Wachovia Fires Hewitt BPO

Wachovia is shifting HR functions that it outsourced in 2005 to Hewitt Associates back in-house or to other vendors. HR head Shannon McFayden said the bank will transition tasks such as payroll, pay-related customer service and human resources technology back to Wachovia or to other vendors. Benefits administration and benefits customer service will stay with Hewitt. Moving HR functions back in-house will take up to 18 months. Bank spokeswoman Christy Phillips-Brown could not comment on Hewitt's performance, but Wachovia and Hewitt "agreed this was the best decision for our companies." Hewitt spokeswoman Amy Wulfestieg said the company will work closely with Wachovia in the transition and looks forward to "building on our long-standing partnership together."

Wachovia is taking back a number of HR processes it had outsourced to Hewitt Associates, a potential blow for the BPO provider. The contract, which was one of a slew of wins for Hewitt in the wake of its Exult acquisition, was valued at $450 million. The deal was consummated in Hewitt’s glory days, when both buyers and vendors had high expectations of BPO. “I believe that this was one of those deals signed in the heyday with entirely too much optimism on both sides,” says Naomi Bloom, an industry consultant. Since then, Hewitt has admitted to struggling with its HR BPO business. “They haven’t made a mystery of the fact that they had gotten bogged under by a number of the contracts that they signed in the months after the Exult deal,” IDC analyst Lisa Rowan says. Many of these deals were “lift and shift” transactions, where the buyers expected the vendor to just take over all of their HR processes and do them at less cost. The Wachovia contract was one of these deals, according to one person familiar with the arrangement. It might actually be a relief for Hewitt to be able to offload some of this work and focus on what it does best, which is benefits administration, Rowan says. “If I had to get out my crystal ball, I would say they are going to go back to their sweet spot and just do benefits administration going forward,” she says. But Hewitt maintains it is sticking to the business. But whether Hewitt will be able to turn around its HR BPO business at the pace that shareholders want still remains to be seen.

CitiStreet for sale

CitiStreet, the record-keeping and administrative services firm co-owned by Citigroup and State Street, is for sale, according to banking and private equity sources familiar with the situation. Sources said investment bankers from Goldman Sachs have been hired to find a buyer for CitiStreet. Citigroup spokesman Michael Hanretta and CitiStreet spokesman Michael Bezdek declined to comment. Calls to officials at State Street were referred to CitiStreet. Executives at Goldman Sachs couldn’t immediately be reached for comment. CitiStreet has $230 billion in assets under administration. The firm serves corporate and public retirement plans with 12 million participants.

AIG Headlines

AIG says needs to clarify disclosures regarding CDOs - MarketWatch
AIG still calculating loss on some credit products - MarketWatch
AIG unsure of value of some of its credit derivatives - MarketWatch
AIG auditors cite "material weakness" in financial reporting - MarketWatch

That can't be good. Stock has been pretty much in freefall since the opening bell, as of 10:30 it is down 11.2% at $45, although the last few ticks indicate that might actually be the bottom.

Beck v PACE

The Supreme Court unanimously reversed the ridiculous 9th Circuit decision in Beck v PACE which stated that a merger is a permissible means of plan termination, much to the amazement of the Department of Labor, and that the company therefore had a fiduciary obligation to seriously consider a merger proposal, which it had failed to do.

Justice Scalia, writing for the Court, started off by presenting the fiduciary issue and then went on to acknowledge the plausibility of PACE’s argument. He immediately sidestepped the interesting fiduciary issue and launched into a non-fiduciary analysis from which it would never return. The Court restricted its analysis to whether a plan can be terminated through a plan merger. Ultimately, the answer was no.

It's a shame that the Court chose not to take up the fiduciary question. I swear more bad law comes out of the 9th Circuit than all the other courts of appeal put together. I would have liked the Court to go on record that BOTH parts of the decision were ludicrous, rather than restricting themselves to just one part of the decision.

Reference: http://www.thompson.com/public/headlines.jsp?id=71

Acquisitions Gone Bad

Hewitt Associates To Sell Cyborg Unit To Vista Equity

Worst. Idea. Ever.

Borrowing against your nest egg is becoming as easy as stopping at an ATM. A growing number of companies now offer employees the option of being issued a debit card that taps a 401(k) loan. The card, called ReservePlus, allows workers to withdraw funds from their 401(k)s.

What happens when the idiots who do this have $0 in their 401(k)? Are they going to tax those of us who don't have shit for brains to "help the poor"? Seriously, I feel like just tattooing sucker on my forehead.

Hang on ... it's going to be a rough ride!

The first baby boomers start collecting Social Security benefits today!

