Auditors urge rethink on pension calculations

Auditors are pressing companies to reconsider how they calculate their pension liabilities and urging them to use formulas that could give rise to much larger reported deficits than would be the case if they stayed with the current approach.

Critics say taxpayers may be paying for AIG's discounts

AIG is engaging in extreme price cuts to hang onto market share and may be using money from its federal bailout to pay for it, insurance insiders said. The CEO of Liberty Mutual said AIG is "doing some very stupid things" that are in danger of destabilizing the insurance market. An AIG spokesman denied that it is cutting prices.

Worker, Retiree and Employer Recovery Act of 2008

Was passesd by the House on Wednesday and the Senate yesterday. It is unclear whether Bush will sign it.

The Act

• Provides that shortfall amortization contributions will be based on a percentage of the funding target. The percentage will be 92% in 2008, 94% in 2009 and 96% in 2010, before reaching 100%. For example, under PPA a plan funded at 90% in 2008 had to establish an shortfall base equal to the entire 10% unfunded. Under the Act, this same plan would establish a shortfall base of only 2%.
• Permits asset smoothing.
• Provides that for the first plan year beginning on or after 10/1/2008 the test for the restriction on benefit accruals will be done using the greater of the current year or prior year AFTAP.
• Clarifies that plan expenses must be included as part of the target normal cost.
• Clarifies that target normal cost is reduced by the amount of mandatory employee contributions expected to be made during the year.
• Contains other provisions such as a waiver of age 70-1/2 distributions for 2009 for defined contribution plans, multiemployer funding relief, changes to maximum benefits for small employers and airline specific provisions. In addition, the Act includes some technical corrections.

NJ is insolvent due to pension plan

The state of New Jersey is insolvent. Bankrupt might be a better word. New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes. To top it off, the ongoing plan assumptions are 8.25%. Sorry NJ, that simply is not going to happen.
[Reference: http://globaleconomicanalysis.blogspot.com/]

Earlier blog posts on the ongoing disaster with the NJ pension system:
June 15, 2007
April 12, 2007
April 6, 2007
March 16, 2007

Bad bad bad news for US pensions

On the expense side...

Assets of the 100 biggest US company pension plans, which account for 70% of defined benefit pension assets at corporations, fell by an estimated $120bn in October - the largest monthly loss in at least eight years. In 2008, PPA cash requirements were an estimated $32bn, which will likely rise to about $93bn in 2009.

On the funding status side...

If the spread between Treasuries and high-grade corporate bond yields hadn't more than doubled to 3.3 points over the past 12 months, the combined $60 billion surplus for S&P's 1,500 companies at the end of 2007 would now be a deficit of more than $400 billion. With the drop in liabilities due to a higher discount rate, however, the deficit as of Sept. 30 was only $35 billion.

Worker, Retiree and Employer Recovery Act of 2008 (WRERA)

Senate Finance Committee Chairman Max Baucus (D-Mont.) and Ranking Member Chuck Grassley (R-Iowa) were joined today by Senate Health, Education, Labor and Pensions Committee Chairman Edward Kennedy (D-Mass.) and Ranking Member Mike Enzi (R-Wyo.) in announcing legislation to help ease the financial strain on American families and businesses due to the lagging economy. The package includes important modifications to pension distribution requirements for seniors and businesses, as well as provisions included in the Pension Protection Technical Correction Act of 2008, originally passed by the Senate in December 2007 and the House in March and July of this year. The bipartisan package also extends for one year business tax relief that was included in the first economic stimulus package, and allows companies to write off a greater percentage of their investments in business assets to free up cash for payroll and other expenses.

Actuaries versus quants

A different angle than the stuff you usually see, from Paul Wimott.

Those working in the fields of actuarial science and quantitative finance have not always been totally appreciative of each others’ skills. Actuaries have been dealing with randomness and risk in finance for centuries. Quants are the relative newcomers, with all their fancy stochastic mathematics. Rather annoyingly for actuaries, quants came along late in the game and thanks to one piece of insight in the early 1970s completely changed the face of the valuation of risk.

The insight I refer to is the concept of dynamic hedging, first published by Black, Scholes and Merton in 1973. Before 1973, derivatives were being valued using the ‘actuarial method’, in a sense relying, as actuaries always have, on the Central Limit Theorem. Since 1973 all that has been made redundant. Quants have ruled the financial roost. However, this might just be the time for actuaries to fight back.

