Tuesday, April 3, 2012

New York's Mega Pension Rush?

No, it's not Mega Millions but it's a rush to lock in pensions. Thomas Kaplan and Kate Taylor of the NYT report, State Public Workers Rushed to Join Pensions Before Cutbacks:
Thousands of public employees across New York State rushed to sign up for pensions over the last several weeks, seeking to lock in generous retirement benefits before cuts approved by the State Legislature took effect on Sunday.

At the New York City Employees’ Retirement System, for example, more than 12,000 workers applied last week to enroll in the pension system — more than 40 times the typical weekly number of applicants. And the New York City Board of Education Retirement System received nearly 9,000 applications over the last two weeks, after enrolling only 122 new members in all of February.

“It’s just common-sense economics here,” said Stephen Madarasz, a spokesman for the Civil Service Employees Association, the state’s largest union of public workers. “You’re looking at an enormous difference in benefits.”

Lawmakers approved the changes last month, requiring most employees who joined the pension system beginning on April 1 to contribute more to their pensions while reducing how much money they are promised when they retire.

Public-employee unions, which had unsuccessfully fought to dissuade the Legislature from reducing pension benefits, campaigned using social media and traditional forms of outreach to persuade workers to sign up before the benefits dropped. The New York State United Teachers asked local union leaders to alert their members.

The Public Employees Federation sent an e-mail alert to thousands of workers and posted on its Facebook page. And District Council 37, the city’s largest municipal employees’ union, used lunchtime meetings with its members, as well as Facebook, Twitter, public access television and a variety of media appearances to reach its members.

Many city and state workers are automatically enrolled in a pension system, but others, including some with part-time jobs, choose whether to sign up. Some have not done so because participating in the system requires making a regular employee contribution to the pension fund. “We encouraged them to get in now so that they wouldn’t have to work longer, receive less,” said Lillian Roberts, the executive director of District Council 37.

But Edmund J. McMahon, senior fellow at the Empire Center for New York State Policy, a conservative research group, suggested that the flood of applications was driven partly by hype and fear, rather than by a rational assessment of what he described as incremental changes to public employee pension plans. The unions, he said, “are talking about it as if it’s the difference between having a pension or no pension, which is ridiculous.”

New York is among dozens of states that have sought to reduce pension benefits to workers as the economy has slowed the growth of tax revenues and the size of pension-fund assets. State and local governments nationwide say they are struggling to pay retirement benefits promised to employees.

Gov. Andrew M. Cuomo, a Democrat, joined forces with Mayor Michael R. Bloomberg and local government officials from around the state to urge the Legislature to reduce pension benefits, arguing that the existing system had become unaffordable. The reductions do not affect employees who enrolled in the pension plan before Sunday.

The Teachers’ Retirement System of the City of New York, for example, saw a spike in applications from workers like teachers’ aides, who, unlike teachers, are not automatically enrolled in the system. Matthew Laskowski, a public information officer for the system, said it had received close to 5,000 applications since the pension legislation was passed.

Pension system officials still have to check applications to make sure the employees are eligible, but both sides of the pension issue said the surge in applications demonstrated that the recent changes to the pension system were significant.

“The numbers speak for themselves in terms of the response,” said Mario Cilento, the president of the New York State A.F.L.-C.I.O., which opposed the pension cuts. He said workers across the state recognized, and wanted to avoid, a “drastic reduction of benefits.”

The largest surge in pension enrollments came in New York City, because the last time the Legislature reduced pension benefits, in 2009, it largely excluded city employees. That meant that for city workers, the gap between the pension for those who enrolled by Saturday, and those who enrolled Sunday or after, was particularly large.

Final data on pension enrollments were not available on Monday, but officials in the city and in Albany said all signs pointed to a sharp increase.

The city’s Board of Education Retirement System kept its office open longer on weekdays and opened the past two Saturdays to accommodate the influx of pension applicants. And the city’s Employees’ Retirement System also opened on Saturday, a first, said Karen Mazza, the system’s general counsel, and accepted faxed applications until 11:59 p.m.

Outside of New York City, 4,075 public employees signed up to join the state pension system from March 1 to March 29, according to the state comptroller’s office. That was nearly triple the 1,399 people who registered in March 2011.

