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Cypen & Cypen
August 16, 2012

Stephen H. Cypen, Esq., Editor

1.     CalPERS WILL NOT TAKE IT LYING DOWN:       In a recent post, California Public Employees’ Retirement System said an Op-Ed in the Ventura County Star underscores why it is important to understand the facts before stating an opinion.  True to form, the author of the piece misstates, misunderstands and misinterprets throughout.  The following corrects the details the writer got wrong:

  • Overtime is not included in pension calculations, so it is impossible for public workers to “spike” pay with overtime pay. 
  • This year’s returns will not cause larger than expected increases in employer contributions later this year.  Any increase in contributions due to this year’s return will be assessed in one year for the state and schools, and two years for public agencies.  These increases will be very small, as all gains and losses are amortized over a rolling 30-year period. CalPERS investment returns this year will not cause further bankruptcies. 

CalPERS believes a recent poll cited by the writer in which 53 percent of respondents judged pension levels are “about right” or “too low” indicates Californians understand the importance of pensions and their role in the economy.  The vast majority of Americans do not save enough for retirement, and the very modest pension that most CalPERS members receive marks the difference between poverty and productivity in the golden years.  Fifty percent of all CalPERS pensioners receive only $18,000 per year in benefits.  Three-quarters receive $36,000 or less. 
:     The U.S. Census Bureau has released its “Annual Survey of Public Pensions:  State-Administered Defined Benefit Data Summary Report:  2011.”  The report is part of a continuing series designed to provide information on the structure, function, employment and finances of the United States’ nearly 90,000 state and local governments.  Data in the report refer to fiscal years that ended between July 1, 2010 and June 30, 2011, and do not reflect data for the entire calendar year of 2011.  The survey covers the following retirement system activities:  revenues by state (earnings on investments, employee contributions, government contributions); expenditures by state (benefits, withdrawals, other payments); cash and investment holdings by state (governmental securities, corporate stocks and bonds, foreign and international securities, etc.); membership information by state (number of retirement systems, total members, beneficiaries receiving periodic payments); and liabilities information by state (covered payroll and pension obligations) for state-administered retirement systems only.  State-administered pension systems showed positive earnings on investments in 2011, for the second consecutive year after two years of losses on investments in 2008 and 2009.  Earnings on investments totaled $410.6 Billion in 2011, 41.1 percent higher than the 2010 earnings, which totaled $291.1 Billion.  The 2011 earnings reached pre-market downturn levels, showing a 2.1 percent increase from 2007, which totaled $402.3 Billion in earnings on investments before the market downturn in 2008.  Losses on investments totaled $71.7 Billion in 2008 and $511.5 Billion in 2009.  Pension systems have substantial investments in financial markets and, consequently, earnings are dependent on changes in market performance.  Total holdings and investments for state-administered pension systems rose 14.6 percent, from $2.2 Trillion in 2010 to $2.5 Trillion in 2011.  Total holdings and investments consist of cash and short-term investments, governmental securities (e.g., U.S. Treasury), non-governmental securities (e.g., corporate stocks and bonds, foreign and international securities, mortgages, etc.) and other investments (e.g., real property).  The two largest investment categories -- corporate stocks and foreign and international securities – made up just over half (51.9 percent) of the total holdings and investments for all state-administered pension systems in 2011.  Corporate stocks approximated one-third of the total holdings and investments (34.3 percent) and foreign and international securities amounted to about one-sixth of the total (17.5 percent).  G11-ASPP-ST (August 2012) 
3.      FLORIDA’S PENSION SYSTEM RELATIVELY LOW IN NUMBER OF WORKERS:      The Miami Herald closely analyzed the above Census Bureau data in Item 2, and determined that Florida’s pension system trails most states when it comes to the ratio between employees paying into the system and pensioners taking benefits out of it.  The report ranks Florida 35th out of the 50 states on that measure, with 1.6 public workers in its $134 Billion pension system for every beneficiary.  Nebraska took the top spot with 3.2 workers for every pensioner, while Alaska trailed the pack at No. 50 with an almost even ratio: 38,431 state workers and 37,498 state beneficiaries.  The national average was 1.8 workers for each beneficiary.  The Census report also gives Florida low marks for actual benefits paid to state pensioners.  Florida’s average payout is $19,940 a year well below the national average of $24,140.  Florida held the No. 33 slot on the payout list.  Connecticut took the top spot, with an average beneficiary receiving $37,950 a year.  North Dakota finished last at an average of $14,330 per pensioner. 
