CRUSAP

Critical Review of the U.S. Actuarial Profession

The main paper is 72 pages long; the executive summary is 13 pages. No wonder so many people think actuaries are poor communicators.

It's a very worthwhile read, though, if you are interested in the "State of the Profession." Comments are welcome through October 31st.

FAS158 Released

This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. [...] An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006.

Biggest change in pension accounting since FAS87. First PPA now this. This is an interesting year to be working in pension.

Course 7

I passed Course 7.

http://examresults.soa.org/course7/c7-seminar071006.htm

I am now an Associate of the Society of Actuaries.

http://www.soa.org/ccm/content/exams-education-jobs/exam-results/new-associates---september-2006/

So now I can actually call myself an actuary.

San Diego County Fund suffers big loss

San Diego County's pension fund (not to be confused with the scandal-ridden city pension fund) was named Public Plan of the Year last April. Its investment returns were consistently ranked at the top of pension funds for its size. It had a winning strategy--at least until this week. Much of the fund's strategy was based on a basket of hedge funds. Overall, the fund had $1.3 billion, or a fifth of its total portfolio, in hedge funds. One of the hedge funds in the county's portfolio was Amaranth Advisors, the Connecticut fund that announced it had suffered big losses in natural gas trading. The county does not know how big its losses will be or will this be just the tip of the iceberg or just an isolated incident. (New York Times)

Let me see if I have this straight. A fund takes the highly risky decision to invest 20% of their assets in hedge funds, some of which invest in things like gas trading futures ... and this earns them the Public Plan of the Year award? What the ...? No wonder the pension industry is such a mess.

Schwarzenegger to the rescue

California Governor Arnold Schwarzenegger (R) stated that he will veto a bill passed by state legislators on August 31 that would have made California the first state to provide health care to all its residents under a single-payer, government-run program. The California Health Insurance Reliability Act (S.B. 840), would have created a publicly financed health care program and agency, the California Health Insurance System, to replace private insurers. Individuals and businesses would have paid an annual premium, based on income, to the state. State funds currently allocated to health care would have also gone into the new program.

Now for something completely different...

Above the Law is on a mission. Our quest: to find the hottest ERISA lawyer in America. Pension law. And yes, it's just as boring as it sounds. But just because a practice area is a sleepy backwater doesn't mean its practitioners can't be hotties. To the contrary, ERISA lawyers have more time than overworked M&A attorneys to tone their bodies at the gym and get facials at the spa. So we're expecting to see some pulchritudinous practitioners in this contest. We'll accept nominations until -- eh, until whenever we feel like it, depending on the response rate. We realize there is a distinct possibility that we will end up with zero nominees for this hotties contest. We'll cross that bridge when we come to it. Assuming we receive enough nominees of both genders, the men and women will compete in separate categories. After this competition, you'll never think of ERISA the same way again. The next time you hear the words "ERISA preemption," instead of getting sleepy, you'll get turned on...

If Boomers Have It All, What's Left?

Baby boomers could become known as the generation that took it all, leaving their successors to pay the bills and take the risks the boomers did not have to accept. Look at pensions. Corporate bigwigs (many of them boomers) are protecting their pensions but reducing or eliminating the benefit for younger employees. Instead, younger workers will get defined contribution plans that put all the risk on their shoulders. Companies have deluded themselves into believing that younger employees welcome, even love, the changes. The changes are modern and hip. Portability, direct control, and risk are in. Young employees may end up doing very well. If not, there is a problem. (The New York Times, 01-Sep-2006, National ed., p. C1)

CFA Level 3

I passed the CFA Level III exam in June. I've already had my experience verified and approved, so I should get the CFA charter in the next batch in September.

Pension Protection Act

President Bush today signed the Pension Protection Act of 2006 ("PPA") into law. Big changes to pension funding, effective 1/1/2008. Probably the biggest change to pension law since the passing of ERISA in 1974.

