1. DON’T CUT PENSIONS, EXPAND THEM: The New York State Legislature recently agreed to a deal limiting pensions for future public employees. The state thus joins 43 others that have recently enacted legislation curtailing public retirement benefits. Writing an op-ed piece in the New York Times, Teresa Ghilarducci, Professor of Economics at the New School, says that although New York needs to reduce its spending, cuts come at a particularly bad time: over a third of New York workers, both public and private, approaching retirement age have less than $10,000 in liquid assets. As a result, those workers are projected to be poor or near poor in retirement, with an average budget of about $7 a day for food and approximately $600 a month for housing. Fortunately, there is an easy solution. Rather than curtailing public and private pensions, New York and other states could save millions of workers from impending poverty by creating public pensions for everyone. While the recession bears some blame for the looming retirement crisis, experts agree that the primary cause is more fundamental: most workers do not have retirement accounts at work. Over half of the workers in New York State, more than four million people, do not participate in retirement plans with their current employers, while over half of American workers do not have pension plans at work. Private-sector pensions have been on the retreat for decades. In fact, in the late 1970s and early ‘80s, Congress, worried about the dismal rate of pension coverage, tried to remedy the situation by extending 401(k) plans, originally designed for executives, to everyone, while also passing a law to create individual retirement accounts. The problem is that these steps set up incentives through the tax code, which means that the biggest benefits go to the highest earners -- people who, moreover, would probably have saved anyway. Today 79 percent of such tax breaks go to the top 20 percent of workers. Meanwhile, despite extensive commercial advertising for retirement planning, coverage for ordinary people stalled. And even many of those who do save for retirement fail to consistently put away the 5-to 10 percent of their pay necessary adequately to supplement their Social Security benefits. John Liu, New York City comptroller, called for a plan for New York City residents that would pool employee and employer contributions into a professionally-managed, citywide pension fund. Both plans would use the same professional staff and institutional money managers that invest the state and city pension funds to manage contributions made by participating employers and employees in the private sector. This is a vital step: public pension plans usually outperform 401(k) plans and individual retirement accounts, because instead of a single worker managing a single account, large institutional plans pool workers of all ages, diversify the portfolio over longer time periods, use the best professional managers that are not available for retail accounts and have the bargaining power to lower fees and prioritize long-term investments. By some estimates, costs for public pensions are over 45 percent lower than for individual 401(k) plans. Of course, since these plans would be financed by workers and their employers, there would be no cost to taxpayers. Saving for retirement is never easy, but finding a place to put your money these days is even harder. Opening up public pension options to everyone is a cheap, simple way to help. Way to go, Teresa.
2. CalPERS SETS DISCOUNT RATE AT 7.5 PERCENT: California Public Employees’ Retirement System Board of Administration has voted to reduce the discount rate to 7.5 percent, affirming the recommendation made by its Pension and Health Benefits Committee. CalPERS also directed its Chief Actuary to analyze and bring back an option for consideration to phase in the increased pension costs to employers over a 2-year period. The discount rate for CalPERS was last changed 10 years ago, when it was lowered to 7.75 percent from 8.25 percent. One year ago, the Board voted to keep the discount rate at 7.75 percent with the condition of another review in 2012. The discount rate is calculated based on expected price inflation and real rate of return. According to studies conducted by CalPERS, inflation has been in decline for the last 25 years. As a result, CalPERS’ Actuarial Office recommended a reduction in the price inflation from 3 to 2.75 percent. When added to the current real return assumption rate of 4.75 percent, a discount rate of 7.5 percent emerges. CalPERS’ actuaries offered the Pension and Health Benefits Committee two options to protect soundness of the pension plan: a 7.25 percent discount rate that includes an adjustment to add an element of conservatism to protect further against lower returns, or a 7.5 percent discount rate without such an adjustment. The discount rate change will impact members and employers as follows:
- The change will cost the State $303 Million, of which approximately $167 Million would come from the State’s general fund. The school increase would be approximately $137 Million.
- Public Agency contributions will increase by 1- to 2 percent for Miscellaneous plans and 2- to 3 percent for Safety plans.
- The new discount rate will apply to new service credit purchase requests after March 15, 2012. Costs will increase between 5- and 13 percent depending on the individual circumstances of members. Members who have submitted a request prior to March 15 will be honored with the factors in effect as of the request date.
