Ted Ballantine | Pension360

Wall Street Securitizes Pension Liabilities to Create “Longevity Derivatives”

No one ever said Wall Street wasn’t creative.

Several firms are selling securities backed by longevity risk—the risk that retirees receiving benefits will live longer than expected and thus incur a higher cost on their retirement plan. More from Institutional Investor:

Sovereign wealth funds, educational endowments and ultrahigh-net-worth individuals are the target investors for longevity derivatives, which package the risk that retirees drawing annuities will outlive actuarial expectations.

The roots of this nascent market date back to 2006, when small monoline insurance companies such as U.K.-based Lucida (purchased by Legal & General in June 2013) and Paternoster (bought by Goldman Sachs Group in 2011) began taking longevity risk off European pension funds through bulk annuity buyouts.

These buyouts entail a company selling pension assets earmarked for all or some of its plan participants. The assets are converted to annuities that the sponsor can keep on its books or off-load to the insurer.

[…]

Banks build longevity derivatives products using risk models provided by firms like Newark, California–based Risk Management Solutions (RMS). They’ve closed a dozen such deals, but the customized structure can be tough for investors to grasp. Deutsche Bank is focused on creating a path into the capital markets, according to Paul Puleo, global head of pension and insurance risk markets in New York.

In December 2013, Deutsche created longevity experience options, or LEOs, a more standardized product tailored to capital markets participants. Longevity derivatives resemble the older catastrophe bond, or insurance-linked security (ILS), market, which packages insurance against natural disasters. A key difference between longevity insurance derivatives and cat bonds is that there are now a number of hedge funds dedicated to the ILS market.

Who buys these securities? It’s been mostly life insurers so far. But firms anticipate other interested parties will soon be buying up these instruments, as well. From Institutional Investor:

Although it’s been difficult for capital markets participants to compete with such natural buyers, long-term investors like sovereign wealth funds may find the portfolio diversification attractive. Ultrahigh-net-worth investors might also be interested, says Peter Nakada, Hoboken, New Jersey–based head of the life risks and capital markets units at RMS. These products can be viewed as a social good because they provide insurance for people who may not have enough cash in retirement, Nakada posits: A wealthy individual makes good money now by purchasing them; in the unlikely event that retirees exhaust their annuities, the monetary outlay can provide financial relief to the needy elderly.

The firms selling these instruments seem to realize the market is “immature” and it will take investors a while to warm up to them. But several industry sources told Institutional Investor they see longevity derivatives as a diversification tool and a good fit for portfolios of endowment funds and even high-worth individual investors.

Court Battle Continues Over Allegedly Illegal Pension Changes in Delaware

In Delaware Township, public employees need an auditor’s approval before they receive any changes to their salaries or pensions.

But auditors are claiming two Township supervisors put themselves in a new pension plan without going through the proper channels. Further, the supervisors allegedly broke a separate law when they made the new pension plan retroactive to the dates they started their jobs.

A judge had previously dismissed the auditor’s case, but an appeal is underway. As reported by the Pocono Record:

The court battle will continue over the pension arrangement of two former Delaware Township employees who were also elected supervisors.

Township auditors will appeal a judge’s decision to dismiss their case, which asked that pension payments be stopped for Ileana Hernandez and Ted Parsell, and for the court to order them to pay back any pension money they’ve already collected.

In a written statement in response to the decision, auditors Dennis Lee, Michael Dickerson and Jane Neufeld note that it was township supervisors in 2012 who asked auditors to look into the pension plan.

The case, in the Pike County Court of Common Pleas, alleged that Hernandez and Parsell were illegally compensated after, as supervisors, they approved lucrative pension plans for themselves.

More background on the case and the laws involved, from the Pocono Record:

The Pennsylvania second-class township code states any change in salary or pension must first be approved by the auditors, and any change becomes effective for supervisors/employees only after they are re-elected.

In March 2006, Supervisors Bob Luciano, Hernandez and Parsell and township Solicitor Anthony Magnotta met with then-auditors Dickerson, Louise Chattaway and Kathleen Cancelino.

The supervisors were seeking auditor approval of a proposed new pension plan, but they did not provide any paperwork for the plan.

