Cypen & Cypen
JULY 13, 2006
Stephen H. Cypen, Esq., Editor
1. IMPORTANT NOTICE FOR PENSION BOARDS!:
On June 20, 2006, Governor Bush approved Committee Substitute for Committee Substitute for Senate Bill No. 80, creating Chapter 2006-232. Effective July 1, any Florida agency, including a pension board, that operates a website and uses electronic mail shall post the following statement in a conspicuous location on its website:
So, those pension boards operating a website and using electronic mail should make sure that their websites are appropriately updated to include the foregoing language in a conspicuous location. Also, although not required by the statute, we suggest that pension boards use the same legend on all of their e-mails.
2. PENSION PLAN LIABILITIES CONTINUE TO FALL:
A report from Pensions & Investments indicates that unfunded pension liabilities of the top 100 U.S. corporate pension plans continued to decline in 2005 -- falling 27.2% from the previous year. In dollar terms, the top 100 plans were underfunded by a total of $50.6 Billion in 2005, down from $69.5 Billion in 2004 and $89 Billion in 2003. Overall employer contributions to the top 100 plans dipped 3.3% to $35.7 Billion in 2005, down from $36.9 Billion in 2004. The top 100 plans saw their investment earnings dip in 2005. The average percentage return on plan assets for the top 100 U.S. corporate pension plans was 9.7% in 2005, down from 11.5% in 2004 and 17.2% in 2003. While funded status improved overall, 45 of the top 100 saw their funded ratios drop last year. Discount rates fell while expected long-term rates of return on assets stayed steady in 2005. The average discount rate for the top 100 plans fell to 5.6% in 2005, down from 5.8% in 2004 and 6.1% in 2003. The average expected long-term return on plan assets decreased to 8.5% in 2005 from 8.6% the year before. In their preliminary annual reports, companies sponsoring the 100 largest U.S. pension plans said they will contribute a total of about $12 Billion to their pension plans in 2006, although a number said the amount would depend upon pending accounting rule changes and pension reform legislation.
3. EMPLOYEE BENEFITS IN THE CROSSFIRE:
Based on a 2006 presentation at the Trustees and Administrators Institutes, a recent article in Benefits & Compensation Digest covers a number of minitopics with pros and cons for each. The following deal with two of the subjects, defined benefit plans vs. defined contribution plans and growth investing vs. value investing:
Defined Benefit Plans vs. Defined Contribution Plans
Advantages of Defined Benefit Plans include:
Advantages of Defined Contribution Plans include:
The Advantages of Growth Investing are
The Advantages of Value Investing are
The above items cover only two of the topics debated at the Institutes. The arguments presented are certainly biased in that they ignore the strength of the opposing point of view. There are at least two sides to every issue and Americans love to take sides. There are always topics to debate in the employee benefits arena when trustees, participants and service providers strive to make the best decisions for their respective plans.
4. ANCIENT MARINERS SEE NO RHYME OR REASON NOT TO RECEIVE PENSIONS:
According to the Lafayette-West Lafayette (Indiana) Journal and Courier, about fifteen former members of the Merchant Marine are urging Congress to pass U.S. House Resolution 23, which is a belated “thank you” to the Merchant Mariners of World War II. The bill would also give the Mariners a pension of $1,000 a month for the rest of their lives. The House Resolution, which has 258 co-sponsors, has been before the Committee on Veterans Affairs since being introduced on January 4, 2005. However, the veterans accuse Representative Steve Buyer, Chairman of the Committee, of deliberately impeding passage of the bill. Merchant Mariners volunteered for service but were paid seamen who earned a salary similar to their Navy counterparts. During World War II, members of the Merchant Marine transported bombs, gasoline, shells, ammunition, food, guns, vehicles, planes, medicine and other supplies across dangerous waters. Some estimates are that 9,497 Mariners died during the war, which would mean they fell at a higher rate than did men in any other branch of the military. Yet, these warriors were not officially recognized as veterans until 1998, which prevented them from taking advantage of the GI Bill that would have helped pay for college. We apologize to Samuel Taylor Coleridge for the above caption.
5. A NEW PERIL FOR STOCKS -- STAGFLATION:
Stagflation is what happens when you have little economic growth with a good bit of inflation. It is an awful environment for stocks, and it could come back, according to msn.com columnist Jim Jubak. There are inflation worries, of course. Financial markets are worried that inflation is running so hot that the world’s central banks will raise interest rates again to fight it. That would not be good for either stock or bond prices. There are slow-growth worries, of course. The concern here is that the central banks will overshoot and raise interest rates so high in their battle with inflation that they will either slow or stop economic growth. That certainly would not be good for stocks and if growth slowed enough, rising bad debt could take a bite out of some sectors of the bond market. And now there are stagflation worries to add to the list. Concerns that we could see a rerun of stagflation, that dreadful mix of slow-to-no growth and high inflation that made a good part of the1970s such a bad time for investors, have been on the rise this year. The Bank for International Settlements, based in Switzerland, warns in its most recent annual report that global stagflation is a real possibility. The bank, an international organization of central banks, argues that central banks from the Federal Reserve to the European Central Bank have misunderstood the effects of globalization on inflation. Globalization, the bank says, kept inflation low in the world’s developed economies. Low-priced overseas goods replaced higher priced domestically-produced goods, lowering prices. Competition with low-cost overseas producers forced domestic producers to lower prices, as well. That also acted to dampen inflation. During this period, the prices of overseas goods were not just lower than those produced by domestic competitors, they were also falling over time. Thanks to massive overcapacity in manufacturing centers, such as China and India, overseas producers were forced to compete with themselves and repeatedly to lower prices to keep the business of price-sensitive retailers (like Wal-Mart Stores) in the developed economies. Intervention in the currency markets by national governments kept prices of overseas goods from rising. Low and falling global prices masked the effects of an expanding money supply in the developed world. Interest rates that fell to 0% in Japan and 1% in the United States provided a huge boost to the global money supply, especially as investment funds borrowed money at these rates to leverage their capital assets. In other circumstances, an increase in money supply of these dimensions should have produced measurable global price inflation. But it did not. Traditional measures of domestic inflation in the developed economies did not show rising prices. With inflation prices measures showing inflation still contained, the Bank for International Settlements argues, the world’s central banks kept the money supply spigots wide open for longer than they should have. That has built up considerable inflationary pressure around the world. If the Bank for International Settlements is right, the global economy has built up significant inflationary momentum because global central banks, which did not see inflation in their usual measures, kept the money supply growing too fast for too long. That has created exactly the kind of inflationary situation described by monetarists in which too much money supply faces too little demand for money. To unwind that monetary imbalance, central banks will have to tighten by reducing money supply growth and by raising interest rates to levels that are well above current rates and quite possibly well above levels that are compatible with solid economic growth. So, we could be headed for slow growth and high inflation for awhile -- even if everything goes well in the effort to slow inflation by raising interest rates. Although stagflation is not a certainty, Jubak sees a plausible scenario that gets us to that very uncomfortable position.
6. WHERE THE MONEY IS:
According to BusinessWeek, the city with the highest percentage of millionaires is tucked away in Northern New Mexico. Almost 10% of the nearly 19,000 residents of Los Alamos are millionaires, the highest of any U.S. metropolitan statistical area. Here are the top ten:
Once again, we suspect that nobody considered the Village of Indian Creek, FL, population 33, 100% of whom are probably millionaires.
7. QUOTE OF THE WEEK:
“Money can’t buy happiness,
but it will certainly get you a better class of memories.”
Copyright, 1996-2006, 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.