Pension360

North America’s pension funds, endowments and foundations returned a median of -4.53 percent in the 3^rd quarter of 2015 – which makes it the worst quarter for the country’s institutional investors in four years, according to a report from Wilshire Trust Universe Comparison Service (TUCS).

From Reuters:

“These plans, virtually all of them … were hurt by diversification” in the global equity space, because typically they add diversity by going to international or smaller U.S. equities, said Robert Waid, managing director at Wilshire Associates.

Both of those equity classes fell dramatically, he said, noting that the MSCI ACWI World ex USA Index shed 12.17 percent, while the Wilshire US Small-Cap Index fell 10.88 percent.

The period also marked the first back-to-back declining quarters since March 31, 2009, when markets were still reeling from 15 months of recession.

“When you’re starting to have comparisons that go back to the financial crisis … it shows that it’s a difficult investment environment,” Waid said.

[…]

Wilshire TUCS, a widely-used benchmark for institutional asset performance, includes performance and asset allocation data from roughly 1,700 plans representing about $3.7 trillion in assets.

Included in the study were public and private pensions, endowments and foundations.

 

Photo by www.SeniorLiving.Org 

The myRA program, a retirement savings program announced by Barack Obama in 2014 and developed by the U.S. Treasury, launched nationwide this week.

The program allows participants to save up to $5,500 per year in a no-fee, 401(K)-style retirement account.

More from the LA Times:

The myRA program […] has now launched nationally, the Treasury Department said Wednesday. The myRA is a form of Roth IRA, which allows workers to save their after-tax dollars for retirement. It’s aimed at overcoming some of the obstacles that keep some workers from saving for retirement, especially those who are low-income or who lack retirement benefits: The myRA charges no fees, is low-risk and convenient.

By allowing people to set up automatic contributions, the program is meant to make it easier for people to save, officials said. And contributions can be small, even as little as a few dollars. The accounts have no minimum balance.

People also don’t need to worry about losing money because their savings would be stored in an account where their principal is backed by the U.S. government. The plans will store people’s savings in low-risk investments where the money can grow at a conservative interest rate.

Since last year, the government has been testing the program quietly through a pilot that allowed people to set up automatic deductions from their paychecks. But in the official rollout, the government is also letting people contribute from their checking or savings accounts and even from their tax refunds. Like a regular Roth IRA, workers contribute up to $5,500 a year, or $6,500 a year for people age 50 and up.

Get more info or sign up at myRA.gov.

 

Photo by www.SeniorLiving.Org

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.

Sometimes you appreciate confirmation that actions – you always thought were permissible – continue to be viable options.  We have just received confirmation from the U.S. Court of Appeals for the Fifth Circuit that the long-standing practice of de-risking by purchasing annuities from insurance companies remains permissible.

In 2012, Verizon decided to annuitize the benefits of current retirees by purchasing annuities from Prudential.  A group of those retirees attempted  to stop the transaction from going forward, and when that failed, proceeded to attempt to undo the transaction on the grounds that it involved fiduciary breaches and violated various provisions of ERISA.

The plaintiffs lost repeatedly at the district court level, which ruled that they had no causes of action, but they kept coming back.  Remaining participants in the plans were even added as another potential class of plaintiffs to challenge the impact of the purchase on the ongoing plan.  Readers of this blog know that I have predicted that the plaintiffs would likely lose because their claims were inconsistent with existing interpretations of ERISA.  In an unpublished opinion, the U.S. Court of Appeals for the Fifth Circuit  agreed, upholding the district court’s dismissal of all of the claims of both groups of plaintiffs after de novo review.

The court made the following rulings in rejecting the plaintiffs’ claims:

• The decision to annuitize was not a fiduciary act.  The court cited longstanding authority going back to the common law of trusts that the decision to purchase annuities was a settlor, not a fiduciary activity.
• The possibility of annuitization was not required to be disclosed in the summary plan description (SPD).   The court  concluded that ERISA does not require advance disclosure of  events which are contingent on a plan amendment, and noted that the possibility of plan amendment had been clearly disclosed.  The plaintiffs also claimed that annuitization was required to be disclosed because it was an event reducing or resulting in loss of their benefits, but the court found no basis for concluding that a loss of PBGC insurance was a reduction in benefits.  (Nonetheless, it may be a good practice to include notice that annuity contracts may be distributed in satisfaction of benefit obligations in an SPD.)
• Participant consent was not required for annuitization of their benefits.  There was no precedent for requiring consent.
• Section 510 of ERISA, which prohibits discrimination against participants for asserting protected rights, was not violated merely because the plaintiffs did not have rights to continued plan participation, ERISA coverage or PBGC insurance.
• Paying $1 billion in fees and expenses as part of  the $8.4 -billion annuitization was not a fiduciary breach.  The plaintiffs did not plead with any specificity as to why the amount was unreasonable, and the court would not assume that the total fees were unreasonable solely from the amount.
• It was not imprudent to purchase one group annuity contract from Prudential rather than from multiple insurers.
• Current participants had no standing to challenge the transaction.  Because there are no individual accounts in a defined benefit plan and the plan sponsor must make trust losses, they suffered no current harm.  They could not bring suit as a quasi-representative of the plan

