Analysis: Pension woes are complicating retirement
Stock market losses began dragging down pension assets a few years ago, but the current near-zero interest rates - intended to spur the American economy - have worsened the problem and created the largest gap in assets and liabilities since the end of World War II. “While low interest rates help people borrow money, they dramatically shoot up the pension obligations of plans,” says Rebecca Davis, an attorney at the Pension Rights Center in Washington.And the problem isn’t unique to the U.S. A new study from consulting giant Mercer says the problem is global in scope. The sustainability of pensions in other countries is also at risk, according to the 2011 Melbourne Mercer Global Pension Index released on Tuesday.That’s the kind of uncertainty prompted American Airlines Captain Rod Carlone to leave the work force last month, much sooner than he had expected. Carlone says he did not want to risk missing out on a lump sum payment if the American Airlines Pensions Inc. Pilot Retirement Benefit Program Fixed Income Plan (the pilot pension plan) was underfunded. After almost 24 years at American, he flew his last flight on September 30 from Dallas to Los Angeles.”I can’t afford at almost 62 a financial setback I could not recover from,” Carlone says. “I live in Las Vegas, and this is one wager I didn’t want to make.”Concerns about the pension have resurfaced in recent months, but the airline says participants shouldn’t worry. “We have a history of meeting our pension obligations,” says Sean Collins, director of financial communications at American Airlines.How bad is the cash crunch for companies? The aggregate deficit of pension plans among S&P 1500 companies climbed by $134 billion in September to $512 billion, according to Mercer. The funded status of the 100 largest corporate pensions dropped by $124 billion during September, according to Milliman, an actuarial and accounting firm. Looking at it another way, the funded ratio of companies in the index slipped to less than 73 percent from almost 80 percent at the end of August.The situation is deteriorating rapidly: The decline in the last quarter was the most significant three-month drop since the start of the financial crisis at the end of 2008, Milliman says.Even more worrisome, pension obligations are expected to grow because companies must meet funding requirements set out in the Pension Protection Act of 2006. “You’re talking about dramatically increasing funding obligations in just a year’s time,” says Lynn Dudley, senior vice president policy of American Benefits Council, a Washington, D.C. trade association. “What businesses do is halt projects, and they halt hiring to save the money because it’s not a choice. They’re going to have to put it into the plan.”Companies typically make up for these shortfalls by borrowing or using cash on hand, and most should be able to pay the minimum necessary. But many sponsors have large pension liabilities, says Alan Glickstein, senior retirement consultant at Towers Watson.For example, the Goodyear Tire & Rubber Co. expects to contribute almost $400 million a year in 2012 and 2013 to improve the funding status of its pensions, according to the company. Since April, new retirees can only get half their pension in a lump sum and the other half as a monthly annuity, because the pension for salaried employees is less than 80 percent funded, which is typical for companies with underfunded pensions.American says an outside analysis of its plan in the first quarter of 2011 “found that all four AMR pensions were more than 80 percent funded.” The company says it has contributed more than half of the $520 million it needs to provide this year to its four plans.”Companies with lots of cash can probably weather the storm,” says Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance business. But not every employer has a lot of cash, he says, including nonprofits.More companies may decide to freeze pensions, say experts. When that happens, workers don’t get to accrue additional benefits beyond what they’ve already earned. Companies typically add a 401(k) plan, but that leaves the retirement saving and investing to employees rather than the pros.IDENTIFYING TROUBLEHow do you know if your pension is in trouble? Companies must notify workers if a plan falls below 80 percent funding. Plans with a funding level below 60 percent are forced to freeze and to provide only an annuity.Companies obviously don’t like to slip below the 80 percent threshold, says Mike Dulaney, consulting actuary, retirement and investor services at Principal Financial Group. Employees “are going to get their pensions, but they may lose some flexibility in terms of the pension payments they receive,” Dulaney adds. “They don’t want to give notice to workers about the restrictions,” he says. “It might cause panic among participants.”But they shouldn’t, says Davis of the Pension Rights Center. Even in the worst-case scenario such as when a company files for bankruptcy, workers receive most if not all of their benefits from the Pension Benefit Guaranty Corp., which insures private pensions and pays benefits when companies can’t.Currently, a 65-year-old would receive a maximum of $54,000 a year in pension benefits from the PBGC, if that is what they would have received from their company.Davis recommends that workers stay on top of a plan’s funding status by reading the fund’s annual report, typically sent by mail. Plans must provide additional notices when benefits are restricted because of pension underfunding.Historically, most people eligible for a lump sum take it rather than choose a lifetime annuity. But that’s not necessarily the best choice. New rules allow smaller lump sums, and since January, the Standard & Poor’s 500 stock index dropped 4 percent. — good reminders that managing your own money isn’t easy.Consider your age, life expectancy, company health and other investments before making the choice about whether to take an annuity or lump sum. Most importantly, don’t be tempted to spend that money now if you’re going to need it for retirement. Another consideration, if your company freezes the plan you might want to save more in a 401(k) or IRA.