4.      NOW, HERE IS AN ESTATE PLAN – DIE BROKE:    Shocking as it may seem, three economists from leading universities have found that a substantial fraction of persons die with virtually no financial assets -- 46.1% with less than $10,000 (!) -- and many of these households also have no housing wealth and rely almost entirely on Social Security benefits for support.  Findings in a new paper published by the National Bureau of Economic Research and reviewed in show that a large portion of Americans are relying almost completely on Social Security, and that they die with hardly any money to their name.  Dying broke does not have to be as awful as it sounds.  In fact, it should almost be a goal to which we all aspire.  For many of us, a perfect financial life would be one in which we amassed exactly the amount of money we would need in life, and in which we ran out of money the day we died.  After all, what is the sense of dying with lots of money in the bank?  You really cannot take it with you.  Look at it this way:  consider yourself like a pension fund, which is supposed to pay its last dollar to the last beneficiary on the last day of his life.  Sorta “fully unfunded.” 
5.      SHOULD FUTURE RETIREES EXPECT POVERTY?:      Is your workforce going to retire in poverty?, asks Reuters.  Today’s seniors are more affluent than the general population.  But the generations that follow them -- starting with baby boomers -- will not be as fortunate.  The decline of pensions, the erosion of Social Security and the housing crash all are pointing toward a new crisis of poverty among lower- and middle-class seniors in the years ahead.  Social Security and pensions, in particular, have been the two most important factors in keeping seniors out of poverty for decades.  Both provide reliable, guaranteed income sources for life.  And home equity has been an important fall-back source of assets that can be tapped in retirement.  The reason is because seniors typically have more equity built up in their homes than younger homeowners, and carry less debt into retirement.  Indeed, the poverty rate for seniors in 2010 (the most recent year available) was just 9%, compared with 15% for the general U.S. population.  But the economic safety net is fraying quickly.  As recently as 1998, 52% of Americans over age 60 received income from a defined benefit pension, according to a new study by National Institute on Retirement Security (see C&C Newsletter for August 2, 2012, Item 1).  By 2010, that figure had fallen to 43%.  In the private sector, the decline has been more dramatic -- down from 38% in 1979 to 15% in 2010.  How important are defined benefit pensions in keeping seniors out of poverty?  The study, based on U.S. Census Bureau data, found poverty rates were nine times greater in 2010 in households without defined benefit pension income.  Pensions resulted in 4.7 million fewer poor or near poor families and 1.2 million fewer families on various forms of public assistance.  Pensions are most important to middle- and lower-income families, as more than half of households over age 60 receive pension income.  Social Security plays an even more universal role in keeping seniors out of poverty.  The Center on Budget and Policy Priorities estimates that 45% of Americans over 65 would fall below the government’s official poverty line if they did not receive Social Security benefits.  The number of elderly people in poverty would have been higher by almost 14 million in 2010 without Social Security payments.  It is striking just how little attention is paid in Washington to the looming retirement crisis.  Alongside decline of pensions and Social Security, seniors face rising health care costs and possible weakening of Medicare if it is converted to a defined contribution premium support, as advocated by the Republican-controlled House of Representatives.  (We have not previously reported on Senator Harkin’s recently-introduced hybrid workplace cash balance pension model at the national level, because it does not have a snowball’s chance in Haiti.) 
