Pension Risk Governance Blog Still Going Strong After Nine Years

Nine years today marked the debut of www.pensionriskmatters.com. Since then, I am proud to say that traffic has steadily grown, with continued feedback and suggestions about all sorts of topics. I am deeply grateful to visitors to this independent website for their time and encouragement. While the specific feedback tends to vary by issue or job function, a central theme is clear. Ongoing education about topics such as due diligence, fees, risk management, asset allocation, hedge funds, liquidity and valuation is both needed and desired. In 2015, this award-winning blog will continue its focus on providing objective and helpful information about important subjects that challenge investment stewards and their advisors, attorneys and regulators who oversee the management of more than $30 trillion.

As I point out in "Financial Expert Susan Mangiero Celebrates Ninth Year as Lead Contributor to Pension Risk Governance Blog" (Business Wire, March 25, 2015), "There is never a shortage of subjects to discuss, thanks to ongoing suggestions and contributions from readers and the significant realities of changing demographics, market volatility and new accounting rules."

To date, there are over 900 published analyses, research updates and guest interviews that can be readily accessed by category and keyword. Simply click on the Archives section of www.pensionriskmatters.com. For a complimentary subscription to this blog, as posts are published, click here to sign up. Click here to read our Privacy Policy. If you are interested in contributing an educational essay or letting us know about a relevant news item or rule change, please email contact@fiduciaryleadership.com.

Until the next blog post, thank you for your interest!

Not Everyone Gets a Pot of Gold at the End of the Rainbow

On March 17, the Irish and "Irish-at-heart" happily celebrate St. Patrick's Day, wear the green and look forward to a productive twelve months, after which the festivities can begin anew. Yet March 17 this year brought gloomy headlines for some individuals. In "New pension scheme will see teachers work to 68 in Northern Ireland," Belfast Telegraph journalist Rebecca Black writes that critics of a newly approved plan to increase employee contributions and push back when an educator can retire will make life difficult for new entrants to the job market. For the one out of five teacher graduates who are able to secure employment, they will be asked to pay "9.6%, well above the rate for a civil service pension, and with employer contributions of 13%, well below the rate for a civil service pension." Beyond changes to benefit terms, there are some who offer that teachers burn out by their late 50's and that's why "Most teachers retire by 60." Being asked to work for almost a decade more could be a real hardship.

In the United States, multiple public employee retirement plans have been or are in the process of being examined, restructured, reduced or otherwise reformed. Kentucky State legislators just voted to create a task force to investigate how best to close a funding deficit. As of mid-year, the gap "stood at $14 billion." This step came in the aftermath of a decision not to issue $3.3 billion in pension obligation bonds. See "Senate passes bill to study state's underfunded teacher pension plan" (KY Forward, March 11, 2015).

The State of New Jersey had similarly set up a task force to provide insights into current funding woes and recommend how to move forward. In "A Roadmap to Resolution" (February 24, 2015), the New Jersey Pension and Health Benefit Study Commission urges the freezing of existing retirement plans, the creation of a cash balance plan instead and a unification of benefit plan management to encompass both state and local municipal obligations.

Accounting changes will likely accelerate a further in-depth examination of other retirement and health care plans. According to "Why Some Public Pensions Could Soon Look Much Worse" (Governing, March 17, 2015), recent accounting rule changes - promulgated by the Governmental Accounting Standards Board ("GASB") - force dozens of plans to report "dramatic changes" that reveal significantly larger deficits. Using 2013 and 2014 data, magazine researchers examined 80 public plans in an effort to quantify the impact of using GASB 25 versus GASB 67. The results are telling. Click here to see for yourself how much of a difference ensues due to the now prevailing reporting regime.

As state and municipal plans seek to close serious funding gaps, participants may gasp if they are asked to pay more or receive less or both, making the proverbial gold at the end of the retirement rainbow a challenge.

Calvin Ball and ESOP Governance

Calvin and Hobbes has long been a favorite treat of mine. (I don't have permission to embed a likeness but you can click here for a peek.) This long-running cartoon strip ceased in 1995, ten years after the creation of a mischievous six-year old and his furry feline friend. The brainchild of cartoonist Bill Watterson, Calvin entertained and moralized at the same time, charming a global audience of adults and children alike. In a rare interview, Washington Post reporter Michael Cavna (March 10, 2015) learned from the somewhat reclusive Mr. Watterson that "fantasies are drawn more realistically than reality, since that says a lot about what's going on in Calvin's head." In "America's Most Profound Comic Strip" (Wall Street Journal, March 6, 2015), senior editor at the Weekly Standard, Christopher Caldwell, adds that "...Calvin keeps running into evidence that the world isn't built to his ... specifications" and that his "favorite sport is 'Calvinball,' in which he is entitled to make up the rules as he goes along."