It should be noted that Verizon did not make lump sum offers to the retirees, a practice which the Internal Revenue Service has announced will no longer be permitted, and that issue was not before the court.

Hopefully, this decision is final and will end whatever legal uncertainty had surrounded annuitization under current law, though unpublished opinions are technically not precedent.  While no appeals court  has ruled that employers do not have the  right to annuitize benefits,  as I stated in a recent post, new controls on de-risking practices are under consideration, and the possibility of future changes in the law should be part of the decision tree for employers considering de-risking.

How is a CalPERS pension funded? The nation’s largest pension fund released this intriguing graphic (above) last month showing the fund’s sources of income.

An explanatory blurb from CalPERS:

The CalPERS Pension Buck illustrates the sources of income that fund public employee pensions. Pension fund income over the last 20 years (as of June 2015) shows that every dollar spent on public employee pensions comes from 65 cents of investment earnings, 22 cents from employers and 13 cents from employees.

Pensions are jointly funded by employer and employee contributions, which are invested so that pension fund dollars grow over time. Workers currently contribute up to 15.25 percent of their paycheck to help fund their own pensions.

CalPERS pension payments generate nearly $31 billion of economic activity per year in California, supporting almost 105,000 jobs and generating more than $716 million in sales and property tax revenue every year.

See the press release here.

 

Source: CalPERS

Pension360 wrote last month that a few top Alaska officials were studying the possibility of issuing $3 billion in pension obligation bonds.

In Alaska’s case, issuing this round of bonds will come easy because the issuance gained legislative approval way back in 2008. The bonds were never issued however, as the stock market crash sunk the plan.

Here’s an update on the proceedings from Bloomberg:

Prompted by Governor Bill Walker, Alaska is looking into the possibility of a $1.6 billion general obligation pension bond, [debt manager at the Alaska Department of Revenue Deven] Mitchell said. “It appears that this interest rate environment provides an opportunity for us to get in on the leveraging side at a low rate,” Mitchell said. “We’re thinking it’s not a bad time to consider this alternative.”

This time around, Governor Walker has asked Mitchell to pick up from where they left off in 2008 and see if the economics still make sense. Mitchell said the deal will be ready to come to market if Governor Walker gives the green light. Because of the work done in 2008, the governor won’t need legislative approval to issue the potential bonds.

[…]

If Alaska goes through with its deal, this year’s total pension obligation bonds issues will be more than $3 billion, almost ten times last year’s supply, according to data compiled by Bloomberg.

Mitchell said he’s framing Alaska’s potential deal to mimic Kansas’s. So far Mitchell has arranged an underwriting syndicate and put together a “shell” of a preliminary offering statement.

The risks of POB’s are well known by now: for the state to “win” the deal, investment returns need to beat the interest rate on the bonds over the duration of the bond’s life. If that doesn’t happen, the state is compounding its financial issues.

 

Photo credit: “Flag map of Alaska” by 2002_Winter_Olympics_torch_relay_route.svg: User:Mangoman88, using Blank_US_Map.svg by User:Theshibboleth – 2002_Winter_Olympics_torch_relay_route.svgFlag_of_Alaska.svg. Licensed under Public Domain via Wikimedia Commons

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

John W. Schoen of CNBC reports, Pension ‘fix’ by Congress could backfire:

The latest effort by Congress to save your pension may be putting it further at risk.

Tucked away in last week’s bipartisan budget deal was a provision to sharply raise the premiums on a government-run fund to backstop private pension funds that go bust. With the fund falling deeper in the red, the higher premiums charged to companies offering traditional defined benefit pensions are intended to help put the Pension Benefit Guaranty Corp. back on a solid financial footing.

But critics say the higher premiums — set to rise from $57 per covered worker this year to $78 in 2019 — could prompt even more companies to freeze or close out their traditional defined benefit pensions that pay retirees a guaranteed monthly check for life.

