Pension360

In the near future, the New Jersey Supreme Court will rule on a pension case that Moody’s says has big implications for the state’s credit rating.

The lawsuit in question challenges the constitutionality of a 2011 pension reform law that froze cost-of-living-adjustments on retirees’ pensions.

An appellate court ruled in favor of retirees; if the Supreme Court does the same, the state will owe retirees backpay to 2011.

Here’s what Moody’s says about the case, from NJ.com:

Moody’s Investors Service again sent up a warning flare that a possible New Jersey Supreme Court ruling striking down cuts to public retirees’ pension benefits would soak the struggling retirement system with new pension liabilities.

But in its latest report released Wednesday on the “extraordinary decisions and challenges” the Garden State faces, the Wall Street ratings agency estimated the public pension system’s $55 billion unfunded liability ($113 billion if measured under different accounting standards) would increase by a third if state and local governments are forced to restore retirees’ cost-of-living increases.

The state portion of the unfunded liability would increase from $40 billion to about $53 billion and the system would fall from 51 percent funded to 44 percent if the court strikes the freeze down.

“The heightened burden, combined with an increase in benefit costs, would hurt New Jersey’s pension fund cash flows and funded status and the state’s ability to reach structural budget balance,” Moody’s said.

Retirees are angry because, as part of the 2011 reform law, they made a deal: they’d accept the freezing of their COLAs, and in exchange the state promised to make its full actuarially-required contributions to the pension system.

It took the state two years to renege on its side of the bargain.

 

Photo by Joe Gratz via Flickr CC License

Ten percent of the average teacher’s earnings go toward paying down pension liabilities accrued by their older counterparts, according to a recent paper from the Center for Analysis of Longitudinal Data in Education Research.

More on the research, from U.S. News & World Report:

In a recent paper for the Center for Analysis of Longitudinal Data in Education Research, a team of economists calculated that 10 percent of the earnings for an average public school teacher goes toward paying for pension liabilities accrued on the behalf of prior cohorts of teachers. That’s money they could be taking home in salary.

The contribution made by younger teachers is so high in part because their more experienced counterparts shoulder very little of the burden. States have increased vesting periods and employee contribution amounts for new teachers while leaving the plans for current retirees constant. A recent report by Bellwether Education Partners showed that these and other changes disproportionately affect younger and future teachers compared to those who have already worked for several years.

Reductions in compensation for young teachers are only making a longstanding problem worse. Teacher pension systems already transferred money from younger to more experienced teachers before these systems became underfunded.

Read the full paper here.

 

Photo by cybrarian77 via Flickr CC License

A British pension fund – identity currently unknown – is suing Volkswagen over its emissions scandal, which caused the car company’s shares to plunge.

A German law firm, representing the pension fund, broke the news on Wednesday.

From Yahoo:

Law firm Nieding + Barth said in a statement that together with another fim, Mueller Seidel Vos, it had filed a suit on behalf of the pension fund at the regional court in Brunswick.

“The basis for our claim is (VW’s) violation of its capital market information obligations,” said law firm chief Klaus Nieding.

“Because VW concealed its manipulation of the software in diesel vehicles for many years, shareholders have suffered substantial losses on their investment. And VW must be held responsible for that,” said Daniel Vos of Mueller Seidel Vos.

[…]

The scandal has hit VW hard. It lost nearly 40 percent in market capitalisation since September, when the scandal broke, even if its shares have come back off their lows since then.

The German law firms accused VW chief executive Matthias Mueller of deliberately playing down the affair on his recent visit to the United States.

“That testifies to a lack of will (within VW) to clear up the matter,” Nieding said.

The car manufacturer could soon face lawsuits from more institutional investors, car owners, and penalties from governments.

 

Photo by Long Road Photography (formerly Aff) via Flickr CC License

Jonathan Grabel is the Chief Investment Officer at New Mexico PERA.

In this clip, above, he talks about why his fund isn’t pulling money out of the markets, and how to keep a long-term view even as stocks are falling.

New Mexico PERA manages $14 billion in assets.

 

Credit: CNBC

Photo by www.SeniorLiving.Org 

A week after a Greek official said further pension cuts were a “non-starter” in negotiations with creditors, it appears the country may have to cross that “red line” if it wants to move forward with its bailout.

Greece released a reform plan this month that delivers savings of about 1 percent of the country’s GDP.

But an EU official on Wednesday said the plan needs to be “fleshed out” and improved if Greece wants to move ahead with its bailout.

More from Bloomberg:

Greece must improve its pension proposals in order to move ahead with its bailout program and start discussions on easing its debt burden, European Union Economic Affairs Commissioner Pierre Moscovici said.

Greek Prime Minister Alexis Tsipras needs to offer “more precise parameters” on his nation’s plan to overhaul the pension system, Moscovici said in an interview at the World Economic Forum in Davos, Switzerland. So far, Greece has a “comprehensive and positive” first draft that needs to be fleshed out, he said.

