The Humble Pension Fund

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The Humble Pension Fund

Postby Wombaticus Rex » Wed Jan 23, 2013 11:13 am

"financial markets are cutting our throats with our own money, and it has to stop." --Leo W. Gerard

The Humble Pension Fund: a powerful archetype of how good intentions get weaponized. This is an immense force in the US economy and one I do not fully understand. This thread represents my fumbling cartography. The impetus was two recent Automatic Earth thinkpieces:

The Global Demise of Pension Funds
http://theautomaticearth.com/Finance/th ... plans.html

The Last Remaining Store of Real Wealth
http://theautomaticearth.com/Finance/th ... lth-1.html

Subsequent Pages

Foundational Concepts

On "Corporate Raiders"

The Flawed Math and Inherent Failure of the Model

On "Pension Fund Socialism"
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Foundational Concepts

Postby Wombaticus Rex » Wed Jan 23, 2013 11:17 am

Foundational Concepts

Via: http://www.american.com/archive/2007/ja ... -gov2019t/

2. Creation of the 401(k) (1981)

In making their argument for tax cuts, supply-siders sometimes cite Genesis, pointing out that the “seven fat years” ended because Joseph per­suaded Pharaoh to confiscate money and goods in preparation for the lean years that the confiscation actually caused. Those on the left scoff, but one of the most effective tools for promoting consumer saving, and wealth accumulation, did come about through divine inspiration.

In 1979, a Pennsylvania-based benefits consul­tant named Theodore Benna was helping a bank to figure out how it could convert a cash bonus plan to a deferred profit-sharing plan. After turn­ing to prayer, he realized that a section of the tax code added the previous year would do the trick. This section—401(k)—would become a catalyst for extraordinary growth in U.S. equity markets.

The (k) portion of Section 401 had been inserted by New York Republican Representative Barber Conable, but it had received little attention until Benna’s revelation. And when Benna presented his idea to the bank, it declined, fearing IRS rejection. Benna responded by asking the tax authorities for a clarification, which arrived—in the form of reg­ulatory approval—on November 10, 1981. Michael Clowes, author of The Money Flood: How Pension Funds Revolutionized Investing, writes that the 401(k) idea proved so popular so quickly that by 1984 the Treasury Department—which projected that it would lose $4.6 billion in revenue from 1986 to 1989—raised the prospect of killing off the 401(k), though wisely dropped the idea a few months later.

Since then, the 401(k) has undergone a num­ber of tweaks from the IRS, but its underpin­nings have remained the same. It allows employees to move part of their pay into tax-deferred stock and bond accounts and lets employers contribute as well. Today, two in five families have a 401(k).

From 1990 to 2005, assets under management in 401(k) plans grew from $385 billion to $2.4 trillion. The injection of so much new money into the equity markets helped to reduce the cost of capital, boost the stock market, and generate wealth-creating opportunities for millions and millions of investors, who learned the benefits of long-term investing.


Via:

By the Numbers
Institutional investors controlled $25.3 trillion, or 17.4% of all U.S. financial assets as of 12/31/2009, according to the Conference Board. This percentage has been declining over the last decade and peaked in 1999 at 21.5% of total assets. The gradual percentage decline arises due to the massive value increases in total outstanding assets which are available for investment purposes.


Pension Funds
Pension funds are the largest part of the institutional investment community and control over $10 trillion, or approximately 40% of all professionally managed assets. Pension funds receive payments from individuals and sponsors, either public or private, and promise to pay a retirement benefit in the future to the beneficiaries of the fund.

The large pension fund in the United States, California Public Employees' Retirement System (CalPERS), reported total assets of $239 billion at as of 2011. Although pension funds have significant risk and liquidity constraints, they are often able to allocate a small portion of their portfolios to investments which are not easily accessible to retail investors such as private equity and hedge funds.


Via: http://www2.ucsc.edu/whorulesamerica/po ... alism.html

Any lingering thought that many public pension funds were not much more than happy hunting grounds for Wall Street sharks came crashing down in 2008-2009 as it became clear that public officials, pension fund managers, and political operatives had been for all intents and purposes bribed by rich financiers who wanted the opportunity to take big risks, and make huge profits, with government employees' money. With 40% of all public pension funds investing some of their money in hedge funds in 2008, a cool $78 billion overall, they were a huge source of investment funds for hedge fund managers (Wayne, 2009b),

In addition to large losses for some pension funds due to the risks taken with their money, there were legal problems and scandals for Wall Street bankers and their political go-betweens as it was discovered that criminal activities were part of the picture. For example, in April, 2009, a hedge fund executive pleaded guilty to securities fraud after admitting that he had been paid a stunning $5 million for helping to make it possible for the politically well connected Carlyle Group (an "equity fund" that invests large sums of money for wealthy people) to invest $500 million of New York state pension funds in an energy investment fund managed jointly by Carlyle and another private equity firm (Hakim, 2009; Wayne, 2009a). There are several other such scandals that could be recounted here, and many more that will have surfaced after this document has been completed. It is like a rerun of what happened with "other people's money" in the first ten years of the twentieth century and then again in the 1920s.

As of 2007, institutional investors owned 76.4% of the stock in the 1,000 largest U.S. corporations, an all-time high, up from 46.6% in 1986 when the institutional investor movement began. The list of institutional investors now includes investment companies, mutual funds, hedge funds, insurance companies, banks, and foundations and endowments as well as pension funds. Strikingly, public pension funds only control 10% of these assets, double the percentage they had in 1985, but not much more than the 8% they held in 1994 (Brancato & Rabimov, 2008). Even if public pension funds had the political independence and will power to try to influence corporate boards, they don't have enough assets to make a push without allies. As for their best allies, the union pension funds, they have been decimated for the most part by downsizing, off shoring, and corporate failures in major manufacturing industries.
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On Corporate Raiders and Strip Mining

Postby Wombaticus Rex » Wed Jan 23, 2013 11:24 am

Via: http://psc-cuny.org/clarion/march-2012/ ... r-pensions

How Business Elites Looted Private-Sector Pensions

In December 2010, General Electric held its Annual Outlook Investor Meeting at Rockefeller Center in New York City. At the meeting, chief executive Jeffrey Immelt stood on the Saturday Night Live stage and gave the gathered analysts and shareholders a rundown on the global conglomerate’s health. But in contrast to the iconic comedy show that is filmed at Rock Center each week, Immelt’s tone was solemn. Like many other CEOs at large companies, Immelt pointed out that his firm’s pension plan was an ongoing problem. The “pension has been a drag for a decade,” he said, and it would cause the company to lose 13 cents per share the next year. Regretfully, to rein in costs, GE was going to close the pension plan to new employees.

The audience had every reason to believe him. An escalating chorus of bloggers, pundits, talk show hosts, and media stories bemoan the burgeoning pension-and-retirement crisis in America, and GE was just the latest of hundreds of companies, from IBM to Verizon, that have slashed pensions and medical benefits for millions of retirees. To justify these cuts, companies complain they’re victims of a “perfect storm” of uncontrollable economic forces – an aging workforce, entitled retirees, a stock market debacle, and an outmoded pension system that cripples their chances of competing against pensionless competitors and companies overseas.

What Immelt didn’t mention was that, far from being a burden, GE’s pension and retiree plans had contributed billions of dollars to the company’s bottom line over the past decade and a half, and were responsible for a chunk of the earnings that the executives had taken credit for. Nor were these retirement programs – even with GE’s 230,000 retirees – bleeding the company of cash. In fact, GE hadn’t contributed a cent to the workers’ pension plans since 1987 but still had enough money to cover all the current and future retirees.

And yet, despite all this, Immelt’s assessment wasn’t entirely inaccurate. The company did indeed have another pension plan that really was a burden: the one for GE executives. And unlike the pension plans for a quarter of a million workers and retirees, the executive pensions, with a $4.4 billion obligation, have always been a drag on earnings and have always drained cash from company coffers: more than $573 million over the past three years alone.

So a question remains: With its fully funded pension plan, why was GE closing its pensions?

A look at what really happened to GE’s pensions illustrates some of the reasons behind the steady erosion of retirement benefits for millions of Americans at thousands of companies.

RETIREE PENSIONS UNFAIRLY BLAMED

No one disputes that there’s a retirement crisis, but the crisis was no demographic accident. It was manufactured by an alliance of two groups: top executives and their facilitators in the retirement industry – benefits consultants, insurance companies, and banks – all of whom played a huge and hidden role in the death spiral of American pensions and benefits.

Yet, unlike the banking industry, which was rightly blamed for the subprime mortgage crisis, the masterminds responsible for the retirement crisis have walked away blame-free. And, unlike the pension raiders of the 1980s, who killed pensions to extract the surplus assets, they face no censure. If anything they are viewed as beleaguered captains valiantly trying to keep their overloaded ships from being sunk in a perfect storm. In reality, they’re the silent pirates who looted the ships and left them to sink, along with the retirees, as they sailed away safely in their lifeboats.

The roots of this crisis took hold two decades ago, when corporate pension plans, by and large, were well funded, thanks in large part to rules enacted in the 1970s that required employers to fund the plans adequately and laws adopted in the 1980s that made it tougher for companies to raid the plans or use the assets for their own benefit. Thanks to these rules, and to the long-running bull market that pumped up assets, by the end of the 1990s pension plans at many large companies had such massive surpluses that the companies could have fully paid their current and future retirees’ pensions, even if all of them lived to be 99 and the companies never contributed another dime.

But despite the rules protecting pension funds, US companies siphoned billions of dollars in assets from their pension plans. Many, like Verizon, used the assets to finance downsizings, offering departing employees additional pension payouts in lieu of cash severance. Others, like GE, sold pension surpluses in restructuring deals, indirectly converting pension assets into cash.

To replenish the surplus assets in their pension piggy banks, companies cut benefits. Initially, employees didn’t question why companies with multibillion-dollar pension surpluses were cutting pensions that weren’t costing them anything, because no one noticed their pensions were being cut. Employers used actuarial sleight of hand to disguise the cuts, typically by changing the traditional pensions to seemingly simple “cash balance” pension plans, which superficially resembled 401(k)s.

Cutting benefits provided a secondary windfall: It boosted earnings, thanks to new accounting rules that required employers to put their pension obligations on their books. Cutting pensions reduced the obligations, which generated gains that are added to income. These accounting rules are the Rosetta Stone that explains why companies with massively overfunded pension plans went on a pension-cutting spree and began slashing retiree health benefits even when their costs were falling. By giving companies an incentive to reduce the liability on their books, the accounting rules turned retiree benefits plans into cookie jars of potential earnings enhancements and provided employers with the means to convert the trillion dollars in pensions and retiree benefits into an immediate, dollar-for-dollar benefit for the company.

EXEC PAY THRIVES

With perfectly legal loopholes that enabled companies to tap pension plans like piggy banks, and accounting rules that rewarded employers for cutting benefits, retiree benefits plans soon morphed into profit centers, and populations of retirees essentially became portfolios of assets and debts, which passed from company to company in swirls of mergers, spin-offs and acquisitions. And with each of these restructuring deals, the subsequent owner aimed to squeeze a profit from the portfolio, always at the expense of the retirees.

The flexibility in the accounting rules, which gave employers enormous latitude to raise or lower their obligations by billions of dollars, also turned retiree plans into handy earnings-management tools.

Unfortunately for employees and retirees, these newfound tricks coincided with the trend of tying executive pay to performance. Thus, deliberately or not, the executives who green-lighted massive retiree cuts were indirectly boosting their own pay.

As their pay grew, managers and officers began diverting growing amounts into deferred-compensation plans, which are unfunded and therefore create a liability. Meanwhile, their supplemental executive pensions, which are based on pay, ballooned along with their compensation. Today, it’s common for a large company to owe its executives several billion dollars in pensions and deferred compensation.

These growing “executive legacy liabilities” are included in the pension obligations employers report to shareholders, and account for many of the “growing pension costs” companies are complaining about. Unlike regular pensions, the growing executive liabilities are largely hidden, buried within the figures for regular pensions. So even as employers bemoaned their pension burdens, the executive pensions and deferred comp were becoming in some companies a bigger drag on profits.

WORKERS CONTINUE TO LOSE

With the help of well-connected Washington lobbyists and leading law firms, over the past two decades employers have steadily used legislation and the courts to undermine protections under federal law, making it almost impossible for employees and retirees to challenge their employers’ maneuvers. With no punitive damages under pension law, employers face little risk when they unilaterally slash benefits, even when promised in writing, since they can pay their lawyers with pension assets and drag out the cases until the retirees give up or die.

As employers curtail traditional pensions, employees are increasingly relying on 401(k) plans, which have already proven to be a failure. Employees save too little, too late, spend the money before retiring, and can see their savings erased when the market nosedives.

Today, pension plans are collectively underfunded, hundreds are frozen, and retiree health benefits are an endangered species. And as executive pay and executive pensions spiral, these executive liabilities are slowly replacing pension obligations on many corporate balance sheets.

