1. SURVIVING SPOUSE’S PENSION BENEFIT NOT DISCRIMINATORY ON BASIS OF SE.X: Wood brought suit under Title VII of the Civil Rights Act of 1964, alleging that the surviving spouse benefit provided by the City of San Diego to its retired employees discriminated on the basis of se.x. The district court dismissed Wood’s disparate treatment and disparate impact claims, and entered judgment in favor of the City. The court of appeals affirmed. Wood, a retiree, participated in the City’s defined benefit pension plan. City employees are required to contribute a percentage of their salary to their pensions, and the City is required to make substantially equal contributions. City employees are also required to contribute a percentage of their salary to fund survivor benefits as well as their pensions. Pension contributions and benefits are calculated by ordinance, and are neutral with respect to se.x. When a City employee retires, he must choose among several options for allocating the pension benefit and the survivor benefit (the “surviving spouse benefit”). If a City employee is married at the time of retirement and chooses the surviving spouse benefit, the employee will receive his full monthly pension benefit until his death. At that time, if the employee’s spouse survives him, the spouse will receive a monthly allowance equal to half of the employee’s monthly pension benefit. If a City employee is single at the time of retirement and has chosen the surviving spouse benefit, the City either refunds the employee his contributions to the survivor benefit (plus interest) as a lump sum, or treats the employee’s survivor contributions as voluntary additional contributions made to provide a larger monthly pension benefit. Wood was single when she retired, and had chosen the surviving spouse benefit. She elected to have her survivor contributions treated as additional voluntary contributions, adding to her monthly benefit. The district court’s analysis centered on the obvious fact that the value of a pension is tied to length of a retiree’s life. Like every other retired City employee, Wood cannot predict what the ultimate value of her pension will be, or whether she and her hypothetical spouse would have received more money had she been married. As the district court observed, these values are based on the unknown variables of whether she would have pre-deceased her spouse, whether her spouse would have lived long enough to receive benefits and whether the benefits received by her spouse would have had a value greater than that which she received as a single employee on date of her retirement. In other words, when Wood retired as a single employee, she received her monthly pension benefits plus a guaranteed refund of her survivor contributions (or at least the option to receive a guaranteed refund by taking them as a lump sum). She had no way of knowing whether this benefit is greater or less than what her hypothetical spouse would have received had she retired married and predeceased her spouse. Some married employees will have spouses who outlive them by many years and end up receiving a pension benefit greater than Wood’s; other married employees will outlive their spouses or they will die simultaneously, and thus receive no benefit from their survivor contributions at all. In addition, Wood’s claim is foreclosed by an earlier U.S. Supreme Court opinion, which expressly recognized that facially neutral pension plans will inevitably have a disparate impact on some protected groups, and concluded that such claims are not actionable under Title VII. Wood v. City of San Diego, Case No. 56826 (U.S. 9th Cir., May 9, 2012).
2. DO FUND MANAGERS INTIMIDATE PENSION TRUSTEES?: AiCIO.com reports that some fund managers are purposefully bamboozling pension fund investors, who are struggling to see the bigger picture when allocating capital. Some asset management firms wilfully talk at too high a level when touting their products and services. Trustees need to be better educated so they can question what they are being told. Trustees often start from a very low base in terms of their investment knowledge -- a lot of boards need better financial education as they need to be in charge of high level decisions. They have to understand and be able to drill down into the detail so they can be more nimble and ready to act in changing circumstances. One way to create a more streamlined process would be to work through sub-committees that contain smaller groups of better financially-educated trustees. Trustees need to understand about how assets and investments will fit together. Looking at the fees paid to asset managers, consultants and advisers, it is incredible that some pension funds are still not paying for proper training for trustees in financial matters. The process is time consuming and perhaps costly, but well worth it.
3. MOST PLAN SPONSORS WITH DB PLANS FOR NEW HIRES WILL KEEP THEM: A significant number of U.S. employers that still offer defined benefit pension plans say they remain committed to providing those benefits to new salaried employees, according to a survey by Towers Watson. The survey also found that employers are adding features to their defined contribution plans that mirror DB design to help close possible savings gaps created by the shift from DB to DC plans. The survey found that 68% of respondents that currently offer a DB plan to new salaried employees remain committed to offering a DB plan to new hires over the next two-to-three years. Thirty six percent currently offer a DB plan to new employees. The survey also found that support for DB plans is strongest at companies that cover the most participants: among the largest 10th percentile of respondents, 45% still offer a DB plan to new hires. Despite a vastly changed landscape for retirement plans, the fact that many employers remain committed to DB plans is encouraging, especially since it is more difficult for employees to rely on a DC plan as an effective stand-alone retirement plan. When asked why they are committed to offering a DB plan to new hires, 71% of respondents cited promoting employee attraction and retention as the key reason, followed by maintaining employee morale (cited by 50%). The survey noted that only one-fourth of respondents with active DB plans are not firmly committed to their DB plan, and a small percentage plan to close or freeze their plan over the next two-to-three years. Other key findings from the survey include:
- Fifty four percent of DB plans are hybrid plans, while 46% are traditional plans.
