1. SWITCH FROM DB TO DC MAY NOT BE BEST SOLUTION: National Institute on Retirement Security has released an Issue Brief entitled On the Right Track? Public Pension Reforms in the Wake of the Financial Crisis. The brief builds upon a 2008 NIRS analysis entitled “Look Before You Leap,” which documented the transition and other costs associated with closing a pension plan to newly hired employees. As the economy slowly recovers from the Great Recession, state and local governments continue to face pressure to follow the private sector’s lead in closing defined benefit pensions and freezing benefits. The brief further examines key factors that have contributed to private and public employers’ decisions regarding whether to keep or freeze their DB pensions; and policy changes that have been implemented to address public pension plan sustainability since 2008. The authors find that public employers face a different organizational context than private employers, and consequently have pursued different labor market strategies. By and large, state and local policy makers have evaluated plans with an eye to affordability, sustainability and human resource goals, and have generally found that a wholesale shift to defined contribution plans for new hires is not optimal. The authors also highlight key implications of switching to DC-only plans for worker retirement security and public sector employment relations that warrant public consideration. The following are key findings:
1) Distinct business and labor market dynamics and regulatory pressures led to the decline of pensions in the private sector that do not necessarily apply to governments.
- In the private sector, industry and labor market restructuring led new core industries, especially information technology, to pursue flexible labor strategies, while low-wage, low-benefit jobs proliferated in the service sector. Public employers have remained committed to stable employment relations and use pensions to reward long tenure.
- Onerous regulations and accounting rules governing private pensions have made required pension contributions unpredictable and volatile, creating significant financial uncertainty for employers. Public sector pensions have been able to smooth out the effects of business cycles on funding requirements to a much greater degree.
- Corporate focus on maximizing shareholder value often conflicts with workers’ need for retirement security in the context of retirement plan sustainability issues. State and local governments use DB pensions to serve the public interest by providing public services in a high quality and cost effective manner, while also providing workforce retirement security.
2) A policy of closing or freezing pensions and switching to DC accounts is not necessarily the best approach for government employers and taxpayers. Recognizing this fact, states are modifying their pensions to ensure long-term sustainability.
- Since 2008, 45 states have enacted pension reforms. The vast majority of these states had modified existing pension plans. The most common plan modifications are increased employee contributions, reduced DB benefits for new hires including changes to retirement ages, and cost-of-living-adjustment reductions.
- While a number of states have, for many years, offered DC accounts as an option in lieu of a DB pension, no state has shifted to a DC-only plan since 2005. Some legislative changes in this period involve a mandatory hybrid arrangement consisting of a reduced DB pension benefit or cash balance plan with a DC plan.
- Closing pensions and shifting to DC accounts for new hires is less cost-efficient compared to adjusting DB benefits or switching to a hybrid plan in which limited contributions continue to flow into the existing DB plan.
- Providing the same retirement income from a traditional pension costs nearly twice as much (83 percent more) when funded through a 401(k)-style account, representing an inefficient use of tax dollars.
- For plan sponsors that comply with generally accepted accounting principles, freezing a pension compresses the cost of amortizing existing unfunded liabilities, increasing the cost of the plan until the unfunded liabilities are eliminated. It can also increase unfunded liabilities when changed cash flow and liquidity needs translate to lower investment earnings.
3) Freezing or closing DB plans and shifting to DC-only accounts threatens workers’ retirement security, with mid-career employees being the hardest hit.
- Experience with frozen pensions indicates that long-tenured, mid-career employees are the most likely to see the greatest reduction in anticipated income when they retire.
- While younger workers theoretically have time to make up ground, evidence indicates that in reality, they face substantial risk of falling short.
4) Because pensions play an important role in public sector compensation, freezing or closing DB plans and shifting to DC accounts may negatively affect the ability of public employers to recruit and retain qualified workers.
- If retirement benefits consisted only of DC accounts, the public sector would likely risk decreased productivity and worker commitment, and face increased recruitment costs.
- Studies have found that the compensation of public sector workers -- including benefits -- is about the same or slightly lower than that of their peers in the private sector with the same education and experience. Government employers that stop DB benefits or substantially scale them back for new hires are likely to become less competitive for skilled workers over the long run unless they increase other forms of compensation.
It ain’t so simple.
