RFFOW Presidents Report forApril 2009
http://www.leoff1.net/articles/43/1/RFFOW-Presidents-Report-forApril-2009/Page1.html
By Dick Warbrouck
Published on 04/10/2009
The following was reported by Jeremy Caplan from a report presented by Goldman Sachs’ Global Markets Institute on defined benefit pension plans like the LEOFF plan.
Mr. Caplan asked if you remember those defined benefit programs through which companies promised a certain amount every month to retirees. The market crash may be dealing that already warning concept a final, fatal blow.
A new report from Golden Markets Institute illustrates that massive equity losses have resulted in S&P 500 companies’ pension funds, which had been over funded at the start of the year, fading so fast that they are now underfunded. As a group, instead of holding 108% of the assets they were promising to provide to retirees, they now hold just 91% (and falling).
The S&P 500’s pensions are now collectively under-funded by at least $115 billion. The problem stretches far beyond the finance sector.
Five of the companies with the highest dollar amount of pension underfunding, according to the report, are
Raytheon (underfunded by $1.6 billion), Johnson & John-son ($1.5 billion), ExxonMobil ($1.4 billion).
―This is affecting the broad swath of companies that make up the fabric of what we call the ―real economy,‖ says Mark T. Williams, a risk management expert and finance professor at the Boston University School of Management.
With the stock market shedding more than a third of its value this year, pension funds at big companies have been battered beyond recognition. What looked like safe stowaway spots where corporations securely tucked away assets for their employees’ retirement now look like roller-coaster funds.
In addition to sending shivers up the spines of employees who count on that income, the problem also threatens to haunt the bottom line at many major firms. Williams says some may be forced to consider mergers to accumulate bigger asset bases or may have to sell off strategic assets.
―In the past, the IBMs and GEs of the world have not had to worry about underfunded pensions,‖ says Williams. Now, though, successful firms with undervalued obligations may have to accumulate additional cash, amid the credit crunch just to prop up their pension accounts. That’s in part because evolving accounting standards – including those established in the Pension Protection Act of 2006 – prevent companies from getting too far under-water on their obligations to retirees.
Public pensions have also been hit hard. State and local governments’ pension funds support some 27 million Americans, and many have lost a fifth of their value this year. Virginia’s retirement fund and California’s Calpers have each fallen 20% in just the past four months. The plan is both broad and deep.
Focused on long-term growth, corporate pension funds tend to lean heavily on stocks. More than 60% of S&P 500 firms’ holdings at the start of the year were in equities. Those firms that bet most aggressively on stocks have been especially hard hit.
For example, about 80% of Harley-Davidson’s pension assets were invested in equities at the end of last year. Johnson & Johnson’s (79% equities) and Exxon’s (75%) funds have also been bruised. But the pension pain may be most acute for smaller outfits, some of whose obliga-tions amount to more than 100% of their market capitalization. That category includes companies like Circuit City, whose obligation now amounts to 336% of its market capitalization, OfficeMax (271%) and Goodyear (170%). Where will all this lead? Companies that haven’t done so already will likely move even more swiftly toward defined-contribution plans in place of defined benefits, because doing so reduces the potential scale of their future liabili-ties. The shift means firms will assure the employee of how much they are putting into your retirement fund instead of promising how much you’ll end up with. That latter amount will depend on how the investments perform rather than on the employer’s pledge. ”When my father was working, he knew what he would retire on”, says Williams. “Now the market risk will be borne on the shoulders of employees..”
The following question was asked by a member who married after retirement, retired under LEOFF 1, was employed under the Prior Act and is receiving a Prior Act Benefit, a second retirement check from the city: “I am signed up for the post retirement survivor benefit for Judy. I get the supplemental check from the city also. Would Judy get those checks also and would getting my pension cause her to get the 60% deduction in her Social Security.”
Reply:
As of now, upon your demise, Judy would continue to receive your L-1 pension with future COLAfs. The Prior Act requires that the member be married for five years before retirement to qualify for the survivor benefit, so she would not receive your second check. If she was eligible for the second check, she would forfeit the check if you retired on a disability and she remarried. HB 1506 and SB 5311 which we had introduced, if passed, will allow you to sign up for the new survivor option under the Prior Act. You will then receive a reduction in your present city check and Judy will continue to receive a city check with an annual COLA until her death. This will be similar to what we got passed for LEOFF 1, the survivor option for those who are married after retirement.
