New Normal For Retirement Benefits?

Bloomberg's Brian Parkin reports that German Government Forecasts Pension Growth Over Next 15 Years:

German Chancellor Angela Merkel’s government forecast state pensions will grow over the coming years, defying political and other critics who say that worker and company contributions will have to rise to finance growth.

Even with a freeze on pension increases this year and next, payments for retirees in the compulsory plan will grow by an average 1.6 percent per year to 2023, the Berlin-based Labor Ministry said today. Monthly contributions from gross pay will vary from 19.9 percent now to 20.6 percent in 2023, it said.

Labor Minister Franz Josef Jung hailed the pension program as a success, “proving itself, not least in the economic crisis.” The plan is “secure in spite of demographic change,” Jung said in an e-mailed statement.

Merkel’s coalition, which took office on Oct. 28, is under pressure to keep vows made to pensioners, who make up a quarter of the population and help prop up private consumption in an economy pegged to shrink the most since World War II this year. About 20 million pensioners are in receipt of 23 million pensions this year, according to the Labor Ministry.

Maintaining the pace of pension increments to 2023 will force the government to sell more bonds each year, according to critics including Alexander Bonde, a lawmaker with the opposition Green Party. About 80 billion euros ($120 billion) from Merkel’s 288 billion-euro budget will be spent on topping up pension coffers this year.

If pensions rise as Jung predicts, retirees paying average monthly premiums into the plan and with 45 years of salaried work behind them will be paid 1,533 euros per month, according to the ministry Web site. That compares with 1,224 euros now.

Demographic Change

The BDB banking group said that the government underestimates the pace of demographic change. The number of policy-holders of so-called Riester Plans, a private retirement plan backed by government subsidies, grew the slowest in five years in the third quarter, the BDB said.

“Unless we can boost motivation to buy capital-supported plans we’ll face big problems,” the federation said on its Web site. The group’s members including Deutsche Bank AG and Commerzbank AG sell private policies.

The working population of 20 to 64 year-olds accounts for 50 million out of Germany’s total population of 82 million at present, the Federal Statistics Office said today in a report. That will shrink “drastically” to about 40 million between 2020 and 2035 as the “baby boomers” of the 1960s retire, it said.

In Ireland, Stephen Collins of the Irish Times reports that Brian Cowen gave a strong hint that the old age pension will not be cut in the budget on December 9th:

Speaking at a pension fund awards ceremony at the RDS in Dublin, he outlined the measures introduced over the years to improve the living standards of pensioners and said it was not his objective “to undo all of that good work now”.

Mr Cowen told the audience at the European Pension Funds awards ceremony they should be mindful of the large number of people who didn’t have a lot of disposable income to participate in savings schemes or pension investments and relied on the State pension.

“It is my intention in dealing with the budgetary crisis to ensure that those people will not be adversely affected by the decisions we have to make,” he said.

Mr Cowen said budgets were not simply about balancing books – as important as that was, they were also about acknowledging what was important in society. “I am proud of the provision we made for pensioners during the good years. It is not my objective to undo all of that good work now.”

He said the financial crisis had caused a lot of worry for everyone, particularly elderly people. “Many pensioners around the country have been prudent in investing in pension funds in order to provide for themselves in their retirement years. I am saddened that those people who have been prudent and have been conscious of their obligations to themselves and their families in making such pensions provision, have had their investments greatly depleted as a result of the recent financial markets collapse.”

He added that with the collapse of the financial markets and share values, those people who looked to the banks as the safest return on their investment had seen their faith shattered. “Once regarded as blue-chip shares, they have now seen the value of shares in financial institutions virtually wiped out in a very short time.”

Jonathan Sibun of the Telegraph reports that pension deficits in Britain underestimated by £268bn:

Lloyds' stated pension obligations are €14.2bn shy of the real size of the deficit, while RBS's are €13.3bn behind, according to research from equity research house AlphaValue.

