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Cypen & Cypen
DECEMBER 11, 2008

Stephen H. Cypen, Esq., Editor


A. National Conference on Public Retirement Systems feels that despite current conditions in the world’s financial markets it is imperative that NCPERS member funds educate their various constituencies -- beneficiaries, elected officials and the media -- on the state of public plans and the need to remain calm in the face of adverse market conditions. Following are some points that can be made in discussing public funds with the above-mentioned constituencies:

  • Despite the overall volatility of the world’s financial markets, public pension funds in the United States continue to perform well. America’s 2,654 state, county and municipal public employee retirement systems, which guarantee a secure retirement for 7 million current and 15 million future public service retirees, are well funded, broadly diversified and capable of weathering the economic storm. America’s public pension funds have more than $2.9 trillion in assets invested.
  • Public pensions are designed to withstand fluctuations in market conditions, and help to provide stability over long event horizons. Assets are professionally invested in diverse financial products such as publicly traded equities, government securities, real estate and alternative investments. The investment strategies that public funds use not only guarantee the benefits that they are obligated to pay to current and future retirees, but also help to give financial markets stability and liquidity in times of crises, which diminish the effects of short-term disturbances.
  • While current conditions have caused significant losses across the broader markets -- including losses to individual and institutional investors -- public funds are strong, stable and well positioned to be sources of strength for markets going forward, and will be fully able to pay benefits to retirees as they become due.

B. National Association of State Retirement Administrators and National Council on Teacher Retirement write that funding a pension benefit provided by a governmental defined benefit plan takes place over decades, as plans accumulate assets needed to pay promised benefits. The financing objective of most public pension plans is to establish contribution rates that remain relatively level as a percentage of employer payroll from generation to generation of taxpayers. This strategy promotes intergenerational equity, that is, pension expenses are assigned to periods in such a manner that each period is charged a relatively constant percentage of payroll, which equitably allocates cost of an ongoing benefit program among different generations of taxpayers. Asset smoothing is critical to this strategy; without it, required contribution rates would fluctuate from one year to the next based on short term market activity and other fluctuating actuarial experience, and cost of benefits would be more likely to be shifted to or from future generations. Despite these inherent protections, public pension plans are not immune from the current financial crisis facing all investors. Investment losses will have an impact, and most public pension plans are expected to experience higher required contributions. However, these increases are not likely to emerge immediately, allowing time for the fiscal condition of city and state plan sponsors and the markets to improve. Predicting the magnitude of such increased costs is difficult and will depend on factors unique to each plan, as well as performance of investment markets over subsequent years. What can be expected, however, is that governmental plans should have no problem making benefit payments guaranteed to their beneficiaries. Sticking to the long-view, prudent investment strategies and funding mechanisms not only provide public plans the liquidity needed to pay promised benefits in the near term, but also position plans to accumulate assets that will allow them to continue to do so.

Important words of wisdom.


By letter dated November 26, 2008, Congressman Earl Pomeroy has taken the Pension Benefit Guaranty Corporation’s director to task. Since PBGC‘s director testified before Pomeroy’s Ways and Means Subcommittee on Oversight on September 24, 2008, the value of assets held in private pension plans has continued to fall. According to the Center on Retirement Research, equities in private defined benefit plans declined by 42%, representing a nearly $1 Trillion loss in plan assets over the twelve month period ending October 9, 2008. In response to Pomeroy’s questioning on pension relief during the director’s testimony, the director insisted that the administration had no position on adjusting funding requirements adopted in the Pension Protection Act. The director concluded by indicating that he would need more time to think about possible recommendations. As the hearing adjourned, Pomeroy personally asked the director for PBGC’s recommendation on how Congress might adjust funding rules for pensions. Pomeroy expressed his disappointment that, in the intervening two months, no response has been forthcoming. Understanding that PPA sought to protect workers’ pensions while addressing PBGC’s deficit, Congress has developed legislation that allows limited options to address the dire financial situation facing pensions. Only as this legislation was ready to move, did PBGC offer its concerns, albeit without any documentation to support its position. Analysis of the situation by others suggests that not acting would cause much broader harm to workers and pose greater liabilities to PBGC. Pomeroy wrote that PBGC’s failure to respond to his request suggests that PBGC and the administration have no plan to help workers and employees except to say that Congress should wait and see what happens to pensions over the next few years. “This is as unacceptable as it is irresponsible. To offer last minute, undocumented arguments against modest proposals targeted to address the fallout from the market turmoil on pensions demonstrates blanket disregard for the seriousness of plan sponsors in addressing their pension obligations and the retirement security worries of 20 million American workers and retirees.” Pomeroy still welcomes the director’s recommendations, and hopes to meet with him this month.


