Revisiting – What Would You Pay For This Stock?

On December 28th we posted a brief note discussing UBI Blockchain Internet Ltd, a Hong Kong based company.  Here is that note –

For the year, UBI had an operating loss of $1.83 million on zero revenues. It had $15,406 in cash, and: “In order to keep the company operational and fully reporting, management anticipates a burn rate of approximately $220,000 per month, pre and post-offering.”

Well, it seems like many investors were willing to pay a lot.  You see, UBI Blockchain Internet, a Hong Kong outfit whose shares trade in the US [UBIA] saw it’s stock price during the six trading days starting on December 11, 2017, soar over 1,100%, from $7.20 to $87 on December 18, as the word “blockchain” is in its name.  By December 21, shares had plunged 67% to $29. They closed on Wednesday at $38.50.

The above information was found in an article by Wolf Richter, who points out that UBI isn’t the only “scam” in town.  There has obviously been tremendous interest in all things crypto and blockchain in 2017, but how different is it from the hundreds, perhaps thousands, of dot-com companies that briefly appeared in the late ’90s with absurd stock market returns only to meet catastrophic destruction like supernovas?

We would suggest that you proceed with caution, but if you feel that you must gamble, please choose a “game” with better odds.

I hadn’t been following this stock since the note, but thought to check this morning.  Not to my surprise, the stock is currently trading at $4.00 per share having traded recently (3/23) at $3.00.  I’m sure that there are many such examples where investors have jumped on crypto and blockchain concept trades only to be burned bigtime. As we said above, “investors” should have learned from their experiences around the Dot-com era. Fundamentals do eventually matter!


$1.3 Trillion Spending Bill Allocates $0 For Retirement Provisions

The $1.3 trillion omnibus spending bill that was recently passed by Congress, unfortunately, allocated nothing for retirement provisions.  The Retirement Enhancement and Savings Act (RESA) was not included in the final draft of the spending bill, although industry supporters hoped it would be included. RESA offered a wide-ranging bipartisan package of reforms that actually passed the Senate Finance Committee in 2016. The bill was revived in the Senate in March 2018. Opposition to it came from the House because there wasn’t time for Representatives to offer their own changes to the bill before the spending bill was passed.

If eventually approved, RESA will not only make some improvements to the current system, but it may also provide access to workers who may not currently contribute to an employer-sponsored retirement plan. According to an article from The Hill, RESA passed on a bipartisan, unanimous basis by the Senate Finance Committee in 2016. It is designed to not only help Americans boost their savings but also provide a means to secure retirement income for life to supplement Social Security.

The reforms encourage retirement plan creation and increased savings at small businesses. This is absolutely vital since employees at the nation’s largest firms are much more likely to have access to a 401(k) plan than employees at small firms. According to the U.S. Census Bureau, the U.S. currently has 27.9 million small businesses versus only 18,500 companies with more than 500 employees.

One provision encourages small employers not yet prepared to sponsor their own retirement plans to join an “Open MEP,” a multi-employer plan, to achieve economies of scale and to share the costs associated with plan administration.

Fortunately, some provisions in RESA have been picked up in stand-alone bills, including offering nondiscrimination relief to closed pension plans, allowing multiple employer plans, and encouraging lifetime income options, i.e. annuities—the only product that can guarantee a lifetime stream of retirement income.

Much more needs to be done to help our workers save and prepare for a retirement. Getting RESA passed and funded is a good start.

Do You Still Believe That There Isn’t An Issue?

Retirement Account balances by Age Group

We’ve reviewed many retirement surveys from numerous organizations, and regrettably, the common theme is a significant lack of retirement readiness. The chart above would suggest to us that only the top 10% of American households even stand a chance of having a decent retirement.  Notice, we didn’t say dignified.

As we recently reported, the average Senior citizen spends roughly $46,000 per annum in retirement. Since Social Security’s average payout is only about $16,000, this leaves a significant gap that must be closed through personal savings or a defined benefit payout.  Unfortunately, most private sector workers do not and will not have access to a DB plan.

Furthermore, it has been reported that one could expect to pay roughly $275,000 in out-of-pocket healthcare expenses during their Senior years. Only the top 10% have accumulated assets in excess of $200,000.

The folks in Washington DC better get serious about addressing this unfolding crisis before we have a significant percentage of our once very productive Senior citizens falling onto the welfare ranks.


The U.S. Retirement Crisis And The Impact On State Finances

We’ve been stating for a while that the unfolding U.S. retirement crisis would not only create a social and economic issue for individuals but that it would likely impact U.S. states, as well. We’ve just stumbled across an article in Employee Benefit Adviser written by Paula Aven Gladych, titled “Pennsylvania Focuses on Retirees Who Can not Afford to Retire”.

The article highlights the economic impact on Pennsylvania’s budget from increased expenditures to support the elderly population. According to Joe Torsella, PA State Treasurer, “when people don’t save enough for retirement, the states have to pick up the slack in long-term care and Medicaid and Medicare costs and state budgets get messed up trying to allocate enough funds to handle these extra charges”.

Pennsylvania decided to commission a study to look at its demographics and its ever-growing population of retirement age people. “As we suspected, there are significant impacts to state finances going forward from the state of our retirement preparedness,” Torsella says.

According to the article, “in 2015, Pennsylvania spent $4.25 billion in assistance costs for elderly residents. Fifty-four percent of this cost was attributed to the 21% of the elderly population who have $20,000 or less in annual household income, according to the report.”

If the elderly had been better prepared for retirement, meaning that they could replace roughly 70% of pre-retirement income, the state would have likely saved about $700 million in state assistance costs. The net impact of state assistance costs due to insufficient retirement readiness is likely to exceed $1 billion in the next 12 years.