“The premium increase is just another unnecessary burden on employers who sponsor defined benefit plans, giving them more reasons to consider exit strategies,” said Annette Guarisco Fildes, president of the ERISA Industry Committee, which advocates for large companies that offer pensions.

Long before premiums began rising, companies that offer defined benefit pensions plans had been moving to freeze them (fixing participants’ retirement benefits no matter how much longer they work) or closing them to new workers.

A survey released earlier this year by benefits consultant Aon Hewitt of nearly 250 employers representing 6 million employees found that, of the roughly three-quarters who still offer a defined benefit plan, a third were closing them and another third had frozen them.

Of the companies with plans that remained open, 14 percent of companies said they were “very likely” to close them this year, 9 percent said they were “very likely” to freeze them and 5 percent said there were very likely to terminate them. (Companies terminating plans typically offer participant a lump sum payout to replace the monthly defined benefit income.)

The trend continues a decade-long decline in defined benefit plans in favor of defined contribution plans like 401(k) retirement plans. That historic shift has been cited by some retirement researchers as a major reason for the deficit in retirement savings estimated by the Employee Benefits Research Institute at more than $4 trillion for U.S. households in which the breadwinner is between ages 25 and 64.

Companies that still offer their workers defined pension benefits are facing their own funding shortfall, with too little money set aside in pension assets to cover the cost of paying current and future retiree benefits.

Both public and private pension funds were hit hard by the 2008 financial crisis, which wiped out trillions of dollars in investments that were used to pay retiree benefits. Since then, low interest rates have cut returns and increased the amount of money needed to generate enough income to write monthly checks to retirees.

Underfunded pensions, of course, represent the biggest potential liability for the Pension Benefit Guaranty Corp., which steps in when a pension fund can no longer cover what it owes its participants. Many of the biggest shortfalls have hit older companies with declining profits and large pools of older workers and retirees. Of the 10 biggest pension takeovers by the agency in the last four decades, five were plans offered by airlines and four were pension plans for steel companies.

Since 2000, the cost of backstopping failed pension plans has overtaken the money set aside to cover that cost, leaving the corporation with a deficit of more than $60 billion. Without the higher premiums, agency officials say, the fund will run eventually out of money.

Estimating when that might happen is not easy, especially given the move by pension plan sponsors to reduce their liabilities by closing or freezing plans. A lot also depends on how quickly companies move to shore up pensions that are underfunded.

Since the Great Recession ended, and the economy and stock market have recovered, many private plans have gained ground and raised funding levels. But they still face a multi-billion-dollar gap.

The defined benefit plans offered by 100 large companies tracked by benefits consultant Milliman face a $366 billion pension funding shortfall, based on the latest data available. On average, they’ve set aside less than 82 cents for every dollar in obligations to current and future retirees.

The recently enacted budget also includes a higher tax penalty for underfunded pensions, starting in 2017.

Those single employer sponsors, who manage pension assets for workers of only one company, are in much better shape than so-called multi-employer plans, which cover workers from more than company.

About a quarter of the roughly 40 million workers who participate in a traditional defined benefit plan are covered by these multi-employer plans, according to the Bureau of Labor Statistics.

Those plans, which typically cover smaller companies and unions, face an even tougher set of financial challenges than larger plans that can spread risk over a bigger pool of workers. Declining union enrollments, for example, mean there are fewer active workers to cover the cost of paying retirees, many of whom are living longer than was expected when these plans were established.

Multi-employer plans also face an added burden of their shared pension liabilities. When one company in the plan fails to keep up with contributions, for example, the burden on the other members increases. In the last four years, the Department of Labor has notified workers in more than 675 of these plans that their plans are in “critical or endangered status.”

I recently covered Teamsters’ pension fund, stating multi-employer plans are withering away and it’s all part of a much bigger problem. The article above is excellent and provides a great overview of what’s wrong with Congress’s latest pension fix and why so many American defined-benefit plans are closing or on the verge of closing.

First, as I discussed in the quiet Screwing of America, the latest effort by Congress to “fix” pensions will backfire spectacularly and pretty much ensure more pension poverty in the world’s most powerful nation. When it comes to pensions, there is no justice in America.

Second, companies are increasingly shifting retirement risk onto employees by closing DB plans and shifting new or existing employees to DC plans, or looking to offload pension obligations to some insurance company which will gladly de-risk a DB plan for a nice fee and then offer annuities to employees.

While offloading pension risk makes sense, I agree with those who argue that de-risking pension sponsors may end up with a bad case of buyer’s remorse:

[…] the knee-jerk move by many plan sponsors to offload their pension risks may be a little hasty. While there may be a natural inclination to want to rid themselves of their pension obligations as soon as financially possible, now may not necessarily be the best time to do it.

