Cypen & Cypen
JUNE 22, 2006
Stephen H. Cypen, Esq., Editor
1. MAJOR CORPORATE PENSION PLANS MAINTAIN FUNDED STATUS DESPITE WEAKER EQUITY PERFORMANCE:
The funded status of pension plans -- the ratio of plan assets to liabilities -- at major U.S. companies held steady in 2005 at 83% following two years of modest improvement, according to a new analysis by Mercer Human Resource Consulting and Mercer Investment Consulting. However the impact of “mark to market” balance sheet accounting will be reduced shareholder equity and greater reported volatility, assuming that proposed pension and retiree medical accounting changes go into effect later this year. In the report, “How Does Your Retirement Program Stack Up?,” Mercer analyzed retirement plan data disclosed by the S&P 500 companies in their 10-K reports for the 2005 fiscal year. The analysis will enable companies to compare their pension costs with competitor peer groups or with companies in the same industry group, permitting them better to understand how pension costs affect their company’s overall cost structure, risk profile and competitive position. A pension plan’s funded status is affected by its investment returns and the net percentage increase in its liabilities (after adjusting for new benefit accruals, employer contributions and any plan amendments). Among the S&P 500 companies studied, investment returns slowed to single digits during 2005 -- 8.2% at the median -- and are off to a weak start in 2006. Mercer estimates that the return for a typical plan during the first five months of 2006 was 5.6% on an annualized basis. By comparison, the median investment returns in 2004 and 2003 were, respectively, 12.4% and 18.1%. In contrast, the rise in interest rates in the first five months of 2006 represents a dramatic turnaround from the long, steady decline of the prior three years, with a significant positive impact on funded status. In the first five months of 2006, Mercer found, the discount rate on sample plans it analyzed rose 75 basis points. Combined with the 2006 investment returns cited above, the effect would have been to raise the funded status of the median plan analyzed from 83% to 93%. Earlier this year, the Financial Accounting Standards Board issued an exposure draft that would require plan sponsors to reflect the net funded status of their pension and postretirement medical and life insurance plans directly on the balance sheet. FASB will hold a public roundtable this month to hear from users, preparers and analysts, and has said it will issue its final standard in late September. Mercer found that if the accounting change had been in effect during the 2004 and 2005 fiscal years, many S&P 500 companies would have experienced a significant reduction in shareholder equity. Overall, the median reduction in reported shareholder equity would have been nearly 3%, assuming a 35% tax rate. But for many companies the effect would have been greater. One-fourth of the plans would have experienced a reduction in company shareholder equity of 8% or more. One-tenth would have seen shareholder equity reduced 18% or more and a handful would have had shareholder equity wiped out as a result of the accounting change.
Five municipal firefighters sued the city in a case that arose out of application of the Fair Labor Standards Act overtime exemption for employees “engaged in fire protection activities.” Unless the exemption applies, the FLSA requires that employees be compensated at a rate of one-and-one-half times their hourly rate for all hours worked in excess of forty hours in one week. The controlling issue was whether Plaintiffs are employees engaged in fire protection activities and thereby exempt from coverage of the overtime provisions, even though they spend more than twenty per cent of their time engaged in nonexempt (non-fire protection) activities. In a summary judgment in favor of plaintiffs, the federal district court held that because of their non-exempt work as dispatchers, plaintiffs were not employees engaged in fire protection activity, and therefore were not subject to the exemption. On appeal, the United States Court of Appeals reversed. In 1999, Congress amended FLSA and for the first time provided a statutory definition of “employee in fire protection activities.” The amendment, which adds Section 203(y), clarified the exemption. The 20% rule is now obsolete because Section 203(y) supplants the prior definition along with its related regulations. (Unfortunately, the Department of Labor has not revised its regulations since the legislative change, although one circuit court has observed the need for such change.) McGavock v. City of Water Valley, Mississippi, Case No. 05-60396 (U.S. 5th Cir., June 12, 2006).
