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Cypen & Cypen
October 24, 2013

Stephen H. Cypen, Esq., Editor

1.  PUBLIC PLANS REPORT INCREASING CONFIDENCE, LOWER COSTS, GROWING RETURNS: Public pension plan administrators are increasingly confident about the sustainability of their funds and their readiness to address future retirement issues, according to a new survey by the National Conference on Public Employee Retirement Systems. The 2013 NCPERS Public Retirement System Study also shows continuing financial strength for public funds, with continuing improvement in long-term investment returns. Once again, the annual survey provides convincing evidence that the vast majority of public pension plans are financially sound, well-funded and sustainable for the long term. It also demonstrates that defined benefit public pension plans are the least costly way to ensure retirement security for American workers. The survey covered 241 state and local government pension funds with more than 12.4 million active and retired members and with assets exceeding $1.4 trillion. The majority -- 82% -- were local pension funds; 18% were state pension funds. The major findings of the new study include:

  • Despite a still-sluggish economy and volatile markets, confidence continues to grow among public pension plan administrators about their ability to address future retirement trends and issues. Respondents provided an overall confidence rating of 7.8 on a 10-point scale, up from 7.7 in 2012;
  • Despite market declines in recent years, plans’ returns on long-term investments continue to rise. Returns on three-year investments were 10%, up from four percent in 2012; returns on 10-year investments were 7%, up from 5% in 2012; and returns on 20-year investments remained essentially steady, at 8% this year compared to 9% last year.
  • The overall average expense to administer public pension plans and to pay investment manager fees decreased significantly -- from the 2012 level of 73.1 basis points to 57.3 basis points. (According to Investment Company Institute, the expenses for most equity and hybrid mutual funds average 77 basis points.)
  • Public pension plans continued to adopt systemic and operational reforms to ensure plan sustainability -- including lowering the actuarial assumed rate of return, raising benefit age and service requirements, tightening retiree return to work rules, shortening amortization periods and lowering the number of employees receiving health care benefits.
  • Overall, funds reported domestic equity exposure at 35%, down from 36%. International equity exposure remained steady at 17%.
  • The average funded level of all responding public pension plans was 70.5%.

2. CORPORATE PENSIONS FUNDING RATIO EXCEEDS 91% -- HIGHEST SINCE 2008:  The funded status of the 100 largest corporate defined benefit pension plans improved by $32 billion during September, as measured by the Milliman 100 Pension Funding Index. The deficit dropped to $132 billion from $164 billion, primarily due to a robust investment gain of more than 2% during September. The PFI funded ratio increased to 91.4% from 89.3%.  
3.  ILLINOIS SENATE PRESIDENT SAYS STATE’S PUBLIC PENSION DEBT IS NOT A CRISIS: reports that Illinois Senate President John Cullerton said that the state's public employee pension debt is not a crisis, but instead an issue being pushed by business-backed groups seeking lower income taxes at the expense of retiree benefits. Repeat: Illinois’s public pension debt is not a crisis, but instead an issue being pushed by business-backed groups seeking lower income taxes at the expense of retiree benefits. Cullerton added that it is a subject they have to deal with, but is not something to put them on the verge of bankruptcy.  Under a 1996 law aimed at gradually boosting the amount of money put into the state's pension funds eventually to get them funded at 90% of their liability, payments to the retirement systems are already near their highest level and require only small annual future increases to stay on track. As a percentage of state general revenues, pension payments would continue to be about 20% of the state's general revenues through 2044. (On the high side -- but not bad.)  However, the state's personal income tax rate is scheduled to fall from 5% to 3.75% and the corporate rate is supposed to drop to 5.25% from 7% in 2015. The loss of revenue is estimated at about $5.4 billion. Cullerton contended top business organizations were pushing pension changes for the benefit of lower taxes, and that the public was generally supportive because many people have been moved to 401(k)-style defined-contribution plans from the defined-benefit type of plans that state retirees receive.