Instead, Magnotta and the supervisors verbally explained the new pension to the auditors, and it was approved “as presented.”

But at a regular supervisors meeting in March 2006, supervisors approved a pension plan that was different from what was presented to the auditors and made it retroactive to their start dates.

The auditors say they fear the precedent the court would set if they dismissed the case, referring to a lack of accountability for Township supervisors who skirt the law.

Photo: “Flag-map of Delaware” by Darwinek. Licensed under Creative Commons

Defined-Benefit Plans Continue To Dwindle Among US Firms

States and municipalities are steadily shifting away from defined-benefit plans and moving workers into 401(k)-style or hybrid plans. But the trend isn’t exclusive to the public sector; as a recent survey reveals, the shift is just as pronounced among the country’s largest private sector firms. Reported by Business Insurance:

Just 118, or about 24%, of Fortune 500 companies offered a defined benefit plan to new salaried employees in 2013, down from 123 in 2012 and a steep decline compared with the 277, or 55%, that offered the plans in 2003, according to a Towers Watson & Co. survey released Thursday.

Frequently cited reasons for the decline in employer sponsorship of defined benefit plans include longer employee lifespans, which increases benefit costs; decreased corporate tolerance of fluctuating contribution requirements, which can jump up and down due to investment results; and escalating Pension Benefit Guaranty Corp. insurance rates.

The switch from defined-benefit to defined-contribution shifts more risk onto workers. But 401(k)s carry risk for employers, too, according to Towers Watson.

Such a move “carries risks for employers, such as having workers delay retirement when market performance is poor, which in turn can result in higher benefit costs and less mobility within their organizations,” said Alan Glickstein, a senior retirement consultant at Towers Watson in Dallas, in a statement regarding the survey.

Photo by 401kcalculator.org

UK’s Largest Pension Fund Foresees “Difficult” Year

The UK’s Universities Superannuation Scheme (USS), the country’s largest pension fund, is preparing for the possibility that its unfunded liabilities could be larger than reported, and its financial condition more serious than its 85 percent funding ratio might suggest. From Financial News:

USS pays out £100 million worth of pensions a month, and its team of fund managers and traders in London undertake £1 billion worth of transactions every day. The team beat its targets last year, producing a 7.9% return against benchmark performance of 6.5%, according to its annual report to March 31, 2014, published late Wednesday.

Despite all this, the pension fund is struggling financially. It is currently undertaking a full formal valuation of its assets and liabilities as of 31 March 2014, a lengthy and complex process which it is expected to complete by the end of the year.

The pension scheme has provided an interim estimate of its funding level at the same date – 85%, implying a deficit of around £7 billion. This is a fall from the deficit reported at 31 March 2013 – £11.5 billion – reflecting a recovery in markets in the meantime.

However, USS’s trustees cautioned that the final figure might be “materially” different to £7 billion, and could be larger.

Administrators of the fund, along with labor groups and other parties, are already planning various cutbacks and cost-saving measures to head off the potential news of higher-than-believed liabilities. Reported by Financial News:

The main proposals are to close the old final-salary section of the scheme to its existing members – it was closed to new joiners in 2011 – and to introduce a new cap on the pensions that can be built up under the new career-average benefits section.

At the same time a new defined-contribution section, offering pensions that aren’t guaranteed, would be opened so that any members earning more than the cap can put their extra savings into it.

According to Universities UK’s July proposal: “This threshold has not yet been set but, depending on affordability, Universities UK’s aim is to maximise the number of scheme members who will fall below the salary threshold.”

The Universities Superannuation Scheme became the largest pension fund in the country this year after its assets grew to £41.6 billion.

Hartford Treasurer Wants Pension Fund To Cover Attorney Fees Related To Federal Grand Jury Investigation

Hartford Treasurer Adam Cloud has been racking up legal fees during a months-long FBI investigation into several Hartford offices, including the Treasurer’s.

Cloud sent his lawyer’s bill to the city’s pension fund—but the fund says it doesn’t have to pay. From the Hartford Courant:

Cloud submitted invoices to Hartford’s finance department requesting payment for the services from a pension account, Albert Ilg, the interim finance director, wrote in a letter to Pension Commission Chairman Peter Stevens earlier this month. Invoices show the treasurer is seeking $40,765 for the services.