6.      PUBLIC DB PLANS FOLLOW CORPORATE LEAD IN USING “SELECT AND ULTIMATE” RATES:      Officials in Vermont and Minnesota are responding to pressure to lower their pension plans' assumed rate of return by doing so temporarily, without changing the long-term assumptions, reports  Instead of having a single rate of return, state officials are taking a page from their corporate counterparts, and using a combination of rates that changes over time, known in actuary parlance as “select and ultimate” rates.  One rate is not going to fit every scenario, which gives you ability to look at things in a more comprehensive way.  Under the select and ultimate method, Vermont State Retirement Systems’ rate declined to 6.25% for fiscal 2012 ended June 30, from 8.25% for state employees and teachers and 8% for municipal employees.  It will rise slowly in a predetermined manner over 17 years to an ultimate rate of 9%.   In Minnesota, the state plans are moving to an 8% return assumption for five years, after which it will revert to the 8.5% rate in effect since 1989.  Making the switch would undoubtedly require more analysis and calculations for public plans, but it may be worth it.  The new approach can be politically more palatable, as well, if contribution increases can be muted, and a plan’s funded status does not get thrown out of whack.  We wonder what the Florida Division of Retirement would say about this approach. 
7.      RETIREMENT PLAN PARTICIPANTS UNSURE OF FUTURE NEEDS:     An article in indicates that more than a third of retirement plan participants admitted that they either “guessed” or “made up” their estimates for how much income they would need in retirement, while only 30 percent said they consulted with a professional for help in setting their goals.  The survey by Diversified found that 69 percent of the plan participants polled admitted that their DC plan at work was their only or primary retirement account.  Despite the fact that the vast majority surveyed were at least middle-aged (68 percent said they were 46 years old or older) with a reasonable income (64 percent made at least $75,000 annually), more than half (54 percent) said they had less than $100,000 saved for retirement.  What is worse, 37 percent had less than $50,000 saved.  Only 3 percent said they had saved $1 million or more.  Sixty-one percent said they were saving 10 percent or less of their annual salary in their defined contribution plan, with 25 percent saying they were saving 5 percent or less.  Only 19 percent said they were contributing significant funds to their retirement accounts, saving more than 15 percent annually.  Thirty-eight percent of defined contribution plan participants reported that they had increased the amount of money they are saving for retirement this year over last year.  Eleven percent took a loan against their DC plan over the past 12 months, with 3 percent saying they took a hardship withdrawal.  Diversified said participants need to be saving a minimum of 10 percent a year. 
8.      ARE MONEY MANAGER FEES WORTH IT?:       On June 30, 2011, the Maryland State Retirement and Pension System reported net assets of $37.6 Billion.  The assets were principally publicly-traded stocks and bonds.  During the fiscal year ending June 30, 2011, the System spent $221 Million on Wall Street money management fees, though fund management appears to have yielded subpar results.  A report from the Maryland Public Policy Institute says there is substantial evidence that Wall Street managers are unable to beat passive equity index funds that cost much less in fees. Indeed, during calendar year 2011, 84 percent of actively-managed U.S. equity funds underperformed their benchmarks.  Such underperformance is a consistent problem over time.  The ratio of the System’s Wall Street fees equaled 0.693 percent in FY 2011, above the 0.409 percent of similar state systems nationwide.  If public pension fund assets were indexed to relevant markets rather than actively managed, the public pension systems in Maryland and across the United States would save enormous amounts of money on fees, without undue harm to investment performance.  In fact, many Wall Street managers “shadow” their target indexes with 70 to 80 percent of their investments in the same stocks (or bonds) as those in the index.  The vast majority of the 3,400 state and local public employee retirement systems in the United States contracts with Wall Street firms to select the publicly-traded stocks and bonds that make up the bulk of the systems’ investment portfolios.  Incredibly, total money management fees for the 50 states surveyed totaled $7.9 Billion (a fee ratio of 0.359)!  State pension systems represent the retirement security of millions of public employees across the nation. In Maryland, confidence in the strength of that safety net is beginning
to erode.  In these tumultuous economic times, the administrators of Maryland’s pension systems would be wise to index the systems’ portfolios to ensure average investment returns.  The move would also be a safer, more responsible use of system resources than paying Wall Street management firms millions of dollars each year to deliver subpar results on public stocks and bonds and risky private alternative investments.  By the objective measure of fees to assets, Maryland spends significantly more on Wall Street management fees than almost every other state, and its investment performance is substandard.  This situation has cost the state billions of dollars and should be addressed immediately.  Founded in 2001, the Maryland Public Policy Institute is a nonpartisan public policy research and education organization that focuses on state policy issues.  So, there.  No. 2012-04 (July 25, 2012). 