- Retirement applications with a retirement date on or after March 15, 2012 will have the amount of their benefits under any optional form calculated with the new discount rate. Members who choose optional benefits -- leaving some part of their benefit to a spouse or beneficiary after their death -- will experience approximately a 2 percent increase in cost.
CalPERS, with assets of approximately $235 Billion, is the largest public pension fund in the U.S.
3. A RARE LOOK INSIDE GOLDMAN SACHS: Greg Smith has resigned as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa. His op-ed piece in the New York Times provides a rare look inside the giltest of the gilt-edge banks:
Today is my last day at Goldman Sachs. After almost 12 years at the firm -- first as a summer intern while at Stanford, then in New York for 10 years, and now in London -- I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.
But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.
I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.
When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.
Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients -- some of whom are sophisticated, and some of whom aren’t -- to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.
My proudest moments in life -- getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics -- have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.
I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm -- or the trust of its clients -- for very much longer.
Look for more in a new John Grisham-like book.
4. EBRI 2012 RETIREMENT CONFIDENCE SURVEY: Americans’ confidence in their ability to afford a comfortable retirement is stagnant at historically low levels in the face of more immediate financial concerns about job insecurity and debt, according to the 22nd annual Retirement Confidence Survey from Employee Benefit Research Institute, the longest-running annual survey of its kind in the nation. Asked to name the most pressing financial issue facing Americans today, both workers and retirees were more likely to identify job uncertainty. Americans’ retirement confidence has plateaued at the lowest levels seen in two decades of conducting the survey. Many workers report they have virtually no savings and investments, and workers’ expected age of retirement continues to rise. However, one area in which Americans are saving for retirement is in employer-sponsored retirement savings plan, such as a 401(k). In fact, 81% of eligible workers (38% of all workers) say they contribute to such a plan with their current employer. Although the survey does not distinguish how much money is saved in each type of savings vehicle, workers who currently contribute to an employer-sponsored retirement savings plan are more than twice as likely as those who do not to report savings and investments of at least $50,000. This fact is also affecting their overall confidence, as 64% of those who currently contribute money to an employer-sponsored retirement savings plan are either very or somewhat confident that they will have enough money to live comfortably throughout retirement years, as opposed to only 48% of those who do not. Other major findings in the survey this year are
- Confidence stagnant: Americans’ confidence in their ability to retire comfortably is stagnant at historically low levels. Just 14 percent of workers are very confident they will have enough money to live comfortably in retirement (statistically equivalent to the survey low of 13 percent measured in 2011 and 2009).
- Employment insecurity looms large: Forty-two percent identify job uncertainty as the most pressing financial issue facing most Americans today.
- Concern about health costs: Worker confidence about having enough money to pay for medical expenses and long-term care expenses in retirement remains well below their confidence levels for paying basic expenses.
- Little savings: Many workers report they have virtually no savings and investments. In total, 60 percent of workers report that the total value of their household’s savings and investments, excluding value of their primary home and any defined benefit plans, is less than $25,000.
- Workers’ expected retirement age: Twenty-five percent of workers say the age at which they expect to retire has changed in the past year. In 1991, 11 percent of workers said they expected to retire after age 65. By 2012 that number has grown to 37 percent.
- Retirees’ experience: Regardless of retirement age expectations, and consistent with prior survey findings, half of current retirees surveyed say they left the work force unexpectedly (due to health problems, disability or changes at their employer, such as downsizing or closure).
- Reliance on Social Security: Retirees report they are significantly more reliant on Social Security as a major source of their retirement income than current workers expect to be.
- Expected vs. actual pension income: Although 56 percent of workers or their spouses expect to receive benefits from a defined benefit plan in retirement, only 33 percent report that they or their spouse currently have such a benefit with a current or previous employer.
- Not calculating retirement needs: More than half of workers report that they or their spouse have not tried to calculate how much money they will need to live comfortably in retirement.
- Online technology: Only a minority of workers and retirees feel very comfortable using online technologies to perform various tasks related to financial management. Relatively few use mobile devices, such as a smart phone or tablet computers, to manage their finances, and just 10 percent of workers who use online technology say they are very comfortable obtaining advice from financial professionals online.