I am putting the finishing touches to this article a few days after the first anniversary of the ‘day that quant died’. In early August 2007, a number of high-profile and previously successful quantitative hedge funds suffered large losses. People said that their models “just stopped working”. The year since has seen a lot of soul searching by quants — how could this happen when they’ve got such incredible models?

In my view, the main reason why quantitative finance is in a mess is because of complexity and obscurity. Quants are making their models increasingly complicated, in the belief they are making improvements. This is not the case. More often than not each ‘improvement’ is a step backwards. If this were a proper hard science then there would be a reason for trying to perfect models. But finance is not a hard science, one in which you can conduct experiments for which the results are repeatable. Finance, thanks to it being underpinned by human beings and their wonderfully irrational behaviour, is forever changing. It is, therefore, much better to focus attention on making the models robust and transparent rather than ever more intricate.

As I mentioned in a recent blog, there is a maths sweet spot in quant finance. The models should not be too elementary so as to make it impossible to invent new structured products, nor should they be so abstract as to be easily misunderstood by all except their inventor (and sometimes even by them), with the obvious and financially dangerous consequences. Our goal is to make quant finance practical, understandable and, above all, safe.

When banks sell a contract they do so assuming it is going to make a profit. They use complex models, with sophisticated numerical solutions, to come up with the perfect value. Having gone to all that effort they then throw it into the same pot as all the others and risk-manage en masse. The funny thing is they never know whether each individual contract has “washed its own face”. Sure they know whether the pot has made money, their bonus is tied to it. But each contract? It makes good sense to risk-manage all contracts together but not to go into such obsessive detail in valuation when ultimately it’s the portfolio that makes money, especially if the basic models are so dodgy. The theory of quant finance and the practice diverge. Money is made by portfolios, not by individual contracts. In other words, quants make money from the Central Limit Theorem, just like actuaries, it’s just that quants are loath to admit it! Ironic.

It’s about time that actuaries got more involved in quantitative finance and brought some common sense back into this field. We need models people can understand and a greater respect for risk. Actuaries and quants have complementary skill sets. What high finance needs now are precisely the skills that actuaries have, a deep understanding of statistics, an historical perspective, and a willingness to work with data.

Thanks to CP for the link.

Insurance News

Hartford fell 10.24 (51.56%) to 9.62 after taking a $2.5 billion investment from German insurer Allianz.

In much more important news

The FDIC's powers could be expanded if Congress decides to shift insurance companies from state regulation to federal regulation, Sheila Bair said. The FDIC could start providing guarantees for insurance companies, much like it already guarantees the deposits of most US banks, if the insurance industry comes under federal regulation.

Florida Supreme Court Overturns Workers' Comp Attorney Fee Limits

The Florida Supreme Court announced its final ruling in Murray v. Mariners Health/ACE USA, reinstating hourly attorneys' fees in workers compensation cases.

In response to the announcement, William Stander, assistant vice president and regional manager of the Property Casualty Insurers Association of America referenced SB 50A passed during the 2003 Florida Legislative Session.

"Since the 2003 reform bill passed, workers compensation rates have decreased by over 60 percent, saving employers hundreds of millions of dollars annually," Stander said. "Eliminating hourly attorneys' fees, a key cost driver, was an integral component to the 2003 legislation." Stander added that the Oct. 23 decision will drive more litigation back into the system and drain more money from employers' pockets.

According to the Workers' Compensation Coalition for Business & Insurance Industry, the Court's decision could negatively impact Florida's employees through potential rate increases that will constrict job growth and employee raises. With the restoration of hourly attorney fees, the Court has revived one of the system's prime drivers of claim costs -- excessive attorney involvement, WCCBII added.

"Florida's workers' compensation system averted a crisis with landmark reforms in 2003, which eliminated unaffordable rates, widespread fraud and poor compliance with insurance requirements, while providing reasonably priced workers' compensation insurance that covered more employees than ever before," said Tamela Perdue, WCCBII chair. "As a result, injured workers continued to receive benefits, found legal representation when needed, and returned to work. Unfortunately, today's Supreme Court decision has put us right back into another potential crisis."

[Thanks to DVD for the article]

AIG DEAD

I have been writing a lot of these "dead" headlines lately, haven't I?


http://financeinvestments.blogspot.com/2008/09/interesting-day-on-wall-street.html

http://www.ft.com/cms/s/0/271257f2-83f1-11dd-bf00-000077b07658.html?nclick_check=1

AIG Downgrades

AIG downgraded from AA to A. This of course increases the amount of capital they need to raise.