National Conference on Public Employee Retirement Systems has published a new Research Series paper entitled The Advantages of Using Conventional Actuarial Approaches in Valuing Public Pension Plans. Financial economics is a branch of economics that studies capital markets, examining why people invest, how investments should be valued and how investment risk and return should be measured. Over the past decade, adherents to these theories have successfully advocated applying principles of financial economics to corporate pension plans through calculation of a “market value liability.” Over the past year, they have begun advocating applying the same principles to public pension plans. This approach would be fundamentally different from conventional approaches currently used to value liabilities of public pension plans. The subject position paper examines the MVL approach, and compares it with conventional actuarial methods. It concludes that there are significant advantages to using conventional actuarial approaches for valuing public plans, including:

A. Conventional approaches better reflect the underlying nature of governments that sponsor plans, as well as goals of governmental accounting.

B. Conventional approaches have succeeded in funding most public plans.

C. Conventional approaches better reflect underlying dynamics of public pension plans.

D. Conventional approaches are more likely to provide for stable contribution rates.

E. Conventional approaches are more likely to allocate pension costs equitably across current and future taxpayers.

F. Conventional approaches are more likely to support better decisions related to public plan funding.

NCPERS concludes that current actuarial methods for valuing assets and liabilities in public pension plans are appropriate, and that requiring new disclosures are not only burdensome, but also do not provide any new insight into health of the plan. Furthermore, new disclosures could lead some to believe the plan is in worse shape than it actually is.


While government plans, both defined benefit and defined contribution plans are not subject to provisions of the Employee Retirement Income Security Act, provisions of ERISA are grounded in well-established trust principles, and are instructive in guiding most, if not all, governmental plans. A piece from National Association of Government Defined Contribution Administrators, Inc. cautions that a plan administrator must review plan and trust documents, his own state laws and regulations regarding defined contribution plans and state trust law. (As used in the note, NAGDCA is referring to a plan administrator other than the administrator/fiduciary/board of trustees mandated by Chapter 112, Florida Statutes.) Trustees are clearly fiduciaries. The issue of whether staff who are involved in day-to-day operation of the plan or who provide administrative support to the plan board are plan fiduciaries is less clear cut. Fiduciary status is determined based on functions performed for the plan, not an individual’s title. The administrative staff is acting as fiduciaries when they are exercising discretion or control over the plan or its assets. A plan administrator who performs merely ministerial functions is not a fiduciary. Persons who do not have authority to make any decisions as to plan policy, interpretations, practices or procedures, but who perform the following administrative tasks for a plan within the framework of the plan’s policies, interpretations, rules, practices and procedures, are not fiduciaries: calculation of service for vesting benefits; maintenance of participants’ service and employment records; determination of benefits; orientation of new participants; advising participants of their rights and options under the plan; and processing of claims.


