Happy New Year From KCS and the Kamp Family



GASB 67 – Is Your Pension Plan Ready?

Recent GASB 67 accounting changes may re-price liabilities at a higher valuation thereby causing higher reported pension deficits. Moody’s rating agency has decided to price liabilities under FASB guidelines, which lowers the discount rate and increases liabilities above the GASB 67 valuation.
New Issues for Plan Sponsors:
1. It is estimated that GASB 67 accounting rules will increase the public pension deficit by 30% to 60%
2. Plan sponsors must deal with the blow-back from GASB’s calculation of Asset Exhaustion and Net Pension Liability
3. Moody’s has decided that GASB isn’t strict enough, and, as a result, they’ve proposed to base the credit rating on an AA corporate discount rate (FASB)
4.Moody’s approach increases the GASB pension deficit, while potentially negatively impacting a US state’s borrowing cost and credit rating
Taking the first steps to help your plan offset the impact of GASB 67 and any funding deficits is difficult. However, we have a roadmap for success for plan sponsors.
1. Install a Custom Liability Index (CLI) as the plan’s proper benchmark
It is hard to beat an invisible or unknown opponent. A plan sponsor needs to know the size, shape, growth rate and interest rate sensitivity of their liabilities in order to devise a strategy to have assets outgrow liabilities. Since every pension plan is different, only a CLI could provide the monthly calculations needed for the asset side to function.
2. Asset Allocation should be responsive to the Funded Ratio
The objective of a pension plan is to fund liabilities such that contribution costs are low and stable as a % of payroll. A high funded ratio should have a much different asset allocation (AA) than a low funded ratio. Most AA models are strategic or static and do not respond to the funded ratio. A responsive AA is required, and one that is updated frequently.
3.Monitor Asset Growth vs. Liability Growth
Traditional performance measurement systems monitor assets vs. an asset benchmark (generic market index). This is really measuring assets vs. assets. What is required is a measurement of total assets vs. total liabilities (as measured by the CLI). If you outperform generic market indexes but lose to liability growth – your plan loses!
Allow us to help you! We have too much to lose as a society if we fail to preserve these critically important retirement vehicles.

Are Your Multiemployer Benefits in Jeopardy?

The following summary is provided by the Pension Rights Center

Summary of the pension cutback provisions in the Omnibus spending law
Bill Number: H.R. 83
Date Published: Wednesday, December 17, 2014

In December 2014, Congress passed and President Obama signed into law the 2015 Omnibus spending bill, which includes provisions that allow trustees of certain multiemployer plans to cut retirees’ pensions. Here is a summary of these provisions:

The legislation permits deep pension cuts to retirees in certain financially-troubled multiemployer plans. Financially-troubled plans are plans expected to not have enough money to pay 100% of benefits within 15 and, in some cases, 20 years.1 There are instances where the cuts could be more than 60% of a participant’s benefits. To find out how much your benefits could be cut use this calculator.

The decision to cut benefits is made by plan trustees, who are typically more aligned with active workers and employers than with retirees.

Retirees who are age 80 or over, or who are receiving a disability pension, are not subject to benefit cuts. Retirees ages 75-79 are subject to smaller cuts than retirees under age 75.

How big or small the cuts are for those under age 75 is determined by the trustees. The cuts are subject to certain legal limits, the most important of which is that benefits cannot be cut below 110% of the amounts that the federal pension insurance agency guarantees.2

Plan trustees decide how to allocate the cuts. For example, they can cut retirees’ benefits more than those of active workers, and they can decide whether and how much to reduce survivors’ benefits.

Plan trustees are required to reduce the benefits of participants whose employers went out of business (or withdrew from the plan for other reasons without paying all of their obligations) first, before they reduce the benefits of any other plan participants. This will mean that those retirees whose companies went bankrupt will have greater reductions than other retirees.

UPS retirees in the Central States Teamsters plan are given special protection: their benefits are last in line to be cut. This provision is reportedly the result of a last-minute deal that will save UPS an estimated $2 billion that it would otherwise have been contractually be required to pay to its retirees.

There is no provision for automatic restoration of lost benefits if a plan’s funding status improves.

A trustees’ decision to cut benefits can only be reversed by the Department of Treasury, and then only if the Treasury concludes that the decision is based on a determination that is “clearly erroneous.”

Before cutting benefits, the trustees must provide information to all plan members about the cuts, and plans with 10,000 or more participants must appoint a retired plan participant to represent the interests of pensioners. The trustees appoint this representative and can even appoint a trustee or former trustee of the plan.

Plan trustees must allow all participants to vote on cuts before they are implemented. However, this right is largely illusory. First, a majority of all workers and retirees in a plan – not just a majority of the ones who vote – is required to block cuts. Thus, a vote to block cuts fails even if 100% of those voting oppose the cuts, if only 49% of participants actually vote. Moreover, ballots can be distributed by e-mail, which means that retirees who don’t use the Internet might not vote.

Even if all participants vote against cuts, the Treasury Department, in consultation with the Department of Labor and the Pension Benefit Guaranty Corporation (PBGC, the federal pension insurance program) can override the vote and uphold the trustees’ decision to make cuts if it concludes that the plan’s insolvency would increase the PBGC’s projected liabilities by $1 billion or more.3

The insurance premiums that multiemployer plans pay to the PBGC are increased from $13 to $26 per participant per year. In contrast, premiums paid to the single-employer plan program are between $57 and $475 per participant per year.4

Retirees, widows, and widowers whose benefits are reduced cannot bring a lawsuit under the federal private pension law, ERISA, to challenge the legality of the reductions.