I thought of Calvin and his world views yesterday as I listened to ERISA attorney Ted Becker talk about Employee Stock Ownership Plan ("ESOP") governance. As the lead speaker for an NCEO-sponsored webinar entitled "What the DOL v. GreatBanc Trust Co. ESOP Court Settlement Means for ESOPs," this Drinker Biddle & Reath LLP partner gave some nuts and bolts recommendations that are concrete and therefore radically different from the actions of ERISA trustee "Calvins" who comfort themselves that sloppy work is okay.

Mr. Becker and co-speaker Loren Rodgers (Executive Director of the National Center for Employee Ownership) explained that changing regulatory emphasis on employer security valuation led to what is known as the Fiduciary Process Agreement. Described as a "playbook," the U.S. Department of Labor ("DOL") and "GreatBanc Trust Company agreed that it could be used for future transactions by an ESOP fiduciary in which the ESOP purchases or sells employer securities that are not publicly traded." Engaging an independent and qualified valuation advisor and then adequately reviewing (and understanding) the resulting information used to carry out the valuation are two of the recommendations for trustees.

In the official source file ("Agreement Concerning Fiduciary Engagements And Process Requirements For Employer Stock Transactions" dated June 2, 2014), readers are reminded of the importance of process for multiple tasks. Among other things, this roadmap details what should be documented by the ESOP Trustee when choosing a valuation advisor, to include:

  • "The reason for selecting the particular valuation advisor;
  • A list of all the valuation advisors that the Trustee considered;
  • A discussion of the qualifications of the valuation advisors that the Trustee considered;
  • A list of references checked and discussion of the references' views on the vauation advisors;
  • Whether the valuation advisor was the subject of prior criminal or civil proceedings; and
  • A full explanation of the bases for concluding that the Trustee's selection of the valuation advisor was prudent."

This guiding document likewise lays out suggestions about process regarding the fiduciary review of any potential transaction such as buying or selling employer securities that are not publicly traded, the reliance on the valuation report and much more. As independent fiduciary Mitch Shames writes in "Once Again, Strong Process and Substance Matters" (September 11, 2014), "... DOL requires that the fiduciary be an active participant in an ESOP transaction...far from a passive role."

Having been trained as an appraiser and someone who has (a) rendered opinions of value (b) reviewed others' valuations (c) critiqued valuation models (d) taught valuation courses and (e) served as an expert witness, I know firsthand that inappropriate assumptions, bad data and short cuts are likely to create headaches. Quality of valuations that are used for statutory and commercial reasons can and do vary - sometimes materially so. A "quickie" appraisal that ignores fundamentals about an industry let's say or proceeds from grossly inflated management projections are two potential vulnerabilities. The danger is that an inadequate valuation report potentially creates a domino effect of unwanted outcomes because it is used as a driver to make subsequent decisions. For example, ESOP trustees with multiple suitors may select the "wrong" buyer or approve a recapitalization that would not otherwise occur had a better valuation assessment been used. Valuation numbers are frequently inputs as opposed to the end goal.

Big numbers are involved so it's no surprise that ESOP governance is garnering close scrutiny. According to "The Current State of ESOPs," 2012 ESOP assets exceeded $1.059 trillion with 13.824 million participants in 6,908 plans.

On a separate note, I am speaking at the annual conference of the National Center for Employee Ownership, to be held this year in Denver from April 20, 2015 to April 23, 2015. Entitled "Effective Boards of Directors: Obligations, Recruitment and Compensation," my panel will "cover the standards and responsibilities of directors in the board room, how committees function, building a sustainable board structure and standards and surveys for establishing and measuring compensation to reward the performance of directors." Attorney Kevin G. Long (Shareholder with Chang Ruthenberg & Long PC) and Ms. Nancy Wiefek (Research Project Director with NCEO) will co-present.

ERISA Litigation and Enforcement: Role of Independent Fiduciary and Financial Advisor Best Practices

Mark your calendars to attend an educational webinar entitled "ERISA Litigation and Enforcement: The Role of the Independent Fiduciary and Best Practices for Financial Advisors." Sponsored by fi360 and eligible for continuing education credit, this April 8, 2015 event will take place between 3:00 pm and 4:00 pm EST and address important and timely issues for plan sponsors and their advisors. Details are provided below.