Mark Firman, a pension lawyer with McCarthy Tetrault, notes that by buying up annuities, some firms may be trading in one type of risk for two others — what he refers to as reputation risk and regret risk. 

The idea, says Mr. Firman, is that companies — particularly those in booming sectors like energy — who purchase annuities as a first step toward winding down their defined-benefit pensions, may find they are harming their image as progressive employers among current and prospective talent, labour bargaining units and socially conscious institutional investors. That’s the reputation risk. For those who prefer cold, hard numbers to less definitive, warm and fuzzy aspects of business management, the regret risk will likely have deeper resonance.

Purchasing an annuity today when interest rates are low means getting an insurance company to buy a greater liability and to do so for a higher fee. That higher fee goes toward protecting the insurance company not only from the longevity risk it’s buying but also the likely risk of future interest rate hikes.

“If and when interest rates rise down the road, not only will the liabilities become scaled back but if you did want to de-risk at that point, the annuities will be cheaper,” says Mr. Firman. “Employers who are de-risking today may find out that they may miss out on the opportunity for substantial pension surpluses, which is a situation that we were more used to seeing in the 1990s than we’re seeing today.”

However, unlike the 1990s, pension legislation (in Canada) now allows plan sponsors greater access to those surpluses, which could be used for myriad business-development initiatives and investments.

The good news is there may be a happy medium for plan sponsors who are looking to de-risk in the short term but not necessarily with the intent to wind down their plans entirely or imminently.

According to the Towers Watson data, of the $2.2-billion in annuities purchased in 2013, $850-million was made up of what the consulting firm refers to as “buy-in” transactions. While very similar to the more traditional “buy out” annuities, buy-ins vary on a number of important levels, not least of which is a reversal clause that allows plan sponsors to countermand the transaction down the road — for a fee, of course.

Towers Watson recently closed a buy-in deal worth approximately $500-million — perhaps the largest single annuity transaction in Canadian history — but the plan sponsor preferred to remain anonymous. A similar, $150-million dollar deal was finalized between Sun Life Financial Inc. and the Canadian Wheat Board last year.

David Burke, Canadian retirement leader for Towers Watson, says his practice has been trying to steer pension sponsors away from de-risking and toward what he refers to as “right-risking” — a more sophisticated strategy that takes into account each individual sponsor’s solvency and liability scenarios, their future intentions with respect to the lifespan of the plan and prospective market conditions – to better gauge if, when and how they should limit pension-related risks.

“I’m going to be very curious to see what plan sponsors do in the next few years assuming the funding status is 100%,” says Mr. Burke. “My guess is some are going to get out … and some might say I’m going to … take my risk in a different way but I’m not going to de-risk.”

His comments are echoed by Mr. Forestell, who believes basic annuity buy-outs will quickly evolve into more complex transactions. “What I expect to see in the next year or year and a half is more creative deals in how to do the annuities,” he says.

In the interim, the movement to de-risk is likely to intensify and understandably so given the nail biting that has taken place in recent years. The pity is there will likely be more than a few sponsors stricken with buyer’s remorse a decade from now. Then again, by that point the idea of a defined-benefit pension may very well be an abstract and quasi-historical concept in the private sector.

Of course, insurance companies will tell you now is the right time to de-risk your DB plan and companies struggling with their pension costs are doing the rational thing by offloading future pension obligations onto them.

The problem here isn’t with companies, which are acting very rationally, it’s with the national retirement policy. In my opinion, pensions should be mandatory and managed by well governed public pension funds and backed by the full faith and credit of the federal government. We should also introduce the shared-risk model to make sure these public pensions remain solvent no matter what economic environment awaits them in the future.

This is why I’ve long argued for enhancing the Canada Pension Plan to introduce real change to Canada’s retirement system and argued the United States needs to enhance Social Security for millions of Americans that are falling through the cracks. Of course, to do this properly, the U.S. needs to adopt and improve on Canada’s pension governance and get independent, qualified investment boards to supervise its sprawling public pensions.

Remember, my view is that there is no end to the deflation supercycle and that deflation will decimate all pensions, especially corporate plans that are not chasing a rate-of-return fantasy and are using market rates (not rosy investment assumptions) to discount their future liabilities.

This is why now is the time to introduce real change to the retirement policies of advanced nations and treat pensions like we treat health care and education. In my opinion, a vibrant democracy has three pillars: solid public health care, education and pensions. All three contribute to the economy in important ways but faced critics only focus on the costs, not the benefits of defined-benefit plans.