9.      RETIREES ENTITLED TO COMPANY-PAID HEALTH BENEFITS FOR LIFE:     The U.S. Court of Appeals for the Sixth Circuit considered an appeal concerning the contractual right to continued healthcare benefits for members of a certified class of retirees under Employee Retirement Income Security Act of 1974 and Labor-Management Relations Act.  Defendants Newell Operating Company, Inc. (Newell), its subsidiary Newell Window Furnishings, Inc., Kirsch Division (Newell Window) and the Newell Rubbermaid Health and Welfare Program 560 (Newell Plan), appealed from the judgment entered in favor of plaintiffs, which included monetary damages for the individual plaintiffs and declaratory and injunctive relief requiring defendants provide vested lifetime healthcare benefits to the class members depending on the relevant date of retirement.  Appealing the order granting summary judgment to plaintiffs, defendants challenged the district court’s determinations:  (1) that Newell Window was bound as a successor liable under earlier collective bargaining agreements to which it was not a party; (2) that members of the plaintiff class had vested rights to company-paid health insurance and Medicare Part B premium reimbursements; and (3) that plaintiffs’ claims were not barred by the applicable six-year statute of limitations.  The court of appeals affirmed.  It is true that a successor corporation generally is not liable for its predecessors’ liabilities unless expressly assumed.  Here, the lower court found an assumption of liability (even though there was no question that there was also a substantial continuation of operations at the plant by Newell Window and its predecessors).  Whether and to what extent retiree health insurance and Medicare Part B premium reimbursements were vested is a separate question from whether Newell Window is a successor to the earlier obligations.  If the parties intended for welfare benefits to vest and the agreement to that effect is breached, there is an ERISA violation as well as an LMRA violation.  Vesting occurs upon retirement, not eligibility for retirement, while an employer is free to terminate any unvested welfare benefits upon expiration of relevant CBA.  Significantly, in the sixth circuit, a court may find vested welfare benefits under a CBA even if the intent to vest has not been explicitly set out in the agreement.  Bender v. Newell Window Furnishings, Inc., Case No. 11-1335 (U.S. 6th Cir., May 3, 2012). 
10.    TRENDS IN EMPLOYEE FINANCIAL ISSUES:     Employees are continuing to approach their finances with a proactive, take-control mindset, with a particularly strong focus on retirement planning.  A bulletin from Financial Finesse says they also demonstrated some minor, but broad-based improvements to their financial wellness in the second quarter, recovering some ground from a backslide in the first quarter.  Proactive financial questions continue to increase, as employees seek to improve their financial wellness as a preventative measure, instead of waiting until a crisis happens, to seek help.  Retirement planning questions also increased as a percentage of the total, with employees in most age and income groups indicating retirement planning as their biggest priority.  As a whole, employees have managed to sustain most of the improvements they have made since 2009, and with their continued focus on long-term financial planning, they are well positioned to continue these improvements.  However, they must accelerate their rate of progress in order to be well protected in the event of another recession.  For the first six months of 2012, more than half of all employees still do not have an emergency fund, 42% are uncomfortable with their debt levels and 36% of those with debt do not have a plan on how to get out of debt.  In addition, 84% of employees report feeling financially stressed, and 21% report high or overwhelming stress.  As usual, the top question received was “how much do I need to retire and how much should I be saving?”  Ah, yes, the eternal question.  Financial Finesse is an unbiased financial education company providing personalized and innovative financial education and counseling programs to over 500,000 employees at over 400 organizations. 