The Pension Benefit Guaranty Corporation administers the Pension Plan Termination Insurance Program under Title IV of the Employee Retirement Income Security Act of 1974. Pension plans covered by Title IV must pay premiums to PBGC based upon a complex formula. The 2009 flat premium rates for PBGC’s two insurance programs will be $34 per participant for single-employer plans and $9 per participant for multiemployer plans. PBGC publishes the flat premium rates annually for convenience of the public. Federal Register: December 1, 2008 (Volume 73, Number 231) Page72870


Teachers’ Retirement System was established by the Illinois General Assembly in order to provide retirement and other benefits to public school teachers in Illinois, except those employed in public schools located in Chicago. TRS is a state entity for which the state bears funding responsibility. Public school teachers within the Chicago Public School District receive retirement benefits through an entity separate from TRS, the Chicago Teachers’ Pension Fund, which is not a state entity, but an independent body managed by Board of Education of the City of Chicago. The board filed suit against the state Treasurer and the state Comptroller alleging that under the statutory scheme, the board is the only school district in Illinois compelled to guarantee financial health of its pension fund. As a result of the discrepancy between mandatory (TRS) and discretionary (CTPF) state funding, the board alleged that the state had appropriated increasingly greater amounts each year to fund TRS, while failing each year to meet its stated goal of providing funding to CTPF. TRS was granted leave to intervene, and filed a motion to dismiss the board’s complaint. In dismissing the complaint, a Cook County judge found several rational bases for disparate funding treatment of TRS and CTPF. First, the general assembly could reasonably have decided that mandating state contributions to TRS and not to CTPF was required in order to increase the funding level of the less-well-funded TRS (63.8% vs. 80.1%). Second, unlike TRS, the board has authority to fund CTPF by way of property taxation. Third, TRS is a state entity, while CTPF is not; thus, the legislature could reasonably have decided that the state should be mandated to contribute to TRS as a state entity, while allowing the state discretion in funding CTPF, an entity independent from the state. Case closed -- at least for the time being. Board of Education of the City of Chicago vs. Giannoulias, Case No. 08 CH 9640 (Ill. Cir., October 30, 2008).


AARP Public Policy Institute has published The Coverage of Employer-Provided Pensions: Partial and Uncertain. Part of the 56-page publication deals with “pension wealth,” which takes two forms: balances in defined contribution plans (401(k)-type/IRAs) and the capitalized value of accrued pension rights of participants in defined benefit plans. (Value of the latter cannot easily be estimated.) Median sizes of 401(k)-type and IRA plan balances of working families are modest. The combined value is only $34,000. The average value is more than three times as high, reflecting the skewed (and unequal) distribution of these assets. (For those of you who forgot your math, the median is the middle of the distribution.) Although accumulated balances in both IRAs and 401(k) plans should increase with age of the holder, balances of Americans nearing retirement are still low. In particular, the median balance for workers ages 60-64 is only about $85,000. At these ages, it should be near its peak. This sum would purchase a nominal life annuity of no more than $570 per month for a male retiree, age 65. The same some would purchase an indexed annuity -- one with payment indexed to the cost of living -- with an initial payment of $400 per month, or less than 40% of the average Social Security benefit. In practice, balances of 401(k) plans are not used to buy annuities, and the actual return on them could be less. Bear in mind that 401(k) plans have not been part of the American scene for the entire working life of this age group. Nonetheless, the holdings of other financial assets of the 60-64 age group are not large. The important note: all of these data far predate the current financial situation.


Executives who oversee pension funds and their investments may want to consider steering clear of any securities lending activity, according to Financial Week. A new analysis from consultants at Watson Wyatt finds the risk-reward tradeoff of securities lending has changed greatly during the current economic turmoil. The consulting firm is now advising some of its corporate clients that if executives do not understand all of the arrangements and risks involved in their securities lending activities, they should suspend securities lending. For years, many pension fund officials have viewed securities lending as just an administrative activity. Essentially, they have viewed the share lending as a mechanism to offset custody costs, since custodians for pension funds often package securities lending along with their broader services. Now, however, pension fund executives and financial executives need to consider a number of potential land mines -- including counterparty risks and collateral -- that could cause funds to sustain substantial losses as a result of securities lending. Collateral may pose the biggest threat: when pension funds have taken cash collateral for securities lending, many of the areas where they have invested this cash have lost a substantial amount of value, which changes the risk-reward proposition greatly. Some of Watson Wyatt’s pension fund clients have placed caps on the amount of securities they can have out on loan, while others have elected to suspend securities lending altogether. (In our experience, we have found that, at this time when collateral pools are in a negative position, it is difficult, if not impossible, to cap, suspend or terminate securities lending programs.) By the way, the securities lending market currently has $5 Trillion in outstanding loans. Is securities lending the financial world’s next train wreck?