“We need first to have that pension reform — I want that to happen as fast as possible,” Moscovici said. That would pave the way for finishing the bailout program’s first overall review and “after that, we might discuss about re-profiling of the Greek debt” by lowering the debt service burden, he said.

[…]

Moscovici said he plans to meet Tsipras and International Monetary Fund Managing Director Christine Lagarde during the Davos meetings. He welcomed Greece’s renewed pledges to continue talks toward a new IMF program and said there has been a “constructive” climate around recent negotiations.

Creditors disliked the reform plan because much of the savings to Greece came in the form of higher contributions from workers, which creditors believe could harm the country’s economic growth.

 

Photo credit: “Flag-map of Greece” by en.wiki: Aivazovskycommons: Aivazovskybased on a map by User:Morwen – Own work. Licensed under Public Domain via Wikimedia Commons – https://commons.wikimedia.org/wiki/File:Flag-map_of_Greece.svg#/media/File:Flag-map_of_Greece.svg

A Greek official made it clear last week that further pension cuts would be a non-starter in negotiations with creditors.

But the country’s finance minister this week said he is willing to discuss pension reforms with the IMF – if it means their bailout review will be quick.

From Reuters:

Greece’s international lenders – the IMF and the European Union – are widely expected to launch a review this week of the reforms Athens has adopted as part of a bailout package it clinched last year to avert bankruptcy. Technical teams are already in Athens.

“We are even ready to discuss the pension reform, as long as the IMF wants to conclude this discussion in a timely manner,” Euclid Tsakalotos told a news conference.

[…]

The review, if concluded sucessfully, could pave the way for discussions on debt relief that Greece has long sought, coax back investments and help its crippled economy return to growth.

Meanwhile, several unions are planning a strike to protest the planned reforms. From ABC:

Union discontent is growing in Greece against planned pension reforms, with civil servants joining in a strike by private sector workers next month in what will be the first general strike of the year in the financially struggling country.

The ADEDY umbrella civil service union said Monday it will participate in the Feb. 4 strike, and accused the radical left-led government of aiming to “plunder” pensions through drastic new cuts.

Unions representing lawyers, doctors and engineers have also strongly protested the draft reforms, which would significantly increase their social security contributions.

One condition of the IMF bailout is that Greece trim nearly $2 billion in pension costs.

 

Photo credit: “Flag-map of Greece” by en.wiki: Aivazovskycommons: Aivazovskybased on a map by User:Morwen – Own work. Licensed under Public Domain via Wikimedia Commons

Carol Buckmann is an attorney who has practiced in the employee benefits field for over 30 years. This post was originally published at Pensions & Benefits Law.

Alliance Bernstein recently released the shocking result of a survey it had taken of plan sponsors: a whopping 37% of those fiduciaries surveyed didn’t know that they were fiduciaries.Obviously, it is unlikely that these individuals are fulfilling their fiduciary responsibilities if they are unaware of their status.  And we wonder what will happen if the plans of these oblivious fiduciaries are selected for a Department of Labor audit, though we are sure that it won’t be a pretty picture.It is possible to be an ERISA fiduciary and not know it, because no acknowledgement of fiduciary status is required.  ERISA has a functional definition of fiduciary, which means that you become a fiduciary based on what you do.  Administration, investment control and giving investment advice for a fee are the activities that trigger fiduciary status. ERISA also provides that there must always be at least one named fiduciary to manage a plan,  and this will be the Company and its directors if no other designation is made.

Another form of ignorance can complicate this problem, because it is also possible to believe that your plan service providers are fiduciaries when they are not.  Small plan fiduciaries are not the only ones under these misconceptions.  Misplaced reliance on what these non-fiduciary vendors are doing can result in avoidable compliance failures and litigation exposure. Here is a short checklist for people who have relationships with employee benefit plans:

• If you are a director, you have some fiduciary responsibilities even if the board has  delegated authority to other fiduciaries.
• If you are a plan trustee, you are a fiduciary.
• If you are on a plan committee, including an investment or administrative committee, you are a fiduciary.
• If you have adopted a prototype or other pre-approved plan, your vendor is not a fiduciary unless it has agreed to make decisions and become an administrator as defined in Section 3(16) of ERISA or manages investments.
• If you have appointed an investment manager with the authority to make investment decisions, the investment manager is a fiduciary.
• If you are receiving investment advice from a broker or registered investment adviser, you may not be receiving advice from an ERISA fiduciary as the law stands now.  It all depends on factors such as whether the advice is one-time or on a regular basis, or is given with the understanding that it will be a primary basis for plan investment decisions.  The Department of Labor, with the support of the Obama administration, has been working on a controversial new proposal to extend ERISA fiduciary responsibilities to brokers and others who provide investment advice to plans, but so far, is being close-mouthed about what it says.

