Author: Site Staff

New Jersey Attorney General Anne Milgram filed a lawsuit on behalf of the $59 billion New Jersey Division of Investment against executives of Lehman Brothers Holdings, claiming the state’s pension fund lost more than $100 million on investments in Lehman, said a spokesman for Gov. Jon Corzine.

The suit alleges fraud and misrepresentation on the part of Lehman executives “in violations of New Jersey and federal securities laws, negligent misrepresentation, breach of fiduciary duty, fraud, and aiding and abetting. It seeks to recover compensatory and punitive damages,” Corzine’s office said in a statement released Wednesday, March 17.

The Division of Investment bought preferred and common stock in Lehman after the investment bank claimed it had sufficient liquidity, a strong capital base and superior hedging, risk management and valuation practices, the statement said.

“Lehman’s executives kept telling investors its financial position was solid when, in fact, the opposite was true,” Milgram said in the statement. “The state bought and held Lehman securities at artificially inflated prices and lost millions, which we seek to recover with this suit.”

Filed by Isabelle Clary of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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There’s no good news among five different reports on pension plans’ funded status, whether looking at last year or as recently as last month.

For 2008, the 100 largest U.S. corporate pension plans saw their funded status fall by 30 percentage points, dropping to 79 percent funded as of December 31 from 109 percent at the end of 2007, according to an analysis by Watson Wyatt Worldwide of Arlington, Virginia.

That’s based on cumulative assets of $798.9 billion and liabilities of $1.017 trillion at the end of 2008, compared with $1.078 trillion in assets and $992 billion in liabilities a year earlier.

Recent information isn’t any better.

For February, Milliman Inc. reported a funded status of 71.7 percent for the top 100 plans; Mercer, 74 percent for plans in the S&P 1,500; BNY Mellon Asset Management, 67.7 percent for its typical pension plan; and Towers Perrin, 60.2 percent for its benchmark plan.

Last year, according to Watson Wyatt, the plans lost $303 billion in assets as funding levels fell to a $217 billion deficit from an $86 billion surplus at the end of 2007. Assets of the 100 largest plans declined 26 percent to $799 billion as of December 31.

Only 14 percent of plans had funding levels greater than 90 percent at the end of last year; a year earlier, four-fifths of the plans were more than 90 percent funded.

According to Watson Wyatt, high allocations to equities were the culprit for plans that lost the most assets in 2008, an average 32.3 percent decline for those with at least 90 percent of assets invested in stocks.

Plans with less than 20 percent in equities lost an average of 6 percent.

“There’s more and more of a realization that equities have a lot of inherent risk,” said David Speier, senior retirement consultant at Watson Wyatt. “Those that had a majority in bonds are the lucky ones.”

Only 2 percent of plans invested less than 20 percent in equities and only 1 percent invested more than 90 percent.

Two-thirds of the plans allocated between 55 and 74.9 percent of assets to equities. Among those plans, returns ranged from -23.64 to -28.04 percent.

Pension funds that adopted liability-driven investing strategies did better for the year because those strategies use bond and derivative markets to better hedge their long-term pension liabilities, Speier said.

Watson Wyatt analyzed pension disclosures in plan sponsors’ 10-K filings with the Securities and Exchange Commission, looking specifically at the largest pension plans among publicly traded companies with year-end 2008 fiscal data.

For the 83 companies that provided asset allocation information in their filings, equity targets for 2009 were similar to 2008’s, but the actual allocations to equities declined because of the declining stock market. Actual equity allocations fell to 48 percent at the end of 2008, down from 59 percent a year earlier.

The companies plan to contribute a total of more than $27.7 billion in cash to their defined-benefit plans this year, up 50 percent from $18.4 billion they contributed in 2008, the analysis found.

“Plan sponsors were hit hard with a double whammy in 2008 with severe market declines and new funding rules coming into effect,” Speier said. “This combination will require employers to make staggering pension contributions over the next couple of years, at a time when they can least afford them.”

Seattle-based Milliman Inc. said the 100 largest U.S. corporate defined-benefit plans lost $54 billion in assets in February and $102.7 billion since the end of 2008. Funded status declined to 71.7 percent at the end of February, from 74.9 percent at the end of January and 77.2 percent at year-end 2008, according to the Milliman 100 Pension Funding Index.

