Launched earlier this year, our music video message about pension issues has been viewed by many. Given the rout in the market and recent comments made by House Education and Labor Committee Chairman George Miller ("Miller Declares 401(k) System Paralyzed," Defined Contribution & Savings Plan Alert, October 27, 2008), I'm republishing "Pension Tension Blues." My co-creator Steve Zelin (The Singing CPA) and I hope you enjoy it.
I had the pleasure of speaking on October 23, 2008 in Stamford, CT about "New Directions for the Financial Services Industry." Part of the "Securities Forum 2008: Weathering the Economic Storm," sponsored by the State of Connecticut Department of Banking, panelists addressed the litany of current financial problems, proposed reforms and the likely future for investors and service providers alike.
I was asked to address FAS 157 and international equivalents. In doing so, I urged audience members to make a clear distinction between accounting representation and economic reality or accept the consequences. Unless one truly understands what reported numbers say (or just as importantly don't convey), poor decisions made on the basis of incomplete or even illusory information can lead to costly outcomes (GIGO = Garbage In, Garbage Out).
I've long maintained that disclosure about process is arguably more important than single numbers, derived at a particular point in time. For example, if I'm a pension fund decision-maker who has allocated monies to a manager that in turn invests in "hard-to-value" assets, which information is more helpful to me in understanding my risk exposure to that asset manager - (1) a FAS 157 disclosure that describes possible changes that could affect results or (2) identified likely risk drivers and the controls that have been established to mitigate risk accordingly?
Said another way, am I properly discharging my fiduciary duties by evaluating risk ex poste or instead assessing uncertainty ex ante? I think the answer is obvious, isn't it? After all, no one can respond to "what was" but can certainly act in anticipation of "what might be." By the way, I do believe there is merit in regularly conducting a post-audit of what went wrong and trying to learn lessons as a result.
According to FORTUNE Magazine senior editor Allan Sloan, critics of FAS 157 allege real harm is being done when illiquid securities are marked-to-model at "artificially low market prices." Call me clueless but finger-pointing seems to answer the wrong question. Instead of focusing on FAS 157 as the culprit because it supposedly forces reporting entities to document "bad" economic numbers, why not create a standard that instills confidence in financial statement users? Sloan writes "It's easier to blame accountants for your problems than to admit you made your institution vulnerable by overleveraging its balance sheet and buying securities you didn't understand." Click to read "Playing the blame game: Will 'mark to market' accounting take the fall for the Wall Street mess?" (October 27, 2008).
Just like the magic impossibility of growing a silver dollar into four years of college tuition, accounting representation should be more than smoke and mirrors.
According to Wall Street Journal reporter Matt Moffett, Argentina's leader would like to nationalize the private pension system, allowing this South American country to "raid new pension contributions to cover short-term debts due in coming years." The picture appears bleak indeed. Trounced by lower commodity prices and rising IOUs, the $30 billion plan looks like a juicy target. (See "Argentina MakesGrab for Pensions Amid Crisis," October 22, 2008).
In "Argentina stocks, bonds plunge on pension reform plans" (October 21, 2008), Reuters reports that investors look unfavorably upon a takeover of the private retirement system. In "Argentina Pension Funds Attack Government Plan, Defend Result" by reporter Michael Casey (Dow Jones Newswires, October 21, 2008), a coalition of Argentinian private pension plans decry the need for a takeover. Asserting the need to review long-term performance, private pension leaders say "the reform project was founded on results incurred during the current financial market crisis."
This reminds one of the optical illusion that asks the viewer to recognize both a beautiful woman and an "old hag." Some see Argentina's pension reform as good news and others question the real motivation behind such a proposal.
Is this likely to become a trend around the world? We never thought global megabanks would be nationalized and now they are.
In a somewhat scathing goodbye letter to his investors, hedge fund manager Andrew Lahde lambastes his investors. Calling them "low hanging fruit" and worse, click here to read for yourself.
My rationale for posting the letter is not to sensationalize but rather point out that people seem to be getting more vocal about the economic and political state of affairs. I think this angst is going to have a dramatic impact on the legislative landscape. Recently asked whether I think more regulation is on its way, I answered "without doubt."
Plan sponsors are likely to see a lot more politicians passing the retirement benefit plan "hot potato. The calculus is simple.
In response, plan sponsors that take pension governance seriously (and are demonstrated fiduciary leaders) are likely to have more influence on the outcome.
In response to the October 20, 2008 post entitled "Happy National Save for Retirement Week," one reader captures the sentiment of many. Do you agree? Email your thoughts.