Description: ERISA litigation and enforcement increasingly involves allegations of conflicts of interest and imprudent decision-making on the part of advisors, consultants, banks and asset managers. In several recent matters, regulators and judges have made it clear that the use of an independent fiduciary would be interpreted as a reflection of procedural prudence and the absence of an independent fiduciary could hasten a decision of fiduciary breach.

Learning objectives:

  • Learn about relevant cases and regulatory actions that involve third parties such as financial advisors;
  • Hear a discussion about how advisors, consultants, banks and asset managers can work effectively to demonstrate procedural prudence; and
  • Better understand what state trust law and ERISA oversight activity means for advisors and consultants who work with non-ERISA trusts.

Speakers:

  • Thomas Clark, Esquire (Counsel - The Wagner Law Group)
  • Susan Mangiero, PhD, AIFA, CFA, FRM, PPC (Managing Director - Fiduciary Leadership, LLC)
  • Mitchell Shames, Esquire (Partner - Harrison Fiduciary Group) 

Please join as your schedule permits. Click here to register.

Fiduciary Outsourcing Considerations

I try hard to avoid duplication when contributing to this retirement plan blog (www.pensionriskmatters.com) versus writing about investment compliance on a broader scale (www.goodriskgovernancepays.com). However, there are times when I believe a topic has equal appeal to both plan sponsors and their advisers, attorneys, asset managers and other types of vendors.

With that in mind, I invite you to read "Fiduciary Outsourcing Considerations." As I have said both in private conversations and in public speeches, my work as a forensic economist (and sometimes testifying expert witness) leads me to predict that disputes between institutional investors and service providers are unlikely to disappear any time soon. The good news is that those who take governance seriously have a wonderful opportunity to develop and maintain business with risk management focused pension funds, endowments, foundations and other types of buyers.

ERISA Litigation Costs

After having just blogged about the April 13-14, 2015 American Conference Institute program about ERISA litigation in Chicago, it was somewhat coincidental that an article on the same topic crossed my desk today, painting a grim picture of what could happen to a plan sponsor in the event of a lawsuit.

While only two pages long, "An Ounce of Prevention: Top Ten Reasons to Have an ERISA Litigator on Speed Dial" invites readers to consider the advantages of staying abreast of increasingly complex rules and regulations as part of a holistic prescription for mitigating legal risk. Authors Nancy Ross and Brian Netter (both partners with Mayer Brown) cite "heightened interest" in ERISA by U.S. Supreme Court justices, a rise in U.S. Department of Labor enforcement and court decisions about the importance of having a prudent process. They add that de-risking compliance, disclosure requirements, conflicts of interest, large settlements and attorney-client privilege restrictions are other potential landmines for a public or private company that offers retirement benefits.

Elsewhere, Employee Benefit Adviser contributor, Paula Aven Gladych, predicts that the U.S. Supreme Court review of Tibble v. Edison International ("Tibble") could increase ERISA litigation risk for plan sponsors, regardless of its decision. In "Edison decision could be 'slippery slope' for plan fiduciaries" (February 26, 2015), she writes that "the court focused its attention on duty to monitor fees and investments, generally by investment committees and plan administrators of 401(k) plans." Interested readers can download the February 24 2015 Tibble hearing transcript.

Recent events reflect multi-million dollar resolutions, even when an ERISA litigation defendant feels strongly that it is in the right. In "Settlements offer lessons in breach suits" (Pensions & Investments, February 23, 2015), Robert Steyer reports that publicly available documents can shed light about what types of disputes are being settled, the dollar amounts involved and any non-monetary requests made by the plaintiffs. Competitive bidding as part of selecting a vendor is one example. He goes on to say that regulatory opinions are thought to be particularly helpful when they are viewed by the retirement industry as de facto guidance.

I will report back after attending the ERISA litigation conference in a few weeks although I suspect that judges, litigators and corporate counsel who speak will convey a similar message with respect to fiduciary scrutiny. As Bob Dylan sang, "the times they are a-changing."

