Month: June 2022

Study Finds Pension Obligation Bonds Could Worsen T Retirement Fund’s Financial Woes

Mary Pat Campbell

Link: https://pioneerinstitute.org/featured/study-finds-pension-obligation-bonds-could-worsen-t-retirement-funds-financial-woes/

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A new study published by Pioneer Institute finds that issuing pension obligation bonds (POBs) to refinance $360 million of the MBTA Retirement Fund’s (MBTARF’s) $1.3 billion unfunded pension liability would only compound the T’s already serious financial risks.

With POBs, government entities deposit revenues from bond sales into their pension funds and use the money to make investments they hope will deliver returns that outpace borrowing costs.

“Virtually every study of POBs finds that timing and duration of the bond issues are critical,” said E.J. McMahon, author of “Rolling the Retirement Dice.”  “Bonds floated at the end of a bull market are the most likely to lose money, and that makes this idea a wrong turn at the worst possible time.”

If investments don’t meet a pension fund’s assumed rate of return, it could be left with debt service costs in addition to the pre-existing unfunded liability.  In 2015, the Government Finance Officers Association bluntly warned that “State and local governments should not issue POBs.”  It reaffirmed its guidance last year.

Author(s): E.J. McMahon

Publication Date: 21 Jun 2022

Publication Site: Pioneer Institute

Pension Obligation Bonds

Mary Pat Campbell

Link: https://marypatcampbell.substack.com/p/pension-obligation-bonds#details

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2015: Why are Pension Obligation Bonds OF THE DEVIL? A Lesson from the Dollar Auction  

http://stump.marypat.org/article/191/why-are-pension-obligation-bonds-of-the-devil-a-lesson-from-the-dollar-auction

The dollar auction is a truly evil game. I used to forbid people from playing it at Mathcamp. That’s not a joke.

I had a really ugly graph on that post, and yes, I’ve gotten better with the graphs over the years. The ugliness of that graph was a partial inspiration to seek solutions. (Other ugly graphs as well).

You can barely see it, but there was a POB between 2003 and 2005. It barely made a dent in the unfunded pension liability.

And what then? In the ten years since 2005, Illinois underfunded the TRS pension fund by at least a billion dollars a year.

With regards to contributions, there was a choice on the part of the “government”.

With regards to all the other reasons for shortfalls — investment experience, experience in salary changes and longevity — the government had less direct control. But they definitely had a choice with regards to how much of the budget to apply to the pensions.

And every damn year, the Illinois government made a conscious decision to shortchange the pension. That was not an accident.

POBs are most often used by governments that were shortchanging the pensions, or goosing the benefits in insane and seemingly sane ways, to paper over said shortchanging. This farce lasts only so long.

Author(s): Mary Pat Campbell

Publication Date: 20 Jun 2022

Publication Site: STUMP at substack

End the Tax Exclusion for Employer‐​Sponsored Health Insurance

Mary Pat Campbell

Link: https://www.cato.org/policy-analysis/end-tax-exclusion-employer-sponsored-health-insurance-return-1-trillion-workers-who?au_hash=uEDWOOo1RrC6QDCrTTk5sH9lnJyuweZdaUf8ZDik8E0

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The “tax exclusion” for employer‐​sponsored health insurance shields workers from paying income or payroll taxes on such benefits. The exclusion is an accident of history that predates modern health insurance and is roughly as old as the income tax itself. It fuels excessive health insurance coverage, medical spending, and health care prices and ties health insurance to employment. It has required Congress to intervene countless times to address problems it creates.

The exclusion requires a worker to let her employer control a sizable share of her earnings, to enroll in a health plan that is likely not her first choice, and to pay the remainder of the premium out of pocket. Overall, the tax code effectively threatens U.S. workers with $352 billion in additional taxes in 2022 if they do not let their employers control $1 trillion of their earnings. The additional tax that workers pay if they do not accept those terms constitutes an implicit penalty.

The tax code thus limits a worker’s ability to make her own health decisions. In the United States, compulsory health spending accounts for 83 percent of overall health spending, the ninth highest share among 34 advanced nations. The tax exclusion is the single largest contributor to compulsory health spending.

