Pension360

A Wall Street Journal analysis of data from S&P Global Market Intelligence found that overall compensation for chief finance officers for 332 companies in the country fell by 1.5% compared to last year, owing to the slower rate of growth of pensions.

As explained in an article on the WSJ website:

This year’s major change was in the rate of pension growth. Pensions and deferred compensation, which are combined in proxy filings, grew by about half as much as they did in 2014, for the 134 companies in the group that listed a figure in that category.

Pension values are more a function of accounting, “driven by actuarial assumptions,” rather than strategic decisions, so they could fluctuate “simply because you change mortality assumptions or discount rates,” said Joseph Sorrentino, managing director of Steven Hall & Partners, an executive-compensation consulting firm.

Median pay for finance executives without deferred compensation and pension fluctuations, on the other hand, rose to $3.4 million this year from $3.3 million last year.

Ending the longest strike in its history, German airline Lufthansa and its cabin crew union have agreed to pay and pension scheme changes for 19,000 staff. The agreement will allow the carrier to reduce staff costs and move forward with its budget plans.

Some employees will be moves into a defined-contribution plan.

Reuters elaborated on the deal:

The new cabin crew deal, negotiated by a mediator, includes a pay rise of almost 5.5 percent from Jan 2016 to June 2019, plus a one-off payment of 3,000 euros ($3,344), which has already been paid. Lufthansa ruled out compulsory redundancies for five years.

Among the 20 different contracts agreed via a mediation process was the agreement of a defined contribution pension scheme rather than a defined benefit scheme, in line with what many other major European companies have done.

Overall, the agreement, which also includes flexible contracts to better cover seasonal demand, will allow Lufthansa to bring staff costs for cabin crew down by about 10 percent compared to previous projections, Bettina Volkens, Lufthansa board member for HR, told journalists.

Lufthansa, however, still has an ongoing dispute with its pilot union Vereinigung Cockpit but is also currently in talks with them for a new defined contribution pension plan.

Funding levels for state and local pension plans throughout last year was nearly unchanged, having risen from 73 percent in 2014 to 74 percent in 2015, according to a report released by the Center for Retirement Research at Boston College.

Funding declined slightly, however, when assets are valued per the new accounting rules of the Governmental Accounting Standards Board.

From Reuters:

If public pension plans meet their assumed expected returns over the next four years, plans should be 78 percent funded by 2020, the report found. Funds are highly sensitive to investment performance.

Across the country, many public pension funds have been recasting investment priorities as cash flows turn negative, meaning funds pay out more in benefits than they collect from contributions and investment income, a repercussion of more baby boomers retiring. Adding to the challenges, most retirement systems are underfunded, and investment returns have been choppy.

Pension plans on average assume a nominal return of 7.6 percent on their total portfolios and nominal stock returns of 9.6 percent.

Returns this year will likely be much lower.

A Federal appeals court upheld lower-court decisions and sided with Fort Worth in a suit, filed by police officers and fire fighters, over an alleged violation of a section of the Texas Constitution when the city cut pension benefits in 2012.

The decision is the third of a string of hearings over 2012 reforms that amended the calculation of benefits and cost-of-living adjustments for general employees, police officers, and fire fighters in Fort Worth.

In an article in the Star-Telegram, Circuit Judge Thomas Reavley said:

“Like most public pension plans in Texas, Fort Worth’s is underfunded,” Circuit Judge Thomas Reavley said in the opinion. “Over the years, Fort Worth has sought to improve the financial condition of its pension plan. We have concluded that [the section] permits prospective changes to the pension plan of the public employees within its reach.”

The executive director of Fort Worth Employees’ Retirement Fund said early last month that the board seeks to implement more aggressive investment policies to boost returns.

A former Disney employee filed suit against the company’s 401(k) committee this week for advising plan participants to invest in a fund that eventually lost $2 billion.

The fund in question was a large holder of Valeant Pharmaceuticals stock, the price of which has collapsed epically in the last 12 months (from $250 to $20).

More from the Orlando Sentinel:

Specifically, the federal lawsuit targets the Disney committee over its investment in the Sequoia Fund, which lost $2 billion after one of its biggest stocks tanked.

Patricia Du Vall is the plaintiff in the lawsuit, filed last week in California. She is a former IT analyst at The Walt Disney Co., according to her LinkedIn profile.

The lawsuit, which seeks class action status, also names as defendants several individual Disney executives who are committee members.

The committee invested in the fund and also gave employees the option of investing in it, one of Du Vall’s attorneys said.

Valeant Pharmaceuticals represented more than 30 percent of the Sequoia Fund’s assets, the lawsuit said. Valeant’s shares were more than $250 in August. Today they are at about $20. The company has had numerous problems in recent months including debt, federal probes of accounting and pricing practices, and shareholder lawsuits.

The committee “clearly knew or should have known that the Sequoia Fund was an imprudent investment,” the lawsuit said. “A prudent fiduciary would have recognized that….the Plan’s significant investment of employees’ retirement savings in the Sequoia Fund would inevitably result in devastating losses to the Plan and, consequently, to the Plan’s Participants.”

