CalPERS: Republican Pension Proposals to Sting Members

CalPERS has released a cost analysis of proposed Republican pension reform, noting that the proposal will lower retirement benefits for new hires and shift risk from employers to employees.

(March 19, 2012) — Republican pension reform proposals will lower retirement benefits for new hires and shift risk from employers to employees, a cost analysis by the California Public Employees’ Retirement System (CalPERS) has found.

The proposal will also reduce costs for state, school, and local public agency employers, CalPERS said.

CalPERS’ analysis, requested by the staff of the Senate Republican Caucus, stated: “It focuses on a proposed hybrid retirement plan for new hires…A hybrid plan combines a traditional defined benefit (DB) pension plan with a defined contribution (DC) component similar to a 401(k) retirement savings plan. The hybrid plan is designed to provide workers with a retirement benefit that – combined with Social Security, if applicable – is equivalent to 75% of their highest average pay over three years.”

Read the full analysis here.

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Earlier this year, CalPERS highlighted the National Association of State Retirement Administrators (NASRA)’s brief on hybrid plans maintained by state retirement systems. “Findings from the brief maintain that diversity in plan designs are critical because a one-size-fits-all solution for public retirement systems may not meet different states’ human resource needs, fiscal conditions and frameworks,” CalPERS wrote on its website in January. Additionally, according to NASRA’s initial brief, critical elements of public pension plan design known to promote retirement security include: mandatory participation, shared financing, pooled investments, benefit adequacy, and lifetime benefit payouts.

CalPERS said: “These features are a proven means of delivering income security in retirement, retaining qualified workers who perform essential public services, and providing an important source of economic stability to every city, town, and state across the country.”

In November, NASRA issued the brief noting that hybrid plan designs have been receiving increased attention as states find that closing a traditional DB pension plan to new employees could increase—rather than reduce—costs, and that providing only a 401(k)-type plan does not meet retirement security, human resource, or fiscal needs.

(March 19, 2012) — Corporate confidence and resurgence of merger and acquisition activity could spell positive returns for investors, capital market participants have said.

An upturn in the sector, which has been depressed for the last couple of years due to the tumultuous financial markets, could mean bonds held by investors improve in value, according to fund manager T Rowe Price.

The company said, in a note today on where to find outperformance in fixed income markets: “We anticipate a pickup in merger and acquisition activity, especially in the wireless communications and energy sectors, that could lead to additional capital appreciation.”

The market has some improvement to make. According to market monitor Dealogic, January 2012 saw the slowest start to a year for M&A since 2003. Global mergers and acquisitions volume in January was down 45% from a year earlier.

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However, analysts at investment bank, Barclays Capital said: “Firms described an active level of M&A discussions, a clear pick-up from last year, but few announcements so far. CEO confidence is key, and Europe still an important variable.”

In terms of issuance, investor benefits should come in through the volume that is to be issued by companies involved in M&A activity.

The analysts said that funding was at record low levels, meaning businesses could tap debt markets very cheaply to fund takeovers. Although this initially might spell low returns for investors, high yield corporates – whose debt pays out more than ‘more safely rated’ issuers – had taken to extending the maturity of their debt and lowering the chance of default.

The bank also said that shareholder pressure on large companies to streamline would trigger spin off and carve-out deals.

One bank executive told Barclays Capital that he projected a slow steady build in M&A, more gradual than the previous two cycles where deal flow boomed into the tech bubble (1999-2000) and the leverage bubble (2006-2007). The scenario was steadier, more constrained growth over a longer period.

Barclays Capital analysts also raised the price targets it set on European banks by substantial margins. The analysts said several players pulling out of some sectors left market share on the table for competitors, who could improve revenue streams that have not recovered since capital market and trading activity dried up almost 12 months ago.

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