5. STATE IMMUNE FROM SUIT UNDER SELF-CARE PROVISION OF FMLA: The Family and Medical Leave Act of 1993 entitles an employee to take up to 12 work weeks of unpaid leave per year for (A) care of a newborn child; (B) adoption or foster-care placement of a child; (C) care of a spouse, child or parent with a serious medical condition; and (D) the employee’s own serious health condition when the condition interferes with employee’s ability to perform at work. FMLA also creates a private right of action for equitable relief and damages against any employer, including a public agency. Subparagraphs (A), (B) and (C) are sometimes referred to as the family-care provisions, and subparagraph (D) as the self-care provision. The U.S. Supreme Court previously held that Congress could subject states to suit for violations of a family-care provision based on evidence of family leave policies that discriminated on the basis of sex. Coleman filed suit, alleging that his employer, the Maryland Court of Appeals, an instrumentality of the State, violated FMLA by denying him self-care leave. The federal District Court dismissed the suit on sovereign immunity grounds. The Fourth Circuit Court of Appeals affirmed, holding that unlike the family-care provisions, the self-care provision was not directed at an identified pattern of gender-based discrimination, and was not congruent and proportional to any pattern of s.ex-based discrimination on the part of the states. Under the federal system, states, as sovereigns, are immune from damages suits, unless they waive that defense. Congress may also abrogate the states’ immunity pursuant to its powers under §5 of the Fourteenth Amendment, but it must make that intention unmistakably clear in the language of the statute. Sex-based discrimination that supported allowing family-care suits against states is absent with respect to the self-care provision. Coleman v. Court of Appeals of Maryland, Case No. 10-1016 (U.S. March 20, 2012).
6. AIG $1.6 BILLION PAYMENT BOOSTS TARP RECOVERY TO 80%: American International Group Inc. repaid $1.6 Billion to the U.S. Treasury Department, lifting the government’s portion of recouped financial-bailout money to 80%, Dow Jones Newswires reported. The payment brings the amount of Troubled Asset Relief Program funds the government has recovered to $331 Billion out of $414 Billion disbursed. Not too shabby.
7. ONE-IN-FIVE WORKERS PARTICIPATE IN MARCH MADNESS POOLS AT THE OFFICE: Brackets, bets and upsets are hot topics around the water coolers. Twenty per cent of workers said they had participated in March Madness pools at work. Nearly 10% watch March Madness games at the office and 17% spend, on average, more than an hour checking scores while on the clock. A CareerBuilder annual survey shows that men are more likely to participate in March Madness in the office, with 27% joining office pools compared to 13% for women. Comparing regions, workers in Midwest were most likely to place bets at work (23%) compared to 20% of workers in the West, 19% in the South and 18% in the Northeast. In addition to waging around March Madness, workers also shared some other amusing or memorable office pools they had bet on:
- Who would be the first person to drink too much at a company party
- When somebody would punch out the supervisor
- How long the CEO’s fourth marriage would last
- How many accidents would occur at the intersection outside of the office building
- What fake illness a co-worker would call in sick with
- How long it would take someone to quit
- Who would be the first person to read the Cypen & Cypen Newsletter from cover-to-cover
8. YORKSHIRE RIPPER CLAIMS PENSION FROM BEHIND BARS: According to dailymailonline, Peter Sutcliffe has been nurturing plans to go to the European Court of Human Rights to claim his state pension. He says he should have his pension, up to $200 a week, because he paid his insurance stamp as a hard-working lorry driver before he was arrested in January 1981. Nobody under 40 can have much memory of the atmosphere, especially in the north of England, during the five years or so that the “Yorkshire Ripper” was active. He started murdering prostitutes and moved on to what were known at the time as “innocent” women. He had killed 13 before police, badly misled by the notorious Sunderland Ripper tape, finally caught Sutcliffe in Sheffield. During the years when Sutcliffe was killing, women were genuinely frightened to go out alone. The lives of millions were restricted or overshadowed by the murderously perverted sexual impulses of one man. His arrest did more to reclaim the streets for women than a hundred show trials of hapless students who drank too much. Sutcliffe, now in Broadmoor Hospital, has never ceased trying to wriggle out of the responsibility for his murders. In 2010, a judge dismissed his hopes of release, and ordered that he should stay locked up for good. Apparently we in Florida are not the only ones with pension forfeiture issues.
9. GOLF WISDOMS: Never play your son for money.
10. PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.): “The crows seemed to be calling his name, thought Caw.” -- Jack Handey
11. QUOTE OF THE WEEK: “They should put expiration dates on clothes.” Gary Shandling
12. ON THIS DAY IN HISTORY: In 1969, 31st NCAA Men’s Basketball Championship: UCLA beats Purdue 9272; UCLA wins its 5th national championship in six years.
13. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.
14. PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm. Thank you.