It’s important to educate people on the the huge advantages of well-governed defined-benefit (DB) plans. These include pooling investment risk, longevity risk, and significantly lowering costs by bringing public and private investments and absolute return strategies internally to be managed by well compensated pension fund managers who are also able to invest with the very best external managers as they see fit, making sure alignment of interests are there. DB plans also offer huge benefits to the overall economy, ones that will bolster the economy in tough times and reduce long-term debt.

In short, there shouldn’t be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people and the better off advanced economies struggling with global deflation will be.

I end this comment by referring you to a recent comment my friend Brian Romanchuk published on his blog, Pensions And Public Policy: The Golden Era. I will let you read his comment but he concludes by stating this:

The success of the early post-war public and private pensions were the result of them being aligned with the political environment of the time. There is little political consensus on many important contemporary issues, and so pensions represent just another area of policy incoherence. This incoherence means that it is unclear what reforms would be seen as successful. I hope to discuss such reforms in later articles.

I agree with Brian, there’s way too much policy incoherence on pensions and other important economic topics. In my view, any paradigm shift in macroeconomics has to incorporate a coherent view which convincingly argues for bolstering well-governed public defined-benefit pensions recognizing the long-term benefits this will have on growth and reducing debt.

Former media executive Mel Karmazin said Wednesday he’s no longer invested in the stock market, and that he’s basically in cash. Karmazin also discussed the buyback bubble which is  the real bubble the Fed is fueling.

In fact, I couldn’t resist to comment on Paul Krugman’s last piece, The Conspiracy Consensus, stating the following:

The Fed doesn’t care about about Republicans or Democrats, only about big banks and their elite hedge fund and private equity clients. Interestingly, while the Fed needed to lower rates and engage in QE to prevent another Great Depression, ZIRP and QE ended up exacerbating inequality via several channels. First, companies were incentivized to borrow big and repurchase shares to pad the bloated compensation of their top brass. Second, U.S. public pensions were forced to take on more risk investing in hedge funds and private equity funds to make their 8% pension rate-of-return fantasy. Lastly, historical low rates punish savers and reward financial speculators as people who need to rely on a fixed income can’t invest in fixed income assets that yield enough.

This is why I’ve long argued that U.S. Social Security needs to move the way the Canada Pension Plan has moved which has assets managed by the Canada Pension Plan Investment Board, a national pension fund which directly invests in public and private markets and is supervised by a qualified, independent investment board. But first you need to get the governance right and unfortunately, the U.S. will never get the governance right because there are too many powerful interests milking public pension funds dry. All this to say, there is a conspiracy which is going on at the Fed but it has nothing to do with what the Republicans or Democrats are claiming.

Also, at one point on Wednesday morning on CNBC, Karmazin discussed how he agonized cutting defined-benefit plans for employees under 55 years old, knowing full well that it penalized employees but he needed to do it to save one of the companies he was managing.

The truth is if America went Dutch on pensions, CEOs wouldn’t have to agonize over such decisions and employees can have peace of mind that even if their company went under, they’ll be able to retire in dignity and security. In fact, going Dutch/ Canadian on pensions is the only pension fix that won’t backfire and pay off in the very long-run.

 

Photo by Sarath Kuchi via Flickr CC License

Pension360 reported this week on the imminent court decision coming on Poland’s 2014 pension overhaul, which shifted the assets of private pension plans to the state.

On Wednesday, the country’s high court weighed in, and upheld the legality of the reform.

From Reuters:

The decision means that Poland will not face a significant rise in public debt, as some had feared, especially lawmakers in the Law and Justice (PiS) party which won a parliamentary election last month and is now forming a new government.

The pension reforms introduced by the previous centre-right government in 2014 shifted assets from the privately owned pension funds to the state balance sheet. The move reduced Polish public debt by about 8 percent of gross domestic product GDP, giving Warsaw greater scope to borrow and spend.

The transfer moved 153 billion zlotys ($39.34 billion) of bonds from the funds to the state-run Social Security Office (ZUS), effectively halving the value of assets managed by the private funds.

[…]

The Tribunal confirmed on Wednesday that most aspects of the reform were legal, including the asset transfer to ZUS and a ban on bond investments imposed on the private pension funds.

The reforms were advantageous for the Polish government from a public debt standpoint; but the shift had repercussions – including the Warsaw Stock Exchange’s main index losing 10 percent of its value since the reforms.