We are also trying to remove the remarriage penalty in the Prior Act for the survivors who were married to a member who retired on a disability pension. Your wifefs Social Security would also be reduced under the Windfall Elimination provision in Social Security which we and other retiree organizations are trying to have repealed by the Social Security Fairness Act first introduced in 2007.
I want to thank President Bruce Phillips and the members We discussed the history and accomplishments of the Retired Firefighters of Washington and were able to address and answer questions regarding current issues facing Washington State fire and police retirees.
I promised that I would try to answer a question regarding the first COLA eligibility after retirement. RCW41.26.240: Increase or decrease in retirement allowance:
Effective April 1971, and of each succeeding year, every retirement allowance which has been in effect for more than one year shall be adjusted to that dollar amount which exceeds its original dollar amount by the percent-age difference which the department finds to exist between the index for the previous calendar year and the index for the calendar year prior to the effective retirement date of the person to whom, or on behalf of whom, such retirement allowance is being paid. RCW 41.26.240 ties your LEOFF 1 monthly benefit to the average Consumer Price Index-Seattle area for Urban Wage Earners and Clerical Workers, all items.
The law required, effective April 1, 1971, and of each succeeding year, every retirement allowance which has been in effect for more than one year be adjusted to that dollar amount which exceeds its original dollar amount by the percentage difference which the Department of Retirement Systems finds to exist between the index for the previous calendar year and the index for the calendar year prior to the effective retirement date of the person to whom the retirement allowance is being paid.
Put differently, all benefits shall be adjusted from the original dollar amount by adding the percentage difference that exists between the index for the calendar year prior to the year in which the adjustment becomes effective and the index for the calendar year prior to retirement.
The law also says that members must be retired for more than one year before receiving the first allowance adjustment. Because of this procedure members with a retirement date of April 2 through December 31 do not receive an adjustment on April 1 of the first calendar year following the year in which the retirement occurred. For these members the first adjustment occurs as of April 1 during the second calendar year following retirement. The first adjustment in such cases does, however, take into account the change in the consumer price index for both years following retirement. So, in fact, these members are receiving the full percentage increase in their first allowance for both years, but they do not receive the retroactive dollars for the time prior to their first April 1
The following was reported by Jeremy Caplan from a report presented by Goldman Sachs’ Global Markets Institute on defined benefit pension plans like the LEOFF plan.
Mr. Caplan asked if you remember those defined benefit programs through which companies promised a certain amount every month to retirees. The market crash may be dealing that already warning concept a final, fatal blow.
Mr. Caplan asked if you remember those defined benefit programs through which companies promised a certain amount every month to retirees. The market crash may be dealing that already warning concept a final, fatal blow.
The following was reported by Jeremy Caplan from a report presented by Goldman Sachs’ Global Markets Institute on defined benefit pension plans like the LEOFF plan. Mr. Caplan asked if you remember those defined benefit programs through which companies promised a certain amount every month to retirees. The market crash may be dealing that already warning concept a final, fatal blow.
A new report from Golden Markets Institute illustrates that massive equity losses have resulted in S&P 500 companies’ pension funds, which had been over funded at the start of the year, fading so fast that they are now underfunded. As a group, instead of holding 108% of the assets they were promising to provide to retirees, they now hold just 91% (and falling).
The S&P 500’s pensions are now collectively under-funded by at least $115 billion. The problem stretches far beyond the finance sector.
Five of the companies with the highest dollar amount of pension underfunding, according to the report, are
Raytheon (underfunded by $1.6 billion), Johnson & John-son ($1.5 billion), ExxonMobil ($1.4 billion).
―This is affecting the broad swath of companies that make up the fabric of what we call the ―real economy,‖ says Mark T. Williams, a risk management expert and finance professor at the Boston University School of Management.
With the stock market shedding more than a third of its value this year, pension funds at big companies have been battered beyond recognition. What looked like safe stowaway spots where corporations securely tucked away assets for their employees’ retirement now look like roller-coaster funds.
In addition to sending shivers up the spines of employees who count on that income, the problem also threatens to haunt the bottom line at many major firms. Williams says some may be forced to consider mergers to accumulate bigger asset bases or may have to sell off strategic assets.
―In the past, the IBMs and GEs of the world have not had to worry about underfunded pensions,‖ says Williams. Now, though, successful firms with undervalued obligations may have to accumulate additional cash, amid the credit crunch just to prop up their pension accounts. That’s in part because evolving accounting standards – including those established in the Pension Protection Act of 2006 – prevent companies from getting too far under-water on their obligations to retirees.