- Seventy eight percent of DB plan sponsors for new hires believe employees value the guaranteed benefits from pensions more than other features, compared with 50% of DC-only sponsors.
- Fifty four percent of DB sponsors for new hires believe employees value income throughout retirement, while only 28% of DC-only sponsors do. A growing number of employees are willing to pay more from each paycheck to ensure a guaranteed retirement benefit.
4. GASB STANDARDS ARE ACCOUNTING GUIDELINES, NOT FUNDING REQUIREMENTS: In a Memorandum to National Association of State Retirement Administrators members, Executive Director Keith Brainard says Governmental Accounting Standards Board standards are accounting guidelines, not funding requirements, a fact that will come into even sharper focus this summer when GASB issues its expected revised statements for pension accounting. The new standards are expected to remove the link between pension accounting and funding, achieved in part by eliminating the Annual Required Contribution. Brainard makes reference to a recent paper that observes that policymakers may determine the period and basis with which to amortize unfunded pension liabilities, without regard to GASB standards. Sensible reasons exist, however, to consider pension reforms in terms that comply with the sound actuarial principles on which these GASB standards are based. The Government Finance Officers Association recommends as a Best Practice that its members establish a period for amortization of unfunded actuarial accrued liabilities that does not exceed the parameters established by GAAP. The GFOA recommendation is rooted in upholding the principle of intergenerational equity, that is, each cohort of taxpayers should pay for the costs of services provided during their lifetime, and future generations should not be charged for the cost of services associated with prior generations. Constitutional and statutory provisions in many states require policymakers to apply amortization periods that are consistent with actuarial principles contained in current GASB standards. Beyond transition costs and maintaining intergenerational equity, policymakers considering pension plan changes must also consider such factors as ability of the new plan to meet key stakeholder objectives; additional financing costs associated with extending the amortization period; the administrative costs associated with establishing a new plan; potential response of bond analysts to a failure to comply with GASB standards and the effects -- on liquidity, asset allocation and investment returns -- of closing a plan. Impact of a change in amortization policy is only one of many factors policymakers must consider when evaluating pension reform. Just as every pension plan is unique, so also are the adjustments needed to preserve or restore a plan’s sustainability, which must reflect a wide range of variables. Although GASB standards do not directly tie the hands of governmental plan sponsors, the principles on which these standards are based are primary considerations and should, with cost and other analyses, be calculated for policymakers to determine the full impact of retirement plan changes.
5. DESPITE VOLATILE FINANCIAL MARKETS, NY RETIREMENT FUND STRONG: Despite a volatile year in financial markets, the New York State Common Retirement Fund earned an estimated 5.96 percent rate of return for the state’s 2011-2012 fiscal year, according to State Comptroller Thomas DiNapoli. The estimated value of the Fund is $150.3 Billion, the highest since the global economic meltdown in state fiscal year 2008-2009. Financial markets took investors on an up and down ride last year, but the New York State Common Retirement Fund’s diversified investment portfolio, coupled with a long term view, have helped weather these large swings. Over the last three years, the Fund has experienced strong gains during a period of economic instability. The Fund remains one of strongest in the country, providing retirement security to more than one million New Yorkers. The third-largest pension fund in the nation remains among the highest funded plans in the country. In September 2010, the Fund lowered its assumed long-term investment rate of return from 8 percent to 7.5 percent. The New York State and Local Retirement System provides benefits to state and local government employees, retirees and beneficiaries. Over the last 20 years, 82 percent of the costs of benefits have been funded from investment returns. DiNapoli’s remarks were published in thecuttingedgenews.com.
6. BUY AN ANNUITY FROM SOCIAL SECURITY?: A key challenge many households entering retirement face is how to use their savings as a source of income. As 401(k)s replace traditional defined benefit pensions and as Social Security replaces a smaller share of household pre-retirement earnings, drawing an income from savings becomes increasingly important. A new Issue Brief from Center for Retirement Research at Boston College says households have three traditional options. First, they could put their savings in safe assets, preserving the value of their principal and live on the interest. Second, they could invest their savings in a portfolio of stocks and bonds, and draw out an income. Third, they could buy an annuity from an insurance company, giving up their savings in exchange for a lifetime income. In addition to these three traditional options, households could use their savings to “buy” an annuity from Social Security: they could delay claiming their Social Security benefits to get a higher monthly benefit at an older age, using their savings in the interim to pay current expenses. The savings used is the “price” and the increase in monthly benefits is the annuity it “buys.” The first section of the brief reviews a household’s three traditional options for drawing an income out of retirement savings. The second section describes how households can use their savings to “buy” an annuity from Social Security, with the prices and incomes available at different ages. The third section discusses why buying an annuity from Social Security is generally attractive and is especially attractive today. The final section concludes that the Social Security option presents an effective, and often overlooked, drawdown strategy that households should seriously consider. No. 12-10 (May 2012).