The losses were offset slightly by liability decreases of roughly $21 billion, resulting in a net loss of $33 billion for the month.

Assets fell to $869 billion at the end of February, down from $923 billion at the end of January and $972 billion from year-end 2008. Pension liabilities went to $1.212 trillion at the end of February, from $1.233 trillion at the end of January and $1.259 trillion from year-end 2008.

“I’m glad February is behind us,” John Ehrhardt, principal, consulting actuary and co-author of the Milliman index, said in a telephone interview. “I hope the worst is behind us, but the hole we’ve dug in January and February is going to be tough to pull out of.”

Even if asset values and contributions went up over the rest of year, companies are still probably looking at a net decrease in their pension plans’ funded status in 2009, and that change is going to hit the companies’ balance sheets because their cash contribution requirements will go up, he added.

Reports from Mercer LLC, New York; Towers Perrin of Stamford, Connecticut; and BNY Mellon Asset Management in New York suggest further declines in funded status in 2009.

In Mercer’s study, the funded status of S&P 1,500 companies’ defined-benefit plans was an estimated 74 percent as of February 28, down slightly from 75 percent at the end of January. The Mercer analysis found an aggregate estimated deficit of $373 billion, just below the $380 billion as of January 31 and the $409 billion at the end of 2008.

Meanwhile, a hypothetical benchmark pension plan tracked by Towers Perrin suffered a 3.9 percentage point decline in its funded ratio in February to 60.2 percent, the lowest level since the firm created the benchmark in 1990.

The benchmark plan’s portfolio is 60 percent equities and 40 percent fixed income. The plan’s equity portfolio has returned a cumulative -43 percent since September.

“Pension funds are going through the same down period as everyone else who participates in the capital markets,” Jerry Mingione, principal at Towers Perrin, said in a telephone interview. “The timing and extent of the drop-off is of course coming as quite a shock to investors and financial managers.”

The BNY Mellon Pension Liability Index showed that the typical U.S. pension plan dropped six percentage points in February to 67.7 percent funded. New York-based BNY Mellon defines the typical plan as having a moderate-risk portfolio consisting of: 50 percent Russell 3,000 Index equities; 10 percent Morgan Stanley Capital International Europe, Australasia and Far East Index equities; and 40 percent Barclays Capital U.S. Aggregate Index bonds.

Mingione said that given the turbulence, disparate results on funding status are possible.

“The bond markets are so disparate in terms of the yield curves,” Mingione said. “You can get very different results depending on the bonds you let in.”

Filed by Jennifer Byrd of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Health insurance premiums charged by insurers providing coverage in a pioneering Massachusetts program that extends state-subsidized coverage to about 165,000 low-income residents will dip slightly next year, according to the agency that runs the Commonwealth Care program.

While state officials originally projected an average rate increase of 2 percent for the next year, which begins July 1, negotiations resulted in a slight decrease.

In the current year, rates increased by an average of about 9 percent, and since the program started in 2006, the average annual increase has been about 4.5 percent, according to the Commonwealth Health Insurance Connector Authority, the program’s administrator.

About 70 percent of enrollees with the lowest incomes pay no premiums, with the cost picked up by the state. Other enrollees receive partial premium subsidies based on income.

Enrollees selecting the lowest-priced plans next year will see no increase in their monthly premiums, while those selecting higher-priced plans will pay a bit less. Five health insurers will provide plans next year, up from four this year.

Commonwealth Care was created by Massachusetts’ 2006 health care reform law. Its central goal is to move the state to near-universal coverage. Last year, more than 97 percent of residents had coverage, compared with about 90 percent in 2006.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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The White House says it’s looking at restrictions on some $30 billion in taxpayers’ money approved to help American International Group as the administration tries to reclaim or block millions of dollars in bonuses the struggling company awarded executives.

President Barack Obama and his top aides expressed outrage at reports that AIG went ahead with $165 million in bonuses even though the company received more than $170 billion in federal rescue money. Obama directed Treasury Secretary Timothy Geithner to see whether there was any way to retrieve or stop the bonus money.

“I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?” Obama said Monday, March 16, in announcing a plan to help small businesses.

The financial bailout program remains politically unpopular and has been a drag on Obama’s new presidency, even though the plan began under his predecessor, President George W. Bush.

