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.

More on Delta and Northwest

The three Delta plans, which cover about 106,000 people, have $6.9 billion in assets and $17.5 billion in liabilities, according to PBGC estimates. Based on preliminary estimates, the PBGC says it would have to guarantee $8.4 billion of the $10.6 billion benefits funding shortfall. The PBGC itself has a $23.3 billion deficit. If those estimates hold up, a PBGC termination of Delta's plans would exceed the $6.6 billion loss (by far its largest) absorbed through its takeover of United Airlines' pension plans.

This is slightly misleading for a couple of reasons. First, use of the word "deficit" makes it sound like that's an annual shortfall in revenues against outflows, which is not correct. The $23.3 billion figure is the sum total of the PBGC's unfunded liabilities. Further, the PBGC includes in its estimates of its liabilities an allowance for "probable" plan terminations. So some portion of the Delta shortfall is already reflected in that $23.3 billion unfunded liability.

Additionally, the PBGC also would be hit with a huge loss if Northwest Airlines, which also filed for bankruptcy on Wednesday, terminates its pension plans. The three Northwest plans, have $5.8 billion in assets and liabilities of $11.5 billion, according to PBGC preliminary estimates. Of the $5.7 billion funding shortfall, the PBGC estimates it would be liable for $2.8 billion.

Source: Business Insurance

Delta and Northwest file for bankruptcy

Both companies are plagued by high operating and legacy costs, and both companies will likely want to terminate their defined benefit pension plans and dump their unfunded liabilities on the PBGC. If Delta and Northwest dump their pension plans on the agency, it would add an estimated $12.4 billion in new unfunded liabilities.

[DUH! Fixed embarrassing typo in post title.]

CFA Exam Results

I just found out today that I passed the CFA Level II examination.

The New E&E System

I want to go on record as opposing the new Education & Examination system. So when the SOA announces that their system is an utter failure and needs to be replaced again in 3-5 years, I can give them a big collective "Told you so!"

VEE

My original objection to VEE was that it would weed career changers out of the profession before they even start. I had a math degree, but I had never taken 6 courses (Macro Econ, Micro Econ, Intro Finance, Corp Finance, Time Series, Regression). If I had had to go back to school to take courses to get credit for this stuff, I would have never entered the career. I know many who feel the same way.

It now seems that they have solved this problem, but introduced a different one. One of the options for getting VEE credit is through NEAS coursework. However, here's one student's opinion on a NEAS course: I just sat for VEE Regression and Time Series through NEAS, and thought the finals were an insult to the actuarial profession. I appreciate that it's the easiest path to completing the VEE requirements but at the same time if we are just looking for the "easiest" method, then why bother? If material is important enough for us to know it, put it back in the test. If it's not important enough, then leave it out of the mix completely and give me a "recommended reading" list.

At least one board member has already acknowledged that, "PD was just one failed element of the 2000 restructuring. It was well-intentioned but turned out to be something of a joke in practice." And now it looks like they are making the same mistake with VEE. I can see the assessment now ... "VEE was just one failed element of the 2005 restructuring. It was well-intentioned but turned out to be something of a joke in practice."

Modules

In the first place, replacing Exams 5 + 6 with eight modules doesn't seem like a fair trade at this point, especially with two large exams (instead of just one) to come after the modules.

More ominously, board members are already warning us that the modules were more work than anyone anticipated, and it will be a challenge to have everything in place in time. So, we are probably going to be treated to a half-baked system that will be tweaked, prodded, improved and otherwise messed with for a couple of years.

At the end of a couple of years of tinkering, they will leave us with a system that is as much a joke as PD turned out to be and VEE is already proving itself to be.

Almost half of employees cash out 401(k) at termination

Despite the growing need for employees to save for retirement, a significant number of workers participating in 401(k) plans cash out of them once they leave their company. A study of nearly 200,000 workers who participate in their 401(k) plans found that 45% elected to take a cash distribution once they left their jobs. The remainder either kept their savings in their current employer's plan (32%) or rolled the money over to a qualified IRA or other retirement plan (23%).

The highest incidence of cash distributions was among young employees (66%) age 20-29. Employees who were older and more tenured were more likely to preserve their retirement wealth, either keeping their assets in their current employer's plan or rolling it over. Still, more than 42% of workers age 40-49 elected to cash out of their plans upon leaving their jobs.

Balance was a factor when it came to workers' tendencies to cash out of their plans. Nearly three-quarters (72.5%) of workers with balances under $10,000 took a cash distribution. When plan balances were between $10,000 and $20,000 at termination, cash-out rates were much lower. Still, nearly a third (31%) of these employees elected to take their distribution in cash.

Source: Hewitt Associates