Friday, September 20, 2019

When Your Deal Involves a Pension

Corporate deals abound perhaps like never before. Mergers, acquisitions, consolidations -- call them what you will. They're still deals and they involve pensions, sometimes frozen, more often than you think. If you are the acquirer in any of these transactions, it would not be at all surprising to find that your team is giving these pensions were getting shorter shrift than they deserve.

Why?

More than most other elements of a corporate transaction, the costs of sponsoring a pension plan (single-employer) or being a participating employer in one (multiemployer) are both volatile and perhaps a bit out of your control. On the surface, that's bad. And, a significant problem is that traditional due diligence does not address this.

What do I mean by that? There are plenty of firms out there that perform due diligence in deals. On the financial side of this, the work is typically done by large accounting firms and their consulting arms or by the larger, traditional, multi-service consulting firms. What I have seen, and I have by no means seen everything, tends to be a fairly standard report with numbers filled in. It often relies a lot on the past and tends to assume that the past will be reflective of the future. For many of those future costs, that's probably not a horrible assumption. For pensions, unfortunately, it often is.

You see, whether you are focused on cash or on financial accounting, the amount of your future costs is dependent on rules. The rules are complex and they do not lend themselves to cost stability. Today, estimating what those costs will be is not easy. Doing so under a variety of economic scenarios is more complex and likely more expensive. Developing strategies to control those future costs adds even more difficulty and even more cost. It also takes a long time. And, of course, you are never able to work with current or perfect data. In the future, it will be much simpler. At least that sounds nice, but our predictions about the future are often wrong.

The future is here. It's here today.

Everything I said above that was difficult and expensive and more difficult and more expensive and takes a long time -- it doesn't have to.

We don't need great data. We don't need to bother your staff. We can move at the speed of deals. And it won't break the bank.

That future you were hoping for -- it's here now.

Wednesday, July 24, 2019

S&P Implies Hospital Pensions Are Not a Problem -- I'll Be the Judge

I read two excellent articles on the same topic recently. Both Rebecca Moore for Plan Sponsor and Jack O'Brien for Health Leaders Media wrote about an S&P study that implied that pensions are not a problem for not-for-profit hospitals in the US. I found the different perspectives interesting as Rebecca is a retirement plan journalist who was covering a hospital retirement issue while Jack is a hospital journalist who was covering a retirement issue with regard to hospitals.

In summary, here is what I learned:

  • The U.S. not-for-profit health care sector has benefited from an increase in the median funded status of its pension plans in fiscal 2018—increasing from 80.6% to 85%, according to S&P Global Ratings;
  • S&P measures the underlying pension liabilities using a "conservative municipal bond rate;"
  • S&P applauded that many hospitals have focused on de-risking liabilities;
  • S&P views the following as positive with respect to hospital pensions:
    • Full funded status;
    • Any sort of de-risking; and 
    • No pension plan at all.
I'm not going to spend a lot of time dissecting what S&P thinks is good. As a firm, they employ many excellent economists while my formal economic training is quite sparse. But, I'd be remiss if I did not comment on the use of municipal bond rates. While they are not far from the measures typically used for corporate pension plans, I'm not sure how movement in yields on municipal bonds should affect the measurement of obligations in hospital pensions.

Let's return to the initial premise that being that hospital pensions are well-managed (I said not a problem in my title, but the words that were actually used were well-managed). Are they? Is 85% a good funded status? Are the hospitals managing frictional overhead costs? Is de-risking the right approach for a plan that is 85% funded? If so, which type(s) of de-risking should they be using?

While it's not the case for all of them, the majority of hospital pension plans are either [hard] frozen or they are soft frozen (no new entrants). This implies that the goal is to eventually terminate those plans. A plan that is 85% funded cannot be terminated. In fact, generally speaking, a plan that is 100% funded on the basis that S&P uses cannot be terminated (annuities have some level of built-in costs as compared to a traditional actuarial measurement of pension obligations). 

Getting from 85% funded to just a bit more than 100% funded is a tall task. There are a number of ways to make progress on this, some passive and some active. They include watching discount rates increase, investing more aggressively (and hoping that produces better returns), contributing more money to the plan, and cutting the overhead costs of the plan.

Let's attack those in order.

Unless a hospital has more control over the economy than I think it does, it cannot affect the yields on municipal bonds.

Investing more aggressively works well when it works well meaning that if you can beat your bogie, you improve your funded status and get closer to being able to terminate the plan.