The White House is aware of the nation’s bailout fatigue; hundreds of billions of taxpayer dollars have gone to prop up financial institutions that made poor decisions, while many others who have done no wrong have paid the price.

News that AIG still needs billions in taxpayer dollars to prevent a collapse did little to build public confidence, Obama aides acknowledged.

Seeking to turn the public tide, White House spokesman Robert Gibbs aggressively criticized AIG and said administration officials were working to put strict limits on the next $30 billion installment bound for the company.

“Treasury has instruments that can address the excessive retention bonuses, and add provisions to ensure that taxpayers are made whole,” Gibbs said.

The AIG news overshadowed what Obama’s aides had hoped to spend the first part of the week discussing: billions of dollars to help the nation’s small businesses in the hopes of getting credit flowing again. Obama heaped praise on the little guys of American industry, often overshadowed in the blitz of government bailouts.

Obama’s latest plan allows the government to spend up to $15 billion to buy the small-business loans that are now choking community banks and lenders. That, in turn, could allow those banks to start lending money again to small companies to invest, pay bills and stay afloat.

“You deserve a chance. America needs you to have a chance,” Obama said in an appeal to all those who run small businesses or hope to one day.

On Capitol Hill, House Republican leader John Boehner was unmoved. He called Obama’s White House event “simply an attempt to provide political cover for the job-killing burden the president’s budget would place on our nation’s small businesses.”

The House Republican whip, Eric Cantor of Virginia, said Obama’s plan was welcome, but he predicted it would affect only a small portion of the loan market for small businesses, leaving others and their workers “in the cold.”

Filed by Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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President Obama says he has asked Treasury Secretary Timothy Geithner to “pursue every single legal avenue” to block the payment of $165 million in executive bonuses at American International Group.

“This is a corporation that finds itself in financial distress due to recklessness and greed,” the president said to small-business representatives gathered in Washington on Monday, March 16.

“Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” the president said of planned compensation for employees at AIG Financial Products. That unit’s credit-default swap business contributed significantly to AIG’s plight.

“How do they justify this outrage to the taxpayers who are keeping the company afloat?” Obama said.

Noting that AIG “has received substantial sums” from the U.S. Treasury as part of rescue efforts during the past six months, the president said he has asked Geithner to “use that leverage and pursue every single legal avenue to block those bonuses and make American taxpayers whole.”

As the crowd applauded, he added that the Treasury secretary is “working to resolve the matter” with AIG chief executive Edward Liddy, who the president noted “came on board after the contracts that led to these bonuses were agreed to last year.”

“What this situation also underscores is the need for overall financial regulatory reform, so we don’t find ourselves in this position again, and for some form of resolution mechanisms in dealing with troubled financial institutions, so we have greater authority to protect the American taxpayer and our financial systems in cases such as this,” Obama said.

He said the government does not have all of the regulatory authority it needs to deal with situations like AIG.

Filed by Mark A. Hofmann of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Massachusetts officials are integrating a two-decades-old state program that heavily subsidizes COBRA health insurance premiums with the new federal COBRA premium subsidy to further cut the costs of coverage for employees who lose their jobs.

Launched in 1988, the Massachusetts program—known as the Medical Security Program and administered by the Division of Unemployment Assistance—reimburses 80 percent of COBRA premiums for unemployed workers with adjusted gross incomes of up to 400 percent of the federal poverty level.

The Massachusetts program is the only one of its kind in the country.

Under economic stimulus legislation signed into law last month by President Barack Obama, the federal government will pay 65 percent of COBRA premiums for employees who lose their jobs between September 1, 2008, and December 31, 2009. The subsidy is available for up to nine months, until an employee is eligible for coverage from a new employer or becomes eligible for Medicare.

Massachusetts will apply its 80 percent subsidy to COBRA beneficiaries’ 35 percent share. That will result in beneficiaries paying 7 percent of the premium and the Massachusetts Security Program paying 28 percent.

That type of integration between the Massachusetts program and the federal COBRA premium subsidy is explicitly allowed under the stimulus law.

As of January, more than 3,500 Massachusetts unemployed workers were receiving the state-provided COBRA premium subsidy, state officials say.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Unemployment and reduced spending on health care have a direct effect on the country’s mortality rate, according to a new study from the University of North Texas Health Science Center’s School of Public Health in Fort Worth.