Pension Transparency In A Digital World

Intrigued after reading "Colorado turns to Twitter to recruit pension board members" by Meaghan Kilroy (Pensions & Investments, February 23, 2015), I spent some time exploring the various social media sites for the Colorado Public Employees' Retirement Association ("PERA"). Recruiting Tweets can be found by clicking here. There is also a video at www.copera.org about "Serving as a PERA Trustee" for the $44 billion system that covers 500,000 individuals. Viewers learn about guardian-type investment oversight duties that include loyalty, prudence and care. A more traditional information sheet entitled "Serving As A PERA Trustee: Factors to Consider" describes what trustees do, their fiduciary responsibilities, the composition of the PERA board, educational requirements and typical time commitment.

Elsewhere, whether part of its blog, Twitter site, You Tube channel or main website, there are numerous pronouncements about financial performance, new investment offerings, videos about retirement planning, calculators and Town Hall meetings.

One Twitter post that particularly caught my eye linked to a February 20, 2015 news item entitled "Colorado PERA: Best Practices Leader." Besides letting readers know that the Board of Trustees had hired Milliman, Inc. to conduct a review of PERA's actuary, a hyperlink maps to the May 2014 recommendation of the Government Finance Officers Association ("GFOA") that pension plan fiduciaries "exercise prudence" in selecting and monitoring service providers such as actuaries. The cherry on top of the cake, in terms of transparency and easy access to information, comes in the form of an embedded link to the Milliman audit report as well as to the response from PERA's actuary, Cavanaugh Macdonald Consulting, LLC.

Having spent considerable time in reviewing the use of social media by retirement industry service providers and plan sponsors for several clients, I was happy to learn about the Centennial State's commitment to knowledge-sharing. While I cannot attest to the details of PERA's structure, its investment program and other elements of governance by examining internet properties alone, it does appear that this public plan sponsor is focused on regularly communicating with its participants, retirees and vendors.

Given a plethora of negative headlines about pension plans (public and corporate), shedding light on critical issues by any sponsor will likely be seen as a smart thing to do. This assumes that information provided to various constituencies is clear, accurate and helpful. A talented digital media professional can play a vital role by ensuring that a steady flow of content gets disseminated. Beyond that, he or she needs to engage with the intended target audience(s), solicit their feedback on an ongoing basis and make recommendations to a plan sponsor (or service provider) as a result. Compliance or confidentiality restrictions have to be taken into account. Avoiding complexity is another challenge that competes with the need to avoid being "too cute" and thereby coming across as trivial.  The list of "must do" tasks is long when an organization decides to craft a communications strategy that relies on new technology. Quantity is the not the same as quality and the use of social media can be counterproductive if not adopted with care.

Plan sponsors and financial service providers may have no choice but to join cyberspace colleagues as the use of services such as Twitter, LinkedIn and Facebook continue to gain popularity. See "Social Media Used By 71% Of Retirement Plan Participants, Survey Says" (Financial Advisor, September 26, 2013).

ERISA Litigation Conference Addresses Timely Fiduciary Issues

Dr. Susan Mangiero announces the sponsorship of a forthcoming conference about ERISA litigation and regulatory issues by Fiduciary Leadership, LLC. Produced by the American Conference Institute ("ACI"), this mid-April event pairs attorneys (including corporate counsel) with jurists to address timely topics that include, but are not limited to, the following:

  • Excessive fees;
  • Church plan lawsuits;
  • Fiduciary liability insurance;
  • Use of independent fiduciaries;
  • Enforcement risk;
  • Ethics;
  • Employee Stock Ownership Plan ("ESOP") litigation;
  • Proceedings related to company stock in ERISA plans; and
  • Health care mandates and related compliance.

Interested readers of www.goodriskgovernancepays.com or www.pensionriskmatters.com can read more about the program, speakers and venue by downloading the ERISA litigation conference brochure. There is a $200 discount off the current price for any blog reader who calls 888-224-2480 or visits http://www.americanconference.com/ERISA.

I look forward to seeing you in the Windy City in a few weeks. With the just announced push by the White House for fiduciary conflict of interest rules, U.S. Supreme Court activity in Tibble v. Edison International and news of multi-million ERISA litigation settlements, this conference is expected to be informative and important.