AIG in BIG trouble

May follow Lehman and Merrill into the dustbin of history before too much longer. Shares down 50% to $6 a piece. AIG needs to borrow $40B (their losses over the last three quarters) from the Fed window just to survive. I would be very concerned if the Fed opened their window to an insurer; that's unprecedented.

Cobb County Pension Plan

Citing a $115 million gap in its employee pension fund, Cobb County told workers late Thursday that it wants to alter its pension formula to increase employee contributions and reduce some benefits, among other changes. With about $349 million in assets and about $578 million in obligations, the plan is under-funded by about 40%, one of the worst ratios in the metro area. To meet acceptable standards, it must cut that rate to 20%.

[Thanks to MPC for the link]

Aon buying Benfield

After this deal goes through, the top four reinsurance brokers would be:
1. Aon = $1.615 billion
2. Guy Carpenter = $902 million
3. Willis Re = $606 million
4. Towers Perrin = $156 million

Passed APMV

I just learned that I passed the Society of Actuaries Portfolio Management exam I took on May 9th. Just one more exam to go to earn Fellowship in the Society.

ING buys CitiStreet

As reported in this blog back in February, CitiStreet was on the block. ING closed on its purchase of the company today. Price tag: $900M.

Northrop Grumman Closing Pension Plan

Northrop Grumman will stop offering its cash balance plan to new employees (generally effective 7/1/2008) but instead is moving them into an existing defined contribution plan with a matching contribution. New employees will receive an automatic company contribution of 3% to 5% of base pay per pay period based on age to a retirement account in the Northrop Grumman Savings Plan. Existing employees still have the cash balance plan, but the company is decreasing the pay-based credit component of the payout formula depending on the employee’s age.

HP and EDS discussions complete

Hewlett-Packard will buy EDS for $13.9 billion in a deal that will turn it into a more-formidable rival to IBM but will also likely entail significant job cuts in order to achieve the necessary cost savings. The combination would make HP the second largest global provider of IT services after IBM. Under terms of the deal, H-P will pay $25 a share in cash for EDS and expects the deal to close in the second half of 2008.

Again, I am wondering where ExcellerateHRO measures up in all this.

Edited (6/9/09) to add: Towers Perrin has sold its 15% stake in ExcellerateHRO to HP. I wonder if HP will keep the company as a division of its business or spin it off?

HP and EDS in "advanced discussions"

HP and EDS confirmed that they are in "advanced discussions" that could result in HP acquiring EDS to create a more formidable competitor to IBM. Such a deal could be worth between $12 billion and $13 billion. The news sent EDS shares surging $5.27, or almost 28%, before a halt closed trading at $24.13. The rumored value of the deal would imply a price between $24 and $26 a share for EDS, a level the stock has not traded at since last August. HP's stock fell $2.48, or 5%, to $46.65 [before also being halted, something the story doesn't mention].

Source: MarketWatch

This could be interesting for the HR outsourcing industry. EDS owns 85% of ExcellerateHRO; I doubt this is a business HP wants anything to do with that particular business. I'd wager they will put their interest in ExcellerateHRO on the block as soon after buying EDS as their contractual obligations allow.

Khan Leaves Hewitt - You Heard It Here First

Rohail Khan, Leader of North America Benefits Outsourcing, is no longer at Hewitt. The prediction in this blog that he would be gone within a year turned out to be correct with a margin of error of one week.

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.

Employee Benefits Spring Meeting

Wed May 30
Pension Protection Act Part 1 – PPA Overview
Pension Protection Act Part 2 – Benefit Restrictions Under PPA
Pension Protection Act Part 3 – 10 Biggest Unresolved Issues with PPA

Thu May 31
Accounting Part 1 – What Hath FASB Wrought?
Financial Economics Part 1 – Learning the Ropes
Financial Economics Part 2 – Making It Real

Fri Jun 1
Future of Retirement Part 1 – Report from the Meeting – Headlines
Late Breaking Developments
Future of Retirement Part 3 – Stakeholder Tensions – What do you think?
Dialogue with Treasury and IRS

Ceridian Going Private - Who's Next?