British Airways, which is pursuing a merger with Spanish airline Iberia, boasts the third highest shortfall at €10.5bn. The size of BA's pension deficit is being monitored by the airline's shareholders as Iberia has retained the right to walk away from the agreed merger pending the outcome of a triennial review at the UK carrier's pension fund.

Other companies boasting sizable differences between actual and stated pension obligations included Barclays, BT Group, GlaxoSmithKline and HSBC, according to the research.

BT revealed last week that its final-salary pension scheme deficit had more than doubled in the past six months from £4bn to £9.3bn. The change came as a result of movements in bond yields and inflation expectations, as well as changes to accounting regulations.

AlphaValue said many of the 430 companies monitored underestimated the true value of their pension deficits by assuming a low level of wage inflation and by adopting a high discount rate, a measure used to value pension funds' liabilities.

The research house said 31 companies had underestimated their deficits by 40pc or more, with UK firms among the worst offenders.

"More than one-third of 2008 pensions obligations – some €1,100bn – are recorded at UK companies, as this is where the largest companies operate with the largest defined-benefit commitments. The bulk of the "non-accounted-for" pension deficit is also with UK corporates, especially the banks, as they use rather high discount rates compared with non-UK peers," said Pierre-Yves Gauthier, a director at AlphaValue.

Companies are believed to be attempting to reduce stated pension deficits by scaling back projected wage rises and maximising the discount rate. Last year, average wage inflation fell from 3.7pc to 3.6pc, while discount rates grew from 5.38pc to 5.57pc. AlphaValue said the "spread" helped save European companies about €51bn in 2008.

Mr Gauthier said many companies had made efforts to correct valuations this year, but warned that volatile market conditions made it important to find consistent measurements, above all on discount rates.

Official figures from companies' 2008 accounts show pension deficits at the European companies growing 22pc last year to €280bn.

The AlphaValue research showed an additional €300bn of unrecognised deficits, the equivalent of 9pc of shareholders' equity.

In Australia, Richard Lowe of Global Pensions reports that AMP to increase its pension contribution to 12%:

Australian superannuation provider AMP will increase the pension contributions it pays for its employees to 12% from the mandatory 9% by 2014.

AMP chief executive Craig Dunn announced the decision during a business lunch in Melbourne, adding fuel to the ongoing debate around raising the current minimum employer contribution rate.

He said: "Australians, by and large, aren't natural savers. In fact, the average Chinese consumer saves at almost 30 times the rate that the average Australian does.

"It's been our mandatory savings in superannuation which have helped cushion the worst impacts of the global financial crisis. But of course, we should and can always do more."

The announcement follows separate comments by John Brogden, chief executive of the Investment and Financial Services Association (IFSA), and Chris Bowen, minister for financial services, superannuation and corporate law, that Australians would benefit from an increase in the mandatory contribution rate. (Global Pensions; November 2, 2009)

Treasury secretary Ken Henry claimed in a recent report that the current contribution level of 9% would provide "adequate" retirement income for most Australians, but Bowen argued "adequate" is not enough.

Dunn said: "We've decided, as a company, to increase the superannuation contribution we pay for our employees to 12 per cent by 2014. In fact, in our view, the issue of whether 9% is enough needs to be debated more broadly."

The comments were made during a Trans-Tasman Business Circle lunch, which Dunn used as an opportunity to explain the reasoning behind AMP's proposed merger with the Australian and New Zealand operations of AXA Asia Pacific.

AXA Asia Pacific rejected the A$11bn acquisition offer by AMP earlier this month, claiming the bid undervalued the company.

In the United States, Carla Fried of CBS Money Watch reports that the indicator to watch is the 401 (k) match:

A year ago, the 401(k) match became an expendable benefit for a big slice of Corporate America panicked about their revenue prospects in the throes of the financial crisis and recession. Watson Wyatt says about 25 percent of large firms it surveys reduced or suspended their match in 2009. An unofficial tab kept by the Pension Rights Center suggests that plenty of smaller firms followed suit.