The New York State Teachers’ Retirement System also saw an uptick; a spokesman estimated that the system recorded more than 1,500 new enrollments last month, compared with 1,035 in March 2011.

A spokesman for Mr. Cuomo’s budget office said the spike in pension enrollments would not have a measurable impact on the state’s pension system. The bulk of the projected savings from the pension changes are expected over the long term — $82 billion over 30 years for the state and local governments, according to the Cuomo administration. But only $1.2 billion is expected to be saved over the next five years.

Budget experts were divided on whether the deluge of last-minute applications would have much of an impact on New York City’s finances.

“No question it’s going to take some bite out of projected savings,” said Doug Turetsky, the chief of staff for the city’s Independent Budget Office. But he said it was too soon to tell what the ultimate cost would be, because some of those who signed up recently may not end up working for the city long enough to receive a pension.

Carol Kellermann, the president of the Citizens Budget Commission, said she did not expect the rush of applications to have significant budget implications for the city, in part because the affected employees are mostly lower-paid.

“It’s school aides — it’s not police and firemen or teachers, who have the higher salaries and the bigger pensions,” she said.

I also don't think this rush to pensions will have significant budget implications. Unions acted rationally and were right to inform their members of changes to the legislation, prompting this surge in applications. It was a no-brainer for members to lock in pensions.

As I wrote in my last comment on reforms to New York's pensions, the push to cut defined-benefit plans to new members , shifting them into defined-contribution plans, is simply the wrong way to go. Instead of opting for meaningful pension reforms which include a wholesale change in governance of pension plans, the Governor took the easy route.

From Chris Chirstie in New Jersey to Andrew Cuomo in New York to Jerry Brown in California, everyone wants to tackle the 'pension monster' but they're all going about it the wrong way. If governments can find the money to bail out banksters on Wall Street, they can afford to hire the best to figure out a way to bolster defined-benefit plans for public sector workers and more importantly, expand coverage, offering similar DB plans to private sector workers.

The perpetual myth on pensions is that they're a giant 'Pension Ponzi' and that taxpayers will end up footing the bill once they go bust. This is utter nonsense. Just like healthcare, pensions are sacred and should be treated as such. Governments need to get the funding right using appropriate discount rate, unions need to accept certain reforms, but the most important reforms in U.S. public pensions have to be in governance. My last comment on pension funds chasing alternatives highlighted the pressing need to change governance.

Finally, Digital Journal reports, Funded Status of U.S. Pensions Rises More than Three Percentage Points in March, According to BNY Mellon:
The best quarter for U.S. equity markets in a decade helped to drive the funded status of the typical U.S. corporate pension plan in March 3.6 percentage points higher to 79.8 percent, according to BNY Mellon Asset Management. U.S. stocks have now risen for six consecutive months.

The pension plans also benefited from an increase in the Aa corporate discount rate, which resulted in lower liabilities, according to the BNY Mellon Pension Summary Report for March 2012. The funded status of the typical corporate plan has now increased 7.4 percentage points this year.

Assets for the typical corporate pension plan in March rose 1.3 percent, and liabilities fell 3.2 percent, BNY Mellon said. The decrease in liabilities was due to the Aa corporate discount rate rising 25 basis points to 4.58 percent, according to the report.

Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Higher yields on these bonds result in lower liabilities.

"Both the equity markets and interest rates moved in the right direction in March, helping moderate risk corporate pension plans approach a funding level of 80 percent," said Jeffrey B. Saef, managing director, BNY Mellon Asset Management, and head of the BNY Mellon Investment Strategy & Solutions Group (a division of The Bank of New York Mellon). "Further improvements in the funded status could encourage plans to increase their hedge against interest rate moves."

Indeed, as plans' funded status improves, many will hedge against interest rate moves which will cap the upside of any rise in bond yields. Analysts who think bonds are going to 'blow-up' driving yields to 20%+ are totally clueless about liability-driven investing and how pensions will jump on bonds if yields spike.

Below, Bloomberg reports that traders think the worst is over for Treasuries. Not sure about this as I see the liquidity rally in stocks continuing, prompting a further backup in yields. Also, Darren Ruane, a senior bond strategist at Investec Wealth & Investment, talks about corporate and sovereign debt. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse."

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