Since fiduciaries may be personally liable for losses caused by fiduciary breaches, knowing whether you and your vendors are fiduciaries is essential self-defense against being blind-sided in the pocketbook by a court award, audit penalty or settlement.

 

Photo by Martin Raab via Flickr CC License

A proposed California ballot measure, which seeks to curb the state’s pension benefits and rein in costs, will not make it on the 2016 ballot.

The initiative’s two backers – former San Jose Mayor Chuck Reed and former San Diego Councilman Carl DeMaio – said they are now shooting for the November 2018 ballot.

The measure would have shifted new state employees into a 401(k) system and capped how much employers could contribute to new hires’ pensions.

More from the Sacramento Bee:

Reed said in a telephone interview that he is disappointed but undeterred. Professional fundraisers and potential donors, he said, believed that economics, politics and a pending U.S. Supreme Court decision would strengthen the likelihood of passing a pension measure in two years.

“Enough people in my coalition think so,” Reed said, “and you have to listen to them.”

Labor unions, which opposed Reed and DeMaio’s proposal and others like it, rejoiced at Monday’s news that another “extremist” stab at changing public pensions had failed.

[…]

[Reed] couldn’t persuade donors to come up with up to $3 million needed to gather qualifying signatures by mid-April. Beyond that, Reed estimates he would need another $25 million to wage a campaign against fierce union opposition.

Internal discussions, Reed said, turned to 2018. By then, some of his advisers speculated, the state economy might cool down, putting state and local budgets under more stress and giving voters more reason to pay attention.

There would also be no election for president that year, he noted, which tends to suppress turnout in Democratic, union-friendly California.

It costs about $28 million to run a ballot measure’s “campaign”, and to collect the necessary signatures, according to Reed.

 

Photo by  San Jose Rotary via Flickr CC License

Ontario is moving forward with its planned expansion of retirement benefits, even if other provinces aren’t yet following.

The rest of Canada will eventually follow, but the country is currently studying various angles of retirement benefit expansion. A decision will come in December.

More from The Globe and Mail:

The ORPP will apply to people who do not already have a comparable workplace pension. It will be funded by contributions from workers, matched by their employers. For someone earning $45,000 annually, the ORPP would return $6,410 a year in retirement if paid into for an entire working life; for someone earning $90,000 or more, that figure would be $12,815.

The pension plan will be administered at arm’s length from the government and run by civil service veteran Mr. Rafi. Formerly the top bureaucrat in the province’s massive health ministry, he most recently handled the high-profile assignment of steering the Pan American Games in Toronto last summer. Between salary and bonuses, he will be eligible for up to $656,250 in annual pay in his new job.

While Ontario leaps off the diving board, the rest of the provinces are huddled nervously by the shallow end, tentatively dipping their toes in the water.

Prime Minister Justin Trudeau pledged to pursue CPP enhancement in his winning campaign last year, and Mr. Morneau is now trying to reach a consensus with the provinces. Any expansion of CPP must be agreed to by Ottawa and at least seven provinces representing two-thirds of the country’s population.

Mr. Morneau’s spokesman said he is “absolutely committed to ‎moving forward on enhancing the CPP,” but he does not have a preconceived notion of exactly what the enhancement will look like – whether similar to the ORPP or something else.

Canada is currently studying the effects of expanding retirement benefits; how businesses would react, how GDP would be affected, and which workers the expansion should affect in the first place.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons

A new accounting requirement, issued by the Governmental Accounting Standards Board (GASB) and directed at cost-sharing retirement plans, could lead to in-fighting between cities and states, according to a recent report.

The report, released by the Center for State and Local Government Excellence and the Center for Retirement Research at Boston College, says cities and states could bicker over their respective shares of unfunded pension liabilities.

More details from BenefitsPro:

[The new GASB rule] requires employers that participate in cost-sharing pension plans to report their share of a state’s “net pension liability” on their balance sheet is having a substantial impact on many large cities that participate in cost-sharing state plans.

[…]

GASBB’s rule change not only requires employers to move pension funding information from footnotes onto their balance sheets, but also requires those who participate in cost-sharing plans to provide information regarding their share of the net pension liability on their books.

The liability isn’t new, and does not affect the funded status of a pension plan.

However, reporting their share of such liabilities has nearly doubled the burden of the 92 cities in the study that are in such plans.

“Local governments—now saddled with a portion of the state plan’s unfunded liabilities on their books—may be more interested in seeing the unfunded liability decline over time and will have a vested interest in ensuring that their contributions are doing just that,” [the report says].

In its footnotes, the study reported that, because of the change, “political tensions have already begun to emerge between a state and the local governments involved in its cost-sharing plans.”

Read the report here.

 

Photo by Laura Gilmore via Flickr CC License