“The requests include consultation regarding matters involving the Treasurer’s Office, but seem to indicate they do not involve Mr. Cloud within his role and pertaining to duties regarding the Pension Commission,” Ilg wrote. “It is my understanding the City of Hartford is already providing counsel for the treasurer in regard to the Federal Grand Jury subpoenas.”

The city hired attorney John Droney to represent Cloud in connection with a federal grand jury investigation into an insurance controversy. But Ilg said in the letter to Stevens that another attorney, William P. Beccaro of Essex, has been hired to provide services.

“To the best of my knowledge there is no other inquiry against the Pension Commission arising from the grand jury,” Ilg wrote. “As you know, the Pension Commission can only spend Pension Fund resources for legal and other matters that relate to actions by Mr. Cloud in his role as the secretary to the Pension Commission.”

The investigation involves $670,000 in insurance premiums that were sent by Cloud’s office to an insurance broker for the city. The broker, Hybrid Insurance Group, had warned city employees that their policies were in danger of cancellation if they didn’t pay.

The money was wired to Hybrid, but it has since disappeared.

Christie Administration Says 2011 Pension Reform Law Was Unconstitutional

Chris Christie’s lawyers submitted a court filing yesterday urging a judge to dismiss lawsuits from unions alleging that Christie broke the law when he reduced the state’s pension payments earlier this year.

Christie himself signed a law in 2011 mandating that the state make payments into the pension system. But now, Christie’s lawyers have said that the 2011 reform law was unconstitutional to begin with. From the Asbury Park Press:

In a 122-page court filing submitted Tuesday, in response to four lawsuits filed by unions objecting to the reduced $681 million contribution that’s in this year’s budget, Christie’s lawyers argue, in essence, that one of the key concessions the governor made to get Democrats on board with his signature legislative achievement isn’t legal.

Democrats such as Senate President Stephen Sweeney have said the portions of the 2011 pension reforms that made retirement-system contributions a contractual obligation and gave unions the right to sue if they weren’t made were an important provision they wanted in exchange for agreeing to increase workers’ contributions for pensions and health care.

In the court filing, Christie’s administration says three separate sections of the state constitution — the debt limitation clause, the approprations clause and a governor’s veto power — overrule the pension reform’s effort to mandate pension contributions as a contractual right.

The court filing says the final word about appropriations rests with a governor, not lawmakers or judges, unless the state’s voters approve of such a change in a November referendum. As such, the state asks a judge to dismiss the unions’ lawsuits.

“Plaintiffs ask New Jersey to keep a commitment that the state was constitutionally incapable of making. The constitution forbids the Legislature from placing an unwilling populace in an eternal fiscal stranglehold. The Legislature may not incur long-term financial obligations that create an enforceable right to an appropriation without first obtaining permission from the citizenry whose budgetary options, preferences and needs will thereafter be constrained.”

Read the entire court filing here.

Report Reveals World’s Largest Pension Funds

Towers Watson released its annual Global 300 report and revealed the largest pension funds in the world. Six of the 20 largest funds were public funds in the United States.

From Asia Asset Management:

With more than US$1.2 trillion in assets, Japan’s Government Pension Investment Fund (GPIF) was for the tenth-year running ranked as the world’s largest retirement savings manager in an annual Towers Watson report.

[…]

North America remained the largest region in terms of assets, accounting for 41.4% of the worldwide total. According to the consulting firm, the leading 300 players now make up 47% of pension assets globally.

Here are the 20 largest pension funds in the world, according to the report:

Screen shot 2014-09-03 at 4.09.58 PM — Source: Towers Watson

Pension Tax Could Loom Large in Race for Michigan Governorship

Pensions aren’t the biggest issue in Michigan’s race for governor. But with incumbent Rick Snyder in a dead heat with challenger Mark Schauer, Snyder’s 2011 pension tax increase could prove to be a major factor in the way the race eventually plays out.

From Money News:

Polls have shown Snyder, 56, in a dead heat with Democratic challenger Mark Schauer, 52, a former state legislator and congressman who’s hammering Snyder for hurting pensioners while cutting business taxes by $1.4 billion.