401(k) Match Policy Signals Better Job Outlook

A new survey from Watson Wyatt suggests employers are slowly easing out of panic mode. Of firms that cut their match this year, 35 percent say they intend to reverse that decision in the next six months. That’s a sharp increase from June, when just 5 percent said they were going to reinstate their match in the near future.

Granted, 35 percent is not 95 percent, but the trend suggests that employers are now less concerned about layoffs and more focused on how to retain existing employees and attract new hires.

It’s Back — Sort of

Seventy percent of firms in the survey say they will reinstate the same matching formula that was in place before the cut/suspension. But 13 percent say they are coming back with a lower match, and 17 percent say they will now peg their match to annual profits. Seems we have ourselves an emerging New Normal for retirement benefits, too.

Market-Timing Employers Cost Employees Plenty

With Bill Bernstein’s strawberry and nausea retirement advice still fresh in my mind, it’s frustrating to realize that the firms that pulled the plug on their match in 2009 kept their employees from maxing out on the chance to buy low. It’s not just that employees lost their 2009 match; they also lost having that match participate in the 60 percent market rally since the March low. I’m guessing that’s not a strategy mentioned in the 401(k) educational material employers dutifully provide to plan participants.

In Charleston, West Virginia, two bills before the House and Senate would allow cities to enroll new hires in newer, less expensive pension programs. They also give cities 40 years to pay off their unfunded liability and any interest that has accumulated on that liability.

In New Jersey, Elise Young reports that New Jerseyans will fund pension benefits for a lobbyist earning $191,000 a year – just one of scores of non-government employees, including high-paid executives and their staffs, who are entitled to public retirement payouts.

In Russia, Sergei Nikolayev reports in the Moscow Times that Central Bank Averts $44M Pension Fund Heist:

The Central Bank has foiled an attempt to steal 1.25 billion rubles ($44 million) from the state’s Pension Fund using counterfeit documents, a scheme that bankers say couldn’t have been carried out by ordinary criminals.

The Pension Fund discovered the theft Monday when it received a notice from the Central Bank that 1.25 billion rubles had been transferred from its account, Marita Nagoga, a spokeswoman for the fund, said Tuesday. She said the Pension Fund had made no such request to the Central Bank, which holds the fund’s accounts.

The Pension Fund said the transactions were carried out after the Central Bank received two counterfeit payment orders, with fake signatures and stamps from the fund. The purported swindlers went to the bank’s Moscow Branch No. 5 on Friday evening, where they first managed to transfer 1.25 billion rubles, set aside for construction and planning work, to the Pension Fund’s account with the Central Bank. Then they made a second transfer, moving those funds to an account controlled by Spetstekhprom at Kuban bank, an Interior Ministry source said.

The two transfers were completed Friday, and on Saturday the criminals began transferring the funds to a variety of different banks, including some abroad. By Tuesday evening, the Central Bank had managed to block the transfers and return the money to the Pension Fund.

A secretary at Kuban, who only gave her first name, Irina, told Vedomosti that the bank’s managers could not speak to journalists because they had all been taken away for questioning after their office was searched.

Kuban has existed since 1989, but little is known about the lender, which doesn’t have a web site. According to the Interfax-100 bank ratings, Kuban has assets of 223 million rubles ($7.75 million) and capital of 42 million rubles, and it is not part of the state’s deposit insurance system.

Alexei Frenkel, a banker convicted last year for organizing the 2006 murder of Central Bank First Deputy Chairman Andrei Kozlov, listed Kuban among the banks that he said were unfairly denied access to the deposit insurance program because they were suspected of money laundering.

The bank was led by Marina Burova for several years, but her place was recently taken by Vladimir Zasorin, according to the Bankrange.ru industry portal.