Reforming the exclusion would free U.S. workers to control $1 trillion of their earnings that employers currently control, give consumers more health care choices, and make health care more accessible. Building on the bipartisan success of tax‐​free health savings accounts appears to present the best politically feasible opportunity for reform. The United States will not have a consumer‐​centered health sector until workers control the $1 trillion of their earnings that the exclusion forces them to let employers control.

Author(s): Michael Cannon

Publication Date: 24 May 2022

Publication Site: Cato

Accelerated Death Benefit Rider Financing Approaches

Mary Pat Campbell

Link: https://www.soa.org/sections/product-dev/product-dev-newsletter/2022/june/pm-2022-06-scholz-eaton/

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Living benefit riders to life insurance policies (also known as ‘combo’ or ‘hybrid’ policies) have become a core component of life insurance sales strategy. LIMRA reported that in 2020 “Combination products represented 24 percent of life insurance sales based on total premium.”[1] Concurrently, the long-term care insurance (LTCI) industry reached an inflection point when more LTCI (and chronic illness) benefits were sold through hybrid products than from standalone LTCI coverage.

On the spectrum of life and LTCI hybrid policies, the richest of these provide coverage of LTCI first through accelerating the policy’s death benefit, and then by providing extended LTCI benefits for many more years. There are a handful of individual and worksite insurers who sell these rich hybrid policies. On the other end of this spectrum are acceleration-only riders to life insurance policies. These riders provide policyholders the opportunity to receive a portion of the policy’s death benefit in advance, under certain conditions. Some of these riders do not cover qualified LTCI, but instead cover ‘chronic illness,’ which has a similar benefit trigger but is not formally LTCI.

This article outlines industry practice and consideration for pricing these acceleration-only policies. The National Association of Insurance Commissioners (NAIC) Model Regulation #620 addresses accelerated death benefit riders to life insurance policies.[2] Model Regulation #620 outlines three financing methods for accelerated death benefit riders which we describe in this article. The Interstate Insurance Product Regulation Commission (the IIPRC, or the “Compact”) adopted standards for some of these riders in the Additional Standards for Accelerated Death Benefits (IIPRC-L-08-LB-I-AD-3).[3] For companies filing chronic illness, critical illness, and terminal illness products in the Compact, these standards define—among other items—the form and actuarial submission requirements and benefit design options for accelerated death benefit riders. If a company is filing an acceleration rider for a qualified LTCI benefit, that product would be subject to the IIPRC individual LTC insurance standards.

Author(s): Stephanie Scholz and Robert Eaton

Publication Date: June 2022

Publication Site: Product Matters!, SOA

When a Tax Break Is Actually a Tax Penalty

Mary Pat Campbell

Link: https://reason.com/2022/06/08/when-a-tax-break-is-actually-a-tax-penalty/

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When is a tax break actually a tax penalty? When it’s the tax exclusion for employer-sponsored health insurance. 

That’s what Michael Cannon, Cato Institute’s director of health policy studies, convincingly argues in his recent paper, End the Tax Exclusion for Employer-Sponsored Health Insurance. His paper is a compact lesson in the ways that some supposed tax breaks can effectively function as tax penalties, not only distorting markets, but invisibly penalizing people for their choices. And it’s a reminder of the ways that seemingly minor, offhanded policy decisions, made with little thought to long-term consequences, can exert a haunting influence long after they are made.

The tax exclusion for employer-sponsored health insurance is exactly what it sounds like: a carve-out for health coverage offered through the workplace. 

…..

But he argues that, in practical terms, this tax break actually acts as a stealth penalty on workers who want to make their own health insurance choices. Typically even a generous employer only offers a handful of health plans, and those plans are unlikely to take the exact form an employee would otherwise choose on his or her own. If an employee wants to purchase any other plan, however, he or she would have to do it with money first received—and taxed—as cash compensation. Thanks to taxation, it would be worth a lot less. Thus the tax exclusion acts as a tax penalty on any employee who wants to choose their own health insurance. 