"Let me get this straight. Congress, after voting to give bailouts to all the movers and shakers, now has the audacity to pass a meaningless Resolution admonishing We the Sheeple to SAVE for retirement?
With joblessness and debt encumbrances at an all time high, just how do these brain trusts up there on the Hill think there is going to be a lot of "saving" going on? Incredible!!!!"
Editor's Note: The House and Senate resolutions to formalize this holiday are dated late June 2008.
Given its global prevalence as a performance benchmark, the ongoing scrutiny about the economic accuracy of the London Interbank Offered Rate ("LIBOR"), is not surprising. In the text that follows, one of the authors of a recent paper about LIBOR rate-setting adds a few comments.
"Thank you, Susan, for your October 15, 2008 coverage of our "Libor Manipulation?" research manuscript. As always, you succeeded in 'cutting to the heart' of a rather complex topic in your customarily succinct, yet engaging style. When your readers download and peruse our work, I would encourage them to focus on the manner in which we extend and elaborate on the analysis done by the Wall Street Journal. For instance, we were able to detect two specific dates in time that reflect structural 'breaks' in data patterns. One occurred shortly after (and doubtlessly occurred in response to) the publication of the Journal's announcement of its investigation. However, the other event occurred over eight months before the appearance of this announcement, and appeared to coincide with the publication of three relevant external news events that affected the industry. Your readers will find more information in our manuscript. We welcome readers' comments."
Submitted by Professor Michael Kraten, PhD, CPA, Sawyer Business School, Suffolk University
Given the market rout of late, with 401(k) plans taking more than a tumble, this week's celebration of thrift is especially relevant. Supported with a U.S. House and Senate resolution to encourage financial independence, October 19 through 25 mark the "National Save for Retirement Week."
Expect to read and hear more about the dwindling retirement money pot for millions of individuals. The socioeconomic, political and regulatory ramifications are significant.
Imagine my surprise and delight when told that PensionRiskMatters.com is part of the "Our Favorite Blogs" collection for a major hedge fund site, AllAboutAlpha.com. Veteran financial guru, founder and editor Chris Holt has done a great job with his site.
Thanks Chris. We are honored.
Long accepted as a key rate benchmark, the London Interbank Offer Rate ("LIBOR") may be replaced by something else if a current deal is a trendsetter. According to Bloomberg reporter Cecile Gutscher, Electricite de France SA will repay interest on an 11 billion pound sterling loan - used to finance the acquisition of British Energy Group Plc - by first computing "an average of funding rates supplied by BNP Paribas SA, Deutsche Bank AG, Royal Bank of Scotland Group Pld, Banco Santander SA and Societe Generale SA." (See "EDF to Use Alternative to Libor on 11 Billion-Pound Buyout Loan," October 14, 2008)
This rate at which banks lend to each other in the global capital markets has had its ups and downs lately. Volatility, due in large part to the credit crisis and the resulting financial services industry fallout, has taken its toll. Borrowers, hedge fund investors and fixed-LIBOR interest rate swap counterparties represent just a few of the many organizations that are impacted by gyrating LIBOR rates.
According to a new research study, directional moves may not be the only concern about LIBOR. Authors Rosa Abrantes-Metz, Michael Kraten, Albert Metz and Gim Seow examine LIBOR rates relative to other short-term borrowing costs, along with an assessment of the "individual bank quotes that were submitted to the British Bankers Association." Seeking to dispel or validate the notion that LIBOR levels are artificially low (alleging that quoting banks do not want to be seen as needing money and therefore cite low rates), the authors conclude that manipulation is unlikely, noting some irregularities in the data. For more information, click to read "Abrantes-Metz, Rosa M., Kraten, Michael, Metz, Albert D. and Seow, "Gim, "LIBOR Manipulation?" (August 4, 2008).
This pension blog includes several posts about LIBOR and its varied applications: (a) derivative instrument trades such as swaps-linked LDI strategies (b) asset management performance analyses and (c) borrowing arrangements. See "Are Pension Investments Too Complicated?" (September 5, 2008) or "Lowballing LIBOR May Cost Pensions Plenty" (April 18, 2008).
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At a time of great market turmoil, plan participants, shareholders and taxpayers want to know whether their retirement plans are in good hands. Risk is truly a four-letter word unless plan sponsors can demonstrate that a comprehensive pension risk management program is in place. Unfortunately, there is little information that details if, and to what extent, plan sponsors are doing a credible and pro-active job of identifying, measuring and mitigating a variety of risks. The risk alphabet includes, but is not limited to, asset, operational, fiduciary, legal, accounting, longevity and service provider uncertainties.