2. A SIX-POINT PLAN TO ADDRESS ACCELERATED EXODUS FROM DB PLANS: Unfortunately, defined benefit pension plans have been in decline for many years. There are many reasons for the long-term decline, including, for example, funding/accounting volatility, competitive pressures, employee preferences and workforce changes. However, recently, the decline has markedly accelerated in a new way due to intensified pressures, with employers understandably exiting the system with respect to part or all of their plans. On behalf of pension plan sponsors – both those that continue to maintain an active plan and those that previously maintained an active plan, Americans Benefits Council offers a six-point plan to respond to such pressures:
- Funding stabilization needs to be made permanent. Business needs predictability and stability. Businesses cannot be subject to costs that are structurally designed to increase during economic downturns, thus impeding recovery. The artificial decreases in interest rates over the last several years have created enormous increases in funding obligations, triggered by the Federal Reserve Board’s efforts to combat the economic downturn through lower interest rates. The funding stabilization rules in effect in 2012 (Map-21) need to be made permanent.
- Accounting standards need to be stabilized. For many legacy companies, pension plan liabilities are disproportionately large compared to size of the business. The same artificial decreases in interest rates noted above for funding purposes have created very large pension plan liabilities on company balance sheets, far in excess of any reasonable long-term valuation of those liabilities. The interest rates used to measure pension obligations need to be reformed to avoid artificial distortions caused by short-term non-market forces, such as the Federal Reserve Board’s actions to reduce interest rates.
- PBGC premiums need to be based on a stable long-term assessments of need. In these challenged economic times, companies have to scrutinize every significant cost. Under the new PBGC premium structure, large companies can incur annual premium costs of tens of millions of dollars. The PBGC premium structure needs to be stabilized. The need for premium adjustments cannot be based on short-term artificial fluctuations in interest rates.
- Businesses should not be prevented from engaging in helpful transactions by PBGC. Businesses are constantly entering into transactions to expand or contract components of their businesses in order to achieve greater efficiency and prospects for growth. PBGC consistently uses statutory powers designed for entirely different purposes to require companies engaging in business transactions to make enormous additional contributions to their plans. PBGC’s power to impose costs on business transactions needs to be conformed to the original intent of Congress. Congress authorized PBGC to require security from pension plan sponsors that shut down a major facility and trigger a very large layoff.
- We need to continue working with Congress, Treasury and IRS to prevent testing rules from encouraging pension plan closures. When businesses must reluctantly close pension plans, they need flexibility to preserve the pension plan for existing employees, who may have been counting on getting continued pension benefits. In many cases, IRS testing rules have the effect of forcing companies to close down their pension plan completely. In this and prior sessions of Congress, bills have been introduced that would have addressed this problem. Very constructive discussions have also begun with the Treasury Department to avoid forced closures of plans.
- Workable rules for hybrid pension plans are critical. Hybrid pension plans, such as cash balance plans and pension equity plans, have been the sole source of significant growth during the long decline of the DB system. The development is obviously good for the workers, as well. Any direct or indirect application of the rules on a retroactive basis would be a very serious problem. The solution is to continue to work with Treasury and IRS.
The Council’s mission is to be the most effective advocate for employer-sponsored benefit plans. Let’s see … now.
3. WHY SAVING FOR RETIREMENT MAY BE GOOD FOR WOMEN’S HEALTH: Women are more financially powerful than ever before. Not only do they make up half of the U.S. workforce, but they are the primary breadwinners in 4 out of 10 U.S. families. And yet, according to a recent survey released by TD Ameritrade Holding Corporation, 75 percent of women said they have no specific retirement savings goal and nearly 1 in 4 women (22%) over the age of 23 said they have not started saving for retirement yet, compared to only 13 percent of men. While women are becoming more financially powerful, some of their financial behaviors do not necessarily reflect the same evolution. The survey revealed that 38 percent of women said they started saving for retirement after the age of 34. Clearly, gender roles have changed over the last 30 to 40 years, and women are contributing more to the financial well-being of their families. And yet, while there has been a shift in the female mind-set in how they think about financial planning, women are not actually taking action in ways compared to their more engaged male counterparts. These behaviors may be contributing to why women are feeling less secure about their financial futures. According to the survey, 30 percent of women anticipate they will be financially worse off in retirement compared to their male counterparts (23%), and 48 percent of women said they are not looking forward to retirement.
