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VIDEO: Pennsylvania Lawmaker Pushes For Hybrid Pension Plan

Republican Rep. Mike Tobash has taken to YouTube to promote his plan for a hybrid pension system in Pennsylvania.

The plan was introduced July 2 as House Bill 1353.

The group Pennsylvania Needs Pension Reform, which supports the plan and also hosts the above video on its YouTube account, provided a summary of the benefits on its website:

What the Plan Does
1. Shifts risk.
Under this plan, the future pension investment risk facing the state, school districts, and taxpayers will shift to members of the retirement plans as hybrid tier participation grows. The Commonwealth and its taxpayers would be more sheltered from risk, irrespective of market performance.
2. Delivers competitive benefits.
This plan provides new employees with retirement benefits that are every bit as competitive and desirable as those they would receive in the private sector.
3. Protects earned benefits.
The plan proactively works to protect the benefits that hard-working Pennsylvanians have already earned. Under this plan, no current employee or retiree would see any changes to his or her plan.
4. Demonstrates responsible spending.
This is the fiscally responsible thing to do; not a “quick fix” like we have seen in the past. We would be making a fundamental change to ensure we can responsibly meet our statutory obligation to the retirement systems moving forward.
5. Stops the bleeding.
The projected debt associated with our current pension systems is expected to be eliminated by fiscal year 2044 as we meet our annual payment obligations. We can eliminate the unfunded liability years sooner by putting savings back into the systems.
6. Safeguards Pennsylvania’s credit rating.
The Commonwealth’s credit rating has already suffered from the pension crisis. Our approach protects taxpayer money by helping to avoid inflated interest rates on our credit.

New Jersey Lawmaker Puts New Pension Proposal On Table

Chris Christie’s pension commission members aren’t the only ones brainstorming pension reforms in New Jersey lately. A Democratic assemblyman has proposed a plan that would shift new hires into a hybrid plan with some attributes of defined-contribution plans and some attributes of defined-benefit. Reported by The Star-Ledger:

Assemblyman Troy Singleton (D-Burlington) last week sent some public union leaders a draft of a bill he’s considering introducing that would keep the current pension system in place for those already enrolled in it, but shift new public workers to a “collective defined contribution retirement program” – a sort of mix between a traditional pension plan and a 401(k).

“It may be something we don’t introduce, but it may be something we do in a different form. But I’d like to start some dialogue in where our pension system goes in the next step for our pension system,” Singleton said in a phone interview “The only thing I would tell you is it’s still a work in progress.”

The idea did not get a warm reception from the public worker labor unions, even though Singleton himself comes from the private side of organized labor, as an official in the Northeast Regional Council of Carpenters.

And Singleton acknowledged that the plan would not do anything to solve the pension’s unfunded liability of about $40 billion, which he said must be dealt with through increased state payments.

Singleton provided the Star-Ledger with an outline of how the plan would function. The gist:

Workers would establish accounts that both they and their employers would pay into, though the workers would pay three times as much as the employer. The money would be managed by a “professional money management provider” that could charge fees of no more than 0.25 percent of the total, while the plan’s appointed board and the State Investment Council would determine where the money would be invested.

The investment returns would be annually credited to the retirement accounts. But if the return is greater than 8 percent, the excess would go into a reserve fund, which would later be used if the investments lost money. The plan would allow for “bonus” payments to the retirement accounts if the reserve fund is healthy enough.

It’s far from the current pension system, in which workers’ final retirement payments stay the same, no matter how good or bad the funds’ investments are doing.

Christie appointed a commission last month to examine the state’s pension system and propose reform ideas. The commission’s final report will come in the next few months.

CalPERS, Harvard Money Linked To Caribbean Pay Day Loan Venture

A unique series of events exposed this week a controversial investment made by a handful of institutional investors.

Institutional investors such as Harvard and CalPERS invested a combined $1.2 billion with a private equity fund, Vector Capital IV LP. But Vector soon tried investors’ patience, as it was slow to invest that money.