The $5.3 billion buyout of Ceridian makes the company the latest among a number of HRO providers to go private. The offer was made by private equity firm Thomas Lee Partners and Fidelity National Financial and is expected to close in the fourth quarter. The price represents a 5% premium.

ACS founder and chairman Darwin Deason has been working to take his company private. Similarly in March, Kronos was acquired by private equity firm Hellman & Friedman Capital Partners for $1.8 billion.

"My immediate thought is, who is next?" says Neil McEwen, managing consultant at PA Consulting. "And my immediate answer would be Hewitt Associates." Rumors have been circulating for months that Hewitt, which has been struggling to revive its HR BPO business, might go private to get away from shareholder scrutiny. Jennifer Frighetto, a Hewitt spokeswoman, declined to comment.

Disability Benefits in Sweden

In recent years, there has been a boom in sickness and disability in Sweden. Thirteen percent of working-age Swedes live on some type of disability benefit. That is the highest proportion in the world. Yet, Swedes are the healthiest people in the world, according to the WHO. There are several dynamics at work. Sweden has a very generous welfare system. The government trusts people to be honest. Benefits are easy to get. Therefore, fraud has crept into the system. [This is known in the insurance business as moral hazard.]

But things are changing. The system cost too much and cannot be sustained. The government is cracking down. People are losing their benefits. People are being told to return to work, the gravy is over. For example, Lotta Landstrom has lost her sick benefits after two years. (Lotta is allergic to electricity, says her doctor.) Unfortunately, the government is having to provide training to people who need it because they have been out of the labor force for so long. [Ain't socialism grand, folks?]

[Wall Street Journal]

More Outsourcing Industry News

ACS has received a revised proposal from Darwin Deason, Chairman of the Board of ACS, and Cerberus Capital Management LP to acquire, for a cash purchase price of $62 per share, all of the outstanding shares of the company's common stock, other than certain shares and options held by Deason and members of the company's management team that would be rolled into equity securities of the acquiring entity in connection with the proposed transaction.

Mercer HR Services announced that Mary Tinebra, who has played an integral role in the growth of the firm’s outsourcing business, has been appointed Global Leader of Sales and Alliances. Sean Andersen has joined Mercer HR Services as the Leader of Organizational Effectiveness Practices, and Joe Mehringer (formerly of Hewitt Associates) has joined as the Total Retirement Product Manager.

Hewitt Associates Makes More Changes in Executive Team

Jay Rising is the new president of HRO. He succeeds Julie Gordon, who has served as acting president. He most recently served as president of field operations at RightNow Technologies, a customer experience software company. Prior to that, he spent nearly ten years at ADP.

Julie Gordon was appointed to the new position of president of client & market leadership. In her new role, she will oversee Hewitt's overall client relationship strategy, with particular focus on its largest clients, most of which use both Hewitt's consulting and outsourcing services.

Steven Fein has been appointed to the newly created position of sales and product strategy leader ... Rohail Khan will continue as leader of operations.

http://www.hewittassociates.com/Intl/NA/en-US/AboutHewitt/Newsroom/PressReleaseDetail.aspx?cid=3996

WSJ weighs in on Florida insurance situation

It isn't easy to put one of the more well governed states on the path to fiscal ruin in a mere three months, but it seems Florida Governor Charlie Crist is exceptional. His campaign to socialize Florida's insurance market has placed the Sunshine State one big hurricane away from financial disaster.

Not that you'd know this from Mr. Crist's approval ratings, which remain in the stratosphere thanks in part to his populist turn bashing insurance companies. The Republican campaigned last year on promises to do something about his state's property-insurance premiums, which have climbed in the wake of some recent nasty hurricanes. Economists know that these rising costs are necessary, and in time beneficial, because insurers must build reserves against the more frequent storms hitting ever-more-populated coastal areas.

But Mr. Crist is a man on a poll-driven mission and his line has been that greedy insurers are ripping off his constituents. In January he convinced the Republican legislature to pass a "reform" designed to lower the price of insurance by making the state a larger player in the market and undercutting private insurers. The new law allows state-run Citizen's Property Insurance -- intended to be an insurer of last resort -- to compete directly with private companies.

This exercise in Cuban economics is already gutting Florida's once-competitive insurance market. Private insurers know the law will artificially depress rates, forcing some to operate at a loss. Many have responded by cancelling policies, prompting Governor Crist to issue an "emergency" order freezing premiums and barring cancellations. Yet even this hasn't stopped the bleeding.

