Faulty Retirement Expectations

Only 41% of workers said they or their spouse have a traditional defined benefit pension plan from their current or previous job, but 62% expect they will receive retirement income from a defined benefit pension plan.

Workers expressed a level of confidence in their retirement-readiness that didn't jibe with reality. For instance, 24% of workers who said they were "very confident" about their financial security in retirement are not currently saving for retirement, and 43% of "very confident" workers have less than $50,000 in savings.

Only 60% of workers are currently saving for retirement; and only 66% say either they or their spouse have saved for retirement, according to the study. Not surprisingly, younger workers were more likely than older workers to have a smaller retirement nest egg; 68% of workers younger than 35 had total savings and investments less than $25,000, compared to 31% of workers older than 55.

More on the NJ Pension Situation

State senators from both political parties said at a hearing that they had been shocked to learn that they had voted again and again in recent years for measures that had left the state pension in great distress, and they faulted the state treasury for failing to explain to them the risks of what they were doing. “I had no idea we were in the company of some of the same corporations that I have condemned for not funding their pensions,” said Sen. Shirley Turner (D - Mercer County). “And now, it seems, we’re in the same boat, and sinking.”

The hearing, by the Senate Budget and Appropriations Committee, was called in response to a report in The New York Times last week that described how New Jersey has diverted hundreds of millions of dollars that should have gone into its pension fund, using unorthodox steps authorized by governors from both parties over a number of years. In response to the article, Gov. Jon Corzine has said that the state will change certain accounting procedures. He has also asked the state attorney general to investigate, with outside actuarial help, whether tax requirements, securities laws or other rules have been violated. The attorney general, Stuart Rabner, will have to walk a careful line in such an inquiry, however. He is currently representing the State of New Jersey in lawsuits, filed by several employee groups, that accuse the state of failing to fund workers’ pensions lawfully. In those cases he is arguing that the state has acted legally.

The office of the attorney general has also said in audited financial statements that the state’s pension plans are “qualified” as tax-preferred plans. Normally, only the IRS can issue a ruling that a pension plan is qualified, after reviewing it to make sure it complies with the tax code. But New Jersey’s annual reports state that its pension plans are qualified “based on a 1986 declaration of the attorney general of the State of New Jersey.” The IRS said it had no record that New Jersey had ever requested to have its pension plans qualified. “Just because the attorney general says it’s qualified does not mean it meets the requirements of the Internal Revenue Code,” said Andy Zuckerman, director of employee plans, rulings and agreements at the IRS.

In the hearing, the state treasurer, Bradley Abelow, tried to calm the senators’ deepest concerns about potential legal and financial problems facing the pension fund. But at the same time, he argued that their complaints of being kept in the dark were unfounded. “The financial position of the system’s funds is transparent, and stated in various publications in accordance with the required accounting standards,” he said. He brought a list of places where information about the pension fund was available, including annual actuarial reports and monthly updates to each plan’s board of trustees.

But Sen. Barbara Buono (D - Middlesex County) said that was not enough. “There is not full disclosure to the Legislature,” she said, “perhaps not intentionally.” Sen. Buono also said she thought many of her fellow legislators had failed to live up to their responsibility to understand the implications of what they vote on.

Some senators wondered whether any of the outside professionals helping with the pension fund were at fault, expressing confusion about the roles played by actuaries, auditors, lawyers and others. “If you’re paying someone who is consistently giving us bad advice, why do we continue to pay them?” Sen. Turner asked. “Many times, you can find the financial people to give you the advice you want, so that you can do the things you want.” She said she wanted to know, for example, who had prepared bond offering statements that wrongly showed that the state had made hundreds of millions of dollars’ worth of pension contributions in years when it had really contributed nothing.

Frederick Beaver, director of the Division of Pensions and Benefits, defended the outside actuaries. He recalled that when he joined the division in 2003, people had been asking the actuarial consultants whether they could “push the envelope” and save more money by diverting pension contributions. The actuaries advised against it, he said.

Fidelity Eliminating Pension

Fidelity Investments is eliminating its traditional pension plan for roughly 32,000 of its employees.

This is particularly interesting since Fidelity is one of the big players in the outsourcing market for companies that have traditional pension plans.