Contributing more money to a plan is an easy concept. All it requires is having money to contribute. In 2019, hospitals, generally speaking, don't seem to have that kind of money laying around. On the other hand, hospitals do have lots of assets many of them not pulling as much weight as they might were they re-deployed into the hospital pension plan. I have some ideas in this vein, and would be happy to tell you about them.

Finally, for the last three years, October Three has published a report on PBGC premiums. The report has found that hospitals, compared to any other industry, are consistently paying more in needless PBGC premiums than any other industry. In other words, there are techniques available to them to lower those premiums that as a group, they are not using.

So, with all due respect to S&P, the judge has ruled. Hospital pension are a problem and generally speaking, hospitals are not managing those pensions well. The judge thinks those hospitals should contact him.




Thursday, June 13, 2019

Do We Have A Retirement Crisis? Of Course We Do.

Do we have retirement crisis in the US? Showing my age and with apologies to Messrs. Rowan and Martin, you bet your sweet bippy we do. Despite all the pundits citing data and telling us that we don't have that problem, I'm telling you we do.

I was inspired to write this by an excellent piece that I read in Investment News this morning. The theme was that Vanguard's data shows that the average combined savings rate (employee plus employer) has increased since 2004 from 10.4% of pay to 10.6% of pay. To understand this better, let's look at what else has happened during this period.

The Pension Protection Act (PPA) of 2006 became law. Many defined benefit (DB) pension plans were frozen and or terminated. The new in vogue terms in the 401(k) world all suddenly started with auto: auto-enrollment, auto-escalation, auto-pilot. At the same time, the new fear became that of outliving your savings.

That's right, people are living longer. People know that people are living longer. This frightens many. From a retirement perspective, they don't know how to deal with this. So, the old normal (2019) cannot continue to be the new normal (beyond 2019).

Why do I say that? What's wrong with the analysis from pundits?

Suppose I told you that 55% of Americans are "on track to retire," whatever that means (every recordkeeping firm who puts out data like that has their own basis for what that does mean). Is that good news or bad news? Most who think that the 401(k)-only system is as close to nirvana as one can get would tell you it's great news. They say so on social media. They go out of their way to bash those who disagree.

Well, I disagree and here is why. I'm going to reword what they are saying taking what they say as factual. Suppose I told you that 45% of Americans are not on track to retire. How would you react to that? My intuition says that you would think that is a horrible thing. Yet, it is exactly the same thing as 55% of Americans being on track to retire.

Further, the data being used often assumes that Americans will take their 401(k) balances and draw them down ratably and prudently. Which Americans are those? They're not the Americans of 2019. They're not the ones who want the latest gadget. They're not the ones that love their Amazon Prime accounts. They're not the ones from the instant gratification world of today.

For most Americans, being able to guarantee a level of lifetime income protection is of nearly paramount importance. It's not easy in a 401(k) world. In-plan annuity options are rare and expensive. Taking a distribution to buy an annuity is even more expensive and requires an education in an industry that few Americans have access to.

Look at the generation that retired over the 25 years or so from roughly 1980 to 2005. They often have lifetime income. They may also have account-based savings. They, because they did not live in a 401(k)-only world, were able to get it right.

DB plans of the past had problems. Smart people designed better solutions, but the really [not so] smart people conspired to make us think that 401(k) only is the best solution.

It's time to visit those better solutions.


  • Cost stability and predictable cost for plan sponsors.
  • Lifetime income availability at actuarially fair prices for participants.
  • Account growth through professionally managed assets, but with a guaranteed return of principal.
  • The ability to take your account with you.
And, you can still have your 401(k) on the side to supplement it.

Doesn't this feel closer to nirvana. Isn't this a way to truly move the needle and get us out of the retirement crisis?

Wednesday, April 17, 2019

4 Problems at the Intersection of Finance and HR

They are two of the most visible departments in corporations even though neither directly produces revenue, but does require expenditures -- Finance and HR. Historically, they have been at odds neither particularly caring about the worries of the other despite being inextricably linked. This occurs in many ways, but I'm going to focus on four in the order that they seem to arise:

  1. Recruiting
  2. Cost control and stability
  3. Retention
  4. Workforce transition
Of course there are many more, but I have some thoughts that link all four of these together. In 2019, that's not always easy as there are constant pushes in Congress to tell employers how much they must pay, which benefits they must provide, and at what costs. How then does one company differentiate itself from another?

To the extent possible, every employer today seems to offer teleworking, flexible work hours, and paid time off banks. While they once were, those are no longer differentiators. After the Affordable Care Act took effect, the health plans at Company X started to look a lot like the health plans at Company Y.