Meanwhile, the same crowd that created this mess – employers, consultants, and financial firms – are now the primary architects of the “reforms” that will supposedly clean it up. Under the guise of improving retirement security, their “solutions” will enable employers to continue to manipulate retirement plans to generate profit and enrich executives at the expense of employees and retirees. Shareholders pay a price, too.

Their tactics haven’t served as case studies at Harvard Business School, and aren’t mentioned in the copious surveys and studies consultants produce for a gullible public. But the masterminds of this heist should take a bow: They managed to take hundreds of billions of dollars in retirement benefits that were intended for millions of workers and divert them to corporate coffers, shareholders, and their own pockets. And they’re still at it.

______________________________

A former investigative reporter for The Wall Street Journal, Ellen Schultz covered the so-called retirement crisis for the Journal for more than a decade. Adapted from Retirement Heist by Ellen Schultz, by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright © Ellen Schultz 2011.


Via: http://articles.latimes.com/2012/jul/17 ... s-20120718

Pension funds seriously underfunded, studies find

Corporate and public pension funds across the country are seriously underfunded, threatening the retirement security of workers and straining the financial health of state and local governments, according to a pair of independent studies.

In 2011, company pensions and related benefits were underfunded by an estimated $578 billion, meaning they only had 70.5% of the money needed to meet retirement obligations, according to a report by S&P Dow Jones Indices.

Funds generally don't need to have all the money needed pay future pensions because returns on investments vary over the years and people retire at different ages and with different levels of benefits, experts said. But a funding level in the 70% zone is considered dangerously low.

The looming shortfall, and the move by corporations to 401(k)-type plans in which the level of investment is controlled by employees, could keep many aging baby boomers from retiring, said Howard Silverblatt, a senior S&P Dow Jones Indices analyst and the report's author.

"The American dream of a golden retirement for baby boomers is quickly dissipating," Silverblatt said. "Plans have been reduced and the burden shifted with future retirees needing to save more for their retirement.

"For many baby boomers it may already be too late to safely build up assets, outside of working longer or living more frugally in retirement."

While the cost of retirement is out of reach for many older workers and growing more expensive for younger ones, it's becoming less of a burden for employers, according to the report issued Tuesday.

Employers are paying less into pension funds despite the fact that company cash levels remain near record highs and cash flows are at an all-time high," Silverblatt said.

Meanwhile in the public sector, a separate pension-related report by the national State Budget Crisis Task Force warned that public pension funds in the U.S. are underfunded by $1 trillion to $3 trillion, depending on who's making the estimate.



Via: http://online.wsj.com/article/SB1000142 ... 91482.html

How Employers Raid Pension Plans

By ELLEN E. SCHULTZ

When it comes to threats to your retirement, there's one you may have overlooked: your employer. In recent years, companies have been freezing pensions, slashing retiree health benefits and eliminating 401(k) contributions.

Companies claim they have no choice: They're victims of a "perfect storm" of an aging work force and market turmoil. But if you're one of the 50 million employees and retirees covered by a pension at a U.S. company, you can't necessarily rely on what your employer tells you.

Here's a translation of some of employers' most common claims:

"Spiraling costs force us to freeze your pensions."

That's partly true -- but not the whole story. A little over a decade ago, pension plans had $250 billion in surplus assets. But employers siphoned billions from the pension plans to pay for restructuring costs, often by providing additional payouts in lieu of severance, and by withdrawing money to pay retiree health benefits -- and in some cases parachutes for executives.

When the market cratered in 2008, there was no surplus to cushion the blow, and today, pensions collectively are underfunded by 20%.

With one big exception: Pensions for top executives continue to spiral, and account for much of the growing pension cost companies complain about.

Another reason your pension plan might be underfunded: Your employer stopped contributing to it. The Government Accountability Office found last year that 10 large companies that hadn't made required contributions to their pension plans paid top executives $350 million shortly before terminating their underfunded pension plans in bankruptcy.

"We're improving your pension plan."

Hundreds of companies began changing their traditional pension plans, which are based on average pay and years worked, into "account-style" plans, resembling 401(k)s.

Employers claimed the plans were easier to understand, but usually failed to mention that the new formula reduced pensions of older workers by 20% or more, and in many cases, including at AT&T, T +0.52%froze the pensions of long-tenure workers.

"Lump sums are better for a modern work force."

The new-style pension plans usually gave departing employees a choice of taking their pension in monthly payments in retirement or cashing it out in a single, one-time payout. That's a key reason employers claimed that the new account-style pensions were better than traditional pensions for a more mobile work force. But they weren't doing employees any favors.

Employers used lump sums as carrots to lure workers in their peak earning years to retire early, and didn't tell them the payouts might be worth 20% to 50% less than the value of the monthly pension. When Mary Fletcher left her management job at IBM and was offered a lump sum, she hired an actuary, who determined that although the lump sum was $71,500, Ms. Fletcher's pension was really worth $100,000.

"Retire now, and we'll provide health care until you reach 65, at little cost to you."

Hundreds of thousands of employees, including managers at Unisys and Lucent, took this bait, believing they'd have affordable health coverage until they qualified for Medicare at age 65. But within a few years, their employers began jacking up premiums or eliminating coverage.

When frantic retirees pointed to written promises, employers pointed to "reservation of rights" clauses in the technical plan documents, which gave the employer the legal right to renege on the promise.

"Retiree health costs are spiraling."

Retirees' premiums and other costs for health care have been jumping by hundreds of dollars a month, but not necessarily because employers are spending more for coverage. A key reason is that years ago employers capped the amounts they would pay for the benefits, so when the ceilings are reached, all the increases are passed on to the retirees. As the retirees' share of costs escalate, healthier ones drop out and get cheaper coverage elsewhere, leaving a pool of older, sicker retirees -- with higher expenses.

Retirees' share of costs may also grow when companies, such as Xerox, segregate the retirees into their own risk pool, instead of including them in the broad-based employer plan. And some companies charge salaried retirees more to subsidize union retirees, whose premiums the companies can't unilaterally raise.

"We're buying life insurance to help finance your benefits."

Employers -- especially banks -- commonly offer managers a small life-insurance policy if they agree to let the company take out coverage on their life, with the company as beneficiary. Companies say they use the policies to finance retiree health benefits, but in reality, the policies finance executive pay and supplemental pensions. The policies act like executive pension funds, and when employees, ex-employees and retirees die, the death benefits go to the company.

If your employer has taken out life insurance on you since 2006, it's supposed to tell you it has done so, but it doesn't have to say how much the policy is for. If an employer or former employer bought a policy on you before that, they don't have to disclose anything.
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The Flawed Math and Inherent Failure

Postby Wombaticus Rex » Wed Jan 23, 2013 11:36 am

Via: http://www.nytimes.com/2010/04/03/busin ... quity.html

Pension Funds Still Waiting for Big Payoff From Private Equity

Private equity deal-makers, those kings of corporate buyouts, made billions for themselves when times were good. But some of their biggest investors, public pension funds, are still waiting for the hefty rewards they were promised.

The nation’s 10 largest public pension funds have paid private equity firms more than $17 billion in fees since 2000, according to a new analysis conducted for The New York Times, as the funds flocked to these so-called alternative investments in hopes of reaping market-beating returns.

But few big public funds ended up collecting the 20 to 30 percent returns that private equity managers often held out to attract pension money, a review of the funds’ performance shows.

Many public pension funds are struggling to recover from a collapse in the value of their portfolios, despite large private equity investments that were supposed to help cushion their losses.

Fees are at the center of the debate over the divergent fortunes of private equity managers and their investors, because fees often make a big dent in any investment gains.

That “raises the question as to why they accept to pay this level of fees,” said Oliver Gottschalg, a professor at the HEC School of Management in Paris who conducted the study on private equity fees.

State and local pension assets declined by 27.6 percent from the end of 2007 to the end of 2008, wiping out $900 billion, according to the Government Accountability Office.

Those poor returns have rankled some longtime private equity investors like the California Public Employees’ Retirement System, or Calpers. In September 2009, it “strongly endorsed” principles proposed by the Institutional Limited Partners Association, which represents private equity investors, to keep management fees in check and improve disclosure about fund performance.

The funds vary in how they report their performance and calculate their returns, allowing a significant number to classify themselves as “top quartile,” or the best performers.

“The fees paid to private equity managers has been a source of great frustration,” Joseph A. Dear, the chief investment officer for Calpers, said in an interview, adding that the managers “shouldn’t be making a profit on the management fee. They should make money when their investors make money.”

Still, despite the high fees, he said the funds’ performance had been good. “We don’t expect 20 percent,” he said. “We expect 3 percent more than public markets, net of fees.”

Private equity executives generally say their fees are justified by their market-beating returns. Reached by e-mail on Friday, Robert W. Stewart, a spokesman for the Private Equity Council, the industry’s trade association, declined to comment.

Public funds pay a lot of money to managers of so-called alternative investments like private equity, venture capital, real estate and hedge funds. In 2009, the Pennsylvania Public School Employees’ Retirement System paid $477.5 million in fees — 20 percent more than it did in 2008 and 283 percent more than in 2000, the earliest year for which data was available.

These funds generally charge fees totaling 2 percent of the money they manage and then take 20 percent of the profits they generate.

And yet, even after paying hundreds of millions of dollars in fees, the Pennsylvania fund is ailing. It lost more than a quarter of its value during its latest fiscal year and is now worth less than it was a decade ago, although its performance has improved recently.

Private equity owes its explosive growth largely to America’s pension funds. Buyout funds raised $200 million in 1980 and $200 billion in 2007. According to Prequin, a financial data provider, public pension funds were the biggest contributors over that period and now have $115.9 billion invested in private equity.

But these investments have not worked out as well as many had hoped. According to data from the Wilshire Trust Universe Comparison Service, the median returns for public pension funds with assets greater than $5 billion were negative 18.8 percent over one year, negative 2.8 percent over three years, and 2.4 percent over five years.

Indeed, research conducted by several university professors challenge the private equity firms’ premise that returns beat the stock market over long periods of time.

Two professors, Steven Kaplan of the University of Chicago and Per Strömberg of the Stockholm School of Economics, contend that, after fees, many private equity investments just about match or even trail the returns of the broad stock market between 1980 and 2001.

Additional research by Ludovic Phalippou of the University of Amsterdam and Mr. Gottschalg of the HEC School of Management shows that private equity funds underperformed the Standard & Poor’s 500-stock index by 3 percent annually from 1980 to 2003, after accounting for fees.

To be sure, private equity returns have beaten abysmal stock market returns over the last decade, helping to provide a cushion at some funds. For Pennsylvania’s public school workers, the 10-year return for private equity was 9.5 percent, even after deducting for fees, compared to 3.6 percent for all assets, including stocks and bonds.

The largest pension fund investors put a significant chunk of their money in private equity during the bubble years, from 2005 to 2008, according to a separate analysis by Mr. Gottschalg. Of the top 10 pension funds, eight invested more than 45 percent of their total capital in private equity during that period.

Mr. Kaplan said that the funds started during the boom years, so-called vintage funds, were likely to disappoint investors.

“The deals of 2006 and 2007 will not perform very well,” Mr. Kaplan said, referring to mergers and acquisitions led by private equity firms that have not yet been cashed out through a sale.

Some big funds are doubling down on private equity anyway. In November 2007, the Washington State Investment Board, whose $75 billion fund is among the most heavily invested in private equity, increased its commitment to that asset class to 25 percent, from 15 percent, and its real estate allocation to 13 percent, from 12 percent.

Others, however, are retrenching. As of last September, the Pennsylvania State Employees’ Retirement System, a $24.3 billion fund that is distinct from the school workers’ fund, had 23 percent of its pension investments in hedge funds, another 23 percent in private equity and venture capital, and an additional 8.4 percent in real estate — bringing its total in alternative investments to more than 54 percent.

A spokesman for the fund, Robert Gentzel, said it was working to scale back those allocations to 12 percent for private equity and venture capital and 9 percent for hedge funds.


Via: http://www.barlettandsteele.com/journal ... ment_2.php

The Broken Promise

It was part of the American Dream, a pledge made by corporations to their workers: for your decades of toil, you will be assured of retirement benefits like a pension and health care. Now more and more companies are walking away from that promise, leaving millions of Americans at risk of an impoverished retirement. How can this be legal? A TIME investigation looks at how Congress let it happen and the widespread social insecurity it's causing.

The little shed behind Joy Whitehouse's modest home is filled with aluminum cans—soda cans, soup cans and vegetable cans—that she collects from neighbors or finds during her periodic expeditions along the roadside. Two times a month, she takes them to a recycler, who pays her as much as $ 30 for her harvest of castoffs. When your fixed income is $ 942 a month, an extra $ 30 here and there makes a big difference. After paying rent, utilities and insurance, Whitehouse is left with less than $ 40 a week to cover everything else. So the money from cans helps pay medical bills for the cancer and chronic lung disease she has been battling for years, as well as food expenses. "I eat a lot of soup," says the tiny, spirited 69-year-old, who lives in Majestic Meadows, a mobile-home park for senior citizens near Salt Lake City, Utah.

