Administration May 2, 2008

CitiStreet Sold for $900 Million

May 2, 2008 (PLANSPONSOR.com) - After months of rumors about being "shopped," CitiStreet has been sold to ING Group.
Reported by

Citigroup Inc. and State Street Corporation early this morning announced that they have entered into a definitive agreement to sell CitiStreet, a benefits servicing business, to ING Group in an all-cash transaction valued at $900 million (EUR 578 million).

CitiStreet is a joint venture formed by the companies from which it drew its name in 2000, owned 50% each by Citi and State Street.   According to a press release, the acquisition is expected to close, pending customary closing conditions, by the end of the third quarter of this year.

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The rationale for the sale was one commonly cited by firms that exit the recordkeeping business – a mismatch with the core focus of the parent company (see  Hartford Scores a Hat Trick ,  Recordkeeping Survey 2007: Under Currents ).  “CitiStreet is an industry leader, but retirement plan record keeping and administrative services are not strategic priorities for us,” said Charles D. Johnston, President of Citi Global Wealth Management, in the announcement.  

The transation also brings together recordkeeping operations that have traditionally focused on opposite ends of the market.  While CitiStreet’s impact has been most evident among large plans, more than 90% of ING’s defined contribution business has been in the micro segment of the market (see  PLANSPONSOR’s 2007 Recordkeeping Survey ).  In fact, ING was ranked second by number of plans in that survey (see  Top 10 Recordkeepers – Number of Plans ).  

CitiStreet provides a range of recordkeeping and administrative services to more than 16,000 plans and 12 million participants, and is one of the nation's largest recordkeepers.  It was the second largest by participants in PLANSPONSOR's 2007 Recordkeeping Survey (see  Top 10 Recordkeepers ), and fourth in terms of assets under administration.  Headquartered in Quincy, Massachusetts, CitiStreet has more than $262 billion in assets under administration as of March 31, 2008 and approximately 3,700 employees.

"In the eight years since its launch, CitiStreet has had steady growth and become a leading benefits servicing provider," said Ronald E. Logue, Chairman and Chief Executive Officer, State Street Corporation. "This transaction recognizes the strong business we built while enabling us to focus resources on businesses that are more closely aligned with our long-term strategy."

However, even if recordkeeping was not a strategic priority, Johnston acknowledged the continued commitment of Citi's adviser business by noting, "Smith Barney remains committed to serving corporate and business clients with retirement plans and other institutional offerings and we will work closely with ING and State Street to ensure an orderly transition for clients and employees," he said in the announcement.

ING Perspective

On the other side of the transaction, Michel Tilmant, Chairman of the Executive Board of ING Group said, "This acquisition is consistent with ING's focused strategy to support the strong organic growth of the Group with suitable add-on acquisitions aligned with its core banking, investments, life insurance and retirement services growth businesses."


In a  press release , Kathleen Murphy, CEO, ING US Wealth Management said, "This acquisition brings together two customer-centric cultures that are committed to making retirement saving and other benefits delivery easier for plan sponsors and plan participants. With ING's excellence and leadership in the education, small employer, government and health care markets, and CitiStreet's excellence and leadership across all employer markets, we are creating a new value proposition that will span the full spectrum of the defined contribution and benefits servicing marketplace. Furthermore, in a converging defined contribution environment, ING's and CitiStreet's key stakeholders will be well-served by a leading retirement savings provider that is committed to addressing the evolving needs of investors."

According to the announcement, the acquisition will provide significant operational synergies for ING and is expected to be EPS (earnings per share) accretive by 2010, excluding merger-related expenses and the amortization of customer-based intangible assets.

Administration May 1, 2008

Should Government Pension Valuations Follow Corporate Pensions' Path?

May 1, 2008 (PLANSPONSOR.com) - While some believe public pension plans should continue their current actuarial methods for calculating liabilities and funding, others argue that the current methods do not give a true picture of a plan's financial status as market-based calculations would.
Reported by

Andrew D. Wozniak, CFA, ASA, Director of Research and Analysis with BNY Mellon Pension Services, and Peter S. Austin, Executive Director of BNY Mellon Pension Services, explained in a report issued by BNY Mellon that “many financial economists believe that public pension plan liabilities should be valued the same way financial markets value the debt of governments.” These critics of the current actuarial methods of public pension funds believe the use of a discount rate, asset smoothing, and varied cost methods – actuarial methods eliminated in the valuation of private pension plans by recent regulations  – understates public funds’ liabilities, distort real asset and liability values, and make comparisons with other plans challenging.

However, advocates of the current system point out that unlike corporations, governments exist permanently, do not have the threat of bankruptcy, and have an unlimited ability to tax or print money to fund obligations, according to the report. These advocates claim market-based valuations are irrelevant and would be challenging or misleading because:

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  • Certain actuarial cost methods do not define and accrued liability,
  • Estimated future benefit payments are not known with certainty due to uncertainty of actuarial assumptions (e.g. mortality, future salary increases, future cost of living increases, and withdrawal and retirement assumptions), and
  • A lack of matching assets for a pension commitment, such as a 50-year inflation-indexed bond.

Advocates of the current public pension valuation methods warn that the disclosure of a market-based liability could result in unfavorable changes in the public plan landscape as has been experienced in the private defined benefit plan world. Stakeholders could notice a 20% – 40% increase in liability values, leading to reports of serious funding deficiencies, leading policy-makers to freeze benefits or switch to defined contribution plans, and ultimately leading to a less secure retirement for public employees, the report said.

Wozniak and Austin suggest a compromise between the old valuation methods and those similar to what private pension plans are moving to. In their scenario, assets would be reflected at market value as of a valuation date, a uniform actuarial cost method would be used for every public pension plan, and two liability measures would be used: market liability and ongoing liability.

The report authors say that the traditional valuations based on an actuary’s best guess should be replaced with an annual probabilistic valuation looking at a range of possibilities and their likelihood. In the authors’ suggested scenario policy-makers would specify in advance what ongoing and market funding ratio thresholds would be required to increase benefits, and governments would reflect the market values of assets and liabilities on their balance sheet.

Finally, Wozniak and Austin warn that a change in valuation methods would require governments to educate the media and stakeholders that lower funded status ratios do not necessarily indicate a plan is in trouble and to emphasize a plan’s ongoing funding.

The report, U.S. Public Pensions At a Crossroad: Which Way Forward?, is here .

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