“I’m very sorry I voted for Mr. Snyder,” said Rosalind Weber, 67, a retired state worker from Ionia who calls herself an independent. “I won’t vote for him again. I didn’t like what he did with the taxes.”

Snyder bucked a decades-old trend among states of reducing taxes on retirees. While other issues are stirring the race, Michigan’s 7.7 percent July unemployment rate remained above a 6.2 percent U.S. average, the pension tax is driving a Democratic drumbeat for change in Lansing, where Republicans control all three branches of government.

Until Snyder’s changes took effect, Michigan had exempted most pension payments from the income tax, now at 4.25 percent. He created a three-tier system for retirees born before 1946, after 1952 and those in between. Members of the youngest group were hit hardest; instead of being allowed to exempt $47,309 in retirement income, they’re now taxed fully until age 67. Then, they get a $20,000 exemption.

Michigan’s House Fiscal Agency estimates that the tax cost retirees around $350 million in 2013 alone. And, as everyone knows, seniors vote. We’ll see how the race plays out, but the pension tax increase is sure to be an issue moving forward.

Nebraska Under-Reports Retirement Liabilities by Over $700 Million, Says Watchdog Group

Every year, watchdog group Truth in Accounting scrutinizes the finances of every states and produces a report on what they find.

By and large, Nebraska passed TiA’s fiscal test with flying colors—except when it came to retirement liabilities. The state reported its liabilities to be a little over $1 million. But Truth in Accounting says the liabilities are closer to $770 million.
From Nebraska Watchdog:

Truth in Accounting, an economic think tank based in Chicago, named Nebraska one of just a handful of “sunshine states” with more than enough money to pay its bills. The state has $4.3 billion in liquid assets and owes about $3 billion, for a surplus of $1.3 billion — or $2,200 per taxpayer.

However, Truth in Accounting says Nebraska’s retirement liabilities are “massively underreported” at $1.1 million. Its detailed analysis of the state’s assets and liabilities, including unreported pension and retirement health liabilities, found $772.5 million in retirement benefits promised but not funded.

“Because of the confusing way the state does its accounting, only $1.1 million of these liabilities are reported on Nebraska’s balance sheet,” TIA wrote.

The report says unfunded employee retirement benefits represent 26 percent of state bills, as state employees have been promised $772.5 million in pension benefits. The good news is Nebraska has the money to pay for the liabilities.

Read the detailed report on Nebraska’s fiscal situation here.

Photo by Tom Benson via Flickr CC

17 States Considering State-Run Retirement Plans Aimed at Private Sector Workers

Many private-sector workers don’t have access to retirement plans through their employers, and states across the country are now trying to solve that issue. The trend has flown under the radar, but well over a dozen states are in the process of setting up (or brainstorming) a state-run retirement plan that caters to private-sector employees.

From Benefits Pro:

According to the Pension Rights Center’s website, 17 states are at some stage of legislating state-administered plans that hope to deliver retirement plan access to the country’s smallest employers.

Among them, Maryland, Connecticut and Illinois have either set up a commission to study creation of statewide retirement programs or taken early steps to create such programs.

Nebraska has held hearings examining the state of its private-sector employees’ retirement readiness. Indiana is moving forward, too, as are Arizona, Colorado, Minnesota, Ohio, Oregon and Vermont.

More specifics on a few of the initiatives from Benefits Pro:

In Connecticut, a panel is evaluating whether state-run automatic individual retirement accounts or other retirement programs could help increase savings. The panel is expected to issue an interim report by May.

In Illinois, legislation has been introduced that would require employers who have 25 or more employees but don’t offer a retirement plan to automatically enroll workers in a Roth IRA with a 3 percent payroll deduction.

In Maryland, a retirement program task force was established after a lawmaker wrote a bill requiring employers with at least five employees who don’t offer a retirement plan to establish an automatic 3 percent payroll deduction into a retirement plan.

California, as usual, was among the first states to have begin implementing the idea of a state-sponsored retirement plan for private sector workers. In 2012, Jerry Brown passed the Secure Choice Retirement Savings Trust Act, which eventually will require all business with over five employees to enroll their employees in the state plan.

Deprecated: Function get_magic_quotes_gpc() is deprecated in /home/mhuddelson/public_html/pension360.org/wp-includes/formatting.php on line 3712