Whitehouse never envisioned spending her later years this way. She and her husband Alva Don raised four children. In the 1980s they lived in Montana, where he earned a good living as a long-haul truck driver for Pacific Intermountain Express. But in 1986 he was killed on the job in a highway accident attributed to faulty maintenance on his truck, as his company struggled to survive the cutthroat pricing of congressionally ordered deregulation. After her husband's death, Whitehouse knew the future would be tough, but she was confident in her economic survival. After all, the company had promised her a death benefit of $ 598 every two weeks for the rest of her life—a commitment she had in writing, one that was a matter of law.

She received the benefit payments until October 1990, when the check bounced. A corporate-takeover artist, later sent to prison for ripping off a pension fund and other financial improprieties, had stripped down the business and forced it into the U.S. bankruptcy court. There the obligation was erased, thanks to congressional legislation that gives employers the right to walk away from agreements with their employees. To support herself, Whitehouse had already sold the couple's Montana home and moved to the Salt Lake City area, where she had family and friends. With her savings running out, she applied early (at a reduced rate) for her husband's Social Security. She needed every penny. For health reasons, she couldn't work. She had undergone a double mastectomy. An earlier cancer of the uterus had eaten away at her stomach muscle so that a metal plate and artificial bladder were installed. Her children and other relatives offered to help, but Whitehouse is fiercely self-sufficient. Friends and neighbors pitch in to fill her shed with aluminum. "You put your pride in your pocket, and you learn to help yourself," she says. "I save cans."

Through no fault of her own, Whitehouse had found herself thrust into the ranks of workers and their spouses—previously invisible but now fast growing—who believed the corporate promises about retirement and health care, often affirmed by the Federal Government: they would receive a guaranteed pension; they would have company-paid health insurance until they qualified for Medicare; they would receive company-paid supplemental medical insurance after turning 65; they would receive a fixed death benefit in the event of a fatal accident; and they would have a modest life-insurance policy.

They didn't get those things. And they won't.

Corporate promises are often not worth the paper they're printed on. Businesses in one industry after another are revoking long-standing commitments to their workers. It's the equivalent of your bank telling you that it needs the money you put into your savings account more than you do—and then keeping it. Result: a wholesale downsizing of the American Dream. It began in the 1980s with the elimination of middle-class, entry-level jobs in lower-paying industries—apparel, textiles and shoes, among others. More recently it spread to jobs that pay solid middle-class wages, starting with the steel industry, then airlines and now autos—with no end in sight.

That's why Whitehouse, as difficult as her situation is, is worried more about how her children and grandchildren will cope. And well she should. For while her story is the tale of millions of older Americans, it is also a window into the future for many millions more. A TIME investigation has concluded that long before today's working Americans reach retirement age, policy decisions by Congress favoring corporate and special interests over workers will drive millions of older Americans—a majority of them women—into poverty, push millions more to the brink and turn retirement years into a time of need for everyone but the affluent. The transition is well under way, eroding efforts of the past three decades to eliminate poverty among the aging. From taxes to health care to pensions, Congress has enacted legislation that adds to the cost of retirement and eats away at dollars once earmarked for food and shelter. That reversal of fortunes is staggering, and even those already retired or near retirement will be squeezed by changing economic rules.

Congress's role has been pivotal. Lawmakers wrote bankruptcy regulations to allow corporations to scrap the health insurance they promised employees who retired early—sometimes voluntarily, quite often not. They wrote pension rules that encouraged corporations to underfund their retirement plans or switch to plans less favorable to employees. They denied workers the right to sue to enforce retirement promises. They have refused to overhaul America's health-care system, which has created the world's most expensive medical care without any comparable benefit. One by one, lawmakers have undermined or destroyed policies that once afforded at least the possibility of a livable existence to many seniors, while at the same time encouraging corporations to repudiate lifetime-benefit agreements. All this under the guise of ensuring workers that they are in charge of their own destiny—such as it is.

The process has accelerated dramatically this year. Two major U.S. airlines—Delta and Northwest—turned to bankruptcy court to cut costs and delay pension-fund contributions. This followed earlier bankruptcy filings by United Airlines and USAirways, both of which jettisoned their guaranteed pension plans. Then on Oct. 8, the largest U.S. auto-parts maker, Delphi Corp., filed for bankruptcy protection, seeking to cut off medical and life-insurance benefits for its retirees. Delphi's pension funds are short $ 11 billion. To Elizabeth Warren, a Harvard law professor who specializes in bankruptcy, this is just going to get worse, as ever more companies see the value to their bottom line of "scraping off" employee obligations. "There's no business in America that isn't going to figure out a way to get rid of [these benefit promises]."

That may include the world's largest automaker—General Motors. Although GM chairman Rick Wagoner has insisted that "we don't consider bankruptcy to be a viable business strategy," some on Wall Street are skeptical, given the company's array of problems. Their view was reinforced when GM, the company that dominated the American economy through the 20th century, announced on Oct. 17 that it had reached a precedent-setting agreement with the United Auto Workers leadership to rescind $ 1 billion worth of health-care benefits for its retirees. If ratified by the union membership, the retrenchment will hasten the end to company-subsidized health care for all retirees. From 1988 to 2004, the share of employers with 200 or more workers offering retiree health insurance plunged, from 66% to 36%. The end result: a fresh and additional burden on retirees. Concluded a report by the Kaiser Family Foundation and Hewitt Associates: "For the majority of workers who retire before they turn age 65 and are eligible for Medicare, the coverage provided under employer plans is often difficult, if not impossible to find anywhere else." For retirees over 65, "employer plans remain the primary source of prescription drug coverage for seniors on Medicare ... This coverage is more generous than the standard prescription drug benefit that will be offered by Medicare plans beginning in 2006."

Perhaps the best yardstick to assess the outlook for the later years is the defined-benefit pension, long the gold standard for retirement because it guarantees a fixed income for life. The number of such plans offered by corporations has plunged from 112,200 in 1985 to 29,700 today. Since 1985, the number of active workers covered in the private sector declined from 22 million to 17 million. They are the last members of what once promised to be the U.S.'s golden retirement era, and they are fast disappearing. From 2001 to 2004, nearly 200 corporations in the FORTUNE 1000 killed or froze their defined-benefit plans. Most recently, Hewlett-Packard, long one of the most admired U.S. companies, pulled the plug on guaranteed pensions for new workers. An HP spokesman said the company had concluded that "pension plans are kind of a thing of the past." In that, HP was merely following the lead of business rival IBM and such other major companies as NCR Corp., Sears Holding Corp. and Motorola. The nation's largest employer, Wal-Mart, does not offer such pensions either. At the current pace, human-resources offices will turn out the lights in their defined-benefit section within a decade or so. At that point, individuals will assume all the risks for their retirement, just as they did 100 years ago.

The shift away from guaranteed pensions was encouraged by Congress, which structured the rules in a way that invites corporations to abandon their defined-benefit plans in favor of defined-contribution plans, increasingly 401(k)s, in which employees set aside a fixed sum of money toward retirement. Many companies also contribute; some don't. Whatever the case, the contributions will never be enough to match the certain and long-term income from a defined-benefit plan. What's more, once the money runs out, that's it. If people live longer than expected, get stuck with unanticipated expenses or suffer losses of other once promised benefits, they will have little besides their Social Security to sustain them.

The dawning perception among Americans that when it comes to retirement, you're on your own, baby, is surely a reason that President George Bush ran into so much opposition to his proposal to change Social Security from a risk-free plan into one with so-called private accounts. Critics of the 70-year-old system were determined to chip away at Social Security as part of a larger effort to promote what the Bush Administration calls an "ownership society." As Treasury Secretary John Snow told a congressional committee in February 2004: "I think we need to be concerned about pensions and the security that employees have in their pensions. And I think we need to encourage people to save and become part of an ownership society, which is very much a part of the President's vision for America."

Of course, it's much easier to own a piece of America when you have a pension like Snow's. When he stepped down as head of CSX Corp.—operator of the largest rail network in the eastern U.S.—to take over Treasury, Snow was given a lump-sum pension of $ 33.2 million. It was based on 44 years of employment at CSX. Unlike most ordinary people, who must work the actual years on which their pension is calculated, Snow was employed just 26 years. The additional 18 years of his CSX employment history were fictional, a gift from the company's board of directors.

Snow is not alone. The phantom employment record, as it might be called, is a common executive-retirement practice in corporate America—and one that is spelled out in corporate filings with the Securities and Exchange Commission (SEC). Drew Lewis, the Pennsylvania Republican and onetime head of the U.S. Department of Transportation, got a $ 1.5 million annual pension when he retired in 1996 as chairman and CEO of Union Pacific Corp. His pension was based on 30 years of service to the company, but he actually worked there only 11 years. The other 19 years of his employment history came courtesy of Union Pacific's board of directors, which included Vice President Dick Cheney. And then there's Leo Mullin, the former chairman and CEO of Delta Air Lines. Under Mullin's stewardship, Delta killed the defined-benefit pension of its nonunion workers and replaced it with a less generous plan. Now, little more than a year after he retired, the airline is in bankruptcy and can dump its pension obligations. But you need not fret about Mullin. On his way out the door, he picked up a $ 16 million retirement package. It's based on 28.5 years of employment with Delta, at least 21 years more than he worked at the airline.

How Savings Can Be Hijacked
At the same time corporate executives are paid retirement dollars for years they never worked, hapless employees lose supplemental retirement benefits for a lifetime of actual work. Just ask Betty Moss. She was one of thousands of workers at Polaroid Corp.—the Waltham, Mass., maker of instant cameras and film—who, beginning in 1988, gave up 8% of their salary to underwrite an employee stock-ownership plan, or ESOP. It was created to thwart a corporate takeover and "to provide a retirement benefit" to Polaroid employees to supplement their pension, the company pledged. Alas, it was not to be. Polaroid was slow to react to the digital revolution and began to lose money in the 1990s. From 1995 to 1998, the company racked up $ 359 million in losses. As its balance sheet deteriorated, so did the value of its stock, including shares in the ESOP. In October 2001, Polaroid sought bankruptcy protection from creditors.

By then, Polaroid's shares were virtually worthless, having plummeted from $ 60 in 1997 to less than the price of a Coke in October 2001. During that period, employees were forbidden to unload their stock, based on laws approved by Congress. But what employees weren't allowed to do at a higher price, the company-appointed trustee could do at the lowest possible price—without even seeking the workers' permission. Rather than wait for a possible return to profitability through restructuring, the trustee decided that it was "in the best interests" of the employees to sell the ESOP shares. They went for 9[cents]. In short order, a $ 300 million retirement nest egg put away by 6,000 Polaroid employees was wiped out. Many lost between $ 100,000 and $ 200,000.

Moss was one of the losers. Now 60, she spent 35 years at Polaroid, beginning as a file clerk out of high school, then working her way through college at night and eventually rising to be senior regional operations manager in Atlanta. "It was the kind of place people dream of working at," she said. "I can honestly say I never dreaded going to work. It was just the sort of place where good things were always happening." One of those good things was supposed to be the ESOP, touted by the company as a plan that "forced employees to save for their retirement," as Moss recalled. "Everybody went for it. We had been so conditioned to believe what we were told was true."

Once Polaroid entered bankruptcy, Moss and her retired co-workers learned a bitter lesson—that they had no say in the security of benefits they had worked all their lives to accumulate. While the federal Pension Benefit Guaranty Corp. (PBGC) agreed to make good on most of their basic pensions, the rest of their benefits—notably the ESOP accounts, along with retirement health care and severance packages—were canceled. The retirees, generally well educated and financially savvy, organized to try to win back some of what they had lost by petitioning bankruptcy court, which would decide how to divide the company's assets among creditors. To no avail: Polaroid's management had already undercut the employees' effort. Rather than file for bankruptcy in Boston, near the corporate offices, the company took its petition to Wilmington, Del., and a bankruptcy court that had developed a reputation for favoring corporate managers. There, Polaroid's management contended that the company was in terrible financial shape and that the only option was to sell rather than reorganize. The retirees claimed that Polaroid executives were undervaluing the business so the company could ignore its obligations to retirees and sell out to private investors.

The bankruptcy judge ruled in favor of the company. In 2002 Polaroid was sold to One Equity Partners, an investment firm with a special interest in financially distressed businesses. (One Equity was a unit of Bank One Corp., now part of JPMorgan Chase.) Many retirees believed the purchase price of $ 255 million was only a fraction of the old Polaroid's value. Evidence supporting that view: the new owners financed their purchase, in part, with $ 138 million of Polaroid's own cash.

Employees did not leave bankruptcy court empty-handed. They all got something in the mail. Moss will never forget the day hers arrived. "I got a check for $ 47," she recalled. She had lost tens of thousands of dollars in ESOP contributions, health benefits and severance payments. Now she and the rest of Polaroid's other 6,000 retirees were being compensated with $ 47 checks. "You should have heard the jokes," she said. "How about we all meet at McDonald's and spend our $ 47?"