Rio’s Coal & Allied unit Q3 output up 33% vs yr ago
Rio Tinto and Japan’s Mitsubishi Corp
are in the process of mopping up the shares in Coal and
Allied Industries that they don’t already own.Rio Tinto currently owns 75.7 percent of Coal and Allied,
and Mitsubishi 10.2 percent.The companies are offering A$125 a share, valuing the miner
at A$10.8 billion.Coal and Allied operates three mines in New South Wales
state producing coking and thermal coals.
Florida says more work needed in foreclosure talks
* New round of talks to be held in Washington on ThursdayBy Kevin GrayMIAMI, Oct 12 (Reuters) - Florida’s attorney general
dismissed media reports that a final settlement is imminent in
multi-state negotiations over alleged foreclosure abuses by
U.S. banks.Florida Attorney General Pam Bondi also said states that
have pulled out of the negotiations should return to bolster
any deal. Federal, state and bank officials are expected to
hold another round of negotiations in Washington on Thursday.”I read this morning that we’re settling this tomorrow. I
doubt that’s going to happen,” Bondi said, speaking on
Wednesday during an event in Miami.”We still have states that aren’t on board yet. We’re
trying to bring in some people who left the table.”Negotiations toward a settlement have been going on for
months, with penalties on the banks of up to $20 billion being
discussed. A settlement would free up a backlog of foreclosures
weighing on housing markets and dragging on economic growth.Banks, including Bank of America Corp , JPMorgan
Chase & Co , Wells Fargo & Co and Citigroup Inc are seeking to maximize their legal immunity. Investor
worries about banks’ financial liability have helped send bank
shares falling this year.Last month, the state of California pulled out of the
negotiations, with the state’s attorney general saying the
talks had failed to provide enough relief for homeowners and
released the banks from too many legal claims.New York abandoned the negotiations in August expressing
similar concerns.”The main thing I want to focus on is bringing everybody
back to the table,” Bondi said. “That right now is the most
important thing.”Whether we agree or disagree, we all have to stay at the
table or we’re never going to get anything done.”The banks are accused of dealing with a deluge of mortgage
defaults that began in 2008 by cutting legal corners and
unlawfully rushing through foreclosure paperwork.The claims include allegations of “robo-signing” in which
lenders’ employees or outside contractors produced and signed
reams of foreclosure documents without fully understanding
their content.A settlement with all 50 states and federal authorities
could help the banks move beyond the legal fallout that has
dogged them since the height of the financial crisis.The talks have been bogged down by disagreement over the
banks’ legal exposure.Sources close to the negotiations have told Reuters a
settlement is possible without all states signing on. Even if a
state chooses not to sign on to a final deal, its homeowners
could still benefit, the sources said.Details over the size of any penalties and how that money
would be divvied up have not yet been worked out, people
familiar with the talks said.”We’re doing our best to resolve this,” Bondi said.