1 Plans projected to run out of money within 20 years can cut benefits if there are twice as many retirees as active workers in the plan or the plan does not have enough money to pay more than 80% of future promised benefits. However, no plan can cut benefits unless the cuts are projected to restore the plan to solvency.
2 The Pension Benefit Guaranty Program’s multiemployer program guarantees 100% of the first $11 of a participant’s monthly benefit rate, plus 75% of the next $33 of the monthly benefit times the participant’s years of credited service.
3 When a multiemployer pension plan runs out of money, benefits are reduced to the PBGC’s very low guarantee levels and the agency makes loans to the plan to keep it operating. The anticipated size of those loans will exceed $1 billion in the case of some large plans.
4 The maximum benefit guaranteed by the single-employer program is $60,132 a year in 2015, almost five times the maximum benefit guaranteed by the multiemployer program for a retiree with 30 years of service, $12,780 a year. The guarantee amount is lower for participants with fewer than 30 years of service. Single-employer guaranteed benefits are indexed for inflation. Multiemployer guaranteed benefits have not been increased since 2000.

The single-employer program guarantees pensions for retirees whose employers contributed to plans that were set up by one company rather than by a group (or association) of employers. Both types of plans can be negotiated by unions but single-employer plans are typically administered by employers. Multiemployer plans are usually run by an equal number of employer and union trustees.

Congress : 113th
Sponsor: Rep. Jim Kline (R-Minn.)
Rep. George Miller (D-Calif.)
Tags: Benefit cutback, Congress, ERISA, Legislation, Multiemployer plan, PBGC, PBGC limits/ guarantees, PBGC premium, Pension Rights Center, Red zone/ critical status, Traditional (defined benefit) pensions, Underfunding
– See more at: http://www.pensionrights.org/issues/legislation/summary-pension-cutback-provisions-omnibus-spending-law#sthash.ajmGnbFs.dpuf

Continue To Do Nothing At Your Own Peril!!

The expectation that rates would have to rise following QE1, QE2, QE3, QE forever, has mislead DB plan sponsors into reducing core fixed income, chasing yield that injected more risk / illiquidity into the plan, while widening the asset allocation mismatch between assets and liabilities. We’ll discuss in another blog post the devastating impact of adding hedge funds and commodities in 2009, while simultaneously reducing traditional equity and fixed income beta product.

The sharp move down in rates for US 10- and 30-year Treasury bonds in 2014 has catapulted liability growth versus asset growth. 2014 is shaping up to be nearly as bad as 2011 in the performance of assets versus a plan’s liabilities, and it may exceed the hit we took in 2011 if the current market activity continues. How many plan sponsors and their consultants are focused on this trend?

So, as an industry we can continue to focus on the return on asset assumption (ROA), believing (hoping) that the ROA is truly reflective of liability growth – it isn’t – or we can put into play a new game plan that actually uses a plan’s liabilities to drive investment structure and asset allocation.

We’ve been discussing this concept for 3 years. We’ve presented our thoughts through multiple media outlets. We’ve been trying to convince plan sponsors that the ROA is not the correct benchmark, but because everyone focuses there we must be wrong, insane, etc. What will it take to get sponsors to realize that doing the same thing over and over, while expecting a different outcome is silly!

We have many thoughts on how best to use your fixed income in this low rate environment. Given the economic issues we are facing on a global basis, low rates might just be the new normal. If so, we better adjust our game plan or the remaining 24,000 DB plans will go away just as the 125,000 have disappeared since 1986.

Japan’s Downgrade based on the wrong reasons?

The following appeared in today’s WSJ – “Moody’s Investors Service downgraded Japan’s credit rating Monday, highlighting the challenges facing Prime Minister Shinzo Abe as he tries to stoke inflation and growth.

In explaining its move, Moody’s cited heightened uncertainty over Japan’s ability to cut its fiscal deficit after Mr. Abe decided last month to delay an increase in the national sales tax scheduled to take effect next year.”

Given Japan has a fiat currency (yen), the deficit is not an issue, provided that the easy money policies necessary to get the economy going doesn’t stoke too much inflation. Clearly the growth in Japan’s debt hasn’t proven an issue to date. Japan has other issues, such as an aging population, that will keep demand for goods and services below historic levels, and if demand remains muted, so will both growth and inflation.

KCS Fireside Chat – December 2014 – Emerging Managers

We hope that this blog post finds you well, and that you had a wonderful Thanksgiving holiday with family and friends.

In the latest edition of the KCS Fireside Chat, we share with you part one of a two part series on emerging managers, and the role that they have in the institutional investing community. KCS is blessed to have two colleagues who have each dedicated a significant portion of their careers researching and supporting emerging managers. Ivory Day and Lillian Jones are the foundation of Jones KCS Emerging Insights, LLC, which is a subsidiary of Kamp Consulting Solutions, LLC. Jones KCS is primarily focused on identifying the up and coming talent that we need to support our client’s portfolios. We hope that you find this edition worthwhile.