Marsh CEO Out

Marsh & McLennan has ousted its CEO, Michael Cherkasky, as part of a review that could lead to a break-up of the scandal-laden group. Mr Cherkasky was brought into Marsh & McLennan in October 2004 after Eliot Spitzer accused the company of colluding with competitors. The group in 2005 reached a settlement with insurance regulators and Mr Spitzer. The settlement caused Marsh & McLennan's profitability to collapse. Its shares have fallen by a fifth this year, while those of rivals such as Aon have advanced.

Investors such as KJ Harrison & Partners have been urging Marsh & McLennan to spin off some of its consulting businesses, including its Mercer human resources consulting unit and Oliver Wyman management consulting unit, arguing that they do not fit well with insurance broking.

Source: The Australian

Hewitt Is Sued Over Enron

Partial settlements in the litigation have resulted in $89 million for participants and beneficiaries in Enron's retirement plans. In 2006, Hewitt Associates was hired to allocate the money to the plans' approximately 20,000 members. Because of a flaw in Hewitt's computer system, the company miscalculated distributions, the suit alleged. The error was not discovered until late January 2007, when a participant questioned her allocation. In July, Hewitt accepted responsibility for its mistake in court, the suit says. Its lawyer told the judge the company's software used the wrong stock price to calculate the distributions and promised to fix the error. The company submitted revised calculations, but the numbers are still wrong, court papers said. Hewitt also refuses to fund any portion of the $22 million shortfall.

The Enron case is at least second time in recent months Hewitt has been sued by a client. In August, Schering-Plough alleged Hewitt had not met its contractual obligations after the company replaced Hewitt as its health-plan administrator.

Hewitt Associates launches Global Risk Services

Hewitt Associates announced the launch of Global Risk Services, a new initiative that will help pension plan sponsors manage the risks they face. [...] "A key differentiator of Hewitt's Global Risk Services is that we look at both sides of the equation — risk and return are just the two sides of one coin."

How on Earth is that a differentiator? Like nobody ever thought of risk and return as the two sides of one coin before?

Loss at Hewitt

Hewitt Associates reported a fourth quarter loss of $266 million, or $2.51 per share, compared with a profit of $23 million, or 21 cents per share, in the previous year. Total operating expenses grew to $1.05 billion from $685 million. Quarterly revenue was $768 million, compared to $728 million a year ago.

For the fiscal year 10/1/2006-9/30/2007, Hewitt posted its second consecutive yearly loss. This year's loss was $175 million, or $1.62 per share, compared with a loss of $116 million, or $1.08 per share last year. Full-year sales were $2.99 billion, versus $2.86 billion in the prior year.

Pensions Can Be Outsourced

From the LA Times...

Citigroup got the green light from the Federal Reserve for an unusual deal to take over the $400-million retirement plan of a British newspaper company. In exchange for getting its hands on all that cash, Citigroup will run the pension plan - investing the money, paying the benefits and taking on the liability previously borne by Thomson Regional Newspapers. And it's eyeing similar moves stateside. Other banking investment and financial companies, including JPMorgan Chase, also are exploring the idea of taking pension plans - and their billions of dollars of assets - off the hands of employers. At least three federal agencies are considering aspects of the idea, including its basic legality and safeguards for workers.

Advocates say such changes would be a win-win for retirees and employers, retaining all the protections of current law, while putting plans in the hands of sophisticated financial stewards. Plus, large banks are less likely to go out of business or face severe financial strains than smaller employers.

Yet other people worry that such setups could subject retirement benefits to new risks and jeopardize decades-old worker protections. They're concerned that the would-be pension managers are more interested in profit than in the security of retirees. Further, they fear that unwise investments could bring a crisis for which there is no simple solution.

And from the industry magazine Pensions & Investments...

Bradley Belt, the former PBGC chief, wants to take over your frozen pension plans — and he’s betting he can wring enough money out of the hundreds of millions of dollars now sitting in frozen plans in the US to pay off the existing liabilities and turn a tidy profit for his new company and other investors. “We’re very comfortable with our ability to manage the assets against the liabilities in a way that will allow us to earn a consistent return above the liabilities, but without taking inordinate risk in doing so,” said Mr. Belt, now chairman of Palisades Capital Advisors LLC, in an interview in the firm’s Washington office. There’s no precedent for pension plan liability buyouts in the US. So over the past several months, Mr. Belt has been meeting with federal regulators, pension plan sponsors and representatives of investment firms to encourage support for a concept that he argues could serve the best interests of plan sponsors, plan participants and the PBGC alike.

Of course, this isn't really news. The big banks have been making their plays in this space for years now, as seen in this story from January 2006 ...