 

Photo by Joe Gratz via Flickr CC License

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Julia Lurie of Mother Jones reports, 100 CEOs Have More in Retirement Savings Than 41 Percent of Americans Combined (h/t, Suzanne Bishopric):

You’ve heard about income inequality—about how, for example, the top 10 percent of Americans control more than half of all income.

But we’ve heard less about inequality when it comes to retirement savings. According to a report released this week by the Center for Effective Government and the Institute for Policy Studies, just 100 CEOs have retirement accounts that total $4.6 billion—that’s more than the retirement assets of 41 percent of Americans, or 116 million people. The authors used SEC filings to examine the 100 largest retirement accounts among Fortune 500 CEOs, and found that the average CEO has saved up $49.3 million for retirement. By contrast, the median balance in 401(k) accounts at the end of 2013 was $18,433.

Even more than the overall disparity, what caught my eye was the race and gender inequality, both at a CEO level and in the general population. The CEOs with the 10 largest retirement funds were all white men, and their retirement assets dwarfed those of the top 10 CEOs who were women or people of color. (Two women are counted in both of the latter groups: Indra Nooyi of Pepsi, and Ursula Burns of Xerox. Click on image)

And the majority of people of color and female heads of household have no retirement assets. Without a pension, IRA, or 401(k) account, these individuals will be completely dependent on Social Security when they do retire—and the average Social Security benefit is $1,223 per month (click on image).

So, what’s going on here? Nari Rhee, a researcher who studies retirement disparities at the University of California-Berkeley Labor Center, says a number of factors make the retirement gap so big. First, of course, is the income gap: Full-time, working women make 78 percent of what men do; the median wealth of white households is 10 and 13 times that of Latino and black households, respectively. And with less money, there’s less to stow away for the future.

But in addition, people of color are more likely to invest the money that they do save on housing or a business than in stocks, bonds, or mutual funds. The fallout: People of color were hit harder by the collapse of the housing market in 2008.

And finally, says Rhee, people of color are less likely to work in jobs that offer retirement benefits, particularly since so many jobs are concentrated within low-wage or part-time work in the private sector (think food service or manufacturing, construction, manufacturing, or janitorial staff).

All of this together helps create financial disparity during retirement: one in five retired Latino Americans and about one in six retired blacks live under the poverty line, compared with about 1 in 15 whites.

The report calls for a cap on deferred compensation and an expansion of Social Security benefits and public pensions. Without changes, says Anderson, “We’re really looking at a retirement crisis where you’re going to have millions of seniors with unmet basic needs and, on the other hand, a privileged few corporate executives with platinum pensions.”

I touched upon the gross inequity in retirement income in my weekend comment on the quiet screwing of America but this article breaks it down and demonstrates the stark contrast among racial and gender lines.

Not surprisingly, America’s retirement crisis is disproportionately hitting women and people of color but it’s also hitting many hard working white Americans who are unable to save for retirement and even if they do manage to save, they’re living a 401(k) nightmare, all  part of a de facto retirement policy that has failed millions of Americans.

But have no fear, Blackstone is here, and if Tony James gets any traction on his solution to America’s retirement crisis, pretty soon every American will be saving and investing like U.S. public pensions, paying inordinate fees to private equity and hedge funds that are underperforming the market.

Don’t worry folks, this is all part of Wall Street’s license to steal. As long as the “big boys” and the “big banks” that service them make off like bandits, it doesn’t matter if millions of Americans are falling through the cracks, condemned to pension poverty. This is how trickle down economics works: “‘If you feed enough oats to the horse, some will pass through to feed the sparrow.”

And what are U.S. politicians doing to address America’s looming retirement crisis? They’re enabling it, doing everything wrong by weakening Social Security instead of bolstering it and hiking pension premiums for companies making it easier for them to drop defined-benefit plans. No U.S politician is willing to accept the brutal truth on DC plans.

Worse still, you have politicians like Chris Christie who publicly decry government stealing from retirees at GOP debates as his state government funnels hundreds of millions in financial fees to Wall Street.

It’s enough to make you sick. I used to think America’s retirement crisis is a slow motion train wreck. Now I realize, just like the heroin epidemic, it’s more like a speeding train heading off a cliff and for millions, the American dream is turning out to be a living nightmare.

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Suzanne Woolley of Bloomberg reports, You’re About to Get Too Expensive for Your Pension Plan:

The federal budget deal could speed the long, lingering death of old-fashioned defined-benefit pension plans, in which employers reward years of service by providing a guaranteed stream of income in retirement.

The deal could affect any pre-retiree in a former employer’s pension plan by increasing the per-head premiums that plan sponsors must pay to the Pension Benefit Guaranty Corp. If it goes through as written, every person in a plan will get more expensive at the stroke of a pen.