While no one could have predicted the extreme volatility that characterizes the current state of global capital markets, it has always been known that poor risk management can make the difference between economic survival and failure. Applied to pension schemes, ineffective risk management could prevent individuals from retiring at a certain age and/or leaving the work force with much less than anticipated. Others pay the price too. Taxpayers worry about rate hikes that may be inevitable for grossly underfunded public plans. Shareholders could find themselves on the hook for corporate promises or experience depressed stock prices due to post-employment benefit obligations.
In an attempt to shed some light on this critical topic area, Pension Governance, LLC is pleased to make available a new research report that explores current pension risk management practices. In what is believed to be a unique large-scale assessment of pension risk practices since the publication of a 1998 study by Levich et al, this survey of 162 U.S. and Canadian plan sponsors seeks to: (1) understand why and how pension plans employ derivative instruments, if they are used at all (2) identify what plan sponsors are doing to address investment risk in the context of fiduciary responsibilities and (3) assess if and how plan sponsors vet the way in which their external money managers handle investment risk, including the valuation of instruments which do not trade in a ready market. The report was written by Dr. Susan Mangiero, AIFA, AVA, CFA, FRM, with funding from the Society of Actuaries.
Each survey-taker was asked to self-identify as a USER if he/she works for a plan that trades derivatives in its own name. A NON-USER works for a plan that does not trade derivatives directly but may nevertheless be exposed indirectly if any of the plan's asset managers trade derivatives.
In answering broad questions, a large number of surveyed plan sponsors describe themselves as doing all the right things to manage investment, fiduciary and liability risks. However, answers to subsequent questions - those that query further about risk procedures and policies at a detailed level - do not support the notion that pension risk management is being addressed on a comprehensive basis by all plans represented in the survey sample.
Key findings include the following points:
Click to download the 69-page study, entitled "Pension Risk Management: Derivatives, Fiduciary Duty and Process" by Susan Mangiero. Given the large file size, readers are encouraged to (a) first save the file (right mouse click) and then (b) open the file from wherever you have saved the file. Otherwise, you may receive an error message, depending on your computer configuration.
The study is also available by visiting www.pensiongovernance.com. Send an email to PG-Info@pensiongovernance.com if you experience any difficulty in downloading the pdf file and/or want to comment about the study.
As markets tumble, hedge fund investors are asking for longer lock-up provisions in order to preserve their investment.
Say what?
The reasoning goes like this. If an investor can redeem, and does in fact ask to redeem, a hedge fund manager may be forced to sell assets to raise cash. More liquid assets are sold first, leaving behind less liquid assets that are arguably harder to value. Pre-mature sales, due to accelerated redemption requests, may even force a hedge fund to close and "give long-term investors their money back at a time when asset prices are low." By asking for longer lock-up periods, investors are seeking to forestall forced sales and thereby protect their original investment. See "Hedge investors ask for lock-ups to avoid closures" by Laurence Fletcher, Reuters UK, October 8, 2008.
We caught up with Mr. Edward Stavetski, Director of Investment Oversight, Wilmington Family Office, and asked him for his two cents. Here is what he has to say.
"This crush of cash outflows may be only one cause of fund closures at year end. Consider high water marks as we near the end of the calendar year. As news that some hedge funds are down 30 to 40 percent, it will become quite difficult for those fund managers to realize any earnings from their respective 20 percent performance clause. Most funds use management fees to keep the lights turned on but depend on the performance fee income to hire star traders or retain top talent. Without the near-term promise of a high performance payout, we could see a dramatic shift of key players in the hedge fund world. While people may rejoice that the 'nasty' hedge fund cult is finally getting its just desserts, the damage will reach far beyond the hedge fund community. The rush to buoy cash holdings will depress prices of stocks, bonds, mortgage-backed securities and other capital-raising mechanisms in the near-term. None of this is good news for investors, asset managers and/or consumers."
This blogger wonders if smart money will head towards or away from hedge funds. After all, if pensions and 401(k) plans are dumping stocks in record numbers, and U.S. treasuries (and international equivalents) return little, how else will plan sponsors and individuals "make up for losses?"
We'll watch and see.
