Sunday, November 11, 2007

Citigroup, Yeah, Right

It's been quiet of late on the pension front, as the parade of stupid ideas for how to further erode workers' retirement security seemed to be over. Interrupting the silence are the events in this recent article by Jonathan Peterson of the Los Angeles Times with the inviting title, "Pensions May Be Outsourced." It begins as follows:

WASHINGTON -- Would you feel comfortable if your company sold off your pension plan to a big bank?

This month, Citigroup Inc. got the green light from the Federal Reserve for an unusual deal to take over the $400-million retirement plan of a British newspaper company.

In exchange for getting its hands on all that cash, Citigroup will run the pension plan -- investing the money, paying the benefits and taking on the liability previously borne by Thomson Regional Newspapers. And it's eyeing similar moves stateside.

Let's not mince words here. There is no upside for the workers and retirees. Federal regulators should put a stop to this immediately. If Citigroup (yes, this one) can convince the plan sponsor that it can provide financial management services in the most efficient manner, then the plan sponsor should be allowed to employ Citigroup for its investment management. However, the plan sponsor must still be the entity that guarantees the pension payments to the plan participants. The plan participants should always have recourse to the plan sponsor. That should not be outsourced.

Read the whole article. If you are like me, you will roll your eyes, possibly to the point of permanent damage, when you get to this part:
Ari Jacobs, head of the Retirement Benefits Advisory Group at Citigroup in New York, said American employers seemed "very interested in opportunities to reduce or eliminate the risks associated with their pension plans." He added: "We in the U.S. are looking at a similar model" as the British deal."

A lot of these companies -- including some that are our clients -- are asking, 'What are our alternatives now that we've frozen the pension plan?'" said Scott Macey, senior vice president and director of government affairs for Aon Consulting.

Until now, the alternatives have been to pay off workers with cash or to buy annuities from insurance companies, which then continue to pay the benefits.

But now, financial companies such as Citigroup say they could do the job more cheaply than insurance companies -- and with greater expertise at managing risk. Insurance companies, for example, face costly state-by-state regulation that pushes up the price of annuities.

"As a financial institution, we believe we're better at managing financial risk than anybody else," Citigroup's Jacobs said. "That's our core business."

(Yes, that Jacobs fellow seems to be talking about the risk management virtues of this Citigroup.) If the plan is frozen, then the plan sponsor can simply prefund the present value of expected payouts with purchases of government bonds and eliminate interest rate risk by duration matching the bonds to the expected payouts. That's all that needs to be done if what is being done is purely in the interests of the plan participants, and any number of financial services or insurance companies could be contracted to do it.

The reason plan sponsors perceive there to be risk is that they feel like they should be using the pension fund to invest in stocks, so that they can claim the risk premium in the present value calculations of their obligations and prefund them with less money today. That sleight of hand is what generates almost all of the problems in pension regulation.

And where there are investors looking to get something for nothing, there will be investment firms willing to give them nothing for something. Normally, I'd say they are a perfect match for each other, except that in this instance, they are playing with the pensions of workers and retirees.


save_the_rustbelt said...

The only possible upsides for workers would be:

1) the plan could not (presumably) be dragged through a Chapter 11
2) the plan would still be subject to Erisa???? (need a legal answer on that both of these)

Citigroup - now that would be funny if the possibilities were not so tragic.

I would rather take my chances with New York Life (annuity) than with Citigroup or any of the pirates and theives who run Wall Street.

muckdog said...

My issue with pension funds is overhead costs and under performance. I've wondered why companies and public agencies (including non-profits) just don't outsource the whole kit and kaboodle to Vanguard or the like. It could be invested 80% in VTI and 20% in BND at .11% annual expenses (or lower due to bulk buys) and be done with it.

When someone retires, they shift their portion of the assets to a low-cost Vanguard immediate annuity and start collecting checks.

Get rid of all the overhead and high-cost investment options that underperform.

Something like that. Too simple or too simplified?

Independent Accountant said...

This is unreal. Citigroup is good at managing risk? Really? I can see it now, Citigroup uses these pension plans to buy MLEC assets! Whose idea is this? Hank Paulson's? This is a joke."We believe we're better at managing financial risk than anybody else", said Jacobs. Give me a break. This smells like a Ponzi scheme.

Tom said...

Well, you guys don't get it...if the financial incentives surrounded getting the retirees their money, it would happen; but as it is, they surround getting the "extra" profit back into companies. As with anyone owned by money (salespeople, bankers), change the incentive, change the behavior.

Anonymous said...

HSBC bank IS NEXT TO JOIN THE BANKERS GRAVEYARD,,,Some damaging information on HSBC is due out shortly,,shitloads of subprime on the books,,,wow wow wo wo woshhhhhhhhh

Emery Woodall said...

Uhhhhh.... the Rockerfellers suck. That is about the extent of my input into this discussion. But since they control the Fed, the CFR, and our government, what are the chances of any real regulation of this world banking monopoly?

None. But if they go under I guess we could say Meredith Whitney was right. Interestingly since all the rich sheiks are investing their sovereign wealth funds it could drag them all down as well.

"And they worshipped the dragon which gave power unto the beast: and they worshipped the beast, saying, Who is like unto the beast?"

OK. I guess I made a few more comments than I meant too.