USAA last week became the latest to significantly restrict the number of new policies it issues in the state, and to drop 27,000 second-home policies. This follows pullbacks from AllState, State Farm, Nationwide and others. The storms and new regulation have also forced some insurers out of business, leaving thousands of policyholders with no coverage and fewer options for getting it.

Large numbers of homeowners are now turning to Citizen's, which itself is only able to offer lower premiums because of its implicit taxpayer guarantee, and because its actuarial assumptions reside in la-la land. Citizen's likes to say it will have $8 billion with which to pay claims, but it rarely notes that much of this is a line of credit. Between such credit and its bonding authority, what Citizen's really has is the potential to rack up huge liabilities that will have to be paid by someone when the next storm surge comes ashore.

Most likely, that someone will be all Florida homeowners, who, in the event of a Citizen's collapse, will be on the hook for large assessments. This tax is likely to be levied on every homeowner, including those who don't live in areas at high risk for storm damage. Another option would be for the state to provide a bailout, putting all taxpayers on the hook. The risk of a taxpayer bailout is also high for the state's hurricane fund: The new law doubled its risk-bearing capacity to $32 billion in business, thus allowing insurers to purchase reinsurance at cheaper rates than on the open market. However, the fund has only $1 billion in cash on hand, and thus no way to cover its new business if disaster strikes -- short of dunning taxpayers.

In sum, what Mr. Crist has done is concentrate the risk of future hurricane losses within his own state government, rather than spreading it around the world through the insurance industry. This is astonishing, given that the Sunshine State accounts for 27% of all hurricane-exposed property in the U.S., worth some $2 trillion. After Katrina, private insurers paid more than $40 billion to 1.7 million policyholders in Florida. But the state government and its taxpayers may end up paying for the next big one largely by themselves.

At least other states are learning from the Florida meltdown. Rather than create state competitors to the private market, Mississippi and South Carolina have taken steps to expand their markets of last resort. Louisiana's Governor and insurance regulator have talked openly of the need to rebuild the private insurance market, rather than transfer risk to taxpayers. Even the liberal Atlantic Coast states, usually the first to turn to new regulations, have largely rejected attempts to socialize their storm risk.

For now, many Floridians are thrilled that their rates are falling and so the Governor is popular. He recently asked for new legislation to give Citizen's even more power to compete with private underwriters. However, Mr. Crist and his fellow Republicans had better hope that predictions of more frequent hurricanes are wrong. Because when they hit, and taxpayers discover there's no such thing as free insurance, what could get blown away is their governing majority.

Summary of 2007 Social Security & Medicare Annual Reports

For the first time, a “Medicare funding warning” is being triggered [...] By law, this warning requires that the President propose, and the Congress consider, remedial action.

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)

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

Aon Consulting gets new CEO

Aon Corporation has appointed Andrew M. Appel, 40, as CEO of Aon Consulting Worldwide, the company's human capital and management consulting operation. The appointment is effective immediately. Appel will report to Greg Case, Aon's president and CEO. Appel succeeds Donald C. Ingram, who has had longstanding plans to retire as Aon Consulting's chief executive officer. Ingram will remain as Aon Consulting's chairman. Appel joins Aon from McKinsey & Company, where he was a senior partner in the firm's Financial Services and Technology practices. While at McKinsey, Appel served as a consultant to a wide variety of clients, mainly in financial services. Appel also was a founding leader of McKinsey's Business Technology Offices and a member of McKinsey's Global Technology and Operating and Practice Committees.

It looks like the McKinsey-ites are taking over.

Québec Health Care

The Supreme Court of Canada declares that unreasonable wait times for health care violates the Québec Charter of Human Rights and Freedoms.

Pension Plan Funding Discussion

In the wake of the PBGC taking over United's seriously underfunded plan, a discussion arose on the Actuarial Outpost regarding pension plan funding requirements. Check it out here.

Feedback on my most recent PBGC post

Comments from an actuarial colleague have brought to my attention that my flippant comment about "bad for John Q. Taxpayer" may have left readers with an incorrect impression. To clarify the situation, I have reproduced his comments (with which I agree) here.

PBGC has never received any money from the US government (i.e., tax revenue). It is funded entirely from premiums, investment income, assets from trusteed plans and amounts recovered through bankruptcy proceedings.