7. ASPPA SUPPORTS MODIFICATION OF DB PLAN FUNDING RULES TO ADJUST FOR ARTIFICIALLY LOW INTEREST RATES: By letter dated May 23, 2012, American Society of Pension Professionals & Actuaries expresses its support for modifying the single employer pension funding rules to adjust for artificially low interest rates, such as those currently being experienced. Many small business owners that sponsor defined benefit plans have seen dramatic increases in minimum required contributions due to the forced low-interest environment. This level of minimum contributions could not be foreseen when the plans were adopted, and the result is a serious cash drain to meet contribution demands. Amending the rules to moderate the funding requirements in times of extreme and unsustainable interest rates would provide much-needed stability. Although modifications to funding requirements should be adopted in time to be effective for 2012, because actuarial calculations for 2012 have already been already been completed for many plans, ASPPA asked that application of the modifications to 2012 be elective. Employers that can afford to make the contributions based on current interest rates may have already committed those amounts, and would prefer not to incur the additional expense of having the calculations redone. ASPPA is a national organization of more than 9,000 retirement plan professionals who provide consulting and administrative services for qualified retirement plans covering millions of American workers. ASPPA members are retirement professionals of all disciplines, including consultants, administrators, actuaries, accountants and attorneys.
8. BEGGARS CAN SCARCELY BE CHOOSERS: The Associated Press reports a federal lawsuit has been filed on behalf of several panhandlers who allege Chicago police regularly chase them from a high-end stretch of Michigan Avenue. The lawsuit contends panhandling is protected speech under the First Amendment, but police systematically intimidate and threaten to arrest them. One of the eight plaintiffs claims an officer told him on several occasions while he begged near high-end shops that he could not do it. City laws prohibit aggressive panhandling tactics, described as unwanted touching, following people or using abusive language. Passively asking for donations, as the plaintiffs claim they were doing, is legal. A Chicago Law Department spokesman said the city respects First Amendment rights.
9. NEW JERSEY MAYOR HACKED WEBSITE: A New Jersey mayor and his son were arrested by the FBI for allegedly hacking into an email account and website tied to a recall effort -- and then intimidating those associated with the site. Felix Roque, according to politico.com, the Democratic mayor of West New York, New Jersey and his son Joseph allegedly accessed and cancelled the domain registration for Recallroque.com, a website that was critical of the mayor and associated with a movement to recall him in February. Joseph learned how to hack email accounts and a domain registration company, by searching the Internet. After RecallRoque.com was taken down, Roque placed a telephone call to the proprietor of the website to say that the page had been taken down by high government officials and that everyone would pay for getting involved against Mayor Roque. We wonder if there is an East New Jersey, New York.
10. SHAREHOLDERS URGE CHEVRON TO STOP FIGHTING ECUADOR JUDGMENT: A shareholder group led by New York State Comptroller Thomas DiNapoli is urging Chevron Corp. to settle a nearly 20-year legal battle pitting the multinational corporation against indigenous people in the Ecuadorian rainforest. Chevron’s continued efforts to fight an Ecuadorian court’s judgment awarding $18 billion in damages related to the dumping of oil waste in the rainforest are hurting the indigenous people of Ecuador, as well as its own reputation, according to Dow Jones New Service. The case dates back to Texaco’s operations in Ecuador, which began in 1964. A lawsuit against Chevron was brought by a group of Ecuadorians in 2003, two years after the company bought Texaco. The suit alleged that Texaco had dumped millions of gallons of oil waste products into the Ecuadorian rainforest, and spilled millions of gallons of oil. The comptroller is trustee of the $150 Billion New York State Common Retirement Fund, which owns 7.24 million shares of Chevron worth about $713 Million. He joined with 39 other investors from North America and Canada to call on the company to end its battle to undo the verdict in the case.
11. FPPTA 28TH ANNUAL CONFERENCE: The Florida Public Pension Trustees Association’s 28th Annual Conference will take place on June 24-27, 2012 at the Hilton Walt Disney in Lake Buena Vista. The hotel is located across the street from Downtown Disney and has complimentary transportation to Disney parks. There are a variety of restaurants within the hotel including a Disney character breakfast Sundays at Covington Mill. A link on FPPTA’s web site,www.fppta.org, will take you to the Hilton Walt Disney site to make your room reservations. Sunday, June 24th the Associates Advisory Board is sponsoring the 24th Annual Associates Charitable Golf Classic held on Disney’s beautiful Magnolia Golf Course. You may access information and updates about the Conference at FPPTA’s website. All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of the Chapters 175 and 185 pension plans should take advantage of this Conference.
12. GOLF WISDOMS: Nothing straightens out a nasty slice quicker than a sharp dogleg to the right.
13. PUNOGRAPHICS: Jokes about German sausage are the wurst.
14. QUOTE OF THE WEEK: “Problems worthy of attack, prove their worth by hitting back.” Piet Hein
15. ON THIS DAY IN HISTORY: In 1868, first Memorial Day parade held in Ironton, Ohio.
16. 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.
17. 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 http://www.cypen.com/subscribe.htm. Thank you.