More News on the NJ Pension Fund

NJ has been diverting billions of dollars from its pension fund for state and local workers to other government purposes for the last 15 years. It has also been using a variety of unorthodox transactions to hide the sleight of hand. For example, in 2005, NJ put either $551 million, $56 million or $0 into its pension fund for teachers. The state records the $551 million contribution in a bond offering. The $56 million dollar figure appeared in an audited financial statement. The $0 appeared in an actuarial report. How much money is in NJ's pension fund? Nobody seems to know for sure.

ACS Going Private? This time for real!

Story 1

Affiliated Computer Services Chairman Darwin Deason has joined with investment partner Cerberus Capital Management in a cash bid to take the troubled business process outsourcing company private. Cerberus has put an offer on the table to take ACS private in a US$5.9 billion buyout. That translates to $59.25 per share, a 15.5 percent premium over the ACS closing price on Monday of $51.29.

ACS has been a likely acquisition target for some time. It has been beleaguered by a backdated stock options investigation that cost the company millions of dollars and prompted the resignation of two top executives last year. Also, its image was tarnished after it languished on the market when it failed to be acquired by private equity investors at the end of 2005.

Little wonder then that the market loves the proposed deal. Shares of ACS were up 16.8% to $59.91 a share on Tuesday after Dow Jones reported that the private equity fund and ACS Founder Darwin Deason planned to buy the company. "The reaction in the market is interesting, because it has pushed the stock price above the takeover price. This is somewhat unusual. Normally, one might expect to see the stock move higher, but not quite to the takeover price -- since there is always a risk of a deal falling apart." In this case, it appears that investors are confident that ACS will fetch the full buyout price. The Dow Jones report indicates that Citigroup is funding the deal and has issued a letter stating that it is highly confident that it will obtain the necessary financing.

Story 2

New questions have arisen about the stock option backdating practices at ACS. An internal probe blamed the backdating on two ousted former executives and another former CEO. No other company executives or directors were involved, according to the company. But a handwritten note by ACS Chairman and founder Darwin Deason discussing the practice of "always" picking the "lowest prices" in a quarter to award stock options puts those assertions in question. Attorneys for Mr. Deason say the note does not imply backdating, nor does the note imply Deason did anything illegal. News of the note comes at a sensitive time. Earlier this week, Deason joined with Cerberus Capital Management to make an offer to take ACS private. Some observers have questioned whether Deason is trying to scoop up the company at a bargain price while its stock is depressed. (The Wall Street Journal, 22-Mar-2007, Midwest ed., p. A4)

NJ Pension Underfunding Substantially Understated

Douglas Love, a prominent member of the council that oversees investments by New Jersey's public pension funds, contends the state has been vastly underestimating how much money it should have to pay for retirement benefits promised to employees. Love says the state has been using inappropriate methods to calculate the value of the benefits promised. He says benefits already earned total $132 billion or more - substantially higher than the $91 billion officially reported. He says a more realistic calculation of the unfunded liability is $56 billion -more than three times as much as the $18 billion included in a recent state report.

HP Pension Plan

Hewlett-Packard will be phasing out its defined benefit pension plan for new employees and replacing it with a 401(k) plan.

Post-Retirement Health Benefits

According to new GASB rules, all 50 states as well as the United States' largest cities will soon have to disclose the value of health care benefits promised to retired workers. That has many governments scrambling. Cities and states that have already calculated the numbers don't like what they are seeing. The numbers are alarmingly higher than expected. Taxpayers are angry. Bond ratings are imperiled.

[NYT]

From the Washington Post

The US has a bad habit of building in areas that don't make sense environmentally or actuarially. That habit has been aided and abetted by public officials who bend to the will of developers and their customers, despite storms, floods, earthquakes and other natural calamities that destroy lives and break banks. The latest example of this can be found in Florida. By rolling back insurance rates, spreading the risk and fiddling with its catastrophe fund, the Sunshine State has invited more development in dangerous places.