3. MERRILL LYNCH NEW RETIREMENT STUDY:
Merrill Lynch has released “The 2006 Merrill Lynch New Retirement Study: A Perspective From Individuals and Employers.” The study was developed in an effort better to understand the retirement expectations and preparedness of both individuals and employers. The study builds on the findings of Merrill Lynch’s 2005 survey, which discovered that three-quarters of baby boomers had no intention of seeking a traditional retirement. Instead, boomers intend to create a whole new life stage that includes a balance of work and active living. The scope of the 2006 study was expanded considerably to probe attitudes and perspectives of the broader adult population age 25-70, their employers and current retirees. The new study confirms that retirement is being totally redefined, not just by baby boomers looking ahead to retirement, but by all adults between those ages. In fact, the “new retirement” realities and expectations identified last year are already well entrenched among 60-to-70-year-olds and older boomers who are already living the “new retirement.” Further, the study reveals a significant disconnect between employees’ goals and expectations and employers’ assumptions and actions -- offering many comprehensive insights into the future of the retirement landscape from both perspectives.
4. RUSSELL TO RESTOCK INDEXES WITH 237 FIRMS:
Russell Investment Group announced its
preliminary list of companies that will join or leave the
broad-market Russell 3000 Index when it reconstitutes its
family of U.S. equity indexes on June 30. The Russell 3000
will continue to hold 98% of the U.S. equity universe as
a result of the annual index reconstitution process and
the total market capitalization will rise from $14.3 Trillion
at this point last year to $15.3 Trillion. The additions
list for the Russell 3000 indicates 237 companies will move
into the broad-market index -- more than last year’s
208 but less than the 10-year average of 437. More than
half of this year’s additions are in three sectors:
health care (43), consumer discretionary (39) and technology
(36). Among the twelve sectors in the Russell 3000, slight
changes are expected in terms of waiting within the index.
The consumer discretionary and services sector likely will
increase from 13.7% to 14.9%, while the integrated oil sector
likely will declined from 5.2% to 4.8%. The financial services
sector will maintain its position as the largest segment,
although it will likely dip from 23.2% to 22%. Over the
course of the year 122 IPOs joined the Russell 3000, including
21 stocks that will be added to the second quarter as part
of the reconstitution process. The number of IPOs added
annually had increased the previous three years from 28
in 2003 to 95 in 2004 and 159 in 2005, before declining
this year. Russell’s Index reconstitution process
is followed closely by many investors because its U.S. indexes
currently have $3.8 Trillion in assets benchmarked against
them and account for 52% of institutional products. The
annual reconstitution of the Russell Indexes captures the
3000 largest US stocks as of the end of May, ranking them
by total market capitalization to create the Russell 3000.
The largest 1000 companies in the ranking make up the Large-Cap
5. WORLD NOW HAS MORE MILLIONAIRES:
According to Bloomberg News ranks of the world’s millionaires rose by 6.5% last year, led by growth in regions outside the United States and Europe. The number of people with more than $1 Million in assets to invest rose to 8.7 million last year, with their holdings rising 8.5% to $33.3 Trillion. Millionaires in the Asia-Pacific Region increased 7.3% to 2.4 million, outpacing North America and Europe. Africa, the Middle East and Latin America, accounting for about 700,000 millionaires, posted the fastest growth of about 10% each as oil prices more than doubled in two years and emerging stock markets rose for a third year. The number of millionaires grew 6.9% to 2.9 million in North America, and 4.5% to 2.8 million in Europe. There wealth is likely to expand further, although at a slower pace.
6. NAKED MAN, TRYING TO PERSUADE GIRLFRIEND TO MARRY HIM, SHOT:
Another gem from the Associated Press. A marriage-minded man ran naked through his neighborhood, trying to show his hesitant girlfriend that taking risks is important. He got more than he bargained for when he ended up being chased and shot at. The two were discussing marriage, when the woman said she was not sure if she was ready. After running naked across the street, the man ducked into some bushes when he spotted a couple walking. The man spotted the bushes rustling, saw bare feet underneath, drew his handgun and ordered the naked man to come out, according to police. Nevertheless, the naked suitor ran away, but the armed man gave chase and eventually fired a shot. The naked runner fell to the ground, suffering minor injuries. Police arrested the gunman on charges of aggravated assault and carrying a concealed weapon. Lord Godiva was not charged.
7. QUOTE OF THE WEEK:
“I believe in looking reality right in the eye and denying it.” Garrison Keillor
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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.