system trust, (3) presents empirical evidence of factors behind reform using a dataset, including countries that have and have not reformed and (4) discusses applicability of the international experience to possible public pension reform in the United States. A very sophisticated report, indeed. 

4.      FORMER ADVISER WINS $3.3 MILLION SIGNING BONUS CASE AGAINST BROKERAGE FIRM: reports that a securities arbitration panel ruled that a former Merrill Lynch adviser can keep his $3.3 Million signing bonus from the company, even though he was essentially fired. Bank of America Corp.'s Merrill Lynch failed to convince a Financial Industry Regulatory Authority panel that the former employee, Robert Connell, should repay the money he received when he came to the company in 2009. As is typical with most FINRA arbitration rulings, the three-person arbitration panel did not specify a reason for its decision. Connell speculated he was fired because Merrill came down with “buyer’s remorse” after giving him such a large bonus.  Merrill may have wanted to fire Connell, but keep his bonus, as well as the team he brought from Smith Barney and his book of business.  Connell, who has been in the industry for 35 years, had an impeccable record before joining Merrill. Upon Connell’s exit from Merrill, the firm sued him to get repayment of the bonus and an injunction to prevent him from using Merrill information to contact clients.  Connell countersued for the bonus, loss of his book of business, as well as other items, including $26 Million in lost compensation he would have earned over the 14 years he intended to work for Merrill.  His total request was for about $35 Million. The FINRA panel ruled that Connell could keep his $3.3 Million bonus, and said that Merrill must also pay Connell $476,500 for work he did during his employment period and pay his attorney’s fees of about $288,000. In the category of “yeah – sure,” a spokesman for Merrill said the company was pleased because the panel reaffirmed the injunction prohibiting Connell from using Merrill customer information. 

5.      INCREASE IN PBGC PREMIUMS ON THE HORIZON?: The Pension Benefit Guaranty Corp. would be given new authority to increase premiums onretirement plans it insures, saving the agency an estimated $16 Billion over the next decade, under President Barack Obama’s fiscal year 2012 federal budget proposal. reports that PBGC’s pension insurance system is underfunded by about $23 Billion, with about $80 Billion in assets and $103 Billion in liabilities, but is currently unable to adjust premiums to reflect a company’s financial condition or risk to its retirement plans. Congress has raised premiums across the board, regardless of financial stability of a company or its retirement plan.  (In 2005, Congress raised the premium from $30 a year per employee and indexed it to inflation, making the current premium about $35 a year per employee.) Under the proposal, increases would be at the discretion of PBGC, similar to the model used byFederal Deposit Insurance Corp. Query: why do critics only focus on the public sector financial status? 

6.      PRE-RETIREES WORKING WITH FINANCIAL ADVISORS MORE CONFIDENT: While almost two-thirds of pre-retiree households (age 55-70) do not have a professional financial advisor, the majority (54 percent) of those who do, feel confident they will be able to live the retirement lifestyle they choose. LIMRA Retirement Research found that three times as many pre-retirees who did not work with a professional financial advisor felt unprepared retirement as compared to those who did. When asked whether they felt confident they will be able to live the retirement lifestyle they choose, 63 percent of these pre-retirees were not. Prior LIMRA research found that less than half of pre-retirees have adequately saved for retirement. In fact, 55 percent have less than $100,000 in household financial assets. In addition, research shows that less than half of pre-retirees have considered implications of outliving their income – a whopping 30 million Americans who are woefully unprepared for retirement.  LIMRA (which we surmise is an acronym) is a worldwide research, consulting and professional development organization that helps insurance and financial services companies increase their marketing and distribution effectiveness. If they say so. 

7.      PENSION PLAN SPONSORS INCREASINGLY ADOPT LMI TO REDUCE VOLATILITY: A new survey from Aon Hewitt found that after years of market turmoil, pension plan sponsors are shifting their asset allocation away from domestic equities in favor of liability-matching investments in an effort to reduce plan volatility. The survey of 227 large U.S. employers, representing $389 Billion in total assets, revealed that in 2010 38 percent of sponsors reduced their exposure to domestic equities and the same percentage expects to do so in 2011.  Just 4 percent expect to increase domestic equity exposure.  Plan sponsors are primarily shifting assets to liability-matching investments with long-duration corporate bonds as the asset of choice.  Nearly a third of plan sponsors expect to increase allocation to long-duration bonds, and 24 percent expect to increase allocation to other corporate bonds, while just 13 percent expect to do so for government bonds. Other key findings are (1) one-in-five plan sponsors raised global equity exposure in 2010, compared to just 13 percent that lowered such exposure; (2) nearly 20 percent of plan sponsors raised exposure to alternative asset classes, while only 10 percent lowered exposure in 2010; (3) sixteen percent of plan sponsors are very likely to implement longevity-hedging strategies, and 10 percent have already done so; and (4) nearly one-third of pension plan sponsors have already delegated full responsibility for implementation of theirinvestment policy or are likely to do so in the future. 

8.      REMARKABLE QUOTES FROM REMARKABLE JEWS: God will pardon me.. It's His business. Heinrich Heine

9.      BLESSED ARE THE CRACKED, FOR THEY LET IN THE LIGHT:  Out of my mind. Back in five minutes.

10.    PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.):   How is it one careless match can start a forest fire, but it takes a whole box to start a campfire? 

11.    QUOTE OF THE WEEK:    “I’ve developed a new philosophy. I only dread one day at a time.” Charlie Brown

12.    ON THIS DAY IN HISTORY: In 1997, a tornado narrowly misses downtown Miami (and we watched it come across Biscayne Bay toward Miami Beach). 

13.    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. 

14.    PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at Thank you. 



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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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