Under a new management team headed by Jacques Nasser, former chairman of Ford Motor Co., Polaroid returned to profitability almost overnight. Little more than two years after the company emerged from bankruptcy, One Equity sold it to a Minnesota entrepreneur for $ 426 million in cash. The new managers, who had received stock in the postbankruptcy Polaroid, walked away with millions of dollars. Nasser got $ 12.8 million for his 1 million shares. Other executives and directors were rewarded for their efforts. Rick Lazio, a four-term Republican from West Islip, N.Y., who effectively gave up his House seat for an unsuccessful Senate run against Hillary Rodham Clinton in 2000, collected $ 512,675 for a brief stint as a director. That amounted to nearly twice the $ 282,000 paid to all 6,000 retirees. The $ 12.08 a share that the new managers received for little more than two years of work was 134 times the 9[cents] a share handed out earlier to lifelong workers.

Let's Break a Deal
Washington has a rich history of catering to special and corporate interests at the expense of ordinary citizens. Nowhere is this more evident than in legislation dealing with company pensions. It has been this way since 1964, when carmaker Studebaker Corp. collapsed after 60 years, junking the promised pensions of 4,000 workers not yet eligible for retirement, pensions the company had spelled out in brochures for years: "You may be a long way from retirement age now. Still, it's good to know that Studebaker is building up a fund for you, so that when you reach retirement age you can settle down on a farm, visit around the country or just take it easy, and know that you'll still be getting a regular monthly pension paid for entirely by the company."

Oops. There oughta be a law. It took Congress 10 years to respond to the Studebaker pension abandonment by writing the Employee Retirement Income Security Act (ERISA) of 1974. It established minimum standards for retirement plans in private industry and created the PBGC to guarantee them. Then President Gerald Ford summed up the measure when he signed it into law that Labor Day: "This legislation will alleviate the fears and the anxiety of people who are on the production lines or in the mines or elsewhere, in that they now know that their investment in private pension funds will be better protected."

Perhaps for some, but far from all.

Another group that had no pension worries would turn out to be the biggest winners under the bill. Congress wrote the law so broadly that moneymen could dip into pension funds and remove cash set aside for workers' retirement. During the 1980s, that's exactly what a cast of corporate raiders, speculators, Wall Street buyout firms and company executives did with a vengeance. Throughout the decade, they walked away with an estimated $ 21 billion earmarked for workers' retirement pay. The raiders insisted that they took only excess assets that weren't needed. Among the pension buccaneers: Meshulam Riklis, a once flamboyant Beverly Hills, Calif., takeover artist who skimmed millions from several companies, including the McCrory Corp., the onetime retail fixture of Middle America that is now gone; and the late Victor Posner, the Miami Beach corporate raider who siphoned millions of dollars from more than half a dozen different companies, including Fischbach Corp., a New York electrical contractor that he drove to the edge of extinction. Those two raiders alone raked off about $ 100 million in workers' retirement dollars—all perfectly legal, thanks to Congress. By the time all the billions of dollars were gone and the public outcry had grown too loud to ignore, Congress in 1990 belatedly rewrote the rules and imposed an excise tax on money removed from pension funds. The raids slowed to a trickle.

During those same years, the PBGC, which insures private pension plans, published an annual list of the 50 most underfunded of those plans. In shining a spotlight on those that had fallen behind in their contributions, the agency hoped to prod companies to keep current. Corporations hated the list. They maintained that the PBGC's methodology did not reflect the true financial condition of their pension plans. After all, as long as the stock market went up—and never down or sideways—the pension plans would be adequately funded. Congress liked that reasoning and, in 1994, reacting to corporate claims that the underfunded list caused needless anxiety among employees, voted to keep the data secret. When the PBGC killed its Top 50 list, David M. Strauss, then the agency's executive director, explained, "With full implementation of [the 1994 pension law], we now have better tools in place." PBGC officials were so bullish about those "better tools," including provisions to levy higher fees on companies ignoring obligations to their employees, they predicted that underfunded pension plans would be a thing of the past. As a story in the Los Angeles Times put it, "PBGC officials said the act nearly guarantees that large underfunded plans will strengthen and the chronic deficits suffered by the pension guaranty organization will be eliminated within 10 years."

Not even close; instead they accelerated at warp speed. In 1994 the deficit in PBGC plans was $ 31 billion. Today it's $ 450 billion, or $ 600 billion if one includes multiemployer plans of unionized employees who work for more than one business in such industries as construction.

Since the PBGC no longer publishes its Top 50 list, anyone looking for even remotely comparable information must sift through the voluminous filings of individual companies with the SEC or the Labor Department, where pension-plan finances are recorded, or turn to the reports of independent firms such as Standard & Poor's. The findings aren't reassuring. According to S&P, Sara Lee Corp. of Chicago, a global maker of food products, ended 2004 with a pension deficit of $ 1.5 billion. The company's pension plans held enough assets to cover 69.8% of promised retirement pay. Ford Motor Co.'s deficit came in at $ 12.3 billion. It could write retirement checks for 83% of money owed. ExxonMobil Corp. was down $ 11.5 billion, with enough money to issue retirement checks covering 61% of promised benefits. Exxon had extracted $ 1.6 billion from its pension plans in 1986 because they were deemed overfunded. The company explained then that "our shareholders would be better served" that way.

In reality, the deficits in many cases are worse than the published data suggest, which becomes evident when bankrupt corporations dump their pension plans on the PBGC. Time after time, the agency has discovered, the gap between retirement holdings and pensions owed was much wider than the companies reported to stockholders or employees. Thus LTV Corp., the giant Cleveland steelmaker, reported that its plan for hourly workers was about 80% funded, but when it was turned over to the PBGC, there were assets to cover only 52% of benefits—a shortfall of $ 1.6 billion to be assumed by the agency.

How can this be? Thanks to the way Congress writes the rules, pension accounting has a lot in common with Enron accounting, but with one exception: it's perfectly legal. By adjusting the arcane formulas used to calculate pension assets and obligations, corporate accountants can turn a drastically underfunded system into a financially healthy one, even inflate a company's profits and push up its stock price. Ethan Kra, chief actuary of Mercer Human Resources Consulting, once put it this way: "If you used the same accounting for the operations side [of a corporation] that is used on pension funds, you would be put in jail."

The old PBGC lists of deadbeat pension funds served another purpose. They were an early-warning sign of companies in trouble—a sign often ignored or denied by the companies themselves. "Somehow, if companies are making progress toward an objective that's consistent with [the PBGC's], then I think it's counterproductive to be exposed on this public listing," complained Gary Millenbruch, executive vice president of Bethlehem Steel, a perennial favorite on the Top 50.

Time proved Millenbruch wrong. The early warnings about Bethlehem's pension liabilities turned out to be right on target. Bethlehem Steel eventually filed for bankruptcy, and the PBGC took over its pension plans—which were short $ 3.7 billion. The company, once America's second largest steelmaker, no longer exists. In the Top 50 pension deadbeats of 1990, the PBGC reported that the funds of Pan Am Corp., operator of what was once the premier global airline, had only one-third of the assets needed to pay its promised pensions. Pan Am does not exist today.

Contrary to the assertions of company executives, PBGC officials and members of Congress, one company after another on the 1990 Top 50 disappeared. To be sure, many are still around. Like General Motors. That year, the PBGC reported a $ 1.9 billion deficit in GM's pension plans. Today, by GM's reckoning, the deficit is $ 10 billion. The PBGC estimates it at $ 31 billion. As for the pension-fund deficit, if GM or any other company can't come up with the money, the PBGC will cover retirement checks up to a fixed amount—$ 45,600 this year—or until the agency runs out of money. That's projected to occur around 2013. At that point, Congress will be forced to decide whether to bail out the agency at a cost of $ 100 billion or more. When judgment day comes, other economic forces will influence the decision. Medicare, which is in far worse shape than Social Security, already is in the red on a cash basis. In what promises to play out as a mean-spirited competition, Congress has laid the groundwork to pit individual citizens against one another, to fight over the budget scraps available for those and all other programs.

Who's Left Holding the Bag?
In the meantime, pension plans that companies are dumping are so short of assets that the PBGC's financial position is rapidly deteriorating. In 2000, the agency operated with a $ 10 billion surplus. By 2004, the surplus had turned into a $ 23 billion deficit. By the end of this year, the shortfall may top $ 30 billion. As the Government Accountability Office put it earlier this year: "PBGC's accumulated deficit is too big, and plans simply do not have enough money in the system to back up the long-term promises many employers have made to their workers." To add to its woes, the agency has a record 350 active bankruptcy cases, according to Bradley D. Belt, executive director. Of those, Belt told Congress, "37 have underfunding claims of $ 100 million or more, including six in excess of $ 500 million."

Congress idly watched United Airlines and USAirways unload their pension obligations on the PBGC. Now Delta and Northwest are positioned to do the same. That increases the likelihood that other old-line carriers like American and Continental will be forced to do likewise. Northwest's CEO, Douglas Steenland, bluntly told the Senate Finance Committee last June, "Northwest has concluded that defined-benefit plans simply do not work for an industry that is as competitive and vulnerable from forces ranging from terrorism to international oil prices that are largely beyond its control, as is the airline industry." In that, he merely echoed Robert Crandall, former chief of American Airlines, who told another Senate committee in October 2004: "All the [older] legacy carriers must get rid of their defined-benefit pension plans." In all, the pension funds of those airlines are short $ 22 billion.

The sudden shift from annual pensions of a guaranteed amount for a lifetime to a lesser and uncertain amount for a limited period is taking its toll on workers. Robin Gilinger, 42, a United flight attendant for 14 years, sees a frightening financial picture. She has another 14 years to go before she can take early retirement. Under the old pension plan she would have received a monthly check of $ 2,184. Because of givebacks, that's down to $ 776—a poverty-level annual income of $ 9,312 by today's standards, even before inflation takes its toll over the coming years. And there is the distinct possibility it could be less than that. Her husband lost his pension in a corporate takeover.

Gilinger, who lives with her husband and 9-year-old daughter in Mount Laurel, N.J., is not planning on early retirement and certainly couldn't afford it in the current situation. But she has concerns reminiscent of Joy Whitehouse's experience. "It's scary. What if something happened to my husband or if I got disabled?" she asks. "Then I'm looking at nothing. Above all, what's frustrating is that we were told we were going to get our pension and we're not. The senior flight attendants, the ones who've worked 30 years, they're worried how they're going to survive." Each time the PBGC takes on another failed pension plan, it makes the pension-insurance program more expensive for the remaining businesses. That in turn prompts other companies to unload their plans. The PBGC receives no tax money. Its revenue comes from investment income and premiums that corporations pay on their insured workers. As a result, soundly managed companies with solid retirement plans are compelled to pick up the costs for plans in mismanaged companies as well as those that just want to unload their employee benefits. A proposal by the Bush Administration to overhaul the system, critics fear, would actually increase the likelihood that more companies will kill existing plans and that other companies considering establishment of a defined-benefit plan will choose a less expensive option. An analysis of 471 FORTUNE 1000 companies by Watson Wyatt Worldwide, a global consulting firm, concluded "healthy companies would see their total PBGC premiums increase 240% under the proposal, more than double the 113% increase for financially troubled employers."

Barring a reversal in government policies, the PBGC could require a multibillion-dollar taxpayer bailout. The last time that happened was during the 1980s and '90s, when another government insurer, the Federal Savings and Loan Insurance Corp., was unable to keep up with a thrift industry spinning out of control. The Federal Government eventually spent $ 124 billion. Unlike the FSLIC, which was backed by the U.S. government, the PBGC is not. That means an indifferent Congress could turn its back on the retirement crash. By the agency's estimate, that would translate into a 90% reduction in pensions it currently pays.

Where the 401(K) Falls Short
The universal replacement to the pension, by the consensus of the Bush Administration, Congress, Wall Street and corporate America, is the ubiquitous 401(k). As Bush explained at a gathering at Auburn University in Montgomery, Ala., earlier this year, "When I was young, I didn't know anything about 401(k)s because I don't think they existed. Defined-benefit plans were the main source of retirement. Now they've got what they call defined-contribution plans. Workers are taking aside some of their own money and watching it grow through safe and secure investments."

Tell that "safe and secure" part to the folks at Enron, who lost $ 1 billion in their 401(k)s. Or WorldCom employees, who also lost $ 1 billion. Or Kmart employees, who lost at least $ 100 million. Welcome to the 21st century version of Studebaker.

Truth to tell, the 401(k) was never intended as a retirement plan. It evolved out of a tax break that Congress awarded to corporate executives in 1978, allowing them to defer part of their salaries and cut their tax bills. At the time, federal income-tax rates were much higher for upper-income individuals—the top rate was 70%. (Today it's half that.) It wasn't until several years later that companies began to make 401(k)s available to most employees. Even then, the idea was to encourage saving and provide a tax shelter, not to substitute the plans for pensions. By 1985, assets in 401(k)s had risen to $ 91 billion, as more companies adopted plans. Still, the amount was only about one-tenth that in guaranteed pensions.