As workers lose their jobs, they often lose their health insurance, suffer from stress and adopt unhealthy behaviors.

They also might delay preventive care because of cost or coverage issues. In a news release, the school of public health said that research since World War II has found that economic development is good for health in developing countries; however, the new study’s findings suggest that unemployment is a much more important factor in health and well-being than economic development.

“Interestingly, this economic downturn is showing how quickly the effects of unemployment, and, thus, reduction of health care expenditures is resulting in mortality,” said Harvey Brenner, a professor of public health at the school, in a news release about the study.

“In the past, we saw people die within 10 years after their job loss,” Brenner said. “Now, we are seeing them die as early as the same year.”

The University of North Texas Health Science Center is composed of the Texas College of Osteopathic Medicine, the Graduate School of Biomedical Sciences, the School of Public Health and the School of Health Professions.

Filed by Jessica Zigmond of Modern Health Care, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Employer groups are expecting the first drafts of federal health care reform legislation to include proposals to tax employees’ health benefits.

The cost of health benefits is exempt from taxes for employers and employees. The White House Office of Management and Budget estimates that the tax exemption, which helped create the employer-based health care system during World War II, will cost the federal government $174 billion in lost tax receipts in 2009, making it a policy target for health care reform.

“This whole idea of limiting the tax exclusion will be one of the most highly contested elements of health care reform,” says James Klein, president of the American Benefits Council. “But we may see different variations on this proposal than we have in the past.”
Employers’ contributions would not be taxed. Instead, the cost of an employee’s health care would be added to total compensation and subject to federal, state and Social Security taxes.

No matter the details, employers are likely to oppose the policy, Klein says.

President Barack Obama is pushing the reform, but the first draft of bills will likely be written in the Senate, where Sen. Max Baucus, D-Montana and chairman of the Senate Finance Committee, has proposed taxing benefits in his legislation. Baucus has argued that revenue to pay for health care reform should come from within the health care system.

Republicans have also proposed eliminating the tax exclusion but have suggested providing a tax credit to individuals who buy insurance.

The proposal, however, is fraught with political obstacles. One version is likely to focus on health benefits that cost a certain dollar amount. The idea is to encourage people to elect less costly benefit plans, which would undoubtedly raise the ire of union members, whose heavily subsidized health benefits represent a large portion of their total compensation.

Another option is to tax benefits of people at a certain income level. But employers fear that Congress could lower that level anytime it wanted to raise revenue.

“It’s a blunt policy instrument,” Klein says.

In a policy brief in January, the Employee Benefit Research Institute wrote, “The change would be especially difficult for self-insured employers that do not pay insurance premiums, since they would have to set the ‘premium equivalent’ for each worker. This would not only be costly for employers, depending upon the requirements set out by law, but could also create fairness and tax issues for many affected workers.”

No concrete details are expected until the spring, when the legislation is set to go before the Senate committees on health care and finance.

“There’s absolutely no question that it’s on the table,” says Susan Relland, an attorney with Miller & Chevalier in Washington. “But we have no details yet.”

—Jeremy Smerd

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It took her awhile to get confirmed, but new Secretary of Labor Hilda Solis won’t waste time making her presence felt by companies that her agency determines are subjecting employees to dangerous working conditions or are shorting their pay.

“Let me be clear, there is a new sheriff in town,” Solis told a crowd of a couple hundred Department of Labor staff, government officials and political supporters at her swearing-in ceremony Friday, March 13.

“We’ll accomplish this through tough enforcement, transparency, cooperation and balance,” she said.

Her remarks reflected President Barack Obama’s budget outline for the agency. He proposes to raise discretionary funding by $1.5 billion by 2010. A big chunk of the increase will go toward the Occupational Safety and Health Administration and the Wage and Hour Division.

Solis said another emphasis would be worker training, especially for “green-collar jobs” and for high-growth industries. “In a time of economic crisis, giving Americans the tools they need to find and keep a job must be our priority,” she said.
 
The swearing-in, conducted by Vice President Joe Biden, was a ceremonial event. Solis, a former congresswoman from the Los Angeles area, has been serving as labor secretary since her confirmation, 80-17, by the Senate on February 24.

The Senate took nearly seven weeks to scrutinize Solis’ background and policy positions. Her nomination was held up by Republicans who had concerns about a potential conflict of interest between Solis’ role as treasurer for an advocacy group and her support of legislation that it sought to pass, including a bill that would make it easier for workers to form unions.