Edited to add link to a PPA blog
http://qualifiedpensionconsulting.com/ppablog/

IBM Decision Overturned

A three-judge panel of the Seventh Circuit Court of Appeals in Chicago yesterday ruled IBM did not discriminate against its older employees in 1999 when it converted its pension plan to cash balance. The decision reverses a 2003 federal court ruling that the change discriminated against older workers. The decision also saves IBM from having to pay up to $1.4 billion to 140,000 older employees and retirees who were affected by the conversion. In its ruling, the appeals court acknowledged that older workers were correct in perceiving "that they were worse off under the cash balance approach" than the defined benefit approach, but "removing a feature that gave extra benefits to the old differs from discriminating against them." The plaintiffs intend to ask the full appeals court to reconsider the ruling.

Maybe if this decision had come down in 2003 IBM wouldn't have frozen their plan.

News from Hewitt

A very insightful article...

Hewitt announced the departure of Michael Salvino, co-leader of its HRO sales and accounts group. The announcement comes on the heels of the announced resignations of Hewitt’s CEO Dale Gifford and Bryan Doyle, president of HRO. Hewitt doesn’t appear to have a successor in place for Salvino. According to some industry observers that could be hinting at a sale of its HRO business. By any standards, the three departures signal a major shakeup only two years after the merger of Hewitt and Exult was announced. At the time of the announcement, the merger was regarded as nothing short of a defining moment in the history of HRO.

And now, while the marriage is still intact, the honeymoon is clearly over. While the union may yet last longer than a typical Hollywood wedding, if the paparazzi could stalk companies, they’d be all over this relationship. I haven’t seen the Las Vegas line, but put the over/under at 18 months and take the under. When the merger first took place it appeared to be the perfect marriage. Hewitt was regarded as the gold standard in benefits outsourcing, setting the paradigm in how total benefits administration was delivered. Exult on the other hand had the most mature of the practices and model of BPO of HR. The orders started pouring in! It would appear, however that the orders came in too fast. Reportedly (and allegedly) implementation became more difficult, and now perhaps Hewitt isn’t competing effectively for the current opportunities.

The rumors had been that Hewitt might be looking to jettison HRO and that Accenture would be the taker. More recently ADP and Fidelity have come into the mix of rumors. The thinking is that another major market player will have better luck in turning the Exult model to profitability. If Hewitt couldn’t turn a profit with it, I don’t think ADP or Fidelity could either. Hewitt was the best at turning administration into profitability. Fidelity and ADP are the best at turning high volume transaction processing into profit. The real problem is that HRO is neither solely administration nor high volume transaction processing. When Hewitt offered services outside of its core model, the troubles began. Now it is hard to tell what the model is. Is it based on Cyborg? Is it a lift and shift of your PeopleSoft or SAP platform? Is it a one-to-many or a one-off model? In the final analysis, we may very well see that the Hewitt-Exult merger did indeed change the way the market views HRO but not in the way in which people may have thought only one year ago.

Drug prices rose sharply

Prices for some of the most widely prescribed drugs rose sharply during the first quarter of the year, according to two separate studies. AARP said prices charged by pharmaceutical makers for brand-name drugs rose 3.9%, four times the general inflation rate. Overall higher prices mean the cost of providing brand-name drugs to seniors rose by almost $240 on average for the 12 months ended March 31. The second survey by Families USA found similar inflation rates among brand-name drug prices. The drug price increases could have a devastating effect on the new Medicare drug program. High drug prices could lead to higher premiums, which could discourage some people from enrolling in the program or staying in the program [the ones least likely to need the service, a concept known as anti-selection in the insurance industry], which in turn could lead to even higher premiums.

Imagine that. Dramatically increasing demand by instituting Medicare drug coverage caused prices to go up dramatically. Who could have predicted such a thing? Certainly not me. I mean, it's not like they explain this in Economics 101 or anything.

PBGC settles with Rennert

The PBGC will stop going after the assets of industrialist Ira Rennert because it has been assured he will keep a disputed steelworkers pension plan for 2000 workers and retirees going after he sells WCI Steel since the potential new owners of bankrupt WCI did not want the underfunded pension plan.