The funding ratio of the typical corporate pension plan dropped to 80% in the second quarter of 2016, down from 83% in Q1.

The data comes from UBS’ US Pension Fund Fitness Tracker, which aggregates data from 500 large corporate pensions.

More on the funding change from UBS:

The fall in Treasury yields during June caused liability values to increase in the second quarter of 2016. Investment returns of 2.1% could not keep up with the return on liabilities over the quarter, causing funding ratios to once again decrease. These estimates are based on the average corporate plan’s reported asset allocation weightings from the UBS Asset Management Pension 500 Database and publicly available benchmark information.

The rather unexpected outcome of the recent referendum in the UK, where voters requested that the UK leave the European Union, has been the main headline in the financial press. Economic estimates suggest that the UK will be the country that will lose most from the voters’ decision. Some negative effects in Continental Europe are likely, while the other continents can expect minimal impact.

The US economy has continued to thread along without big surprises. A rather weak employment number in June encouraged the data-driven Fed to wait a little longer before increasing the target rate. At least one rate increase, maybe two, before the end of 2016 is possible because the labor market is tightening, the fundamentals of the economy remain solid, and inflation is converging toward the expected range around 2%.

Employees of asset manager American Century filed a class action suit against their employer this week for myriad of 401(k)-related allegations, including charging excessive fees, self-dealing and more.

Read the court filing here.

From Investment News:

The class-action lawsuit, Wildman et al v. American Century Services, LLC et al, alleges breach of fiduciary duty under the Employee Retirement Income security Act of 1974 for excessive investment management and record-keeping fees, imprudent fund selection and for self-dealing by American Century, which plaintiffs contend filled the retirement plan with proprietary investment options for its own benefit. Steve Wildman and Jon Borcherding, former American Century employees, are the named plaintiffs representing the class of plan participants.

Since 2010, fiduciaries of the $600 million American Century Retirement Plan populated the plan’s investment menu solely with American Century funds, using a selection process “tainted by self-interest” rather than a prudent one that would have led fiduciaries to use less-expensive funds with similar or better performance, the complaint said.

“Defendants have used the Plan as an opportunity to promote American Century’s mutual fund business and maximize profits at the expense of the Plan and its participants,” the plaintiffs said in the complaint, claiming the firm earned millions of dollars in fees by retaining proprietary investments.

Plan fiduciaries also allowed “grossly excessive” revenue-sharing payments to be made to JPMorgan Retirement Plan Services and Schwab Retirement Plan Services Inc., the plan’s two record keepers over the relevant time period, according to the complaint, filed Jun. 30 in the U.S. District Court for the Western District of Missouri, Western Division.

As some U.S. Treasury yields sank to new lows this week, corporate pensions might consider selling bonds in order to raise cash to pay out to beneficiaries, said Bank of America analysts.

From Reuters:

The average funded ratios of the top 100 U.S. corporate pensions are expected to fall to the lows seen in 2012 as the U.S. 30-year yield has fallen half a percentage point and yield premiums on corporate bonds too have declined since April, according to Bank of America analysts.

“Corporate bond yields are so low that corporates could consider issuing debt to make their pensions whole and come out ahead,” Shyam Rajan, Bank of America’s interest rates strategist, wrote in a research note.

The average yield on A-rated U.S. corporate bonds is about 2.52 percent, while that on BBB-rated corporates is 3.4 percent, according to Bank of America Merrill Lynch data.

If the U.S. Treasury 30-year yield stays in the low 2 percent level, the top 100 domestic corporate pensions worth $3 trillion would be running a funding deficit of $500 billion, Rajan said.

Companies may not want to their pensions to be stuck in such a funding situation because they would have to pay more insurance premiums on them.

Norway’s massive sovereign wealth fund has joined a lawsuit against Volkswagen, led by CalSTRS, seeking reparations for the stock price drop that followed the company’s emissions scandal.

The SWF, Government Pension Fund Global, manages about $825 billion – $10 billion of which were Volkswagen shares.

From Investments and Pensions Europe:

Norway’s sovereign wealth fund has joined the California State Teachers’ Retirement System (CalSTRS) and around 800 other institutional investors in suing Germany’s Volkswagen.

Norges Bank Investment Management (NBIM) issued a short statement on behalf of the Government Pension Fund Global, confirming it joined the lawsuit on 20 June, which follows last year’s revelation Volkswagen used ‘defeat device’ software to underplay the emissions of diesel vehicles.

The NOK7.1trn (€745bn) fund added that it would be represented by Quinn Emanuel Urquhart & Sullivan, which filed the suit claiming around €2bn in damages, backed by CalSTRS and others, in the Braunschweig District Court.

NBIM said in May it planned to sue Volkswagen over last year’s emissions scandal, which saw the company’s share price drop from €162.40 to as little as €92.36 at the beginning of October.