There has been talk, especially from labor unions and some Democrats, about a taxpayer bailout of the PBGC. This is *extremely* unlikely, perhaps impossible, so long as Republicans control the Congress. Here's why:

Only ~25% of American workers enjoy defined benefit plans. By "coincidence," they tend to be in industries that are unionized. I cannot imagine a Republican administration or Congress agreeing to tax 100% of American workers to bail out 25% of American workers who enjoy better retirement benefits and are Democrats to boot. It just isn't going to happen.

If you've been following the Administration's pension funding proposal, they are proposing increases in the flat dollar premium and significant modifications to the variable rate premium (creating a risk-based premium, eliminating the credit balance when calculating whether a plan qualifies for the full funding limit exemption, etc.).

One last thought. If you pay close attention, you'll notice that the PBGC changed its logo last year. (Look for a copy of a premium payment package or a premium form.) The fine print under the logo used to read "U.S. Government Agency" but now it reads "Protecting America's Pensions." (The image in the logo was also changed to look sleeker.) Rumor has it that the language was changed to eliminate the suggestion that the PBGC is backed by the "full faith and credit" of the U.S. government. It certainly seems plausible.

PBGC Takes Over United Pension Plans

United Airlines and the PBGC announced a settlement that would allow the airline to hand over its four underfunded pension plans to the government in the largest corporate-pension default in US history. While the move needs approval by a bankruptcy-court judge and is being contested by some of the airline's unions(*), the shedding of $9.8 billion of retirement obligations would represent a huge step in UAL's efforts to lower its costs and attract funding to exit from Chapter 11 this fall. Giving up the plans would save the company $645 million a year for the next five years.

Good for United, bad for the PBGC and John Q. Taxpayer, since the PBGC is already running a $23.3 billion unfunded liability.

(*) The Association of Flight Attendants has already announced its intention to fight this in court. AFA has also voted to let the union call a strike if its contract is abrogated by the bankruptcy judge, a step that has no legal precedent and one that United says would be illegal.

The surprise UAL settlement, reached Friday during a regularly scheduled hearing in bankruptcy court in Chicago, would cancel objections raised by the PBGC to UAL's intentions to jettison its retirement plans. Terms of the agreement are expected to be filed with the court tomorrow, and Judge Eugene Wedoff scheduled a May 4 hearing on the matter. UAL said the agreement would keep it on track to step out of court protection as "a sustainable, competitive enterprise for the long term" and would narrow the number of issues to come to the bankruptcy court at a trial on May 11. Erasing that liability could force other unprofitable airlines with heavy pension obligations to seek bankruptcy protection specifically to turn over their own underfunded plans onto the government. If UAL succeeds in eliminating its pension liabilities that would substantially worsen the situation for competitors that don't have this relief. Then the rest of the big airlines that offer such costly defined-benefit retirement plans will probably follow suit since they couldn't possibly survive with these costs intact.

This could very well create a domino effect that destroys the PBGC.

The PBGC last month asked a federal judge to let it unilaterally take over a pension plan covering 36,000 active and retired mechanics and ramp workers, and in December made the same move toward the plan covering 13,500 active and retired United pilots. The agency wanted to assume those funds before further benefits accrued, to its financial detriment. The PBGC was hoping at least one or two of the other United plans could be retained. But the agency was hit by an adverse legal ruling last month in federal court in Delaware in a pension-termination case involving Kaiser Aluminum Corp. The court rejected the agency's position that each pension plan sponsored by a company should be looked at individually. On Friday, the PBGC said the settlement agreement provides a better recovery than it would have received as an unsecured creditor in UAL's bankruptcy case. The PBGC said it will guarantee payments to plan participants totaling $6.6 billion, meaning the workers and retirees would be shorted by $3.2 billion in the form of benefit reductions(*).

(*) What the article doesn't explain is that these shortages affect mostly the recipients of the largest benefits. Rank-and-file participant benefits are seldom affected in a PBGC takeover.

Source: Wall Street Journal

Aon Names New CEO

Aon Corporation announced the election of Gregory C. Case, 42, as president and chief executive officer, effective immediately. Case has also been elected to the Aon Board of Directors. Case succeeds Patrick G. Ryan, who has served as Aon CEO since the company's founding. Ryan will continue to serve as executive chairman of the Board. [...] Case most recently served as head of the Financial Services Practice at McKinsey & Company, the international strategic management consulting firm.