All that changed as corporations discovered they could improve their bottom lines by shifting workers out of costly defined-benefit plans and into much cheaper (for companies) and more risky (for workers) uninsured 401(k)s. In effect, employees took a hefty pay cut and barely seemed to notice. Lawmakers and supporters advocated the move by pointing to a changing economy in which employees switch jobs frequently. They maintained that because defined-benefit plans are based on length of service and an average of salaries over the last few years of work, they don't meet today's needs. But Congress could have revised the rules and made the plans portable over a working life, just like a 401(k), and retained the guarantee of a fixed retirement amount, just like corporations do for their executives.

As it is, 401(k) portability often impedes efforts to save for retirement. As today's job hoppers move from one employer to another, most succumb to the temptation to cash out their 401(k)s and spend the money, a practice hardly reflective of a serious retirement system. Today $ 2 trillion is invested in those accounts. But to understand why the 401(k) is no substitute for a defined-benefit pension, look beneath that big number. Earlier this year the airwaves crackled with announcements that the value of the average 401(k) had climbed to $ 61,000 in 2004. Noticeably absent from many accounts was any reference to the median value, a more accurate indicator of the health of America's retirement system. That number was $ 17,909, meaning half held less, half more. Nearly 1 in 4 accounts had a balance of less than $ 5,000.

So it is that in the end, all but the most affluent citizens will have two options. They can join Joy Whitehouse in the can-collection business, or they can follow in the footsteps of Betty Dizik of Fort Lauderdale, Fla., who is into her sixth decade as a working American. She has no choice. Dizik did not lose her pension. Like most Americans, she never had one, or a 401(k). After her husband died in 1968, she held a series of jobs managing apartments and self-storage facilities, tasks that brought her into contact with the public. "I like working with people," she said. But none of the jobs had a pension.

Hence the importance of her monthly Social Security check, which comes to less than $ 1,000. The benefit barely covers her medications for heart problems and diabetes, which she says can cost her as much as $ 800 a month. The new Medicare prescription-drug benefit, she estimates, will still leave her with substantial out-of-pocket expenses. To pay rent, utilities, gas for her car and other living expenses, Dizik has continued to work since she turned 65. For 10 years, she was with Broward County Meals on Wheels, which provides meals to seniors, some younger than she is. But three years ago, when she turned 75, driving 100 miles a day began exacting a toll.

Now she works at a nearby office of H&R Block, the tax- return service. "I do everything there," she says. "I am the receptionist. The cashier. I open the office, close the office. I'm the one who takes the money to the bank. I do taxes." A widow, she lives alone in an apartment building for seniors. Her four children help with the rent, but she is reluctant to accept anything more. "All my children are great, but I do not like to ask them for anything," she said. "I'm waiting for myself to get old, when I will need their help." For the time being, she says, "I'm going strong. I have to."

She doesn't have much hope that Washington will be able to help seniors like her. "They don't understand what it's like to worry: Are you going to be able to make it every month, to pay the telephone bill, the electric bill? How much are you going to have left over for food and other expenses?" Her key to getting by each month is forcing herself to live within a strict budget. "You learn to live very carefully," she said. Although Dizik really would like to retire, she can't. "I will be working the rest of my life." Soon, she will have lots of company.

— With Reporting by Laura Karmatz, Lisa McLAughlin and Dody Tsiantar and research by Joan Levinstein


Via: http://www.nytimes.com/2012/04/02/busin ... d=all&_r=0

2012: Pension Funds Making Alternative Bets Struggle to Keep Up

Searching for higher returns to bridge looming shortfalls, public workers’ pension funds across the country are increasingly turning to riskier investments in private equity, real estate and hedge funds.

But while their fees have soared, their returns have not. In fact, a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better in recent years, for a fraction of the fees.

Consider the contrast between the state retirement fund for Pennsylvania and the one for Georgia.

The $26.3 billion Pennsylvania State Employees’ Retirement System has more than 46 percent of its assets in riskier alternatives, including nearly 400 private equity, venture capital and real estate funds.

The system paid about $1.35 billion in management fees in the last five years and reported a five-year annualized return of 3.6 percent. That is below the 8 percent target needed to meet its financing requirements, and it also lags behind a 4.9 percent median return among public pension systems.

In Georgia, the $14.4 billion municipal retirement system, which is prohibited by state law from investing in alternative investments, has earned 5.3 percent annually over the same time frame and paid about $54 million total in fees.

The two funds represent the extremes, with Pennsylvania in a group of pension systems with some of the highest percentages of investments in alternatives and Georgia in a group of 10 with some of the lowest, according to groupings of funds identified by the London-based research firm Preqin.

An analysis of the sampling presents an unflattering portrait of the alternative bets: the funds with a third to more than half of their money in private equity, hedge funds and real estate had returns that were more than a percentage point lower than returns of the funds that largely avoided the riskier assets. They also paid nearly four times as much in fees.

While managers for the retirement systems say that a five-year period is not long enough to judge their success, those fees nevertheless add up to hundreds of millions of dollars each year for some of the country’s largest pension funds. The $51.4 billion Pennsylvania public schools pension system, for instance, which has 46 percent of its assets in alternatives, pays more than $500 million a year in fees. It has earned 3.9 percent annually since 2007.

Whether the higher fees charged by the alterative-investment firms are worth it has been hotly debated within the investment community for years. Do these investment entities, over an extended period of time, either offset the wild swings in assets during rough patches of the market or provide significantly higher gains than could be found in less-expensive bond and stock investments?

“We can’t put it in Treasury notes and bonds; that’s just not making any money,” said Sam Jordan, the chief executive of the Austin Police Retirement System in Texas.

James Wilbanks, executive director of the Oklahoma Teachers Retirement System, which has largely stayed with stocks and bonds, said that pension funds were obligated to take a cautious approach. “We all heard the stories about institutional funds that had more than half of their assets in private equity in 2008” and then had to sell, he said.

While both sides of the debate can point to various studies, the topic is taking on a sharper focus as more funds embrace the riskier strategy. By September 2011, retirement systems with more than $1 billion in assets had increased their stakes in real estate, private equity and hedge funds to 19 percent, from 10.7 percent in 2007, according to the Wilshire Trust Universe Comparison Service.

Public retirement systems are struggling to earn sufficient returns with interest rates near record lows and more and more workers qualifying for retirement. The costs of their pensions are growing fast, but state and local government returns are not keeping up.

A new study by the Government Accountability Office raised questions about how some alternatives performed for public and private pension funds during the financial crisis. Meanwhile, some public retirement systems that increased their stakes in alternatives are now trying to curb those costs.

Fees for the $242 billion in California’s giant state pension system, known as Calpers, nearly doubled, to more than $1 billion a year, after it increased its holdings in private assets and hedge funds to 26 percent of its total in 2010, from 16 percent in 2006.

Calpers, which has earned 3.4 percent annually over the last five years, is pushing the managers of the funds for lower fees as well as reducing the number of outside managers it uses to try to bring costs down.

“I think it’s part of our job as public fund managers to do our best to drive a better bargain,” said Joseph A. Dear, the chief investment officer for Calpers.

Mr. Dear cautioned that there were big differences in how various alternative investments performed during the financial crisis.

He said that Calpers’s investments in real estate had been “a disaster” and that its hedge fund investments had not met their benchmarks and were under review. But he said that its private equity holdings had easily beaten public stock returns over the last decade.

“Over the longer term, that kind of outperformance represents real skill, not luck, and it’s worth paying for,” he said.

Heads of pension funds across the country feel trapped. Lower-risk instruments, like 10-year Treasury notes with a yield of around 2 percent, simply will not fill the gaps many systems face between what they have and what they owe retirees.

The Austin Police Retirement System, for example, moved 46 percent of the $505 million it oversees into alternatives after the 2000 collapse of technology stocks produced steep losses for the fund.

However, the fund’s choice of investments — real estate in places like Las Vegas and Florida — did not provide much refuge when that bubble burst.

“Vegas was in a boom time,” Mr. Jordan, the fund’s chief executive, said. “Snowbirds were moving there from the Midwest. People were saying at one time it was going to get bigger than New York. Then the bust happened, and we owned some single-family developments, subdivisions, and there’s no one living in those.”

The fund has returned 2.5 percent annualized over the last five years. Mr. Jordan still believes that over many years those investments will pay off, he said.

It has been tough to find robust returns in any markets over the last five years. While the median return for private equity investments held by public pension funds was an annualized 7.2 percent, hedge funds returned only 2.74 percent, according to Wilshire TUCS. Likewise, global bonds earned 6.99 percent while global equities rose 3.68 percent.

Despite their tepid returns, retirement systems that have bet big on alternatives are paying a hefty tab. While funds with little stakes in hedge funds and private equity pay an average of 17 cents on every $100 invested, funds with large stakes pay 77 cents.

The Pennsylvania state retirement system, which has about 46 percent of its money in alternatives, paid those managers 77 percent of the system’s total $195 million in fees last year. Last fall, the system replaced the two consulting firms that had emphasized those investments. Over the last five years, its annualized returns of 3.6 percent lagged behind its peers’.

In a series of e-mails, Pamela Hile, a spokeswoman for the Pennsylvania fund, said that the fund had made many new investments in alternatives from 2004 to 2007. Some of these entities, like venture-capital funds, often have negative returns in the early years as that money is invested, she said.

Noting that pension funds have time horizons that stretch into decades, Ms. Hile added that the retirement system had outperformed its 8 percent target over the last 25 years, with an 8.8 percent annualized return.

Still, the allure of alternatives remains strong, even among public pension funds that without them have still performed better than other funds.

The Oklahoma Teachers Retirement System, which has posted returns of 5.5 percent over the last five years through a mix of stocks and bonds, is putting 10 percent of its fund into private equity and real estate funds.

When asked about the higher fees, Mr. Wilbanks, the fund’s executive director, said, “We believe the outperformance from moving into these categories can justify the additional fees.”

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Pension Fund Socialism

Postby Wombaticus Rex » Wed Jan 23, 2013 1:22 pm

Pension Fund "Socialism"

By Peter Drucker - Winter 1976

IF “socialism” is defined as “ownership of the means of production by the workers”-and this is the orthodox definition-then the United States is the most “socialist” country in the world. Through their pension funds, employees of American business own today at least 25 per cent of the equity capital of American business. The pension funds of the self-employed, of public employees, and of school and college teachers own at least another 10 per cent more, giving the workers of America ownership of more than one third of the equity capital of American business.

Within another 10 years the pension funds inevitably will increase their holdings and will, by 1985 at the latest, own at least 50 per cent of the equity capital of American business. And all of this, of course, excludes personal ownership of stock by individual American workers-a small, but not negligible, percentage of the total.


Via: http://www2.ucsc.edu/whorulesamerica/po ... alism.html

Pension funds and other institutional investors

One of the most persistent claims about corporations in America is that the rich people who benefit from their stock dividends do not control them. The idea is that everybody owns and controls the corporations, even though the corporations seem to dominate the economy to the benefit of a wealthy few. Taking this idea to its extreme, a few analysts have claimed that the accumulations of money owned by everyone through various types of public employee pension funds, union pension funds, mutual funds, and other forms of "institutional investors" might even come to have a significant role in shaping corporate behavior.

The idea that pension funds could be used to control corporations first gained visibility through the claim by management guru Peter Drucker (1976, 1993) that workers' legal right to their pensions -- whether through a company or a local or state government -- meant they now owned a significant percentage of corporate stock. It followed for Drucker that this was a form of socialism. As the dramatic first sentence of his 1976 manifesto put it: "If 'socialism' is defined as 'ownership of the means of production by the workers' -- and this is both the orthodox and the only rigorous definition -- then the United States is the first truly 'Socialist' country" (Drucker, 1976, p. 1). Now that workers owned the economy, it was just a matter of asserting control.

The idea that pension funds could be used to control corporations first gained visibility through the claim by management guru Peter Drucker (1976, 1993) that workers' legal right to their pensions -- whether through a company or a local or state government -- meant they now owned a significant percentage of corporate stock. It followed for Drucker that this was a form of socialism. As the dramatic first sentence of his 1976 manifesto put it: "If 'socialism' is defined as 'ownership of the means of production by the workers' -- and this is both the orthodox and the only rigorous definition -- then the United States is the first truly 'Socialist' country" (Drucker, 1976, p. 1). Now that workers owned the economy, it was just a matter of asserting control.

But as the most detailed analysis of the role of pension funds points out, "The idea of 'pension fund socialism' is an exercise in political rhetoric rather than reality" (Clark, 2000, p. 43). Employees who contribute to pension funds have a legal right to their pensions, but they rarely have any rights when it comes to voting any stock purchased by the pension fund. As for the pension fund trustees themselves, they have a fiduciary responsibility to invest the money they receive from employees as wisely and prudently as possible, but no legal ownership of any stock they purchase. To exert any influence on corporate boards they have to argue that insisting on "good corporate governance" is part of their fiduciary duty because it makes shares more valuable. This line of reasoning is rejected by corporate leaders and most Republicans.