4. SOCIAL SECURITY’S REAL RETIREMENT AGE IS 70: A New Issue Brief from Center for Retirement Research at Boston College recounts that Social Security was designed to replace income once people could no longer work. In the 1930s, the retirement age was set at 65, which coincided with the age used by many private and public pension plans. In the late 1950s and early 1960s, Congress changed the law to enable workers to claim benefits as early as 62. Benefits claimed before 65 were actuarially reduced, so that those who claimed at 62 and those who claimed at 65 could expect to receive about the same total amount in benefits over their lifetimes. In the early 1970s, Congress introduced the Delayed Retirement Credit, which increased monthly benefits for those who claimed after the so-called Full Retirement Age of 65. That credit, which was modest at first, now fully compensates for delayed claiming. As a result, lifetime benefits are roughly equal for any claiming age between 62 and 70, the highest monthly benefits are available at 70. In that regard, 70 has become the new 65. Moreover, the level of monthly benefits at 70 appears appropriate given the increased deductions for Medicare premiums, the greater taxation of benefits, the declining importance of the spouses’ benefit and the diminished sources of other retirement income. This brief aims to clarify Social Security’s current benefit structure. The first section describes how 70 became Social Security’s new retirement age. The second section explores whether 70 is the “right” age, by looking at “equivalency” to 65, the increasing dispersion in life expectancy by socioeconomic status and actual retirement patterns. The third section looks at the Social Security replacement rates that workers will face at different retirement ages. The fourth section clarifies that with the maturation of the Delayed Retirement Credit, the “Full Retirement Age” no longer describes the benefit structure; further increases in this benchmark simply reduce replacement rates for everyone. The final section presents a threefold conclusion. One, the shift to age 70 may be appropriate given the increase in life expectancy, health and education for the majority of workers, but will lead to low replacement rates for the many workers who retire early. Two, further cuts in benefits by extending the Full Retirement Age will lead to very low benefits for early retirees. Three, policymakers need to inform those who can work that 70 is the new retirement age and devise ways to protect those who cannot work.  October 2013, No. 13-15.
5.  WILL SOCIAL SECURITY BE AROUND WHEN IT IS YOUR TURN TO COLLECT?: Only 31% of American adults believe that Social Security will still be around when they retire, according to a new survey from  The vast majority of Americans are less than confident that they will ever see Social Security checks. Americans are fairly split in their opinions, with roughly equal percentages believing they likely will or will not receive Social Security when they retire. The largest percentage -- about 39% -- say they are not sure. Not surprisingly, faith in Social Security rises as people get older.  Among people between the ages 18 and 24, only 11% expect Social Security to still be around when they retire, But even among middle-aged people, less than one-third expect to receive Social Security checks.  People who are currently retired say that they rely on their Social Security checks. The majority of retirees surveyed (56%) say that Social Security accounts more than half of their retirement income. In fact, 36% of retirees say that their Social Security check makes up more than 75% of their retirement income or is their sole source of retirement income! 
6.  PAY MILLIONS, LAG MARKET:  Today’s low-interest-rate environment has made the hunt for investment income tougher than ever. Many overseers of public pension funds, desperate to bolster returns and meet ballooning retiree obligations, have turned from traditional investments like stocks and bonds to hedge funds and private equity. These so-called alternative investments, according to The New York Times, now account for almost one-quarter of the roughly $2.6 trillion in public pension assets under management nationwide, up from 10% in 2006.  Investments in public companies’ shares, by contrast, fell to 49% from 61% in the period. Fans of alternative investments argue that they can generate higher returns. But, increased risks, higher fees and lack of transparency associated with such investments make them problematic. Investigation of the Rhode Island pension system’s recent foray into alternative investments raised fresh questions about the high costs and considerable risks of investing in hedge funds, and whether their returns are indeed worth it. The investigation concluded that the $7.7 billion Employees’ Retirement System of Rhode Island was at risk because of its increased concentration in high-cost and opaque alternative investments. The report was commissioned by the union that represents workers whose pensions are invested by the state. In less than two years, the Rhode Island pension system has ramped up its investments in hedge funds, private equity and venture capital from zero to almost $2 billion, or more than one-quarter of its assets under management. But this mix of investments has not outperformed the fund’s peers: for the year ended June 30, 2013, the fund returned 11.07%, versus 12.43% earned by the median public pension fund. A different report says investment expenses at the pension were $70 million for the year that ended June 30, 2013; earlier estimates had investment expenses amounting to only $11.5 million for the period. It is well known that hedge funds charge much higher fees than other money managers. The alternative investments in the Rhode Island pension charge investment fees of as much as 2.5% percent and performance fees of up to 20% of profits. Transaction costs are additional.  Nice work if you can get it.
