Cypen & Cypen
JUNE 8, 2006
Stephen H. Cypen, Esq., Editor
Investing in fixed income securities outside the U.S. is often perceived as a riskier strategy than deploying those assets domestically, especially with the introduction of currency risk. National Conference on Public Employee Retirement Systems’ Persist says this perception may have some merit when viewed as a stand-alone investment. But when viewed in-depth and within a multi-strategy portfolio context, including international bonds in a diversified investment portfolio becomes a compelling investment strategy. Historically, returns from international bonds have shown not to be well correlated with those of U.S. dollar-denominated bonds or global equities. Therefore, although viewed as a risky asset class, inclusion of international bonds may lower the total risk of a portfolio. In addition, active management of a non-dollar bond portfolio can preserve many attractive features associated with fixed income investing, such as low principal volatility and increased income potential. NCPERS believes a diversified investment portfolio would benefit from the addition of international fixed income due to the following key factors:
Simply stated, investing internationally can increase the investor’s universe of opportunity, and offers the potential for higher yields and total returns while adding potential for reduced overall portfolio risk.
Dow Jones Index, a leading global index provider, announced that it will expand its Dow Jones Islamic Market Index series by launching the Dow Jones Islamic Market China Offshore Index. The Dow Jones Islamic Market China Offshore Index represents companies that have been screened for compliance with Islamic principles and whose primary operations are in mainland China but trade at the Hong Kong Stock Exchange, New York Stock Exchange, Nasdaq or American Stock Exchange. Stocks included in the Index are H shares, red chips, ADR/ADS and Chinese stocks listed in the U.S. The Dow Jones Islamic Market China Offshore Index is designed to serve as underlying for investment products such as mutual funds, exchange-traded funds and other investable products. Excluded from the Index are stocks of companies that operate in alcohol, tobacco, pork-related products, financial services, defense/weapons and entertainment.
The U.S. Department of Labor, Employment Standards Administration, Wage and Hour Division, has announced a new “Back Wage Employee Locator,” at http://cslxwepl.dol-esa.gov/emploc/. The Back Wage Employee Locator system, through a series of questions, will identify whether or not you may be owed back wages. If it is determined that you may be owed back wages, you will be prompted to complete additional questions. Ah, yes, our government at work.
Writing in the St. Louis Post-Dispatch, Gary Findlay, Executive Director of Missouri State Employees’ Retirement System, says that there are consequences to shifting from a traditional defined benefit pension plan to a defined contribution plan (such as a 401(k)). Among them are
There are other probable outcomes of the DB to DC switch, which make the trend seem attractive to certain special interest groups:
We are already passing on significant amounts of economic trash that future generations will be required to clean up. If we are going to add to it by shifts to DC plans from DB plans, at least we have an obligation to let the masses know what is happening. Oh, that Gary.
The overall funding of traditional U.S. pension plans has probably improved in recent months, largely because of higher interest rates, says Bradley Belt, former Director of the Pension Benefit Guaranty Corp. Belt, who left PBGC at the end of May, said if current trends continue he anticipates the government this year will cut its $450 Billion estimate of underfunding at defined benefit pension plans. PBGC acts as a safety net for the pensions of 44 million Americans in employer-sponsored defined benefit plans that have a fixed payout of retirement, based on salary and years of service. Most of these plans are in older industries. The agency has a $22.8 Billion deficit after being hit by pension insolvencies of bankrupt airline and steel companies. The outlook for the agency also depends on what happens at individual companies. If the funded status of pensions does not improve at struggling companies that are at a higher risk of terminating their plans, then there is still a substantial risk to the pension insurance program. Somewhat surprisingly, Belt also had a warning for companies that are moving away from traditional pension plans and instead starting 401(k) retirement savings plans for their employees. While 401(k) plans appear less expensive for companies, switching to them may not save so much money in the long run. When employees discover at age 65 that they do not have enough money in their 401(k)s to retire, they will stay on the job, forcing companies to keep paying their salaries. And they are still going to have legacy costs, because they are basically going to have a working pensioner. The companies will be paying those same pension costs in but with a less optimal work force.
In a commentary on the Enron scandal, BusinessWeek lists a brief history of corporate scandals:
So, you see, that we have been enduring corporate shenanigans virtually since the Pilgrims landed, almost 400 years ago.
7. THE TREND TO FREEZE PENSION PLANS:
Merrill Lynch has issued the first report in a series, which will deal with freezing of pension plans. Economic uncertainty coupled with competitive pressures has acted as a catalyst for companies to freeze their defined benefit pension plans during the past few years. Although worldwide media attention has focused on the demise of the pension system, Merrill finds that plan terminations are not new phenomena, and in fact almost 170,000 plans have terminated in the past three decades. This report explores the immediate accounting implications of a plan freeze. A $1 Billion plan could potentially generate a $200 Million income boost in the year the plan is frozen. Conversely, depending on the circumstances, one could experience a one time expense of this magnitude or more. As the Financial Accounting Standards Board rewrites pension accounting rules, the pension system is clearly at an inflection point. A company considering a plan freeze should closely monitor the potential balance sheet and income statement impact of accounting proposals as it could alter the decision to freeze a plan. It is also possible that permanent ERISA funding legislation could be enacted by the end of July. It is likely that airlines will be allowed to amortize their deficits over twenty years (versus seven years for all others). The quid pro quo for this relief is that airlines will be forced to freeze their plans. On the other hand, if House and Senate conferees can resolve age discrimination issues facing Cash Balance plans, new types of DB designs could emerge and reverse the trend to freeze or terminate such types of plans. Merrill thinks companies should wait and see what the new pension landscape brings. One interesting fact from the report: of the 168,725 DB plans terminated over the past thirty years, 98% of the terminations had sufficient assets to cover their obligations -- without PBGC involvement.
8. PERHAPS HE WAS GOING TO MAKE A NEW KIND OF FROZEN DAIQUIRI:
And speaking of freezes, police say they found a nearly empty pint bottle of vodka between the front seats of an ice cream truck after they pulled over the driver for swerving into the wrong lane. Police spotted the yellow-and-white van in a subdivision, after several motorists called to report the swerving vehicle. The van was stopped, and the driver was selling ice cream to children, so the patrolman waited until the driver started up again. The van was pulled over again after the driver failed to signal turns and swerved into the wrong lane. He failed sobriety tests and was arrested on a preliminary charge of driving under the influence of alcohol. When the driver reported having chest pains, he was taken to a hospital, where a test showed his blood alcohol was .24% -- three times the state’s legal level. Associated Press reports that the van and bottle of vodka were impounded. But we’re wondering what happened to all that ice cream.
9. QUOTE OF THE WEEK:
A quote from another great philosopher,
Henny Youngman -- “When I read about the evils of
drinking, I gave up reading.”
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