Compliance August 23, 2011

PwC Denied Summary Judgment on Whipsaw Calculation Claim

August 23, 2011 (PLANSPONSOR.com) – PricewaterhouseCoopers (PwC) was unable to prove that its calculation of benefits for cash balance plan participants satisfied the Employee Retirement Income Security Act (ERISA).
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In Laurent v. PricewaterhouseCoopers LLP, former participants of the firm’s Retirement Benefit Accumulation Plan (RBAP) argued their distributions using a whipsaw calculation improperly used the 30-year Treasury rate to project their benefits to age 65 when a set rate between 7% and 9% would have been more accurate. Under ERISA, a whipsaw calculation must use a “fair estimate” of the rate of return an average participant would have received had he remained in the plan until normal retirement age to project benefits to that age then pay out benefits at the present value of that projection.  

District Judge George B. Daniels of the U.S. District Court for the Southern District of New York found that PwC’s expert witness did not offer proof that the 30-year Treasury rate was a “fair estimate” of the rate of return an average participant would have received. PwC argued the participants’ proposed rate ignored the degree of risk associated with future credits to their accounts, and contended that the only reasonable projection rate is a rate no greater than the risk-free rate of return such as the Treasury rate.  

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However, Daniels noted the expert witness never quantified the risk-free rate of return as being equivalent to the Treasury rate, and the expert focused on the question of today’s worth of the current account balance instead of the future worth of the current account balance.Daniels pointed out the expert concluded under no circumstances can the plan participant be entitled to more than his current account balance. Daniels said a required proper whipsaw calculation provides that a plan participant is entitled to the future account balance discounted back to present value regardless of whether that exceeds the current account balance.  

The judge concluded PwC’s evidence does not show that there is no genuine dispute as to any material issue of fact and it is entitled to summary judgment as a matter of law.
Administration August 23, 2011

SD Retirement System Recovers Investment Losses

August 23, 2011 (PLANSPONSOR.COM) - According to BusinessWeek, the South Dakota Retirement System ended its latest financial year with $1.6 billion more than it had a year ago.
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Officials say this increase is due to robust investment earnings that will allow a larger increase in pension payments next summer. 

The 26% gain in assets during the 12-month period means the system was fully funded as of June 30, the annual date for measuring the system’s financial condition, BusinessWeek reported.

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Only a few similar state pension plans around the nation are in as good shape as the South Dakota Retirement System, which provides pensions for state and local government employees, Rob Wylie, the system’s executive director, told the Legislature’s Executive Board, which handles administrative matters for the Legislature. The average system is only about 80% funded, he said. 

The good investment return has given the South Dakota pension system a reserve of about $500 million above its liabilities, Wylie added, according to the news report. 

Because the value of assets fell during the recession, the annual cost-of-living adjustment for retirees in the system has been held at 2.1% for the past two years. The improved financial health of the system means pension payments will increase by 3.1% next July, he said. 

According to BusinessWeek, Wylie said the value of the Retirement System's assets has fallen by about 7%, or approximately $560 million, since July 1. But investment officials said those assets will fluctuate daily in the current turbulent stock market.
The system's assets peaked at $8.2 billion before the national recession, but fell to $5.6 billion by June 2009. After gaining 18.7% a year ago and nearly 26% in the past year, the system had $7.9 billion in assets as of June 30 – a gain of more than $1.6 billion from a year earlier.
The system has more than 70,000 members, and most are still working. It includes employees of state government, cities, counties and school districts, and pays more than $300 million a year in retirement benefits. 

The Investment Office earned an extra $245 million last year by exceeding the average earnings of similar pension plans around the nation, said Joseph Anglin, chairman of the council that sets investment policies. 

 

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