Drucker's flawed idea led nowhere, but the possibility of public pension funds as active participants in corporate governance arose again in the mid-1980s when partners at the Wall Street investment firm of Kohlberg, Kravis, Roberts convinced the director of the pension fund in the state of Oregon to contribute major sums to their takeover projects. Takeover specialists soon drew other public pension funds into the action. For a while, pension managers made some extra money for their funds, but it was clearly the private financiers who were calling the shots and making the big money.

However, the full extent of the private financiers' lucrative use of public pension funds from the 1980s to the present was never fully grasped by anyone until the New York Times commissioned a special study of the ten largest of these funds in early 2010 (Anderson, 2010). Between 2005 and 2008, eight of the 10 handed 45% or more of their total funds to private equity firms to manage, which is why these financiers could make $17 billion investing workers' future pensions between 2000 and the end of 2009. (Recall that the financiers receive a 2% management fee on the amount of money they manage and also receive 20% of any profits they make.)

The author of the study asks why the pension funds agreed to these huge fees and profits for private equity firms. The answer is not hard to find. First of all, the private financiers claimed that their superior talents would lead to higher returns for the pension funds than they would receive if mere public employees invested the money in the ordinary ways. In fact, they often said they would likely make 20% to 30% returns with the pension fund money.

Second, the partners in private equity funds could influence pension fund officials due to a combination of clout -- they give campaign finance donations to the elected officials who appoint the pension fund managers -- and mystique (if you are rich, you must be smarter than everyone else). But it is unlikely, according to two different academic studies cited in the New York Times article, that they delivered on these promises if their management fees and private profits are factored into the equation. For example, one of these studies concluded that between 1980 and 2003, the private equity funds did 3% less well than Standard & Poor's 500-stock index (a generally accepted financial index) after the equity funds' fees and profits are deducted. In other words, the public pension funds could have done a little better by investing in a standard mix of stocks as of 2003.

As for the more recent years, state and local pension funds lost an average of 27.6% of their holdings between 2007 and 2009 because of the collapse of Wall Street's housing bubble and the near meltdown of the entire financial system -- which was not due to subprime mortgages or derivatives, but to wild speculation encouraged by Wall Street. The exotic financial schemes that would supposedly bring big returns through innovation and efficiency, and provide "resiliency" to the financial system besides, led to major problems for public pension funds -- and for the endowments of universities, foundations, and cultural organizations as well, because they had all turned some of their monies over to private equity funds. Although many smaller hedge funds were hurt by the financial collapse, the larget of them were not, and certainly not in terms of the personal finances of their top owners and managers. They were thriving as of early 2010, as reported in an April 1, 2010 report in the New York Times on the still-huge salaries of the managers at the top hedge funds (Schwartz & Story, 2010).

And just how important were public pension funds to the private equity billionaires over the past three decades? Just look at the numbers: the amount of pension fund money that was invested by private equity firms rose from $200 million in 1980 to $200 billion in 2007 -- a thousand-fold increase. As the New York Times succinctly concludes: "Private equity owes its explosive growth largely to America's pension funds" (Anderson, 2010).

So, that's the material reality -- the incredible profit-making background -- that readers should keep in mind as I recount the brief history (and meager results) of the pension fund movement that was supposed to have great influence over corporations by the late 1990s at the latest. While the pension-fund activists were making the headlines that follow, the nation's financial districts, which we can think of collectively as "Wall Street," were making bundles of money.
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Re: The Humble Pension Fund

Postby JackRiddler » Wed Jan 23, 2013 6:40 pm

Thank you sir.
We meet at the borders of our being, we dream something of each others reality. - Harvey of R.I.

To Justice my maker from on high did incline:
I am by virtue of its might divine,
The highest Wisdom and the first Love.

TopSecret WallSt. Iraq & more
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TEAMSTERS, HOFFA, REAGAN, MONEY

Postby Wombaticus Rex » Thu Jan 24, 2013 4:43 pm

Via: http://www.cepr.net/err/nytimesarticles ... _11_22.htm

November 15, 2004
Teamsters Find Pensions at Risk
By MARY WILLIAMS WALSH

In the 1960's and 1970's, the Teamsters' huge Central States pension fund was a wellspring of union corruption. Tens of millions of dollars were loaned to racketeers who used the money to gain control of Las Vegas casinos. Administrative jobs were awarded to favored insiders who paid themselves big fees. A former Teamster president and pension trustee was convicted of trying to bribe a United States senator.

Yet for nearly half a million union members who are expecting the fund to pay for their retirement, those may have been the good old days.

Since 1982, under a consent decree with the federal government, the fund has been run by prominent Wall Street firms and monitored by a federal court and the Labor Department. There have been no more shadowy investments, no more loans to crime bosses. Yet in these expert hands, the aging fund has fallen into greater financial peril than when James R. Hoffa, who built the Teamsters into a national power, used it as a slush fund.

The unfolding situation holds a hard lesson for others with responsibility for retirement money. What may appear as a sensible, conventional approach to investing - seeking a diversified mix of growth and income investments for the long term - can wreak havoc when applied to a pension fund, especially one in a dying industry with older members who are about to make demands of it.

But the kinds of investments that make sense for such a fund - like long-term bonds that will mature as members enter retirement - are not attractive to most money managers, because they generate few fees. Consequently, very few pension funds use such strategies today.

At the end of 2002, the pension fund had 60 cents for every dollar owed to present and future retirees - a dangerous level. In a rough comparison, the pension fund for US Airways' pilots had 74 cents for every dollar it owed in December 2002, just before it defaulted. During the bear market after the technology bubble burst, Central States' assets lost value as its obligations to retirees ballooned, causing a mismatch so severe that the fund had to reduce benefits last winter for the first time in its 49-year history.

"There never were benefit cuts in the 1970's," said Wayne Seale, 52, a long-haul driver from Houston and one of about 460,000 Teamsters participating in the fund. "We were happy. We were being taken care of."

If the pension fund fails, it will be taken over by a government insurance program. In that case, some Teamsters would lose benefits.

Hoffa and his successors had put an extraordinary 80 percent of Central States' money into real estate. Instead of hotels, casinos and resorts, its new managers - first Morgan Stanley and later Bankers Trust, Goldman Sachs and J. P. Morgan - invested the money mostly in stocks, and to a lesser extent, in bonds. At the end of 2002, about 54 percent of the fund's assets were in stocks, somewhat less than the average corporate pension fund, which had about 74 percent of assets in stocks that year, according to Greenwich Associates, a research and consulting firm.

Federal law calls for fiduciaries to invest pension assets the way a "prudent man" would, and the strategy used for Central States would certainly be familiar to wealthy individuals, philanthropic trusts, university endowments and other pension funds. The fund's investment results in recent years closely track median annual returns for corporate pension funds, according to Mercer Investment Consulting.

The assets lost 4.5 percent of their value in 2001 and 10.9 percent in 2002, but gained 25.5 percent in 2003, according to the fund's executive director and general counsel, Thomas C. Nyhan.

Morgan Stanley and J. P. Morgan declined to comment. Goldman Sachs defended its record, pointing out that it had exceeded its benchmarks in a very tough market.

But the Central States situation shows that using stocks or other volatile assets to secure the obligations of a mature pension fund greatly increases the risk of getting caught short-handed in a down market. If that happens it can be nearly impossible to bring the ailing pension fund back. This is what has happened recently to pension funds at United Airlines and US Airways.

"Stocks are not a hedge against long-term fixed liabilities," said Zvi Bodie, a finance professor at Boston University who has long challenged conventional pension investment strategies. "For many, many years, right down to the present day, the dominant belief among pension investment people is fundamentally wrong. Now that's a big problem."

The record of a second big Teamsters' pension fund, covering members in the West, bolsters Mr. Bodie's arguments. The Western Conference of Teamsters fund has long shunned stocks and uses a totally different investment approach, a portfolio of 20- and 30-year Treasury bonds and other high-grade fixed-income securities that are scheduled to make payments when its retirees will be claiming their money. The Western Conference pension fund was not perceptibly hurt by the bear market.

If the Central States were a younger pension fund, it could wait for the stock market to improve and bolster its value. But it already has more than 200,000 retirees collecting benefits of more than $2 billion a year.

The companies that employ its members currently put in about $1 billion a year. Its trustees, made up of union officials and company representatives in equal numbers, have contemplated raising employer contributions, but the unionized trucking sector has financial problems, and for many companies a higher contribution would be a hardship. The biggest and wealthiest participating company, United Parcel Service, has been trying to leave the pension fund altogether.

The unionized trucking industry was more stable before deregulation in 1979, and so was the Central States pension fund. In the 1970's, the fund's assets grew by as much as 10 percent a year, according to some media reports from that period. Luck played a big part in that success, because the decade was a bad one for stocks and bonds. Thus, the fund made better returns on its unorthodox real estate portfolio than it would have on a conventional mix of investments. The unionized trucking sector was younger, too. And it was growing, so there was more money available from employees and fewer pensions coming due.

Starting in the early 1960's, the fund loaned tens of millions of dollars for investments in Las Vegas casinos, including the Desert Inn, Caesars Palace, Stardust, Circus Circus, the Landmark Hotel and the Aladdin Hotel, according to a history by Edwin H. Stier, a former federal prosecutor hired by the union as part of its efforts to clean house.

The loans in those days typically involved a front man who signed the papers and a crime family raking off cash behind the scenes. The loan approval process involved kickbacks, threats and, in at least one case, a kidnapping. By the time Hoffa disappeared in 1975, the Central States pension fund had loaned an estimated $600 million to people connected with organized crime, according to Mr. Stier, who resigned his union appointment in April after questioning the union's ongoing commitment to rooting out corruption.

But many of the loans did serve their intended purpose, making money to pay for Teamsters' retirement benefits. The hotels, casinos and other real estate projects, not all of which were connected to organized crime, were generally profitable, according to Mr. Stier, and before his disappearance Hoffa saw to it that his loans were repaid.

By 1977, after years of indictments, prosecutions, Congressional hearings and murders, federal regulators pressured the Central States trustees to resign and turn over the fund's assets to an independent money manager. The 1982 consent decree reduced the trustees' powers permanently, requiring the pension fund to choose an outside fiduciary from America's largest 20 banks, insurance companies and investment advisory firms.

The first to be named fiduciary was Morgan Stanley. Its duties were to pick money managers, to allocate the assets among them and to advise the new board of trustees on investment objectives and strategies.

As it happened, Morgan Stanley got the Central States mandate at a time of explosive growth in the money-management business. A landmark pension reform law had been passed in 1974, requiring all companies to set aside enough money to make good on their pension promises. With assets piling up in trust funds as a result, money managers were competing fiercely for a piece of the business.

Money managers promised pension funds big returns, and to get the big returns they began to add riskier assets to pension portfolios than pension funds had used before. Sleepy bond portfolios were livened up with stocks. Venture capital, junk bonds, securities of companies in developing countries and other exotica began to appear in pension funds.

These investments could be risky, but the industry argued that losses, even big losses, in one year did not matter because a pension fund was a long-term proposition; over time, the losses would be recouped by even bigger gains. Buoyant markets reinforced this thinking in the 1990's, even though by then unionized trucking was in deep decline, and the Central States' ratio of active workers to pensioners was shifting perilously.

Records for the Central States pension fund are not complete, but they indicate that Morgan Stanley kept pace with industry trends, shifting the fund into stocks, particularly international stocks.

By 1997, more than one-third of the pension fund's assets were invested abroad, records show, far more than the norm for such funds. Greenwich Associates surveyed union pension funds in 2003 and found that international equities made up less than 3 percent of their total assets.

A spokesman for Morgan Stanley declined to comment on the Central States investments, citing a policy of not discussing relationships with past clients. He pointed out, however, that international stocks did relatively well in the late 1990's.

Morgan Stanley was replaced as fiduciary by Goldman Sachs and J. P. Morgan in 1999 and 2000. (Bankers Trust served as fiduciary very briefly.) A spokesman for Goldman Sachs noted that his company inherited many of Morgan Stanley's investments and added, "Over the five years we have managed the fund, our performance has exceeded the relevant benchmarks." A spokeswoman for J. P. Morgan cited a policy of not discussing clients' business.

When the stock market crashed in 2000, the Central States pension fund had big bets on technology and telecommunication stocks, energy trading companies and foreign stocks. Some of these stocks became nearly worthless. But the resulting carnage was not apparent to many rank-and-file Teamsters until last winter, when plan officials announced that benefits would have to be curtailed.

Meanwhile, drivers were making their retirement plans.

Tommy Burke, a U.P.S. driver in Fayetteville, N.C., had been planning to retire in 2005, when he would turn 60, and go into the restaurant business. But when the pension fund reduced benefit accruals, it also began enforcing a rule that pensioners could not re-enter the work force, under penalty of having their pensions stopped. Mr. Burke, frustrated, began to research the pension fund on his own, trying to learn just what had happened. In an annual report for the plan, he was shocked to see a reference to a $77 million uncollectible loan.