According to a new study, retiring at age 67 may not be in the cards for many individuals, partly by choice. Tracking desires and expectations of American workers, a newly created Sun Life Financial UnretirementSM Index suggests that 8 out of 10 persons want to continue working as a way to "stay mentally engaged." Other results are not surprising. Fewer than half of the respondents feel they can afford to stop working. One-third of survey-takers worry about the financial viability of Social Security. One coping mechanism, cited by 82 percent of the sample group, is to reduce their spending with about two-thirds of respondents saying they will lower their debt as a way to "improve retirement prospects" For more information about this attitudinal metric, click here.
Nice as it is to have choices about when to retire, the recent market rout makes it difficult at best for some to consider anything else but continued employment (assuming no layoffs by their employer). Yahoo! News references Congressional research that "Americans' retirement plans have lost as much as $2 trillion in the past 15 months." Making matters worse, economic conditions that result in lower wages make it difficult for some to keep saving for retirement, if they did so in the first place. Click to read "Retirement accounts have lost $2 trillion" by Julie Hirschfeld Davis, October 7, 2008.
In an interview with PBS, Peter Orszag, Director of the Congressional Budget Office, explains that "two-thirds of the assets that are in 401(k) plans are in stocks," exposing plan participants to fallout, just like institutional investors. He adds that economic problems are already impacting defined benefit plans. As the value of their asset portfolio drops, companies will need to "put in more money, and that will come out of either their shareholders, their workers, or they'll try to pass it along to their consumers." Click to read "Market Turmoil Puts Squeeze on Retirement Savings," October 9, 2008.
This blog has covered changing demographics and retirement angst for months. One can only hope that the current market malaise is short-lived and that individual savings goes up (or at least excess leverage goes down), to the extent that individuals can afford to put monies aside for post-employment consumption.
According to the Telegraph.co.uk website, the U.S. National Debt Clock has too few digits to measure the current state of affairs. The clock's owner, the Durst Organization, is expected to add a pair of additional placeholders next year, making "it capable of recording a quadrillion dollars of debt." (See "Financial crisis: US debt clock runs out of numbers," October 9, 2008.)
I had to look it up but it turns out that a quadrillion is a thousand trillion or a million million million million (with "quad" referring to four). To put things in context, consider the following statistics:
As U.S. Senator Everett Dirksen is credited as saying, "A billion here, a billion there, pretty soon it adds up to real money." Imagine his posture today. (According to The Dirksen Center website, it is unclear as to whether the former lawmaker did in fact utter these exact words.)
According to "California officials hope for easing of credit crunch" (October 4, 2008), Los Angeles Times reporters Marc Lifsher and Evan Halper paint a gloomy financial picture for this giant state. They explain that Governor Arnold Schwarzenegger may have no choice but to ask for help from Washington if short-term credit markets do not soon improve. An inability to issue Revenue Anticipation Notes with a face value of $7 billion will make it difficult to "get cash to pay for day-to-day operations, including paying workers, funding schools and feeding prisoners, between the end of October and the spring." Click to read the October 2, 2008 letter from the former action hero to The Honorable Henry M. Paulson, Jr.
Vox populi Jon Ortiz (aka Sacramento Bee reporter) and creator of The State Worker blog writes that State Treasurer Bill Lockyer may set his sights on the public workers' pension money pot, CalPERS. Author of an October 3, 2008 letter to The Honorable Bill Lockyer, State Senator Dean Florez writes that "the state should look to one of the world's largest investors, the California Public Employee Retirement System as a reasonable purchaser of short-term California state government debt."
In "Could CalPERS help with California's cash crunch? Maybe" (October 3, 2008), Ortiz posts a response from CalPERS spokeswoman Pat Macht who comments on process. "If we are approached, our investment staff would do their normal due diligence and make an objective evaluation of its merits, including returns as well as how it would fit within our asset allocation ranges and targets which guide our investment selections."
Editor's Questions: Will other cash-strapped states ask public and municipal pension plans to buy state debt? If so, how might this impact the funding status of those employee benefit schemes?
In response to this blog's September 23, 2008 post entitled "Retirement Fallout - Breaking the Bank, Piggybank That Is," we received a link to an opinion piece, published in The Baltimore Examiner. Sent by editor Frank Keegan, the first part of the piece, entitled "Public pension panic," is shown below.