Seeds of Private Health Care in Quebec

Last week, Quebec's Premier Charest proposed lifting a ban on private health insurance for several elective surgical procedures and announced the province would pay for the surgeries at private clinics when waiting times at public clinics and hospitals were unreasonable. The proposal was in response to a Supreme Court decision last summer that said long waits for surgical procedures at public facilities was unconstitutional. The Court then struck down the province's ban on private medical insurance and ordered it to initiate a reform program within a year. The Supreme Court's opinion applies only to Quebec, but it has already generated movement elsewhere. The premiers of British Columbia and Alberta have promised action. All of the provinces are reacting to long waiting lines for some services under Canada's public health insurance program.

PBGC May Take Rennert Hamptons Estate

The PBGC is poised to lay claim to a $185 million five-building, ocean-front estate in the Hamptons with over 100,000 square feet, 29 bedrooms, 39 bathrooms, a 164-seat theater, two bowling alleys, a restaurant-size kitchen, and a garage that holds 200 cars. The estate belongs to Ira Rennert, who built a business empire and fortune by buying distressed companies, often with high-yield junk bonds. One of those companies was WCI which has an unfunded pension obligation of $189 million. The PBGC is threatening an involuntary plan termination and placing a lien on Rennert's house to force him to pick up the tab for the pension plan. This is not the first time the PBGC has gone after the business and personal assets of individuals to satisfy pension obligations. In 1992 it went after Carl Ichan in the TWA bankruptcy.

ACS Affirms No Sale to Private-Equity Investors

ACS announced today that recent unsolicited discussions with a group of private-equity investors regarding a possible sale of the company have ended. ACS has been considering alternatives to enhance shareholder value including the discussions with a group of private-equity investors, as well as the possible dual class recapitalization proposal described in the Company's September 2005 proxy statement.

PBGC to sell half its stake in UAL

The PBGC will soon sell about half of its 23.4% stake in UAL, worth $400 million. The PBGC became an unsecured creditor and the largest single shareholder in UAL when the company dumped a $10.2 billion unfunded pension liability on the agency. The PBGC's position is that a government agency should not take an active role in corporate management or governance. With the sale (in addition to United assets it previously acquired as a creditor and sold), the agency will recover considerably more than the seven cents on the dollar it normally realizes.

Source: WSJ

Sprint-Nextel Freezing Pension Plan

Pension benefits will not be offered to any employees hired after the merger.

That's the third big plan this month. This could end up being the worst year ever for defined benefit plans.

Alcoa closing its plan to new members

Alcoa announced that beginning March 1 it will close its pension plan to new entrants. IBM started by closing its plan to new members last year and followed this up by freezing its plan altogether. I would say the probability of Alcoa likewise freezing its plan in the next couple of years is high. This is shaping up to be a bad year for defined benefit plans.

Medicare a mess out of the gate

The Medicare prescription drug plan is two weeks old, and the going has been rocky especially for the nation's sickest and poorest elderly and disabled. The general consensus is the government has botched the start-up of the program. If it could go wrong, it probably has. No one seems to have definitive answers to questions. Patients are being turned away or overcharged at pharmacies. At least 20 states have stepped in to say they will cover the drug costs of low-income people who have been turned away because of federal foul-ups. On Friday, the intervention of the states led the federal government to tell insurers they must provide a 30-day supply of any drug that a beneficiary was previously taking. The government also stressed that poor people may not be charged more than $5 for a covered drug.

Sources: The Washington Post and The New York Times

IBM Freezing Pension Plan

IBM is freezing its defined benefit (pension) plan effective 12/31/2007 to save money. (It had previously closed the plan to new participants.)

Sources: NYT and AJC

Statistical Notes:
1. In 1979 around 62% of active workers were covered by DB plans. Today, around 18% of active workers are covered.
2. From 1986 to 2004, over 100,000 single-employer plans with about 7.5 million participants were terminated.

More Changes in HR Outsourcing Landscape?

A group of private equity firms including Texas Pacific Group, Bain Capital and Blackstone Group is reportedly looking to buy Affiliated Computer Services (ACS) for about $8 billion.

Hang on, it's going to be a bumpy 2006 in the outsourcing industry.