A bank executive said it was possible that the lender was purchased before the attempted theft in order to carry out the heist. Vedomosti was not able to confirm with the Central Bank the changes in management or the possible change in ownership at Kuban. People who answered the bank’s telephones declined to identify the lender’s director.

If the Central Bank believed that a bank was being used to steal money, it could block the lender’s correspondent account, said Andrei Yegorov, first deputy chief of SB Bank. Then cash could only be withdrawn in person, but the criminals either decided not to do that, or the bank was not the end point for the theft, he said.

The Central Bank sees all ruble transactions within the country, and it takes several days for ruble payments to go abroad, which means the regulator has plenty of time to look into them, said a vice president at another bank.

The bankers said they were baffled, however, that the swindlers were able to bring counterfeit payment orders to the Central Bank.

All banks are Central Bank clients, and officials at several lenders explained how things work at the regulator’s offices. Outsiders aren’t even allowed into Central Bank branches, which require a special pass. The passes are typically given to two or three representatives for Central Bank clients who have legal authority to order transactions.

Even if a client gets a new representative, preparing the entry pass takes several days. The electronic system means that it’s easy to see who has entered branches and at what time, one of the bankers said. Additionally, there are video cameras monitoring the work of all Central Bank tellers.

A teller is not required to check the authenticity of a payment order, another banker said. They just look to make sure that the bank managers’ signatures are present and that the stamps match those on record at the bank. As a result, any representative who regularly visits the Central Bank could conceivably counterfeit and deliver faked documents.

Nagoga said all of the Pension Fund’s transactions were done electronically and that no one from the fund brought requests to the Central Bank on Friday evening. A well-informed banker said the Central Bank would not necessarily find anything suspicious about the order, since such payments are not uncommon, but that an unfamiliar representative would likely put a teller on guard.

“The Central Bank has created a commission, led by First Deputy Chairman Georgy Luntovsky, to carry out an internal investigation,” the Central Bank said.

Finally, George Frey of BusinessWeek reports that European Central Bank President Jean-Claude Trichet on Wednesday urged European insurers and pension funds to have sufficient capital on hand, stressing they are "systemically important" to the financial system:

Trichet, who has long encouraged the eurozone's commercial banks to build their capital reserves, noted the companies play an important role in ensuring stability due to their size, investments, interconnectedness and the economic function of insurance.

In remarks at the Euro Finance Week in Frankfurt, Trichet warned there are "reasons to be cautious about the durability of the recent recovery of insurers' profitability."

He said "the supportive environment for investment income is unlikely to continue once market conditions begin to normalize." He did not elaborate.

"Although there are few solvency concerns facing the industry, there is no room for complacency in this environment. Insurers will have to be mindful of having sufficient capital buffers in place.

"The default of an insurer could cause financial distress in these sectors."

He said euro zone insurers and pension funds had about euro6 trillion ($9 trillion) in investments at the end of June and that they held about euro435 billion of debt securities issued by euro area banks, representing about 10 percent of the total debt securities outstanding at those banks.

The eurozone counts 16 countries sharing the single currency. Some of its biggest insurers include Allianz SE and Munich Reinsurance AG in Germany and AXA SA of France.

Insurers and reinsurers, which sell backup coverage to insurance companies to spread risk in the event of catastrophe, are closely watched for their investment decisions and assessment of the economy because they generally invest large sums of premium capital.

"Most of the time, given the typically long-term investment horizons of insurance companies and pension funds, they are a source of stability for financial markets. However, due to the sheer size of their investment portfolios, reallocations of funds or the unwinding of positions by these institutions have the potential to move markets. In extreme cases, that could put at risk financial stability by triggering large swings in asset prices," Trichet said.

I have long argued that insurers and pension funds need to be monitored by regulatory agencies that respond to systemic risks. Unfortunately, the New Normal for retirement benefits looks a lot like the old normal based on chicanery and deceit. When will we ever learn?