"How in the world can you have an unsecured loan in the amount of $77 million?" he asked.

When an official of the pension fund visited his union local hall this year, Mr. Burke put that question to him, but the answer only upset Mr. Burke more.

"He said it wasn't a loan at all," Mr. Burke recalled. "It was shares of stock in a bank in Russia, and it went belly up." Mr. Burke said he didn't understand why pension money had been used to buy something so risky, if the Labor Department and federal court officials were monitoring the pension fund.

The Labor Department does not generally regulate investment strategy, however. It was watching for signs of self-dealing, racketeering or other flagrant abuse. From that perspective, the fund was progressing well.

Some Teamsters say more complete answers lie in the official progress reports for the pension fund, maintained for the federal courts as required by the consent decree. But those are secret. The New York Times and the Teamsters for a Democratic Union, a reform group within the union, have filed motions with the federal district court in Chicago to make the documents public.

The International Brotherhood of Teamsters, which is legally separate from the pension fund, commissioned independent investment and actuarial analyses of the pension fund in November 2002.

But the study's findings have not been released to the membership.

Many rank-and-file Teamsters complain that their questions about the pension fund have been met with bromides about unforeseeable market forces, and about an unusual convergence of stock market losses and low interest rates that is always described as "the perfect storm." They are unconvinced.

"If this was all about the stock market and this 'perfect storm,' why weren't all these funds affected the same way?" asked Pete Landon, a truck driver from Detroit who participates in the pension fund.

The best clues may lie in the Western Conference of Teamsters pension fund. In the 1980's, when the Central States plan was shifting from real estate into stocks, the Western Conference trustees, acting on actuarial projections of future pension benefits, put together its conservative portfolio of high-quality bonds and other fixed-income securities. The bonds were held until they matured.

Such an investment portfolio requires little stock research or trading and consequently generates little fee revenue for money managers, but it has served the Western Conference of Teamsters well. From 2000 to the end of 2002, when the Central States fund lost $2.8 billion, the Western Conference fund gained $834 million.

"I think the most prudent, most basic pension funding theory would be: You put aside assets today to most precisely meet your obligations in the future," said Edward A. H. Siedle, a Florida lawyer who specializes in pension fund audits. "You do not try to beat the market. You do not try to maximize returns. But in this country, the plan sponsor doesn't want to do that. The corporation wants to put the minimum aside today, and invest it with maximum efficiency. That's the trouble."
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Re: The Humble Pension Fund

Postby Wombaticus Rex » Tue Jan 29, 2013 3:03 pm

Via: http://charleshughsmith.blogspot.com/20 ... -back.html

In a self-employment example, many vendors in urban Thailand set up their informal food stall (a cart or a tent) for a few hours a day. Their net income is low, because what they provide--readymade food and snacks--is available in abundance, i.e. there are many competitors.

Nonetheless, because the cost basis of life is relatively low, modest earnings from a low cost, low-profit enterprise make the enterprise worthwhile.

Compare that with the typical government job in the U.S. or Europe. It is difficult to measure the true cost of government pension costs, as local governments do their best to mask their pension costs and inflate their pension funds' projected returns. But a back-of-the-envelope calculation yields about a 100% direct labor overhead cost for the typical government job with full healthcare, pension and vacation benefits. So an employee earning $50,000 a year costs $100,000 in total compensation expenses.

Many local government employees on the left and right coasts earn close to $100,000, so their total compensation costs are roughly $200,000 per worker.

How much value must be created by each employee to justify that compensation? Government needn't bother itself with that calculation, as the compensation is not set by market forces and the revenue stream can be increased via higher taxes, junk fees, tuition, licences, permits, etc.

As the legacy costs of healthcare and pensions for retirees become due, local government operating budgets are being gutted to pay these ballooning legacy costs.

As a result, it is now impossible for many local municipalities to fill potholes: it makes no sense to have $100,000/year employees performing low-value work like filling potholes. Put another way, there is a labor shortage in high-overhead government bureaucracies because after paying for legacy pension costs, there is no money left to hire more people at $100,000 a year in total compensation to fill potholes, a job that might be worth $35,000 in total compensation.

The value created by government employees filling potholes is completely out of alignment with the cost of their wages/benefits. If employees cost $100,000 (recall that their annual earnings may be $50,000--we must always use total compensation, not wages as reflected on pay stubs), then in effect all work that generates less than $100,000 in value can no longer be done.

This is why cities and infrastructure are falling apart. Once you raise the cost of compensation far above the value being created by the labor, then most lower-value but nonetheless essential work (e.g. filling potholes) becomes unaffordable to accomplish.
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Re: The Humble Pension Fund

Postby Wombaticus Rex » Wed Feb 13, 2013 6:31 pm

Via:

http://online.wsj.com/article/SB1000142 ... 70294.html

Advisers Question Modern Portfolio Theory

When financial adviser Doug Kinsey started in the business more than 20 years ago, he was a big fan of the asset-allocation reports he would pull out for prospective clients.

"I thought they were the most beautiful things ever," says Mr. Kinsey, chief investment officer of Artifex Financial Group, an investment-adviser firm near Dayton, Ohio, that manages about $60 million for middle-class and mass-affluent clients. "They had colorful graphs and charts to show you how your portfolio might look in the future."

But now he views the basis of those presentations, Modern Portfolio Theory, as deeply flawed--and a poor foundation for allocating his clients' hard-earned resources in today's volatile and slow-growth investing environment.

MPT has come full circle. When first proposed in the late 1950s, the theory--which says you can maximize returns for a given amount of risk by selecting the right mix of assets--was widely derided. This view changed in the 1980s as the stock market climbed steadily and it looked as though rigorous diversification was a formula for capturing returns and blunting losses. By 2000 or so, MPT had an aura of immovable truth. Then came 2008 and the "new normal" of sideways investment returns marked by periods of euphoria and despair. And though support for MPT has waned among financial advisers, many stick to its main tenets, in what some observers say is an approach suited to an era that is gone and unlikely to return.

Mr. Kinsey and other critics hold that MPT doesn't mesh with reality. They say its reliance on extremely long-term historic data and its inability to account for catastrophic "black swan" events makes it useful, if arguably, only to investors whose risk appetites never change and whose investment timelines stretch across decades.

For investing expert Bryce James, this makes MPT about as useful in constructing portfolios as the Farmer's Almanac is for predicting the weather from day to day. "Sometimes it works, but mostly it doesn't," says the chief executive of Smart Portfolios, a separate account manager in Seattle.

Though "largely discredited" since 2008--its most ardent fans these days are "new brokerage-firm trainees"--MPT still shapes how many seasoned advisers build and manage portfolios, says Mr. Kinsey.

Mitch Eichen, chief executive of MDE Group, a wealth-management firm in Morristown, N.J., agrees. He says advisers from small-shop independents to the investment brains behind gigantic pension plans stick with the forms of MPT--asset allocation, the efficient frontier--for a simple enough reason. "It's all they know," says Mr. Eichen, whose firm manages about $4.3 billion.

Where ignorance isn't the cause, timidity and laziness often are, he adds. And, as an overriding consideration, some advisers fear seeming weak or indecisive after years of championing MPT.

Mr. Kinsey says he was lucky to have gone sour on MPT before he cofounded Artifex in 2006. This let him start with an approach based on individual securities instead of having to migrate clients away from a years-old asset-allocation strategy. "Our philosophy is based on buying a stock and treating it like any corporate owner would," he says. "We are investors, not an asset allocators."

Mr. Eichen's rejection of MPT has taken him down a different path. His firm uses a simple, non-structured-product strategy to protect against losses by combining exchange-traded funds that track the S&P 500 with options purchased monthly to spread timing risk.

He thinks clients are better served in these bearish times by investment strategies that place asset preservation over the relentless--and inevitably disappointing--hunt for benchmark-beating returns.

"We're selling our clients peace of mind," says Mr. Eichen.


And on the other hand:

Is Modern Portfolio Theory "Dead" ? Come on...
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Re: The Humble Pension Fund

Postby Wombaticus Rex » Sun Feb 17, 2013 3:30 pm

Data point via FT:

There are 222 state pension plans, and a further 3,200 local plans, according to Wells Fargo, and some are in worse shape than others. There are 12 states where local beneficiaries outnumber contributors and, in Arkansas, Idaho, Vermont and Nebraska, payments exceed revenues.
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Re: The Humble Pension Fund

Postby Wombaticus Rex » Sun Feb 17, 2013 4:22 pm

Via: http://www.statebudgetsolutions.org/blo ... ds-collide

Taxpayers get crushed when pensions and bonds collide
May 21, 2012

This all boils down to who gets to pick taxpayers' pockets first, public pensioners or municipal bond investors? More people are waking up to the hard reality that when it comes to state and local government, somebody has to lose money over the next few decades. The National Association of Bond Lawyers is worried enough about it to issue "Considerations" for advising clients who think they're getting safe investments.

"Considerations in Preparing Disclosure in Official Statements Regarding an Issuer's Pension Funding Obligations (Public Defined Benefit Pension Plans)" states "governmental pension plans may have problems that may not be apparent to investors and analysts from either the basic information about a pension plan or system or even from the actuarial valuation."

State and local politicians have been secretly looting public pension funds for decades. Now the bills are coming due, and they don't have enough money to pay. In most states bond investors are in line behind pensioners when it comes to taking taxpayer money.

The warning bell finally got loud enough almost two years ago when the Securities and Exchange Commission gave a wink and a nod to New Jersey for intentionally and repeatedly lying to bond buyers about its public pension fund catastrophe.

SEC determined the state was "negligent" and violated the Securities Act.

"Specifically, the State made material misrepresentations and omissions ... regarding the State's under funding ...." And pension debts "... represent a significant and growing obligation .... The State's misrepresentations and omissions were material in that they failed, over the course of an almost six-year period, to provide investors with adequate information regarding the State's funding ... as well as the financial condition of the pension plans."

New Jersey is not alone. According to a recent study by the Mossavar-Rahmani Center at Harvard's Kennedy School, state and local government finances are "spiraling out of control ... Nearly all states are facing a major financial challenge when it comes to funding their pension promises."

The authors warn of a "looming showdown between taxpayers, elected state officials and many public sector unions." What about bond investors?

Another recent study by the Federal Reserve Bank of Cleveland cites unfunded pensions as a major cause of state and local government stress and says bonds probably are safe, but, "A sudden, unanticipated municipal bond default could cause a sharp decline in investor confidence, potentially leading to a rapid selloff. If investors thought that defaults among multiple issuers were highly correlated, growing uncertainty could fuel a downward spiral of selling and investor losses."

If that happens, investors will be asking their bond lawyers some tough questions.


So NABL put a task force on finding ways for lawyers to cut through government lies about "the extent to which existing or future legal, political or economic factors will likely materially constrain an issuer's ability to meet its overall general operating costs (and thereby materially affect an issuer's ability to meet its pension funding obligations) ...."

The report includes specific ways "... to determine whether the pension plan has accumulated a sufficient amount of assets such that, together with future annual payments and assumed earnings on those assets, there will be funds sufficient to pay that future stream of ben­efit payments."

And it warns, "... information in the notes to the financial statements may not be sufficient to provide a complete understanding of both the current financial status of the plan (assets) and the actuarial determined liabilities, which together represent the funded status of the plan....

"Where concerns arise about the funding and budgeting aspects of an issuer meeting its pension obligations or concerns with the fund­ing and policies of a pension plan ... further disclosure may be warranted. Appen­dix D provides for examples of additional information that may be required in order to fully explain to investors how the issuer's pension funding obligations factor into the whole credit story of the bonds."

Not only bond investors should use Appendix D to find how bad a pension plan is. Public workers and taxpayers should, too.

Because no doubt about it, somebody has to lose. There's not enough money to go around.

In the New Jersey case SEC told officials to stop lying but punished no one. As of now, unless taxpayers rebel, they have to pay billions of dollars for those lies to bondholders and public employees.

The liars and cheats who pocketed millions of dollars doing the deals are off the hook, for now.

To one degree or another, the same perfectly legal fiscal crimes are happening all over the country.

NABL's "considerations" may slow the countdown on this ticking time bomb a little, but it's not enough to stop ultimate detonation when taxpayers get the bill.

Only immediate radical pension reform can prevent that.
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Re: The Humble Pension Fund

Postby Wombaticus Rex » Tue Mar 19, 2013 9:39 am

Image

Via: http://articles.latimes.com/2012/apr/24 ... c-20120424

SEC suit says two former CalPERS officials defrauded equity firm

Former CEO Federico Buenrostro Jr. and former director Alfred J.R. Villalobos fabricated documents to dupe Apollo Global Management into paying $20 million in fees to secure investments from the public pension giant, the suit alleges.

SACRAMENTO — Federal securities regulators sued a former chief executive and a former director of the California Public Employees' Retirement System, accusing them of scheming to defraud an investment firm of $20 million.