11.    STEPCHILDREN ≠ CHILDREN:     The U.S. Court of Appeals for the Fifth Circuit recently decided an ERISA benefits case, in which the plan administrator appealed the district court’s judgment that a deceased plan participant’s stepsons, rather than his siblings, are entitled to the deceased’s benefits.   The appellate court reversed:  In the plan in question, Hunter did not designate a new plan beneficiary after the death of his wife.  According to the plan, in such cases distribution of the decedent’s benefits is made in the following order:  surviving children, surviving parents, surviving siblings and the estate.  The administrator considered, and rejected, the possibility that Hunter’s stepsons might be entitled to Hunter’s benefits.  Because Hunter had no surviving parents and no biological or legally adopted children, the plan administrator distributed the benefits to Hunter’s six siblings.  The stepsons filed suit, and after a bench trial, the district court found for them, and denied the plan administrator’s counterclaim for a declaratory judgment, concluding that the plan administrator abused her discretion by failing to consider the stepsons’ claims of adoption by estoppel.  The administrator’s interpretation was legally correct because (1) she had given the plan a uniform construction; (2) her interpretation was consistent with a fair reading of the plan; and (3) different interpretations of the plan will result in unanticipated costs.  The stepsons also unsuccessfully argued that the administrator should have considered whether they were equitably adopted under Texas law because equitable adoption relates and defines a familial relationship.  Wrong.  Equitable adoption or adoption by estoppel of a child occurs when one promises or acts in a way that precludes the person and his or her estate from denying adopted status to the child.  The doctrine has no broader application, and does not create a legal parent-child relationship.  Nothing in the plan or ERISA required the plan administrator to incorporate the concept of equitable adoption into the plan definition of “children.”  Herring v. Campbell, Case No. 11-40953 (U.S. 5th Cir., August 7, 2012). 
12.    BALTIMORE COUNTY TRUSTEES LEND COUNTY $25 MILLION:       Trustees of Baltimore County’s employee pension system have voted unanimously to lend the county $25 Million for a new recycling facility, to be repaid at roughly 7.88% interest over 15 years.  According to aiCIO, trustees are rejoicing over the deal:  where else can you get 7.88% guaranteed return right now?  (The pension system recently lowered its annual return assumption from 7.88% to 7.25%.)  We would be a lot less sanguine about the investment:  many fiduciary liability policies exclude coverage for investment in securities of the sponsor.  No-brainer or no-brain? 
13.    SEVENTY-EIGHT MONEY FUNDS NEEDED HELP: reports the Federal Reserve Bank of Boston revealed that 78 prime money-market funds between 2007 and 2011 received support from their sponsor firms and that without the help at least 21 of those would have “broken the buck,” by having a net asset value below $1 a share.  The report provides ammunition to Securities and Exchange Commission Chairman Mary Schapiro and her efforts to introduce new costly reforms for the $2.7 Trillion money-market fund industry in wake of the 2008 financial crisis where the Treasury created a taxpayer-backed guarantee program after a major fund “broke the buck,” and suffered a run on assets due to losses connected with Lehman Brothers’ failure in September 2008 (see C&C Newsletter for September 25, 2008, Item 7).  To stem a growing run on money-market funds during the crisis, the Fed also created a taxpayer-backed liquidity facility for money funds.  The two major reforms being considered by Schapiro are (1) imposition of capital restrictions on funds combined with limitations or fees on redemptions by consumers and (2) permitting a floating net asset value, for money-market mutual funds, a prospect that money fund managers argue would severely hurt the industry.  Currently, SEC restricts investments a fund can make to help maintain a stable NAV, which many retail investors, corporate treasurers and municipal investors rely on for their investments.  The SEC has not formally proposed reforms but regulatory observers expect the agency to do so shortly.  All we can say is “now you tell us.” 
14.    GOLF WISDOMS:      The lowest numbered iron in your bag will always be impossible to hit.          
15.    PUNOGRAPHICS:     When you get a bladder infection urine trouble.           
16.    QUOTE OF THE WEEK:   “Some people think that football is a matter of life or death.  I assure you, it’s much more important than that.”  Bill Shankly
17.    ON THIS DAY IN HISTORY:  In 1961, Martin Luther King, Jr. protests for black voting rights in Miami.         
18.    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. 
19.    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  Thank you.



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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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