Author(s): Peter Suderman

Publication Date: 8 Jun 2022

Publication Site: Reason

NYC Comptroller Lander and Trustees Announce $7 Billion Milestone in Climate Solutions Investment

Mary Pat Campbell

Link: https://comptroller.nyc.gov/newsroom/nyc-comptroller-lander-and-trustees-announce-7-billion-milestone-in-climate-solutions-investment/

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New York City Comptroller Brad Lander and trustees of the New York City Retirement Systems announced that investments in climate solutions have now reached more than $7 billion across all systems and asset classes as of the end of 2021, well exceeding the $4 billion goal set by three of the funds in 2018. These investments in companies that are helping to facilitate a just transition to a low carbon economy build on the $4 billion divestment by three of the five funds from companies that own fossil fuel reserves, which is expected to be completed later this year.

This milestone surpasses the goals set by the New York City Employees’ Retirement System (NYCERS), Teachers’ Retirement System (TRS), and Board of Education Retirement System (BERS), in 2018 to double their investments in climate solutions from $2 billion to $4 billion by 2022. In October 2021, the three Systems adopted a goal to achieve net zero greenhouse gas emissions by 2040. As part of this commitment, the three Systems set a goal to reach a total of $37 billion in climate solutions investments by 2035, in line with a total of $50 billion across all five Systems by 2035.

The climate solutions in the New York City Retirement Systems’ portfolio includes investments in companies that derive a majority of their revenue from climate mitigation, adaptation, and resilience activities, such as renewable energy, energy efficiency, pollution prevention, and low-carbon buildings. Climate solutions investments in the Systems’ portfolios have grown consistently and greatly in the last several years, more than doubling in value since 2018.

Author: Brad Lander

Publication Date: 5 April 2022

Publication Site: NYC Comptroller’s Office

Wall Street Is Fleecing a Bunch of Teachers

Mary Pat Campbell

Link: https://jacobin.com/2022/04/katie-muth-pennpsers-pensions-retirement-fund-teachers-sec-pennsylvania

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A new era in the decade-long battle by retirees and whistleblowers to halt massive transfers of wealth out of retirement funds and into Wall Street firms could be at hand, thanks to the case of Katie Muth.

Muth, a Democratic Pennsylvania state senator, is one of fifteen trustees who oversees Pennsylvania’s largest public pension fund, the Pennsylvania Public School Employees’ Retirement System (PennPSERS). Not long after her February 2021 appointment to the board, Muth began questioning the fund’s investments in areas like private equity, hedge funds, and real estate.

Over the past thirty years, public pension funds have moved $1.4 trillion of retiree savings into such high-risk, high-fee “alternative investments,” enriching finance industry moguls like Stephen Schwarzman of the Blackstone Group and Robert Mercer of Renaissance Technologies while often shortchanging retired public employees and teachers.

But Muth says that when she asked the fund’s investment staff for more information about its high-risk investments, she was rebuffed — so in June 2021, she sued the fund for basic information about its investments.

Author(s):MATTHEW CUNNINGHAM-COOK

Publication Date: 6 April 2022

Publication Site: Jacobin

Ohio Teachers’ Pension Increases Alts and Fixed Income Targets, Decreases Public Equities

Mary Pat Campbell

Link: https://www.ai-cio.com/news/ohio-teachers-pension-increases-alts-and-fixed-income-targets-decreases-public-equities/

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The State Teachers’ Retirement Board of Ohio shifted its asset mix at its board meeting last week, announcing it will now target 26% of its assets to U.S. equities, down from 28%. It also decreased its international equity allocation to 22% from 23%. The fund increased its allocation to private equity to 9% from 7% and its allocation to fixed income to 17% from 16%.

The increase in private equity, which had record returns this past year, is part of a broader trend. STRS Ohio saw 29% returns in fiscal year 2021, in part driven by a 45% return on alternative assets. These returns were topped only by domestic equities, which returned 46.3% for the fund.

The pension plan is also beginning to share some of these returns with pension beneficiaries. At its board meeting last week, the pension approved a 3% one-time cost-of-living increase for beneficiaries who retired before June 1, 2018.  The 3% adjustment is still less than half of the Bureau of Labor Statistics’ official inflation calculation of 7% in 2021.