4. HEALTH CARE COSTS LOOM AS LARGEST INVESTORS’ RETIREMENT WORRY: Looking ahead to their retirement years, many investors see a future rife with serious financial concerns and somewhat diminished expectations, according to a recent T. Rowe Price survey. The survey found that investors' biggest retirement concern was rising health care costs, cited by 76% of respondents. The survey also found that investors have a significant lack of confidence in Social Security and in the ability of their parents and grandparents to have enough money to maintain their desired lifestyle in retirement. Here are some selected survey findings:
- The top retirement concerns among investors aged 21-50 are health care costs (76%), rising taxes (67%), Social Security availability (63%), inflation (61%), long-term care (58%), living too long/running out of money (52%) and housing values (52%).
- Only 16% of investors expect to receive full Social Security benefits as currently promised. The remaining 84% expect to receive no Social Security benefits (36%) or some form of reduced benefits when they retire (48%).
- When asked what they are doing differently to prepare for retirement as a result of this Social Security view, the most common responses among the 84% group were saving more (42%) and planning to work longer (29%); 13% said they are doing nothing about it, 11% said they are investing more aggressively, and 5% said they do not plan to retire.
- When asked for ways they are helping their parents or grandparents with financial matters, 19% of investors said they are providing guidance with daily expenses, 15% are providing general retirement planning guidance, 13% are providing direct financial assistance in meeting daily living expenses and 9% are helping their elders better understand their Social Security options.
- For those who provide general retirement planning guidance, only 59% believe their parents or grandparents will have enough money to maintain their desired lifestyle; the remaining 41% believe their elders will not have enough money (26%) or are not sure (15%).
Not outliving one's savings should be the primary goal of any retirement planning strategy -- which is exactly why defined contribution accounts just do not cut it.
5. U.S. SUPREME COURT WILL REVIEW SAME-SE.X MARRIAGE CASES: In its December 7, 2012 Order List, the United States Supreme Court granted review in one case to decide whether California’s same-se.x marriage is constitutional and another whether Congress can withhold federal benefits from legally married same-se.x couples, by defining marriage as only between a man and a woman.
A. Hollingsworth v. Perry, Case No. 12-144 (U.S., December 7, 2012) (on cert. granted). The court will review a lower court’s decision to overturn Proposition 8, by which California voters in 2008 amended the state’s constitutional ban same-se.x marriage. In addition to the question presented by the petition, the parties were directed to brief and argue the following question: Whether petitioners had standing under Article III, §2 of the Constitution in the case.
B. United States v. Windsor, Case No. 12-307 (U.S., December 7, 2012) (on cert. granted). Here, the court will examine a key section of the 1996 Defense of Marriage Act. The federal government refused to defend the law, which, perhaps, led to several lower courts to deem unconstitutional the denial of federal benefits to same-se.x couples who are legally married in states where opposite se.x married couples receive them. In addition to the question presented by the petition, the parties were directed to brief and argue the following questions: Whether the Executive Branch’s agreement with the court below that DOMA is unconstitutional deprives the Court of jurisdiction to decide the case; and whether the Bipartisan Legal Advisory Group of the United States House of Representatives had Article III standing in the case.
6. ”THIRTEENTH CHECK” LITIGATION SPAWNS ATTORNEYS’ FEE DISPUTE: The Board of Trustees of the City Pension Fund for Firefighters and Police Officers in the City of Tampa challenged an award of attorney’s fees to a class representative of retired firefighters and police officers in the City who were recipients of a “13th check.” The 13th check program is a supplemental pension distribution for retirees who also met certain other eligibility criteria. The Board had determined it was not required to issue the 13th check, and declined to do so. After Parker was certified as class representative, 243 of the 13th check beneficiaries opted out of the litigation. However, once the Board sua sponte determined its decision not to issue the 13th check was erroneous, the Board and Parker settled the case. Parker sought attorney’s fees on behalf of himself and the class, which the lower court granted pursuant to Sections 175.061 and 185.05, Florida Statutes, and the substantial benefit doctrine. The District Court of Appeal found that although the trial court had erred in determining that fees were authorized by said statute and by substantial benefit doctrine, it affirmed the fees under the common fund doctrine. Florida courts follow the American Rule that attorney’s fees may only be awarded pursuant to an entitling statute or agreement among the parties. The case was not governed either by an express statutory provision or by the parties’ contract. The appellate court was not persuaded that the Florida Legislature intended that a unique program, established solely by a special law specific to one jurisdiction, be controlled by an attorney’s fee provision found in a regimen governing pension funds. And Florida has not adopted the substantial benefit doctrine. However, the court should have granted fees under the common fund doctrine. Under this doctrine, where a fund is established for the benefit of a group, that fund will be used to pay attorney’s fees that benefit the group as a whole. Although, here, some members of the group for which the fund is established had opted out of the litigation, it is equitable for them to contribute to the costs thereof because the litigation inured to their benefit. The Board of Trustees of the City Pension Fund for Firefighters and Police Officers in the City of Tampa v. Parker, 37 Fla. L. Weekly D280 (Fla. 2d DCA, December 5, 2012).