Rambus asked about shredded records in Nvidia case
* Other judge: ITC may use wrong standard to take cases By Diane Bartz WASHINGTON, Oct 6 (Reuters) - Chip technology company
Rambus Inc (RMBS.O) was quizzed in court about destroyed
documents and its own use of its patents as graphics chip maker
Nvidia Corp (NVDA.O) sought relief from expensive licensing
fees. The two sides squared off on Thursday before the U.S. Court
of Appeals for the Federal Circuit over whether Nvidia
infringed Rambus patents for controlling and managing the flow
of computer data to and from a chip’s memory. The U.S. International Trade Commission, which hears patent
cases involving imports, had previously found Nvidia infringed
Rambus chip patents and issued an order barring the importation
of any chip made with the infringing technology. Nvidia licensed the Rambus technology at royalty rates of
between 1 percent and 2 percent depending on the type of memory
controller involved, to allow its chips to enter the country,
but the legal battle has continued. The ITC had found that Nvidia infringed three patents but
did not infringe two others. Both sides appealed to the circuit
court and the arguments were consolidated. Part of the battle has centered on whether Rambus destroyed
documents to avoid having them used against it in litigation. Rambus has acknowledged document destruction but said it
was part of ordinary business practices. Judge Kathleen O’Malley, part of a three-judge panel that
heard the case, took issue with an attorney for Rambus who said
the company produced the documents that were requested and that
all relevant documents were preserved. “You admit you have no idea what was destroyed! You have no
record of what was destroyed!” she said. “Remember, you saved the ones that helped you and destroyed
the ones that hurt you,” O’Malley said at another point. The appeals court previously ruled in cases between Rambus
and Micron Technology (MU.O) and Hynix Semiconductor
(000660.KS) that Rambus destroyed documents inappropriately.
The cases have been remanded back to lower courts for further
consideration. The battle is a key one for Nvidia, whose core business
relies on the sale of specialized graphics cards. Judge Raymond Clevenger on Thursday repeatedly asked
whether Rambus had proved that it used the patents that it was
seeking to defend. Companies may not sue at the International Trade Commission
unless they show that they are using the patent domestically.
Rambus licensed the patents, and used that to proceed with the
lawsuit. Clevenger said district courts cannot order production or
importation of infringing products to cease since the Supreme
Court said in a 2006 decision that an injunction should not
necessarily follow a finding of infringement. “It’s a factor we
should think about,” he said. Rambus and others go to the ITC to file patent complaints
because the trade commission, unlike U.S. district courts, can
bar the importation of devices made with infringing
technology. The case against Nvidia and others that was before the
International Trade Commission is number 337-661. The U.S.
Court of Appeals for the Federal Circuit case numbers are
2010-1483 and 2010-1556.
Role of hedge-fund boards gains importance in face of compliance, legal pressures
By Judith Gross, Contributing Author. The views expressed are her own.
NEW YORK, Oct. 7 (Thomson Reuters Accelus) - The role of directors on offshore hedge funds has often been, at best, a limited oversight one, with perfunctory meetings and a limited interchange with the fund itself during the year. That has been changing – slowly – as compliance moves to the top of the list of concerns for investors and managers alike. In addition, directors themselves are realizing that the status quo is no longer tenable.
Hedge funds advised by U.S.-based investment advisers tended to only have a board of directors if they were domiciled outside of the United States, since it is a legal requirement in most offshore jurisdictions, but not in the United States. In other words, it has been atypical to see a board of directors on a U.S. fund. But an offshore fund in a place such as the Cayman Islands, the biggest domicile of hedge funds in the world, would certainly have a board of directors.
There are several reasons why this scenario has changed. Recent litigation has ensnared directors, pushing them into playing a more active role. For example, in a recent Cayman Islands Grand Court decision of a fund fraud case, Weavering Macro Fixed Income Fund Limited v. Sefan Peterson and Hans Ekstrom (August 2011), two “independent” directors were ordered to pay $111 million for willful neglect and failing to carry out their duties.
Even though these two directors may not have been “independent” in the technical sense, the judgment was based on the fact that they “did nothing and carried on doing nothing for about six years,” as the justice in the case noted.
What should compliance professionals, investment managers and investors alike look for in a well-functioning board of directors? Here are some areas to focus on in making this determination:
Is the board receiving relevant information on a timely basis? That is, do they have the information that they will need to perform their oversight role?
Are the board meetings substantive, with a full agenda and detailed minutes? This indicates a board that is engaged, as opposed to playing a perfunctory one.
Is the board viewed as an integral part of a fund’s operations? Is the board used as a resource, and do the directors have the necessary experience and knowledge to be a resource? When a problem arises, the board can play an important role in providing guidance and decision-making.
Are the board fees significantly lower than industry standards? While it is important to keep operating expense down, excessively low board fees may indicate a lack of engagement by the board members.
While no two boards will have completely similar procedures and levels of involvement, as the role of hedge fund boards move closer to the standard set by independent fund boards in the United States, hedge fund advisers will need to add this area to their list of compliance and management concerns. Having the board act as a rubber stamp is no longer an option.
(Attorney Judith Gross is the principal and founder of JG Advisory Services LLC, with a background in government affairs, securities law and the hedge-fund industry).