<< It’s pension panic time. Panic early. Panic often. Demand reform. Public employees must take control of their financial destinies. Politicians have made promises they never can keep. They and the union bosses who fleece workers don’t have to worry about it because they figured by the time the inexorable mill of reality turns up their deceit, it all will be somebody else’s problem. They counted on being long gone with millions – maybe billions. Well, the day of reckoning arrived a little earlier than they anticipated. >>
Mr. Mark Steyn, author of the popular paperback book, America Alone, responds to the recent post about changing demographics. Read Mark's comments:
<< Sue, the problem isn't rapid aging, it is a rapid decline in fertility. Before the "smart" ideas of pensions (Bismarck, Germany, 1870) and Social Security (FDR), people's "pensions" were productive children. When the government tried to become the safety net, the incentive to build a flexible, productive, human pension withered. Now we try to shuffle financial assets around to plug the hole, when really what we need is more human ingenuity. So we're all in this together, against the government's unfulfilled and unfulfill-able promises that it will take care of us. >>
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Mr. Bob Mitchell echoes a similar sentiment that government largesse is unsustainable. Here is what he writes:
<< Full credit to Credence Clearwater Revival – “How much should we give? They only answer more! ‘more!’”
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Editor's Notes: Click to read the original post entitled "World Economic Forum Report - Demographic Gaia" (October 2, 2008). Click to access the lyrics and music to "Fortunate Son" by Credence Clearwater Revival.
If you concur or have a different point of view, drop us a line.
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According to Wikipedia, the Gaia Hypothesis refers to an ecology that inextricably ties together elements of Earth and the biosphere. With respect to world population trends, the World Economic Forum embraces the notion that "We Are in This Together" as one possible scenario. Other scenarios put forth include "The Winners and the Rest" and "You Are On Your Own."
In its new report entitled "The Future of Pensions and Healthcare in a Rapidly Ageing World - Scenarios to 2030," authors cite UN projections that, by 2050, "one-third of the populations in developed countries and one-fifth of those in developing countries will be aged 60 or older." Authors Bernd Jan Sikken, Nicholas Davis, Chiemi Hayashi and Heli Olkkonen center on the likely outcomes associated with a radical increase in retirees. Why is this important? As more people leave the workforce, fewer wage-earners remain. This in turn means that fewer dollars (Euros, yen, etc) are deposited into the employee benefits pot to fund promises made to others.
This blog has oft-commented on the potentially dire consequences of "out of control" obligations. World Economic Forum researchers offer that population shifts will no doubt change the political and economic landscape in many countries. Their list of challenges includes, but is not limited to:
The report is chock full of graphs and statistics and includes a comprehensive bibliography. Case studies about China and Italy are worthwhile as their problems mirror those of other countries.
I personally am a believer in the "together" theory, no matter how much we save as individuals and irregardless of employer largesse (for whom that applies).
As we've seen in the last few weeks, global capital markets are kissing cousins. Someone sneezes in one country and we all get a cold. In a similar sense, increasing numbers of impoverished persons likely affect us all in the form of (a) increased taxes on working individuals (b) drag on economic growth as monies are diverted from the business sector to support government programs and the (c) human element of not wanting to see others suffer because they cannot afford everyday basics.
Email your thoughts. Do you think we are in this together as relates to a benefits crisis?
Ms. Alexandra Reed Lajoux, with the National Association of Corporate Directors ("NACD"), responds to "Pension Funds Ask - "Who is Responsible for Risk Oversight? " as follows:
"New appointees face a steep learning curve that exposes a company to risk of another kind. Excellent point, well made. Director education is the key!"
I will be speaking at the 2008 NACD Corporate Governance Conference in just a few weeks. The panel is entitled "What Directors Must Know About the Company's Pension Plan." A session description follows.
"In light of the unanimous U.S. Supreme Court LaRue decisions, panelists look at the board's oversight responsibilities of ERISA plans to assure they are well managed. Historically, many boards have been uninvolved in the plans and have not exercised adequate oversight. From a governance and risk management perspective, we look at salient issues and core elements of oversight that should be addressed at the board level."
Click to read more about the 2008 NACD Corporate Governance Conference.
Wendy Fried writes the following in response to the September 26, 2008 post entitled "Would Better Disclosure Have Helped WaMu Shareholders?"
"It's pretty hard to say without knowing what really pushed WaMu over the edge. If it was a run on the bank by ordinary depositors acting out of fear, as has been reported, it's hard to see how more disclosure would have helped. More likely, what was called for was was smarter regulatory oversight and less faith in self-serving risk models." Wendy is creator of an interesting and colorful blog called Proxyland.
Click to visit Dr. Mangiero's compliance blog
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This blog is made available for educational purposes only. Nothing on this blog is intended to serve as investment, financial, accounting or legal advice. The visitor is urged to seek his or her own investment, financial, accounting or legal advice from a qualified professional. Investment Governance, Inc. specifically disclaims any and all liability related to the subject matter of this blog. Please read our Privacy Policy for further information.
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