Morris Review

A review of the actuarial profession in the UK.

http://www.hm-treasury.gov.uk/independent_reviews/morris_review/review_morris_index.cfm

ACS Acquiring Mellon HR

ACS announced today that it has signed a definitive agreement to acquire the human resources consulting and outsourcing businesses of Mellon Financial Corporation for approximately $445 million. For the year ended December 31, 2004, the HR Business recorded revenues of approximately $660 million. The transaction is scheduled to close by the end of the fourth quarter of ACS' fiscal year 2005 (Apr-Jun 2005).

Mellon Financial yesterday said it has agreed to sell its human resources consulting and outsourcing businesses to Affiliated Computer Services for $445 million in cash. The deal is scheduled to close by the end of the second quarter, subject to regulatory approval. Gerard Cassidy, an analyst at RBC Capital Markets, said the price was lower than he expected. "We were thinking from the combination of historical transaction prices of these types of companies that the price was going to be closer to $500 million, and it came in obviously below that. It points to the fact that the business was wounded, hurt, and Mellon was unable to receive top dollar for this business."

AIG replaces CEO

AIG replaced Maurice "Hank" Greenberg as chief executive amid concern over a rising number of regulatory inquiries at the financial services titan he built over nearly four decades. Greenberg, 79, will continue as non-executive chairman. The company named Martin J. Sullivan, 50, its co-chief operating officer and vice chairman, as chief executive.

Actuaries do not predict age at death

Despite what you may have seen on Las Vegas last night (and on any other show that has ever depicted an actuary), actuaries do NOT have, use or create models that predict the age at which an individual will die. What (life insurance) actuaries do basically boils down to using the law of large numbers to determine how many people in a large group are going to die this year.

Aon settles with Spitzer for $190 million

Story 1: Aon’s top executives, including CEO Patrick Ryan and COO Michael O’Halleran, personally arranged to steer client business to certain insurers in return for their agreement to use Aon’s separate reinsurance brokerage services, according to a complaint filed today by New York Attorney General Eliot Spitzer. The complaint, which was filed and then immediately settled as part of a $190 million agreement between Aon and the states of New York, Illinois, and Connecticut, outlined in detail numerous examples of Aon compromising client interests by placing business with favored insurers.

Story 2: Aon agreed Friday to pay $190 million to end Spitzer's investigation into conflicts of interest and alleged fraud at the world's second-largest insurance broker. The pact also includes the New York and Illinois state insurance departments as well as attorneys general in Connecticut and Illinois, according to the Chicago-based company. Aon will pay the $190 million over 30 months to policyholders deemed to have been damaged by the company's actions. The company also agreed to adopting reforms designed to avoid conflicts of interest.

The stock went up 28 cents (1.16%) in today's trading, and there's been no movement in after-hours trading.

MMC Quarterly Loss

Yesterday, Marsh & McLennan reported a fourth-quarter loss of $676 million, or $1.28 a share, compared with a profit of $375 million, or 69 cents a year, a year earlier. Consolidated revenue for all of 2004 fell 1% to $3 billion. The world's biggest insurance broker said an ongoing restructuring of its business could result in the loss of another 2,500 jobs [in addition to the 3,000 already announced]. The stock's quarterly dividend was also cut, to 17 cents a share down from 34 cents, which would reduce the company's annual payout by $360 million a year. The company's stock fell $1 to $32 today.

Georgia Insurance Scam

A father-and-son team in Barnesville GA allegedly ran a taxicab insurance scam that left thousands of cabdrivers across Georgia without coverage because the vehicles were never insured. Law enforcement officials say the taxi scam, which allegedly ran for more than two years, netted Godfrey Waterhouse and his son, Robert Waterhouse, more than $3 million in premiums. Robert Waterhouse was arrested Tuesday and charged with 40 counts of theft by deception, 40 counts of insurance fraud and one count of racketeering. Godfrey Waterhouse, who was charged with the same 81 counts, is in New Zealand, and state officials are seeking extradition.

The two were licensed to sell insurance in Georgia; the state is in the process of revoking their licenses. The pair allegedly signed up livery companies for policies by saying they were representatives of the Mark Solofa Company, an insurer based in Pago Pago, American Samoa. But Solofa executives told officials they had never heard of the Waterhouses and that they sell policies only to vehicles in American Samoa. They just picked the company's name and were using it. They were just issuing policies and collecting money.