Plan Sponsors Can Expect Contribution Increases in 2012

December 16, 2011 (PLANSPONSOR.com) – Corporate pension plan sponsors face increases in contributions and expense in 2012. 
 

These increases will affect competitiveness, investment and job growth and possibly create a further drag on corporate earnings and cash flow, according to the Mercer and CFO Research Services Redefining Pension Risk Management in a Volatile Economy survey report.

More than half of the respondents surveyed (59%) said their company’s defined benefit (DB) pension plan poses at least a moderate risk to their companies’ near-term financial performance. More than half of the respondents said the impact of DB plans on company health is a focus of attention of equity analysts and investors; nearly two-thirds of respondents said it was a focus of credit analysts and rating agencies.

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Respondents cited a number of factors affecting their pension plan funding, risk management and investment policies. Over the past five years, market volatility and low interest rates have had the greatest impact, coming on the heels of the higher funding requirements of the Pension Protection Act of 2006, the introduction of mark-to-market balance sheet requirements and expanded disclosure under U.S. and international pension accounting standards.

“Plan sponsors have made some efforts to manage their pension risk exposure by making a variety of plan design and investment changes. However, their efforts may not be enough relative to their benefit obligations,” said Jonathan Barry, Boston-based Defined Benefit Risk leader for Mercer’s U.S. Retirement, Risk and Finance business. “With no expectation for a quick recovery, plan sponsors should evaluate the effects of the recent turmoil on their future cash requirements, as well as the impact on their P&L and balance sheet.”

The survey found over the past five years, more than three-fourths (78%) of the employers have made some form of change in their DB plan’s design. Companies have been most likely to close existing plans to new employees (47%), freeze plans for all employees (21%) or terminate their plans outright (13%). This trend toward changing DB plans is likely to continue: roughly one in three of the executives surveyed say it is at least somewhat likely they will freeze or terminate their DB plans in the next two years

“There has been a low level of plan termination in the last five years. Plan termination activity could increase significantly in the next several years,” Barry said during a live webcast.

While relatively small percentages of plan sponsors are currently employing some level of liability-driven investing (LDI), the survey indicated significant acceleration in various risk management strategies over the next few years. Roughly half of sponsors say they are at least somewhat likely to match fixed income duration to their plan liabilities and increase their fixed income allocations. Similar trends also apply to other strategies, such as dynamic de-risking (lowering risk as the funded status improves), lump sum cash-outs for terminated vested employees and annuity purchase.

The survey found that finance executives seem confident in their ability to execute their companies’ DB-plan strategies over the next two years, but not by an overwhelming margin. Forty-seven percent of respondents said the senior finance team at their companies is “very well equipped” to develop and carry out DB plan strategy; another 44% of respondents said their finance teams are “fairly well equipped” to do so.

Despite this confidence, finance executives recognize they face formidable barriers that are largely out of their control. Queried on the obstacles most likely to limit their finance teams’ ability to make needed changes to DB plans over the next two years, more than half of all respondents (56%) cite “economic volatility and uncertainty.” More than one-third of respondents (35%) cite “regulatory or accounting requirements.” 

The obstacles most likely to hold companies back are largely external, according to the survey data and to the executives interviewed for this study. Ultimately, the results of the survey suggest, for finance executives weary of managing the volatility and risk that accompany DB plans, there is little relief in sight. However, the good news is finance executives have a clear view of the plan-design and investment strategies that will make that risk and volatility more tolerable—and many finance executives are confident they are well-equipped to make needed DB plan changes.

“We see plan sponsors positioning themselves for rising interest rates or equity market recovery – either would improve funded status and we expect there will be a significant shift from equities to bonds,” said Nick Davies, Washington, DC-based principal in Mercer’s Investments business. “Corporate defined benefit plan sponsors are intently focused on risk management issues and many are poised to make significant changes. The open questions are, how quickly will market changes occur, and do sponsors have the conviction and capability to carry out their intended changes?”

Redefining Pension Risk Management in a Volatile Economy surveyed 192 senior finance executives at U.S. companies with annual revenues of $500 million or more and representing a wide range of industries. All companies sponsor defined benefit pension plans with an asset value of $100 million or more. The research was conducted in October 2011 by CFO Research Services, the research unit of CFO magazine, in collaboration with Mercer.

To view the full report, visit http://www.mercer.com/referencecontent.htm?idContent=1434825.

CCCERA Files Suit Against County in Effort to Maintain Authority Over Staff

December 16, 2011 (PLANSPONSOR.com) – The Board of Retirement of the Contra Costa County Employees’ Retirement Association (CCCERA) filed a suit to remain in control of its staff. 
 

The suit was filed against the County of Contra Costa and its Auditor/Controller at Superior Court of California in Alameda County. The suit was filed to confirm CCCERA’s independent authority to set the terms of employment for its own staff members.

CCCERA filed the suit after the County’s Board of Supervisors imposed a series of changes to the employment terms of County employees who work solely for the retirement fund. According to CCCERA, this occurred after more than a dozen years of the County recognizing the Retirement Board’s authority.

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The County’s action came after the Retirement Board told the County it wanted to maintain the status quo for its staff.  However, the County imposed a series of changes to the employment terms of County employees who work for CCCERA, which went into effect on October 1, 2011.

“We are seeing an alarming trend across the state of cities and counties attempting to seize control of their employee pension trusts, with an eye towards relieving their fiscal pressures,” said CCCERA’s attorney, Harvey L. Leiderman, a partner in the San Francisco office of Reed Smith LLP.  “Twenty years ago, the Governor tried to do the same thing, and the voters amended the California State Constitution to give county pension trustees independent authority to administer these public trust funds without fear of political interference. 

“Nothing is more important to the independent administration of these funds than the trustees’ power to appoint and pay the staff that carries out their solemn fiduciary duties,” asserted Leiderman. “Allowing the County to dictate the employment terms of CCCERA staff only politicizes the trust.  It violates the Retirement Board’s statutory powers and could seriously impair the professional management of the fund.  That could eventually cost the County and its taxpayers millions more in contributions.”

The County’s previous attempt to limit the Retirement Board’s authority over its staff was rejected by the courts. In 1997, a state court of appeals ruled in Corcoran v. Contra Costa County Employees’ Retirement Board that the Retirement Board was the governing body of the employees who work at CCCERA. 

According to the most recent suit filed, Contra Costa County’s top legal officer has long agreed that CCCERA should have authority over its staff. In a 2002 Opinion, County Counsel advised: “The Retirement Board …has the authority to set the salaries of the Retirement Board staff members. The Retirement Board is the governing board of its staff members.  The Retirement Board’s setting of salaries for its staff members is necessary and integral to it carrying out its fiduciary responsibilities over the retirement system and its assets and funds.”

However, the County’s attitude changed this year as it sought greater control over the pension trust.  County officials rebuffed the Retirement Board’s informal attempts to reconcile their differences. 

The Retirement Board’s lawsuit seeks to reverse the County’s action as to CCCERA’s staff and allow the Retirement Board to independently determine the personnel, salaries and benefits it believes are necessary to meet the needs of the trust fund.

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