X Marks The Spot Approach to Pension Risk Management

Anyone who has been on the receiving end of major surgery may tremble after reading "How to Make Surgery Safer" (Wall Street Journal, February 16, 2015). Journalist Laura Landro describes a panoply of horribles such as operating on the wrong body part or leaving a foreign object inside a patient's body. Honing in on "never events" (i.e. those that are serious and should never occur), she describes attempts by hospitals to reduce human error in a quest to contain the rate of injury, minimize the number of deaths and avoid the billion dollar whack for serious faux pas. Besides the collection and analysis of big data to glean lessons learned and track performance, the writer describes how operating room teams are being prepped to emphasize safety in numerous ways. These include, but are not limited to, the following:

  • Adding radio frequency tags to instruments and sponges;
  • Empowering nurses to override a doctor's orders to wrap up if questions exist about missing items;
  • Convening as a team to agree on strategy before any cuts occur;
  • Identifying ahead of time what procedure should take place and on what part of the body;
  • Training all staff about how to use electrical equipment;
  • Creating, and then following, an appropriate checklist; and
  • Asking patients to actively participate by getting into good shape ahead of time and scrubbing with anti-bacterial soap prior to surgery.

In the pension world, setting a risk management objective by proverbially marking the target spot with a big X merits consideration. After all, if the goal (or set of goals) is vague or flat out wrong, chances are that the "operation" will fail. Should that happen, the "patient" (i.e. participants) could suffer.

The concept of proper goal-setting is far from trivial. Fiduciary breach allegations are undeniably here to stay, courtesy of an increasingly active plaintiffs' bar. Settlements can cost sponsors millions of dollars, even when a company feels strongly that it has done everything correctly. Changing regulations could up the ante. According to "President Obama to Address DOL Fiduciary Redraft at Monday AARP Meeting" (Think Advisor, February 22, 2015), proposed standards put forth by the U.S. Department of Labor appear to be moving closer towards some type of final conflict of interest rule. In a January 13, 2015 memo, the White House seems to be taking the view that retirement plan fees are often too high and have cost savers more than $6 billion. No doubt the financial industry will continue to rebut these estimates.

Based on my experience as a forensic economist and someone who has served as a testifying expert, goal-setting is hugely important when it comes to resolving disputes. An inevitable question is whether something went awry and, if so, what monetary damages should be paid (and to whom). Answering inquiries about whether wrongdoing occurred (and its magnitude) has to start with identifying the objective(s) and then examining the achievement of said goals (or lack thereof).

Similar to the health care profession, continuing to up its game in terms of process improvement, retirement plan sponsors (and their service providers) have a vested interest in creating goals that are (a) clear (b) measurable (c) realistic and (d) appropriate for the situation at hand.

Report Card For Teacher Pension Plans

According to "Doing the Math on Teacher Pensions: How to Protect Teachers and Taxpayers," just published by the National Council on Teacher Quality, "state teacher pension systems had a total of $499 billion in unfunded liabilities" in 2014, up by $100 billion since its 2012 study. On a gloomy note, they add that "the debt costs spread out across the K-12 student population amount to more than $10,000 per student and growing." This can only be seen as bad news for beleaguered municipalities with tight budgets.

Concurrent with funding pressures, researchers explain that numerous state sponsors "are also making it harder for teachers to receive benefits." Sprinkled throughout the report is a reference to fairness (or lack thereof) and limited flexibility, with occasional references to the advantages of offering a defined contribution plan to eligible educators. Few defined benefit plans were identified as being sufficiently portable or moderate in terms of what teachers were asked to contribute. Another cited flaw was the factoring of years of service instead of age only as a determinant of when one could retire. Long vesting periods and restrictions as to when employer contributions could be withdrawn by employees are other weak spots. The inability for teachers to purchase service credits for "prior teaching or approved leave" led to poor rankings for some states.

With a pension grade of A, Alaska tops the list. Mississippi lags with a pension grade of F. Too many states for comfort had a C, C-, D+ or D assessment. Fourth from the bottom is Kentucky with a grade of D-, accounting perhaps for its headlines about legislative reform. In "Ky. lawmakers demand reforms to teacher pension plan" (Louisville Courier-Journal, January 1, 2015 ) reporter Mike Wynn tallies unfunded liabilities at $14 billion, "on top of the $17 billion funding gap at Kentucky Retirement Systems." It is no surprise that the Bluegrass State is under pressure to implement change. In addition, a putative class action suit has been filed by a local history teacher against the Kentucky Teachers' Retirement System, "alleging their administrators have been negligent in protecting teachers' pensions from chronic underfunding by the state and bad investments..."

With low scores, large financial gaps and investment risk-taking on the rise for more than a few state teacher retirement plans, somebody may have to stay after school and write "I will change" one hundred times.