In addition, Solis ran into a tax problem involving her husband, who did not pay about $6,400 in tax liens against his auto repair business until the day before the Senate Health, Education, Labor and Pensions Committee was to vote on her.

Her nomination stumbles seemed far behind her during her swearing-in, with the enthusiastic crowd giving her a couple of standing ovations as she vowed to take the department in a new direction.

The program for the event captured the theme of Solis’ and Biden’s speeches. At the top, it said: “U.S. Department of Labor: The Voice for Working Families.”

Her vision for the department is shaped by her background as the daughter of immigrants who were both members of unions, Solis said. Her father, originally from Mexico, was a shop steward at a battery recycling plant. Her mother, who came to the U.S. from Nicaragua, worked in a toy factory.

Solis credited her father’s union for her family’s health care and other benefits. She articulated her affection for organized labor by recognizing union leaders in the audience.
“Thank you brothers and sisters for being here with me,” she said. “You are a very, very important part of what I will be doing in the next few years.”

While in the House, Solis co-sponsored the Employee Free Choice Act, a bill that would allow workers to form a union once a majority sign cards authorizing one. It would prohibit a company from requiring a secret-ballot election supervised by the National Labor Relations Board.

But Solis vexed Senate Republicans by refusing to answer questions about her position on the bill during her confirmation hearing. It was one of several policy areas on which she declined to comment.

Solis didn’t mention the bill in her remarks at the swearing-in ceremony, but she did emphasize that the department would be a forceful advocate for women and minorities.

Her background was a focus of the event. Solis, the first Latina labor secretary, began her remarks by saying, “Buenos dias.” She also paid tribute to her parents in a portion of her speech spoken in Spanish.

Solis was the first person in her family of six to graduate from college. She earned her undergraduate degree from Cal Poly Pomona and a master’s degree from the University of Southern California. She was the first woman to win a seat in the California Senate.

“The fact that I’m standing before you today as a child of an immigrant family, a working family, is proof that in America anything is possible,” Solis said.

—Mark Schoeff Jr.

The chairman of the Senate Finance Committee is appealing to the business community to help him draft a workable play-or-pay system as part of comprehensive legislation to move the U.S. close to universal health care coverage.

Speaking Wednesday, March 11, in Washington before the annual meeting of the National Business Group on Health, Sen. Max Baucus, D-Montana, said he rejects a single-payer system and instead wants to build on the current employment-based system.

“My vision for reform is one of shared responsibility,” Baucus said, noting that in an earlier position paper he endorsed requiring employers to either provide coverage or pay into a pool to provide health insurance premium subsidies for the uninsured, an approach Massachusetts took nearly three years ago that moved the state to near-universal coverage.

Baucus acknowledged there are many details yet to be resolved in structuring a play-or-pay system. One key concern, he said, is the minimum level of benefits employers would be required to offer to avoid paying into a pool.

“How would that standard relate to what employers already are providing?” he asked.

But the Finance Committee chairman already has come to other conclusions about an employer mandate. The smallest firms, he said, should be exempt, while federal tax credits should be available to other small companies that provide coverage to partially offset premium costs.

Baucus asked the business community, which in the past has largely opposed an employer mandate, to keep an open mind until the legislation he is putting together is complete.

“I urge all of us here to suspend judgment until you can see the whole picture. Wait until we can see all parts of the puzzle,” he said.

And he appealed for employer input. “Help us to develop a play-or-pay structure that works,” he said.

Baucus said he wants his committee to start considering and voting on a reform package in June, with a bill sent to President Barack Obama before the end of the year.

That fast-track schedule is deliberate, he said, noting that history has shown that the greatest chance of passing significant legislation is during the first year of a new presidential administration.

To further delay, he said, could result in disastrous consequences with costs continuing to escalate, resulting in, among other things, employers having less money to grow their businesses and more companies dropping coverage.

Drafting and passing comprehensive health care reform is a huge challenge, Baucus said. The last attempt—in 1993—resulted in the Clinton administration’s biggest domestic failure.

But that risk must be taken. If reform legislation is enacted and is successful in expanding coverage, improving quality and controlling costs, “It may turn out to be one of the most important things that we ever do,” he said.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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