I have a different idea and while I am probably biased by my consulting focus, I am also biased by research that I read. Employees are worried about retiring someday. They are worried about whether they will have enough money or even if they have any way of knowing if they will have enough money. They are worried about outliving their wealth (or lack thereof). They are worried about having the means to support their health in retirement.

I know -- you think I have veered horribly from my original thesis. We're coming back.

Today, most good-sized companies have 401(k) plans and in an awful lot of those cases, they are safe harbor plans. They are an expectation, so having one does not help you the employer in recruiting. While once they had pizzazz, today they are routine. 

Cost stability seems a given, but it's not. Common benchmarks for the success of a 401(k) plan including the percentage of employees that participate at various levels. You score better if your employees do participate and at higher levels. But, that costs more money.

If there's nothing about that program that sets you apart, it doesn't help you to retain your employees. And, as we all have learned, the cost of unwanted turnover is massive often exceeding a year's salary. In other words, if you lose a desirable employee earning $100,000 per year, it is estimated that the total true cost of replacing her is about $100,000. That would have paid for a lot of years of retirement plan costs for her.

There will come a time, however, that our desirable employee thinks it's time to retire. But, she's not certain if she is able. And, even if she works out that she is able, retirement is so sudden. One day, she's getting up and working all nine to five and the next, she has to fill that void. Wouldn't it be great to be able to transition her into retirement gradually while she transitions her skills and knowledge to her replacement?

You need a differentiator. You need something different, exciting, and better. You need to be the kid on the block that everyone else envies. 

You would be the envy of all the others if you won at recruiting, kept your costs level (as a percentage of payroll) and on budget, retained key employees, and had a vehicle that allows for that smooth transition.

I had a conversation with a key hiring executive earlier this month. He said he cannot get mid-career people to come to his organization from [and he mentioned another peer organization]. He was exasperated. He said, "We're better and everyone knows it, but their best people won't come over." I asked him why. He said, "It's that pension and I can't get one put in here." I asked him to tell me more and he explained it as one of those new-fangled cash balance plans with guaranteed return of principal -- i.e., no investment risk for participants, professionally managed assets, the ability to receive 401(k) rollovers, and the option to take a lump sum or various annuity options at retirement. He said that it's the "talk of the town over there" and that even though it seems mundane when you first hear about it, it's their differentiator and it wins for them.

We talked for a while. He wants one. He wants one for himself and he wants one to be as special as his competitor. He wants to be envied too. We talked more.

Stay tuned for their new market-based cash balance plan ... maybe. He and I hope that maybe becomes reality.

Thursday, March 7, 2019

Hospitals and a Sky is Falling Economic Prediction

The headline from today's CFO Journal published by the Wall Street Journal was stark: "Sour Economic Outlook Weighs on CFO Spending, Expansion Plans. Let's leave off the lack of expansion plans, but focus on spending.

Consider a low-margin industry that employs highly-skilled workers in short supply -- hospitals -- in particular. Talk to heads of HR in the hospital sector. Most have nearly identical top concerns: how do I attract and retain skilled professionals? What they are obviously referring to are physicians, nurse practitioners, nurses, technologists, and technicians. These are all careers that require very specific, often extensive, education. They are all in short supply and feeling burnout. What is there to keep them around?

Direct cash is not a good option. First, as the WSJ piece suggests, CFOs just won't part with the levels of cash necessary to attract and retain. Second, and while data demonstrating this phenomenon are difficult to find, people live to their levels of income. In other words, if you have a doctor earning $200,000 per year with annual savings in his 401(k) only, if you give him a $50,000 pay increase, his savings in many cases will remain 401(k) only.

This is not good. Some day that physician is going to burn out. He may tire of a profession that has changed from being highly personal to largely impersonal. He may tire of insurers telling him how to practice medicine. He may tire of government intervention.

In any event, if he tires, he is going to do so without being prepared for retirement.

Therein may lie the key.

Prepare your skilled staff for retirement. Do it not by increasing your costs, but by reallocating your labor costs.

Most people live to (or above regardless of pay or nearly to) their paychecks. And, they want pensions.

Give them what they want. Give them a pension that checks all the boxes:


  • Secure
  • Lifetime Income Options Without Subsidizing the Profits of Large Insurers
  • Portability
  • Easy to Understand
  • Professionally Managed Investments
  • Stable, Predictable, and Manageable Costs
The time is now. Act while the economy is still strong and prepare yourselves and your employees for when it's not.

Tuesday, February 19, 2019

More Evidence Supporting the Value of Second Opinions

I was reading this morning's Wall Street Journal "CFO Journal" newsletter. One headline jumped out at me -- "Finance Professionals Lack Confidence They Can Spot Errors."