Author(s): Anna Gordon

Publication Date: 22 Mar 2022

Publication Site: ai-CIO

Python and Excel Working Together

Mary Pat Campbell

Link: https://www.joveactuarial.com/blog/python-and-excel/

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When we’re exploring using data science tools for actuarial modelling, we’d often like to keep using existing Excel workbooks, which can contain valuable and trusted models and data.

Fortunately, using Python doesn’t mean abandoning Excel as there are some very powerful tools available that allow closely coupled interaction between the two.

These tools allow us to have the “best of both worlds” combining the ease of use of Excel and the power of Python.

We’re going to start with the simplest options and lead through to ways of building workflows that can contain both Excel workbooks and Python code.

With the range of tools available, it should be possible to have the ‘best of both worlds’: the familiarity of existing Excel workbooks and the power of the Python ecosystem working together.

Finally, if you’d like to learn  more, the author of XLWings, Felix Zumstein, has written an excellent book “Python for Excel“, which covers these topics in more detail. Highly recommended.

Author(s): Carl Dowthwaite

Publication Date: 1 Feb 2022

Publication Site: Jove Actuarial

Faulty Regulation Blamed for Pension Plans Cutting Investment in Canada

Mary Pat Campbell

Link: https://www.theepochtimes.com/faulty-regulation-blamed-for-pension-plans-cutting-investment-in-canada_4474326.html

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Canada’s government acknowledges that the significant investments they seek in Canadian businesses and infrastructure must come mostly from the private sector. But in fact for decades, the country’s pension funds have been considerably reducing their domestic investments, a trend the feds and regulation are being taken to task for.

Tony Loffreda, independent senator from Quebec and former vice chairman of RBC Wealth Management, on May 12 asked the government’s representative in the Senate, Marc Gold, what the feds could do to incentivize Canada’s pension funds to invest more in Canada “without necessarily regulating free enterprise.”

….

The CPPIB’s 2021 annual report showed that in 2006, 64 percent of its assets were invested in Canada and the remaining 36 percent invested globally. But by 2021, the mix had changed to 15.7 percent in Canada and 84.3 percent globally.

….

The report outlined some of the reasons for the trend, singling out regulation.

“Plan sponsors are reacting in very predictable ways to their regulatory environment and the only way to change this behaviour is to change the environment,” LetkoBrosseau said.

It said regulation has over-emphasized short-term fluctuations in asset values, resulting in a shorter investment time horizon for pension fund assets. In contrast, pension savings, which represent 30 percent of Canadian savings, are typically invested for the long term and are meant to be managed such that they can take more risk to earn greater rewards.

Author(s): Rahul Vaidyanath

Publication Date: 18 May 2022

Publication Site: The Epoch Times

Deutsche Bank raided by authorities over ESG ‘greenwashing’ claims: ‘We’ve found evidence that that could support allegations of prospectus fraud’

Mary Pat Campbell

Link: https://fortune.com/2022/05/31/deutsche-bank-dws-esg-greenwashing-raid-evidence-seized-whistleblower-fixler/

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German law enforcement officials raided the offices of Deutsche Bank on suspicion of the fraudulent advertising of sustainable investment funds at its DWS unit, dealing yet another setback to CEO Christian Sewing’s attempts to move on from years of corruption scandals.

The investigation revolves around allegations—leveled by a former DWS manager—that the retail money management business engaged in “greenwashing,” in which environmental, social and governance (ESG) investments are sold under false claims.

Roughly 50 officials from the Frankfurt public prosecutor, German securities regulator BaFin, and the federal criminal police office BKA were deployed to the headquarters of the two financial institutions to seize evidence on Tuesday.

“The allegations are that DWS has been advertising so-called ESG financial products for sale as being particularly green and sustainable when they actually weren’t,” a spokesman for the public prosecutor told Fortune, which has been looking into the claims since January. “In the course of our investigations we’ve found evidence that could support allegations of prospectus fraud.”

Author(s): CHRISTIAAN HETZNER

Publication Date: 31 May 2022

Publication Site: Fortune