Florida is the country's first pin in hurricane alley. The major storms of the 2004 and 2005 seasons and their respective $20 billion and $10 billion payouts sent the insurance industry fleeing from the state. Those that stayed either stripped high-risk policyholders of coverage or jacked up premiums. So here's what the state government did: The state-run insurer of last resort, Citizens Property Insurance Corporation, which is also the state's largest property insurer, rolled back planned rate increases. It will try to spread the risk by offering other policies, such as fire and theft. And it will offer its subsidized rates to commercial property. We live in an era with the potential for destructive storms. Everyone - from politicians to the voters they aim to please - must understand that there is a cost to offering below-market insurance that fuels unrestrained building in high-risk areas.

State Farm retreats in Gulf

State Farm retreats in Gulf; won't offer new policies in Mississippi. State Farm's decision Wednesday to stop writing new home and commercial policies throughout Mississippi could prompt other insurers to retreat further from the Katrina-battered region, industry groups and legal experts say. State Farm — which insures about one of every three Mississippi homes — is the first company since Hurricane Katrina to stop offering new policies throughout a state in the Gulf Coast area. Its move underscores the precarious nature of the region's insurance. Since the hurricane, insurers have cut back on homeowner policies in affected coastal areas. The decision Wednesday is one State Farm came to "reluctantly," says company spokesman Phil Supple, partly because of the torrent of lawsuits and rulings in Mississippi since Katrina and the uncertainty of pending legal battles. The move doesn't affect existing policyholders, at least for now.

This morning there was a story on CNN where some talkinghead was making a big stink about how this was unfair. I don't understand.

Here's how I see the matter. State Farm obviously is in the insurance business to make money; surely nobody expects them to write unprofitable business. Insurance in hurricane-prone areas is unprofitable, prompting State Farm to pull out. One's first thought might be that rather than pull out State Farm could instead try to make the business profitable by raising prices (although that might prompt the talkingheads to call *that* unfair).

So why doesn't State Farm raise prices? Because the market won't bear it. Essentially the economics of the matter are that homeowners in hurricane areas want the perks of living by the water, etc., without collectively assuming financial responsibility for the casualty losses that accompany this decision. Clearly homeowners in areas not subject to hurricanes are not going to accept higher premiums which would essentially subsidize those living in hurricane areas. Hence, the only economically viable decision is to pull out. Eventually, the supply of insurance dries up and prices will go up. Economics 101. Why are CNN and other news sources are acting like something horrible is going on here?

New Position at Hewitt - SVP of Corporate Development & Strategy

Hewitt Associates today announced that it has appointed Matthew Levin to the new management position of senior vice president, corporate development and strategy, effective immediately.

That will certainly add fuel to the fire of the rumors that Hewitt is planning to divest its HRO business.

Matt Levin's resume:

IHS Group - September 2004 to September 2006 - Senior Vice President of Corporate Development and Strategic Planning, in which role he was responsible for 10 (very small) acquisitions as well as the company's 2005 IPO

Hudson Highland Group - July 2003 to September 2004 - global operations officer for the human capital solutions business (quite a step up from his previous job at Sibson)

Management consultant (about 2 years) specializing in strategic planning and organizational effectiveness at Sibson & Company, which back then was a unit of Nextera Enterprises and is now a unit of Segal

Graduate of the First Scholar Program at First Chicago (now JPMorgan Chase), where he worked (about 2 years) in corporate finance covering the energy and media industries

MBA from the University of Chicago, BA from Northwestern University

Some additional background that may be of interest:

Steven Denning, Chairman of the investment firm General Atlantic LLC, sits on the boards of both Hewitt and IHS. General Atlantic is IHS's largest shareholder (14.3%) and Hewitt's second largest shareholder (13.3%).

Schwarzenegger reverses direction

California Gov. Arnold Schwarzenegger proposed a sweeping plan to mandate universal health care in the nation's most-populous state, putting forth measures that would require employers to pay into the health-care system as well as tax hospitals and doctors to help offset medical coverage's spiraling costs.

[The whole story can be found in today's WSJ.]

Last year, Schwarzenegger vetoed a bill by California's Democrat-controlled legislature that was not much different from what he is now proposing himself.

CRUSAP publishes final report

www.crusap.net

A lot of the sillier recommendations did not make it into the final draft. That's good. The ridiculously over-long 13-page executive summary is now 15 pages long. That's bad. Who said actuaries are bad communicators?

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)