The Securities and Exchange Commission alleged that former CEO Federico Buenrostro Jr., 62, and former director Alfred J.R. Villalobos, 68, fabricated documents requested by Apollo Global Management, a New York private equity firm.

Apollo had hired Villalobos, a close friend of Buenrostro, as a so-called placement agent to secure billions of dollars of investments from the country's largest public pension fund.

The documents were used by Villalobos and his companies — Arvco Capital Research and Arvco Financial Ventures of Zephyr Cove, Nev. — to bill Apollo for helping to win private equity investment management contracts.

In all, Apollo paid Villalobos more than $48 million from 2005 to 2009.

Villalobos received at least $12 million in additional placement fees from other investment funds that managed CalPERS money.

Both Buenrostro and Villalobos have denied any wrongdoing. Buenrostro was not involved "in any type of fraud or illegal conduct," said his attorney, Bill Kimball.

Villalobos does not have an attorney, the SEC said. The telephone at Villalobos' onetime office near his Lake Tahoe mansion was disconnected.

The alleged phony documents were patched together to make it look as if the fees had been approved by CalPERS investment staff, the suit alleged. Apollo's lawyers had wanted Villalobos to provide them with proof that CalPERS consented to the fees.

"Those documents gave Apollo the false impression that CalPERS had reviewed and signed placement agent fee disclosure letters in accordance with its established procedures," the SEC said in a statement.

"In fact, Buenrostro and Villalobos intentionally bypassed those procedures to induce Apollo to pay placement agent fees to Villalobos' firms," the SEC said.

The false documents bore a fake CalPERS logo and in at least one instance a copy of Buenrostro's signature taken from an otherwise blank paper, the SEC said.

The suit alleged that Villalobos, Buenrostro and an Arvco staffer created the bogus documents beginning in 2007 after CalPERS investment officers were advised by their lawyers not to sign such disclosure orders.

"Buenrostro and Villalobos not only tricked Apollo into paying more than $20 million in placement agent fees it would not otherwise have paid, but also undermined procedures designed to ensure that investors like CalPERS have full disclosure of such fees," said John M. McCoy III, associate regional director of the SEC's Los Angeles office.
The complaint seeks restitution from Villalobos and Buenrostro as well as financial penalties. It did not say how much the SEC was seeking.

Buenrostro and Villalobos also are the target of a civil fraud suit brought by the California attorney general's office in Los Angeles County Superior Court.

And CalPERS, which has an investment portfolio valued at $235 billion, has confirmed that a federal criminal investigation is pending.

The SEC action is the latest by law enforcement in a probe that began in October 2009, when CalPERS released documents in a Public Records Act request that showed Villalobos was paid unusually high placement agent fees for helping Apollo and other investment firms close deals with the pension fund.

Philip Khinda, a Washington securities lawyer hired by CalPERS to conduct a special review of the placement agent scandal, applauded the SEC.

"It's another impressive action by law enforcement authorities, and I expect more from them to come," Khinda said.

CalPERS board President Rob Feckner commended the SEC for its "perseverance" in the case and vowed to continue working with state and federal agencies in the continuing investigation.

For its part, Apollo Global Management, one of the biggest private equity investment firms in the nation, called the SEC allegations "troubling." Spokesman Charles V. Zehren stressed that the company "only learned of the alleged misconduct while cooperating with the regulatory agencies investigating this matter."

Villalobos, a former deputy to Los Angeles Mayor Richard Riordan in 1993, has had a close relationship with Buenrostro since the two served on the CalPERS board of directors in the early 1990s.

The friendship and working relationship deepened when Buenrostro became CalPERS chief executive in 2002. Villalobos hosted Buenrostro's wedding in his lake view home in 2004.

Buenrostro retired in mid-2008 and began working the next day for Arvco. At that time, Villalobos paid him a $300,000 consulting fee and gave him the title to a Lake Tahoe condominium.

In a lawsuit filed two years ago, the California attorney general's office alleged that "Buenrostro … played a key role in assisting Villalobos and Arvco in their fraudulent activities."

The suit also accused Villalobos of compromising Buenrostro and other CalPERS officials with tens of thousands of dollars in gifts, including international trips.

Such breaches of legal and ethical behavior by CalPERS officials now should be a thing of the past, said current Chief Executive Anne Stausboll.

"We have dedicated ourselves as an organization to pursue all of the appropriate policy changes and remedies available to prevent further misconduct," Stausboll said.

Stausboll said those actions included pushing for a new state law requiring placement agents to register with the state as lobbyists, obtaining commitments for more than $215 million in fee concessions from outside fund managers and limiting the value of gifts that board members can receive from companies doing business with the pension fund.


Via: http://www.reuters.com/article/2013/03/ ... vrit=56943

Jury indicts former Calpers CEO for fraud scheme


A former chief executive of Calpers, the largest U.S. public pension fund, was indicted on federal conspiracy charges in connection with a scheme to commit fraud, the U.S. Department of Justice said on Monday.

Former Calpers CEO Federico Buenrostro was indicted by a San Francisco grand jury, as was Alfred Villalobos, a former member of the pension fund's board. They were charged in connection with the scheme involving fraudulent documents related to a $3 billion investment by the retirement system in funds managed by Apollo Global Management.

The private equity company had hired Villalobos' firm, ARVCO Capital Research LLC, to provide placement agent services to secure investment business at the pension fund, formally the California Public Employee Retirement System. He and Buenrostro conspired to create fraudulent investor disclosure letters sent to Apollo, according to a statement released by the U.S. Attorney for the Northern District of California.

Apollo paid ARVCO about $14 million in fees after receiving the fraudulent letters, the statement said, adding that ARVCO transmitted the last of the letters in June 2008, a few weeks before Buenrostro retired from Calpers and was hired by Villalobos to work for ARVCO.

The statement also said the two men made false statements to authorities investigating the disclosure letters, adding that the grand jury charged Buenrostro with making a false statement and obstruction of justice.

The U.S. Securities and Exchange Commission last year charged the two men with scheming to defraud Apollo.

Buenrostro's lawyer and representatives for Villalobos could not be reach for comment.

Apollo and Calpers have cooperated with long-running federal and state probes of placement agent activity at the pension fund, and the investigations spurred it to increase its oversight of placement agents.

"We are extremely pleased that law enforcement authorities are moving to hold individuals accountable for activities which violate the public trust," Rob Feckner, president of the Calpers board, said in a statement.

Apollo said the allegations in the indictment are "troubling" if true.

"Apollo has always followed best practices in handling its placement agent relationships, and was not aware of any misconduct engaged in by Mr. Villalobos during the time that he worked with Apollo," the company said in a statement.
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Re: The Humble Pension Fund

Postby Aurataur » Wed Mar 20, 2013 7:23 pm

Mr. Rex, I thought this source might be useful in your research. This is the Towers Watson top 300 Sovereign Wealth/Pension Fund index. A link to the PDF can be found here: http://www.towerswatson.com/en/Insights/IC-Types/Survey-Research-Results/2012/09/the-worlds-300-largest-pension-funds-year-end-2011

Here's a list of the top US corporate pension funds as of year-end 2011:

General Motors - $104,590,000,000
IBM - $84,657,000,000
Boeing - $80,192,000,000
AT&T - $73,798,000,000
General Electric - $58,639,000,000
Ford Motor - $48,713,000,000
Lockheed Martin - $47,300,000,000
Verizon - $44,298,000,000
Alcatel-Lucent - $38,865,000,000
Northrop-Grumman - $34,163,000,000
United Parcel Service - $33,629,000,000
Bank of America - $32,736,000,000
United Technologies - $32,098,000,000
Exxon Mobil - $29,300,000,000
Wells Fargo - $28,498,000,000
Hewlett-Packard - $24,513,000,000
Raytheon - $24,240,000,000
Chrysler Group - $24,198,000,000
J.P. Morgan Chase - $22,868,000,000
Kaiser - $22,718,000,000
FedEx - $22,567,000,000
Chevron - $22,517,000,000
DuPont - $22,511,000,000
National Railroad - $22,172,000,000
Honeywell - $21,080,000,000
State Farm - $19,301,000,000
Citigroup - $19,236,000,000
Pfizer - $19,218,000,000
Procter & Gamble - $18,367,000,000
3M - $18,302,000,000
Dow Chemical - $17,524,000,000
Shell Oil - $17,505,000,000
American Airlines - $17,386,000,000
Delta Air Lines - $17,244,000,000
Prudential - $16,752,000,000
Johnson & Johnson - $16,126,000,000
Caterpillar - $15,526,000,000
CenturyLink - $15,382,000,000
PG&E - $14,753,000,000
Exelon - $14,619,000,000
Wal-Mart - $14,385,000,000
PepsiCo - $14,198,000,000
General Dynamics - $13,741,000,000
National Electric - $13,582,000,000
Merck - $13,191,000,000
BP America - $13,063,000,000
Federal Reserve Employees - $12,751,000,000
Deere - $12,677,000,000
International Paper - $12,185,000,000
MetLife - $12,122,000,000
ConocoPhillips - $11,956,000,000
Eastman Kodak - $11,526,000,000
Siemens (USA) - $11,474,000,000
United Continental Holdings - $11,435,000,000
Kraft Foods - $11,208,000,000
Southern Co. - $10,960,000,000
Abbott Laboratories - $10,847,000,000
Intel - $10,802,000,000
Alcoa - $10,707,000,000

These 59 company pension funds total $1,490,911,000,000.
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Re: The Humble Pension Fund

Postby semper occultus » Sun Jan 08, 2017 8:01 pm

CalPERS Cuts Pension Benefits For First Time

By Adam Shapiro Published December 20, 2016

http://www.foxbusiness.com/politics/2016/12/20/calpers-cuts-pension-benefits-for-first-time.html

CalPERS cuts retiree benefits for first time ever

FOX Business Network's Adam Shapiro reports from the front lines of America's pension crisis unraveling between CalPERs and the City of Loyalton, California.

The unthinkable just happened in Loyalton, California, a small remote city nestled high in the Sierra Nevada Mountains.

For the first time in its 85-year history, the California Public Employees Retirement System, CalPERS, is drastically cutting benefits for public retirees. Starting January 1st, four retired City of Loyalton public employees will have their pensions cut 60 percent.

For 71-year-old Patsy Jardin, that means her pension will drop from about $49,000 a year to a little more than $19,000.

In an interview with the FOX Business Network, Patsy asked, “How am I going to make it now? What am I going to do?”

Fellow Loyalton retiree John Cussins is asking the same question since his pension will also drop 60 percent, to $1,523 a month.

“It’s not cheap to live here when you’ve got to go on a 100-mile trip just to go to a hospital or a doctor to get your groceries and things and stuff,” he said. “Now, not to have that money we’re going to have to skimp on everything we got.”

John worked about 22 years for the City of Loyalton, Patsy worked there for 34 years. Both of them thought their pensions were safe when they retired since the city had always paid its CalPERS bills in full.

But three years ago, the City Council in Loyalton voted to leave CalPERS in order to save money. At that time, CalPERS informed the city its pension accounts were only 40 percent funded despite the fact Loyalton had paid all its previous bills.

“The City of Loyalton defaulted on their retirees,” CalPERS Deputy Executive Officer Brad Pacheco said. “They made a bad decision and those retirees are going to suffer for it.”

John and Patsy say CalPERS cares more about the 3,000-plus cities towns and municipal entities that pay into the fund than the people the pension fund is supposed to cover in retirement.

Like Loyalton, CalPERS is far from fully funded, only 65 percent. That means right now CalPERS has 65 cents for every dollar that it needs to provide pension benefits for almost two million people.

Some of them are still working and not yet receiving pension benefits. The rest are retired and drawing funds from CalPERS.

Pacheco, the CalPERS spokesperson, told FOX Business network the pension fund is healthy but in a negative cash flow position.

“We are paying out more in benefits than we are taking in in contributions,” he said.

CalPERS pension debt is roughly $164 billion and mostly likely will grow larger in coming years.

For several decades, CalPERS predicted its investments would earn a 7.5% return. Pension funds call that return on investment a “discount rate”. A higher “discount rate” like 7.5% allows politicians to avoid raising taxes or cut spending to meet their obligations to public employees.

A lower “discount rate” requires cities to pay more each year into the pension fund to keep it solvent. CalPERS is actually considering cutting its “discount rate” to just 6.4% to reflect what it expects to be smaller returns in the future. That will require cities, towns and other municipal entities in the CalPERS system to pay more money to cover their employees. Some may have to raise taxes to do it. Others may opt to leave CalPERS just as Loyalton did.

But those that leave may be shocked to learn their pensions are less than fully funded. That’s why Patsy Jardin thinks CalPERS is using her plight to send a message to other California public employees and cities, that despite tight budgets, dropping CalPERS may come with consequences.

She said: “I just think they are setting an example out of the four of us, I really do. I just think we are the ones who are going to pay for this, for all retirees.”



RI Pension Crisis
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