Here were some of my key takeaways:

  • Nearly 70% of finance professionals believe their company has made significant business decisions based on bad financial data.
  • The survey found that ... 55% of professionals lack confidence  in their ability to spot financial errors before reporting results.
  • Roughly one-fourth said they were concerned about errors they know to exist, but hadn't identified.
What does that tell me? It tells me that in-house financial professionals don't trust their own numbers. It also implies that they may not trust externally-produced numbers, but they are not doing anything about it.

Doesn't that scream that you need a second opinion? Thinking about this as an actuary, it tells me that companies that sponsor pension plans whether they are traditional or cash balance, ongoing or frozen, well-funded or not, could really benefit from an actuarial second opinion.

With required contributions annually in the millions or even hundreds of millions or billions of dollars for many longer-term plans, the cost-value trade-off of a second opinion seems clear. If a plan sponsor got meaningful value one year in ten from such a second opinion, they will have paid for all ten of them many times over.

Are you in a long-term relationship with your actuary? If so, has the relationship gotten complacent to the point that they are going through the motions. Think of your desire for a second opinion like a seven-year itch.

Has the actuarial firm that you use recently changed or significantly modified its team that serves you? Did they come back to you with findings from when they reviewed the work that has been done recently? If not, might they have found something they don't want to tell you about? Perhaps not ... maybe so?

Does the actuarial firm that is serving your plan do periodic reviews where national leaders come in and audit the work of the team? Have they done such an audit recently? Did the team tell you about the results of the audit.

And, returning to the theme of the WSJ tidbit, do you want to be one of those seven in ten companies that makes significant business decisions on bad financial data? Isn't it time to think about an actuarial second opinion?

Tuesday, February 5, 2019

Eliminating the Phone-A-Friend Retirement Plan

I read an article earlier this morning informing me that employees don't really understand 401(k) plans. News Flash: that's not news. In fact, looking at behavior of employees and overhearing casual conversations between otherwise intelligent 401(k) participants about the value of their 401 plans, their 201k (when they are underperforming expectations), their 501k (when they are overperforming expectations), and the ways that they choose investment options, this sounds like a statement from Captain Obvious.

How did 401(k) plans get this way? In their earlier incarnations, typical 401(k) plans gave employees an option to defer. In most plans, employees that did choose to defer got a match from their employers. Employees could then invest those assets within the plan in usually about five to eight options.

I recall a conversation back in the early 1990s with an individual who is now on every list of the great minds of the 401(k) world and the great innovators in the 401(k) world. This individual told me that no defined contribution plan needs more than six investment options ... ever .. and that any plan sponsor with more than six should be lined up with their adviser before a firing squad (the words are not precise, so no quotation marks, but they are pretty darned close). The same individual later became one of the leading proponents of a 'full menu' of options with at least one and often more than one from each asset class and each investment style within that asset class.

How exactly do employees benefit from such choices? They don't.

Suppose I choose three highly rated large cap funds from US News's report:

  • T Rowe Price Institutional Large Cap Core Growth Fund
  • Fidelity Blue Chip Growth Fund
  • JP Morgan Intrepid Growth Fund
Let's imagine that they are all in my fund's lineup. How do I choose?

Intrepid sounds like a cool name. Maybe I should pick that. Blue Chip? My grandfather told me to invest in blue chips. I wonder if that's still true today. And, that long name? If it does all those things, it must be really good, too.

I could read the prospectuses. I could do research on performance history. I could look at investment styles and drift whatever all that means. I could phone a friend.

The simple fact is that for most of us, it's a crap shoot ... plain and simple. 

Because of that, despite all the forecasts in the world from 401(k) lovers, this should not ever be a primary plan for employees. As it was intended back in the late 70s and early 80s, this should be a supplemental savings plan -- an addition to what you get in your primary plan.

Your primary plan should be just that. It should be employer-provided. It should not be confusing. There should be no need for a phone a friend option. 

I don't care what kind it is although I have my biases. My bias is that the plan should provide for the ability for participants to take distributions in lump sums or wholesale-priced annuities (my term for annuities on a fair actuarial basis without middle men making profits at your expense). My bias is that the determination of your benefits in the plan should be simple. My bias is that assets should be professionally managed. 

I don't care what label you give to such a plan. I don't even care what label ERISA or the Internal Revenue Code gives to such a plan. What I do care about is that you not lose sleep over whether Intrepid is better than Blue Chip or conversely. What I do care about is that if you choose to annuitize your account balance that you get an annuity that is 100% of what you deserve not some number closer to 80%. 

And, for your supplemental savings, you can have your Phone-A-Friend ... oops, I meant 401(k) plan.