Employers are already deeply concerned about the extent and uncertainty of future pension liabilities and are trying to shed them. The proposed increase in the budget legislation would push even more pension plans to manage costs any way they can, including reducing participant head count, said Alan Glickstein, a senior retirement consultant with Towers Watson.

The budget deal calls for a 22 percent hike, spread out over three years, in flat-rate, single-employer premiums paid to the PBGC, which acts as a backstop to a company’s pension liability should the company become insolvent. Those premiums will already have risen from $31 in 2007 to $64 in 2016; by 2019 they will reach $78.

An increasingly common way companies get rid of those liabilities is by offering participants a chance to take their pensions all at once, as lump sums based on the present value of their future benefits. After strong years for such offers in 2013 and 2014, the activity rose dramatically in 2015, said Matt McDaniel, who leads Mercer’s U.S. defined-benefit risk practice.

More lump-sum deals aren’t good news for employees, about 40 percent to 60 percent of whom take the deals. Most who take lump sums of less than $50,000 cash those retirement funds out rather than roll them into an IRA, paying income tax and a 10 percent penalty if they aren’t at least 59½. While it depends on individual circumstances, it usually makes more financial sense to leave the money in the plan and have it trickle out during retirement.

Perversely, the premium hikes could wind up hurting, not helping, the Pension Benefit Guaranty Corp., because they may not fully offset shrinking head count in pension plans. Benefit consultants are frustrated. “This has nothing to do with pension policy, but is simply a device to raise revenue,” said Towers Watson’s Glickstein. Higher premiums “would be a factor that causes a move away from these plans, and the whole point of the PBGC is to strengthen the employer pension system, so it’s kind of ironic.”

A statement by the Erisa Industry Committee, an association that advocates for the employee benefit and compensation interests of large employers, said it was “outraged.” Its Oct. 27 statement quoted the committee’s president as saying that “even the PBGC’s own analysis does not call for an increase in premiums on single-employer defined benefit plans. PBGC premium increases like the one announced today do nothing to encourage single-employers to continue defined benefit plans or improve benefits for retirees; in fact, the increases only work to further weaken the private retirement system.”

In response to the criticism, an Obama administration official spoke with Bloomberg BNA‘s Pension & Benefits Daily, telling David Brandolph that with the underfunding in the PBGC’s single-employer program, “the proposed premium increases are necessary to ensure that PBGC will be able to pay retiree benefits when pension plans fail. Even with these changes, premiums would likely remain a relatively small percentage of a company’s annual pension contribution and a tiny fraction of total compensation costs.” The official noted that the increases take effect over three years to allow companies to plan for the new costs.

Last week, I ripped into Blackstone’s Tony James and his solution to America’s retirement crisis and followed up with a comment looking at why there shouldn’t be four or more views on DB vs DC plans but only one view which clearly explains the brutal truth on DC plans.

This week, Congress and the Senate just passed a budget and debt deal that they’ll be sending to President Obama which will make it harder for companies to offer defined-benefit pensions. And this is all happening less than a year after Congress effectively nuked pensions.

What is going on in the United States of pension poverty is a real travesty. I call it the quiet screwing of America where corporations flush with cash buy back their shares to pad the outrageous compensation of their top brass while they put off hiring and much needed investments and now Congress made it easier for them to justify their decision to cut defined-benefit plans for their employees.

Not surprisingly, both Democrats and Republicans joined forces to pass this bill, which goes to show you when it comes to corporate interests, there’s no divisive politics, just a bipartisan, unified front to pander to their corporate and Wall Street masters.

This week I learned that some 8,737 UPS retirees could soon see their pension checks cut as they receive their pensions from the cash-strapped Central States Pension Fund (see my previous comment on Teamsters’ pension fund). A month ago, CBC reported that employees of the decommissioned Hub Meat Packers in Moncton will see their pensions slashed by as much as 25 per cent.

In an equally disturbing example, the Washington Post reports on how military veterans are scrambling to sell their pensions through pension advance schemes in an effort to make ends meet, a huge mistake which will squeeze them into pension poverty.

Meanwhile, according to a new study, the 100 top U.S. CEOs have as much saved for retirement as 50 million Americans, thanks in large part to special savings plans that their employees don’t receive:

The Center for Effective Government found that the 100 biggest nest eggs of corporate chiefs added up to $4.9 billion, or 41 percent of what American families have saved for retirement. David Novak, the former CEO of Yum Brands, the company that owns Taco Bell, Pizza Hut and KFC, had the largest nest egg, worth $234.2 million, or enough money to provide an annuity check of about $1.3 million a month starting at age 65.