7. PNC “CPI” RISES 4.8 PERCENT: PNC Christmas Price Index shows the current cost one set of each of the gifts given in the song “The Twelve Days of Christmas.” It began in 1984, when an economist at PNC Bank decided to figure out how much it would cost to buy each of the gifts. Little did he know, he was starting an economic tradition that continues to this day. The PNC Christmas Price Index is similar to the Consumer Price Index, which measures changes in price of goods and services like housing, food, clothing, transportation and more that reflect the spending habits of the average American. The goods and services in the PNC Christmas Price Index, of course, are far more whimsical. And most years, the price changes closely mirror those in the Consumer Price Index. It is a fun way to measure consumer spending and trends in the economy. So even if “pipers piping” or “geese-a-laying” did not make your gift list, you can still learn a lot by checking out how their prices have gone up and down over the years. Here is the entire list:
On the twelfth day of Christmas, my true love gave to me...
12 Drummers Drumming -- $2,775.50 (up 5.5%)
11 Pipers Piping -- $2,562.00 (up 5.5%)
10 Lords-a-Leaping -- $4,766.70 (same as 2011)
9 Ladies Dancing -- $6,294.03 (same as 2011)
8 Maids-a-Milking -- $58.00 (same as 2011)
7 Swans-a-Swimming -- $7,000.00 (up 11.1%)
6 Geese-a-Laying -- $210.00 (up 29.6%)
5 Gold Rings -- $750.00 (up 16.3%)
4 Calling Birds -- $519.96 (same as 2011)
3 French Hens -- $165.00 (up 10.0%)
2 Turtle Doves -- $125.00 (same as 2011)
And a Partridge in a Pear Tree -- $204.99 (up 10.8%)
The overall increase is 4.8%.
8. NICHE PROPERTIES RANK AMONG WORLD’S BEST HOTELS: Everyone in the luxury hotel business can breathe a sigh of relief. The global recession and resulting stigma surrounding indulgences by the world’s richest people once seemed to threaten the industry’s health, but the sector has bounced back and is beginning to thrive again. But high-end hotels are not taking the recovery for granted. Instead, they are raising their game in a bid to lure more customers and ensure that the upturn in demand continues. The move, according to institutionalinvestor.com, means upgrading facilities, providing move customized service, deals/amenities that add value and looking for new ways to offer guests a memorable travel experience. Indeed, some luxury hotels are already taking action and going to great lengths to satisfy their customers, and earn a place on The World’s Best Hotels 2012. Consider the Landmark Mandarin Oriental in Hong Kong, which ranks at No. 1 on this year’s list. The Landmark provides courier services to run errands and has staff help clients pack and unpack and do their laundry. Others among The World’s Best Hotels are similarly honing in on their clients’ needs, and helping them to create special memories. London NYC, Ritz-Carlton Los Angeles, Ritz-Carlton Central Park in New York and the Peninsula Beverly Hills round out the top five.
9. A BAD DAY AT HALLMARK: Looking back over the years that we've been together, I can't help but wonder... “'What the hell was I thinking?”
10. DEFINITIONS: MARRIAGE: It’s an agreement wherein a man loses his bachelor’s degree & a woman gains her master’s.
11. QUOTE OF THE WEEK: “Fear is that little darkroom where negatives are developed.” - Michael Pritchard
12. ON THIS DAY IN HISTORY: In 1903, the Wright Brothers make first flight at Kittyhawk.
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