7. CALPERS APPEALS ELIGIBILITY RULING IN CITY OF SAN BERNARDINO BANKRUPTCY: California Public Employees’ Retirement System has appealed the order of the United States Bankruptcy Court that determined the City of San Bernardino is eligible for relief under Chapter 9 of the Bankruptcy Code. CalPERS contends that the City did not consider alternatives to filing for Chapter 9 protection, did not file its bankruptcy petition in good faith and did not provide reliable financial information. In July 2013, the City of San Bernardino resumed full payments of its statutorily required contributions to CalPERS to fund pension benefits. It still owes $17 million in past due contributions for fiscal year 2012-13, plus penalties and interest. CalPERS says it must and will continue to pursue all past due contributions, resulting interest and penalties owed by the city. More than 1,700 retirees formerly employed by the City of San Bernardino currently receive a pension from CalPERS. Approximately 1,400 current city workers belong to the pension fund and contribute toward their pension.
8. AFTER RECESSION, MORE SENIORS IN WORKFORCE:  As the U.S. economy continues its sluggish recovery from recession and global economic crisis, more seniors and fewer young adults are in the workforce now compared with 2010.  According to a recent Gallup Poll, there has been a three-point increase since 2010 in the percentage of Americans aged 65 and older who are in the workforce -- employed full time through an employer, self-employed, working part time, or unemployed but actively searching for work. At the same time, there has been a two-point decrease in the percentage of Americans aged 18 to 29 who are in the workforce.  The recession contributed to significant household wealth reductions that Americans are still trying to recoup. Older Americans' desire to replenish their retirement savings may partly explain the three-point increase in the percentage of seniors in the workforce, as more postpone retirement or former retirees re-enter it. In addition, Gallup's employment data show that 12% of those 65 and older are employed full time for an employer or are self-employed full time in 2013, versus 9% in 2010, suggesting that older Americans may be keeping their full-time jobs.  
9.  SIX REASONS WHY YOU SHOULD SAVE FOR RETIREMENT NOW: Here are the six reasons from Employee Benefit Research Institute:

  • Because you do not want to work forever.  No matter how much you love your job, you might want the flexibility to make a change on your terms.
  • Because living in retirement is not free, and it might cost more than you think.  Many people assume that expenses will go down in retirement, and for some, they may.  On the other hand, retirement often brings with it changes in how we spend, and on what, which is not necessarily less. 
  • Because you may not be able to work as long as you think. Surveys consistently find that a large percentage of retirees leave the work force earlier than planned – 47% in the 2013.  Many retirees who retired earlier than planned cite negative reasons for doing so, including health problems/ disabilities (55%); changes at their companies, such as downsizing or closure (20%); having to care for spouses or other family members (23%).
  • Because working longer may not be enough.  One of the more recent alternatives proposed is that of continuing to work longer which, if possible, would both serve to postpone depletion of retirement income resources, and to provide additional time to save.  However, this assumption might not prove to be a viable option for all, and even for those who can and do, working until 70 by itself may not be sufficient for some individuals.
  • Because you do not know how long you will live.  People are living longer, and the longer your life, the longer your retirement could last, particularly if it begins sooner than you planned.
  • Because the sooner you start, the easier it will be. What are you waiting for?  Sooner or later you know you need to start to save.  And the later you start, the harder it can be.