By contrast, almost three in 10 Americans approaching their golden years have no retirement savings at all, the study said, and more than half between 50 and 64 will have to depend on Social Security alone, which averages $1,233 per month.

Aside from fatter paychecks, CEOs get two other perks to help them grow their retirement funds faster than their employees can. Companies and business groups argue that CEO retirement packages are tied to executive performance and necessary to be able to attract top executives.

Special Pensions

More than half of Fortune 500 CEOs receive supplemental executive retirement plans (SERPs), a type of tax-deferred defined-benefit plan for the C-suite. These plans have come under heat from shareholders as expensive and unnecessary.

CEOs enjoy these plans even as companies eliminate regular defined-benefit plans for employees. Only 10 percent of companies provide defined-benefit pension plans, covering just 18 percent of private sector workers, according to the Bureau of Labor Statistics. In the early 1990s, more than a third of private sector workers had pension plans.

Executive Tax-Deferred Compensation Plans

Almost three-fourths of Fortune 500 companies offer their senior executives tax-deferred compensation plans. Unlike 401(k) plans offered to regular workers, these special plans have no limits on annual contributions. That allows CEOs to invest a lot more in their retirement than everyday Americans. For example, last year, 198 CEOs running Fortune 500 companies were able to invest $197 million more in these plans because they were not hamstrung by limitations on defined compensation plans, the study found.

American workers over 50 can contribute only $24,000 a year to 401(k) plans, while younger employees have an $18,000 limit.

This is the new pension normal. CEO compensation which includes lavish pensions is soaring to obscene levels while companies are looking to slash pension costs, offloading them to insurers or employees, or if they go belly up, pensions become the problem of some cash-strapped government pension agency which backstops pensions and slashes benefits.

While this is going on pretty much everywhere, at least in Canada there’s talk of enhancing the Canada Pension Plan. In the U.S., there’s a dangerous shift in pension policy which will come back to haunt the country as social welfare costs skyrocket and pension poverty soars, placing more pressure on an ever growing debt problem.

What is the solution to the U.S. retirement crisis? I stated my thoughts last week when looking at the DB vs DC debate:

In short, I believe that now is the time to introduce real change to Canada’s retirement system and enhance the CPP for all Canadians.

I’m also a big believer that the same thing needs to happen in the United States by enhancing the Social Security for all Americans, provided they get the governance right, pay their public pension fund managers properly to manage the bulk of the assets internally and introduce a shared risk pension model in their public pensions.

It’s high time the United States of America goes Dutch on pensions and follows the Canadian model of pension governance. Now more than ever, the U.S. needs to enhance Social Security for all Americans and implement the governance model that has worked so well in Canada, the Netherlands, Denmark and Sweden (and even improve on it).

And some final thoughts for all of you confused between defined-benefit and defined-contribution plans. Nothing, and I mean nothing, compares to a well-governed defined-benefit plan. The very essence of the pension promise is based on what DB, not DC, plans offer. Only a well-governed public DB plan can offer retirees a guaranteed income for the rest of their life.  

What are the main advantages of well-governed DB plans? They pool investment risk, longevity risk, and they significantly lower costs by bringing public and private investments and absolute return strategies internally to be managed by well compensated pension fund managers. DB plans also offer huge benefits to the overall economy, ones that will bolster the economy in tough times and reduce long-term debt.

In short, there shouldn’t be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people and the entire country will be over the very long run.

You’ll forgive me if I keep beating the same drum on this topic but it’s absolutely crucial that policymakers around the world get their pension policy right.

On Friday morning, I received an email telling me that the Canada Mortgage and Housing Corporation (CMHC), a major Canadian Crown corporation, was reverting back to defined-benefit plans for all their employees after shifting new employees into DC plans back in 2012.

The person who sent me that email is a pension authority who shared this with me: “Hopefully, some others will come to same conclusion that a risk shared DB is the most cost effective way to provide a secure retirement and will follow their example.”

He’s absolutely right which is why I’m hoping to see Canadian and U.S. policymakers move toward enhancing and bolstering defined-benefit plans for all their citizens (see my last comment on breaking Ontario’s pension logjam).

Lastly, I discussed inequality in a recent comment of mine looking at which bond bubbles worry the Fed. I think it’s shameful that our society values overpaid hedge fund managers and CEOs and does little to fight for the rights of our most vulnerable, including the poor, the disabled and the elderly who are increasingly confronting pension poverty.

 

Photo by  Bob Jagendorf via FLickr CC License