Public pensions have also been hit hard. State and local governments’ pension funds support some 27 million Americans, and many have lost a fifth of their value this year. Virginia’s retirement fund and California’s Calpers have each fallen 20% in just the past four months. The plan is both broad and deep.
Focused on long-term growth, corporate pension funds tend to lean heavily on stocks. More than 60% of S&P 500 firms’ holdings at the start of the year were in equities. Those firms that bet most aggressively on stocks have been especially hard hit.
For example, about 80% of Harley-Davidson’s pension assets were invested in equities at the end of last year. Johnson & Johnson’s (79% equities) and Exxon’s (75%) funds have also been bruised. But the pension pain may be most acute for smaller outfits, some of whose obliga-tions amount to more than 100% of their market capitalization. That category includes companies like Circuit City, whose obligation now amounts to 336% of its market capitalization, OfficeMax (271%) and Goodyear (170%). Where will all this lead? Companies that haven’t done so already will likely move even more swiftly toward defined-contribution plans in place of defined benefits, because doing so reduces the potential scale of their future liabili-ties. The shift means firms will assure the employee of how much they are putting into your retirement fund instead of promising how much you’ll end up with. That latter amount will depend on how the investments perform rather than on the employer’s pledge. ”When my father was working, he knew what he would retire on”, says Williams. “Now the market risk will be borne on the shoulders of employees..”
The following question was asked by a member who married after retirement, retired under LEOFF 1, was employed under the Prior Act and is receiving a Prior Act Benefit, a second retirement check from the city: “I am signed up for the post retirement survivor benefit for Judy. I get the supplemental check from the city also. Would Judy get those checks also and would getting my pension cause her to get the 60% deduction in her Social Security.”
Reply:
As of now, upon your demise, Judy would continue to receive your L-1 pension with future COLAfs. The Prior Act requires that the member be married for five years before retirement to qualify for the survivor benefit, so she would not receive your second check. If she was eligible for the second check, she would forfeit the check if you retired on a disability and she remarried. HB 1506 and SB 5311 which we had introduced, if passed, will allow you to sign up for the new survivor option under the Prior Act. You will then receive a reduction in your present city check and Judy will continue to receive a city check with an annual COLA until her death. This will be similar to what we got passed for LEOFF 1, the survivor option for those who are married after retirement.
We are also trying to remove the remarriage penalty in the Prior Act for the survivors who were married to a member who retired on a disability pension. Your wifefs Social Security would also be reduced under the Windfall Elimination provision in Social Security which we and other retiree organizations are trying to have repealed by the Social Security Fairness Act first introduced in 2007.
I want to thank President Bruce Phillips and the members We discussed the history and accomplishments of the Retired Firefighters of Washington and were able to address and answer questions regarding current issues facing Washington State fire and police retirees.
I promised that I would try to answer a question regarding the first COLA eligibility after retirement. RCW41.26.240: Increase or decrease in retirement allowance:
Effective April 1971, and of each succeeding year, every retirement allowance which has been in effect for more than one year shall be adjusted to that dollar amount which exceeds its original dollar amount by the percent-age difference which the department finds to exist between the index for the previous calendar year and the index for the calendar year prior to the effective retirement date of the person to whom, or on behalf of whom, such retirement allowance is being paid. RCW 41.26.240 ties your LEOFF 1 monthly benefit to the average Consumer Price Index-Seattle area for Urban Wage Earners and Clerical Workers, all items.
The law required, effective April 1, 1971, and of each succeeding year, every retirement allowance which has been in effect for more than one year be adjusted to that dollar amount which exceeds its original dollar amount by the percentage difference which the Department of Retirement Systems finds to exist between the index for the previous calendar year and the index for the calendar year prior to the effective retirement date of the person to whom the retirement allowance is being paid.
Put differently, all benefits shall be adjusted from the original dollar amount by adding the percentage difference that exists between the index for the calendar year prior to the year in which the adjustment becomes effective and the index for the calendar year prior to retirement.
The law also says that members must be retired for more than one year before receiving the first allowance adjustment. Because of this procedure members with a retirement date of April 2 through December 31 do not receive an adjustment on April 1 of the first calendar year following the year in which the retirement occurred. For these members the first adjustment occurs as of April 1 during the second calendar year following retirement. The first adjustment in such cases does, however, take into account the change in the consumer price index for both years following retirement. So, in fact, these members are receiving the full percentage increase in their first allowance for both years, but they do not receive the retroactive dollars for the time prior to their first April 1