Recruiters in New York and London say corporate pension deficits are driving demand for actuaries who can help match pension fund assets to ever mounting pension liabilities. As the problem becomes more acute, so demand is likely to rise. “Banks are keen to strengthen their offering in this space,” says Kim Yates, a director at London-based search firm Principal Search. She says, “There are several clear leaders, and others are seeking to challenge them.” The leaders are Goldman Sachs and Morgan Stanley, which formed so-called ‘pension advisory groups’ in the late 1990s and now have large teams devoted to the business. More recent entrants include ABN AMRO, which founded its pension advisory group in 2004.

What a mess at ACS

Affiliated Computer Services, caught in a bitter battle between members of the company's board and its chairman, said in a statement November 1 that five board members had resigned after initially refusing to do so. [...] Now that the five independent board members have resigned and two potential buyers are gone, it's unclear how ACS will proceed, sources say.

The dispute began several weeks ago when Mr. Deason and private equity firm Cerberus Capital Management withdrew their $6.2 billion bid to buy the company, saying that the board had dragged its feet on the offer while the credit market dried up. Mr. Deason then demanded the resignations of the five independent board members, accusing them of mismanagement. The departing members are Robert Holland III, J. Livingston Kosberg, Dennis McCuistion, Joseph O'Neill and Frank Rossi. In a separate action, board member John Rexford also has resigned from the board but will remain as executive vice president at the company. ACS also said Wednesday that the directors have agreed to withdraw their lawsuit against the company and Mr. Deason.

SOA Weighs in on financial mess

http://www.soa.org/library/newsletters/the-actuary-magazine/2007/october/edi2007oct.aspx

Start New Job Today

I start a new job today as an honest-to-goodness actuary at a major management consulting firm.

Quit my job

I quit my job in the outsourcing arena. Today is my last day.

Public pension funds take *ANOTHER* risky gamble

The executive director of the Montana pension system is considering recommendations that the nine pension funds in the system invest in hedge funds to boost investment returns. He is not terribly comfortable with the idea but is looking at it. Boomers are getting ready to retire. Montana needs a higher return of investment. The California Public Employees' Retirement System, New Jersey retirement system, Virginia pension fund, and San Diego County Employees Retirement Association are just a few public funds invested with hedge funds. (The Washington Post, 24-Jul-2007, p. D1)

So reality is finally setting in that the contributions put into the plan are insufficient to pay the promised benefits. But instead of sucking it up and making more contributions, they'd rather take a gamble on better returns. And if the bet goes bust, somebody else will be cleaning up the mess. Nice. And look who's among the funds taking this ridiculous risk - two of the funds that are already quite screwed up: NJ and San Diego.

Public pension funds take a risky gamble

Bear Stearns is hawking the riskiest portions of collateralized debt obligations to public pension funds. At a sales presentation of the bank's CDOs to 50 public pension fund managers in Las Vegas, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20% annual return from the bottom [i.e., riskiest] level of a CDO. Many pension funds, facing growing numbers of retirees, are still reeling from investments that went sour after technology stocks peaked in March 2000. Fund managers buy equity tranches, which are also called first loss portions, even though those investments are never given a credit rating by Fitch, Moody's or Standard & Poor's.

Seven percent of all the equity tranches sold in the U.S. in the past decade were purchased by pension funds. Public pension funds have bought more than $500 million in CDO equity tranches in the past five years, The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions. Citigroup sold the tranches to Calpers. The New Mexico State Investment Council, which funds education and government services for children, has $222.5 million invested in equity tranches. The council decided in April to buy an additional $300 million of them. The General Retirement System of Detroit holds three equity tranches it bought for $38.8 million. The Teachers Retirement System of Texas owns $62.8 million of them. The Missouri State Employees' Retirement System owns a $25 million equity tranche.

More Leadership Changes at Hewitt

Hewitt Associates announced four key leadership appointments in its Consulting business:
• Monica Burmeister to global chief of Consulting Operations
• Richele Soja to North American Consulting leader
• Andrew Bell to global leader of Hewitt’s Talent & Organization Consulting business
• Joanne Dahm to North American practice leader of TOC

Some Numbers Regarding NJ Pension Early Retirement

Over the last 20 years (most recently in 2002), NJ has granted special early retirement benefits to employees five times. Payrolls had to be trimmed to plug budget gaps. But in every single case, the early retirement plans cost New Jersey more than it saved. In 2002, more than 5500 workers took the package, more than double the number the state had projected. Many of the retirees were in federally financed jobs so the state did not actually recognize any savings in salaries. To make matters even more absurd, nearly all the vacancies were filled quickly. Only 210 remained vacant at the end of fiscal 2003.

A special ten-member panel appointed to examine pension-related bills, didn't review the 2002 bills. In fact, it never met. The bill passed in just 18 days. Legislators now admit they didn't really consider how to pay for the special benefits. It is now estimated, the feel-good 2002 program will cost the state $617 million, not the $278 million projected in 2002.