We know that many small employers do not offer their employees a retirement program. We also know that employees are not likely to save outside of an employer-sponsored plan.  Thus, it is imperative for states to begin to offer state-sponsored retirement programs that can offer payroll deduction to these small employers and their employees.

As the social safety net gets more expensive, tax hikes are likely to follow. There is a great chance that well-heeled residents will seek to live in less expensive states. We have already witnessed a significant exodus from Illinois to nearby states.  If not careful, we could easily see this happen to other “Blue” states that have been impacted by recent Federal tax changes impacting one’s ability to deduct “SALT” taxes.

Finally, without a decent retirement benefit to rely upon residents won’t have the financial wherewithal to remain active participants in their economy. This will also negatively impact tax collections, businesses, and ultimately that state’s labor force.  It is truly a vicious cycle.

Two Important 401(k) Policy Efforts

According to an article on the 401K Specialist website, there are two important policy initiatives that could provide participants with low savings balances a retirement savings boost. The proposed initiatives deal with Auto Portability and missing participants, which we highlighted in a March 9, 2018, blog post. The policy efforts seem to have bi-partisan support (that’s almost shocking).

With regard to Auto Portability, the legislation is calling for the “routine, standardized, and automated movement of an inactive participant’s retirement account from a former employer’s retirement plan to their active account in a new employer’s plan.” This is critically important because of research that shows more than 50% of balances below $5,000 are more likely to be cashed out than moved to a new employer.

The total of “missing” accounts/participants is staggering.  We reported in a previous post that roughly 25 million abandoned accounts exist with approximately $8.5 trillion in assets. Finding the owners of these accounts will certainly go a long way to reducing the negative effects of low household savings. The Act proposes the creation of a national registry for participant contact information. The Social Security Administration and the Department of the Treasury are identified in the bill as responsible for the administration of the registry.

These initiatives should absolutely be supported.  Given that defined contribution plans are fast becoming the only retirement game, we must do whatever we can to make it easier for our workers/participants to accumulate retirement assets. As we know, too many of our workers (1 in 5 over 65 are still in the workforce) are facing the likelihood that retirement is not an option. Let’s try to reduce that percentage of workers forced to remain in the labor force and these legislative efforts will certainly assist in that effort.


It Just Gets Uglier

Towers Watson has produced a study highlighting the fact that only 5% of new hires in the private sector have access to a defined benefit plan (DB).  The move away from DB plans to defined contribution plans has been amazingly swift. As we’ve discussed on numerous occasions, placing the burden on individuals with the marginal capability to handle this responsibility will likely create a social and economic crisis for older Americans.

According to Towers, “workers who experience a loss of guaranteed retirement income may not exit the workforce in a timely fashion—an outcome that traditional pensions were at least partly designed to avoid. Such counter-cyclical workforce trends could necessitate increased severance pay, raise benefit costs, and reduce mobility within an organization.”

In addition, as of 2015, only 20% of Fortune 500 companies still offered a DB plan (traditional or hybrid) to salaried new hires, down from 59% among the same employers back in 1998. Furthermore, there has been an uptick in plan freezes and closings since the 2008 financial crisis. By 2015, 39% of sponsors had frozen a DB plan, and 24% had stopped offering their primary DB plan to new hires.

City of New Haven Contemplating a POB

The City of New Haven, CT, is contemplating a pension obligation bond (POB) to sure up the City Employee Retirement Fund. The proposed ordinance allows the city to issue up to $250 million in pension obligation bonds next fiscal year to help pay down some of the unfunded liabilities.

CERF, along with the Police and Fire plan, is one of two defined pension plans that the city pays for each year to cover retirement benefits for city employees. The P&F covers pensions for public safety personnel like police and firefighters; CERF covers pensions for all other unionized city employees.

According to Acting Budget Director Michael Gormany and City Controller Daryl Jones, CERF and P&F are each currently funded at around 40 percent. But, we aren’t sure if this is based on GASB accounting or a true mark-to-market basis.  If the former, the funded status could be a lot uglier.

CERF and P&F were each funded at 60.6 percent in June 2008. That number has decreased precipitously over the past decade as the city has struggled to deposit, invest and earn enough money to keep up with the ever-increasing pool of retirees and beneficiaries.

The city is expected to contribute $21.9 million in CERF and $34.6 million in P&F, which are the same as last year, but since 2012 the combined contributions have grown by more than $16 million.

The proceeds from the potential POB would flow to CERF and not P&F.  It is anticipated that the funds would bring the funded status to 85%.  However, as we’ve witnessed on many occasions, the proceeds would be injected into the same asset allocation, and the goal would remain to achieve the return on asset assumption (ROA).

Given where equity valuations are, we believe that injecting this money into a traditional asset allocation is foolish. A better strategy for CERF would be to determine the amount of money necessary to retire all of the retired lives and to then immunize those lives. This strategy would improve the liquidity necessary to meet benefit payments and it would convert the fixed income exposure, with its interest rate sensitivity, to a cash matching strategy that eliminates this source of volatility.

Furthermore, by retiring all of the currently retired lives, the investing horizon is extended allowing for the liquidity premium to be captured from investments in equities, real estate, and other non-traditional investments (alternatives).

There are too many examples of public pension funds issuing POBs at the peak of the equity market in an attempt to capture the potential arbitrage between the ROA and the debt service. Unfortunately, most of those efforts have proved futile. Let’s stop managing pension plans against an ROA objective and start managing these assets to provide the promised benefit at the lowest cost.

The issuance of a POB is not the problem.  But, using the proceeds to fund a traditional asset allocation is! When will these plan sponsors and their consultants learn?