Eventually, some investors threatened to pull out altogether—which led Vector to make the quick decision to invest in Cane Bay Partners VI LLLP, a company that ran numerous pay day loan sites in the Caribbean and charged up to 600 percent interest for a loan. From Bloomberg:

By 2012, investors including Harvard University were upset that about half the money [invested with Vector] hadn’t been used, according to three people with direct knowledge of the situation.

Three Americans on the Caribbean island of St. Croix presented a solution. They had built a network of payday lending websites, using corporations set up in Belize and the Virgin Islands that obscured their involvement and circumvented U.S. usury laws, according to four former employees of their company, Cane Bay Partners VI. The sites Cane Bay runs make millions of dollars a month in small loans to desperate people, charging more than 600% interest a year, said the ex-employees, who asked not to be identified for fear of retaliation.

Mr. Slusky’s fund, Vector Capital IV, bought into Cane Bay a year and a half ago, according to three people who used to work at Vector Capital and the former Cane Bay employees. One ex-Vector employee said the private equity firm didn’t tell investors the company is in the payday lending business, for which borrowers repay loans out of their next paychecks.

Pay day loans are controversial because they charge high interest rates on loans given to people who are usually in a financial bind to begin with.

Many states in the US have banned the practice, which has forced the businesses to go online.

For now, Cane Bay Partners claims it is only a “management-consulting and analytics company”.

Photo by www.panamacity-hotels.travel

Illinois Workers Opt Into 401(k)-Style Plans In Record Numbers

SURS members chart — CREDIT: Illinois Policy

All around the country, employers are funneling new hires into 401(k)-type retirement plans instead of traditional pension schemes.

But the members of one Illinois fund are given the choice of participating in a defined-benefit or defined-contribution plan–and more than ever, they’re choosing 401(k)s. From Illinois Policy:

Today, more than 13 percent of all active employees in the State Universities Retirement System, or SURS, participate in a 401(k)-style plan instead of a traditional pension plan run by the state. These state-university workers control their own retirement accounts and aren’t part of Illinois’ increasingly insolvent pension system.

And recent data from SURS obtained through a Freedom of Information Act request shows the popularity of 401(k)-style plans is growing.

Nearly 20 percent of all SURS employees eligible for a retirement plan in 2014 have chosen a self-managed plan over the traditional pension scheme. Just a few years after the Great Recession, the number of SURS members choosing self-managed plans has reached an all-time high.

In 1998, SURS began allowing its new workers to opt into self-managed retirement plans. In these plans, an employee contributes 8 percent of his or her salary toward retirement savings and the employer puts in a matching 7 percent. That means the employee has the equivalent of 15 percent of each paycheck put into an account that’s entirely theirs.

As for why employees are opting into 401(k)s over traditional pensions? The growing concern over the health of Illinois’ pension funds probably plays a big role. Strong stock market gains over the last few years likely play a part, as well.

Judgement Due in Court Battle Waged By Workers Excluded From Pension System Because of Medical Issues

A five-year long court fight continues to play out in Jacksonville, and chances are good this lawsuit will continue to stretch on even after an initial judgement is filed.

City employees filed the class-action lawsuit after Jacksonville barred many workers with medical issues from entering the pension system. The workers say the city violated the Americans with Disabilities Act. From the Florida Times-Union:

The suit involves about 1,400 employees, and at one point their lawyers said the case might affect up to $500 million of pension payments, spread over 30 years. But there are too many details unanswered still for either side to talk about a price tag yet.

The employees bringing the suit argue the city violated ADA rules by requiring new workers to be screened for health problems such as diabetes and heart disease before they could enroll in the city’s pension system. People with medical issues could be blocked from enrolling in the pension and would instead pay into Social Security, or they could sign a waiver that disqualified them from getting any death or disability benefits based on their particular issue.

“The sole purpose of the examination was to address the terms under which an employee would be admitted to the pension plans, if admitted at all,” reads the judgment drafted by the plaintiffs.

The city changed its rules in 2010 to allow employees to buy pension coverage they couldn’t get earlier, but the suit is about what expenses the city should cover.

The city has argued that it has no liability in the case; if the judge rules on the side of the city, the case will wind down quickly.

But if the ruling falls on the side of employees, more court battles loom. Among them: how much does the city owe? Once that number is determined, the court will need to decide how to divvy up the damages amongst the employees.

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.

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