The Milwaukee Common Council has cleared the way for a court showdown over the City’s new sick leave ordinance (see C&C Newsletter for November 20, 2008, Item 11). Aldermen voted to deny a claim from the Metropolitan Milwaukee Association of Commerce that sought to block the ordinance from taking effect. The move allows MMAC to file a lawsuit against the ordinance before its February 10, 2009 implementation date. The ordinance requires employers to provide private sector employees in Milwaukee with up to 72 hours a year paid sick leave or up to 40 hours a year at employers with less than 10 workers. Legally, the Council could have sat on the claim for 120 days, allowing the ordinance to take effect before the business group could get into court to stop it, but the City Attorney’s Office advised against that procedure, according to JSOnline. Classy move, indeed.


The Securities and Exchange Commission announced that it has unanimously approved measures that will shine more light than ever on the municipal securities market, by tapping power of the Internet. For the first time, investors will have a free, one-stop way to find municipal bond information online to help them make investment decisions. SEC has worked with the Municipal Securities Rulemaking Board to correct a glaring deficiency in the $2.6 Trillion municipal market, in which two-thirds of securities are owned by individual investors. Unlike investors in corporate securities who have direct access to free company information through SEC’s EDGAR system, average investors in municipal securities currently have no free and convenient way to get important information about the municipal bonds in which they invest. Currently, municipal securities investors who want ongoing disclosure information about a municipal bond -- such as annual financial data or a material event like a downgrade or default -- must first locate it on their own at one of the four nationally recognized Municipal Securities Information Depositories. And once they find a source, investors come to find out they must pay significant fees to get the information they want, and then they experience considerable delays while waiting for documents to be delivered to them by mail or fax. The rule amendments approved by SEC designate MSRB as the central repository for ongoing disclosures by municipal issuers. Under a separate MSRB rule change, its Electronic Municipal Market Access system would make these disclosures available to investors in the same manner that SEC’s EDGAR system does for corporate disclosures. EMMA will operate as a consolidated, online portal where investors can instantly access, for free, all key information produced by municipal bond issuers about their bonds. Offering documents, real-time trade prices and educational resources already are available on EMMA at In order to provide adequate transition time, SEC’s rule amendments and MSRB’s rule change will be effective on July 1, 2009. Release 2008-286 (December 8, 2008).


Florida State Board of Administration has voted to maintain the $95.7 Billion Florida Retirement System’s target asset allocation next year. The board accepted the recommendation of its consultant to keep 2008 allocation targets of 38% domestic equity, 28% fixed income, 20% international equity, 7% real estate, 4% private equity, 2% high yield and 1% cash. However, the board set the top target private equity limit to 7% (from 5%) to avoid forced liquidation of assets. The low end of the private equity target range remains at zero. Strategic investments, a dynamic asset class, was given no specific allocation weighting; it is funded on an opportunistic basis by prorata reduction in other asset allocations. As of October 31, 2008, the plan’s actual allocation was 34.9% domestic equity, 27% fixed income, 16.9% international equity, 9.5% real estate, 4.4% private equity, 4.1% strategic investments, 2.3% high yield and 0.9% cash, according to


“The only limits to the possibilities in your life tomorrow are the ‘buts’ you use today.” Les Brown

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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.

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