10.  I CAN STEAL FROM YOU, BUT YOU BETTER NOT TAKE- BACK FROM ME: Thomas filed an action against Bostwick under the Employee Retirement Income Security Act. He alleged that Bostwick was trustee of a defined contribution plan, and breached his fiduciary duties by terminating the plan, liquidating the assets, and taking the proceeds allocable to Thomas’s interest in the plan. Thomas alleges that Bostwick applied these proceeds against Thomas’s judgment debts in violation of the plan’s anti-alienation provision. Bostwick filed a motion to dismiss, contending that Thomas’s claim was moot and further that Thomas failed to state a claim. The United States District Judge denied the motion to dismiss. After Thomas was terminated by the employer, the plan was terminated. In course of liquidation, Bostwick, as trustee, caused the proceeds allocable to Thomas’s interest in the plan to be received by the employer. Thomas alleged that he did not become aware of the liquidation of his interest in the plan or the employer’s receipt of the proceeds until one year before the complaint was filed. He alleged that the employer applied these proceeds against Thomas’s judgment debts to the employer. The employer had earlier filed a civil action against Thomas in state court alleging that Thomas had embezzled funds while working for the employer. The state court entered judgment in favor of the employer and against Thomas.  Further, a criminal complaint was filed against Thomas, asserting multiple felony counts for embezzlement. The state court issued an order for restitution against Thomas and in favor of the employer. The employer filed an adversary bankruptcy proceeding in an effort to obtain a judgment as to whether employer was allowed to accept, without Thomas’s permission, Thomas’s share in the plan’s liquidated assets as partial satisfaction of Thomas’s judgment debts; but the bankruptcy court declined to rule on the question. Thomas alleged that he did not, at any time, authorize the employer to receive his share of the proceeds. He notes that the plan document contains an ERISA-required anti-alienation provision barring any creditor from enforcing any claim against a plan participant’s interest in the plan.  The plan also contained a non-reversion clause, providing that no part of the trust shall revert to the employer or be used for purposes other than the exclusive benefit of participants and their beneficiaries. Finally, the plan stated that following termination of the plan, the trust will continue until the distributable benefit of each participant has been distributed. The case was not moot because the court was capable of finding Bostwick in breach of his duties, entering judgment in favor of Thomas and awarding Thomas damages. The fact that the plan had been terminated does not make Bostwick immune from liability.  Because Thomas alleged that he had not received what was owed to him under the plan, there had not been a final distribution of plan funds.  Finally, the Mandatory Victims Restitution Act of 1996, which allows the federal government to seize funds to enforce a judgment, is not applicable.  Talk about titanium gonads!  Thomas v. Bostwick,Case No. 13-CV-05244-JCS (N.D. California September 19, 2013).
11. INDIANA RETIREMENT SYSTEM URGED TO FORGET PLAN TO PRIVATIZE ANNUITIES: A legislative pension oversight committee has urged the Indiana Public Retirement System to reverse course on plans to privatize annuity savings accounts. The unanimous committee vote is nonbinding, according to At issue is a contentious pension cut for soon-to-be retired teachers and other public employees.  In Indiana, participants have a hybrid system that consists of a defined benefit plan and an annuity savings account component. When someone retires, the person can take the money built up in the savings account and cash out for a lump sum, or annuitize it with the system to receive monthly annuity payments calculated with an automatic 7.5% interest rate. About 50% of retirees take the annuity option. The board used its authority unilaterally to alter the system without consulting with the committee, claiming the present situation did not make sense to have a guaranteed interest rate on annuity payments that is higher than the rate of return for the fund's assets. However, instead of modestly lowering the rate, the board decided to privatize the annuity system with a third-party vendor using market-based rates. The change reduces the risk for the state and public employers, and places the risk on employees. The current market rate is in the range of 4.0% to 4.5%, which would result in a cut of tens of thousands of dollars to beneficiaries. The recommendation asked the retirement system to keep the annuity in-house, and periodically establish an interest rate that will not create an unfunded liability in the fund.
12. JEWISH WISDOMS: I do not want to achieve immortality through my work. I want to achieve immortality through not dying.  Woody Allen
14. TODAY IN HISTORY: In 1929, “Black Thursday,” start of the stock market crash, Dow Jones down 12.8%.
15. 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.
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