"Divided Loyalties: How the Metlife v. Glenn Standard Discounts ERISA Fiduciaries’ Conflicts of Interest" 

Utah Law Review, Vol. 3, No. 955, 2009

BEVERLY COHEN, Albany Law School
Email: bcohe@albanylaw.edu

Since Firestone Tire & Rubber Co. v. Bruch was decided two decades ago, federal courts have been giving employer health and disability benefit plans, regulated under the Employee Retirement Income Security Act of 1974 (“ERISA”), the enormous advantage of deferential review whenever plan members and beneficiaries challenged benefit denials by plan fiduciaries. As a result, ERISA plan members and beneficiaries faced a substantial, and often insurmountable, hurdle. In order to reverse a denial of benefits, the claimant needed to prove that the fiduciary’s decision was arbitrary and capricious, or unreasonable.

Making for an even tougher challenge for plan members and beneficiaries, often the fiduciary that had denied the claim had operated under a conflict of interest. A claim denied was a claim that the fiduciary employer or insurance company providing coverage did not have to pay, so that the fiduciary was arguably incentivized to deny claims due to financial self-interest. Although courts considered whether the fiduciary had operated under a conflict of interest as a factor in determining whether the fiduciary had abused its discretion, often the presence of a conflict did not influence the outcome.

In the recently-decided Metropolitan Life Ins. Co. v. Glenn, the Supreme Court had an opportunity to revisit the deferential standard of review applied to claims denials by conflicted ERISA fiduciaries, and opted to reaffirm the Firestone standard. As a result, the substantial obstacles faced by ERISA plan members and beneficiaries when they challenge a benefit denial remain unchanged. For ERISA health and disability plans in particular, this is a harsh result, for an unfairly denied claim may leave a member without benefits for an expensive and urgently needed medical procedure, or without financial support after suffering a catastrophic disability.

This Article examines the historical development of the standard of review applied to ERISA plan benefit denials by conflicted fiduciaries, and takes a critical look at the Supreme Court’s recent reaffirmation of the Firestone standard in Metropolitan Life Ins. Co. v. Glenn. Ultimately, the author concludes that the standard operates to discount a fiduciary’s conflict of interest as a determining factor in the review. This means that conflicted decisionmaking in the context of ERISA health and disability plans will continue to be a key feature of these plans, raising a question of whether the “undivided loyalty” promised by ERISA to plan members and beneficiaries truly can be achieved.

"Are State Public Pensions Sustainable? Why the Federal Government Should Worry About State Pension Liabilities" 

JOSHUA D. RAUH, Northwestern University - Department of Finance, National Bureau of Economic Research (NBER)
Email: joshua-rauh@kellogg.northwestern.edu

This paper analyzes the flow of state pension benefit payments relative to asset levels and contributions. Assuming future state contributions fund the full present value of new benefits, many state systems will run out of money in 10-20 years if some attempt is not made to improve the funding of liabilities that have already been accrued. The expected shortfalls raise the possibility that the federal government will be faced with a decision as to whether to bail out states driven to insolvency by their pension programs.

"Recruitment of Early Retirees: A Vignette Study of Managers’ Decisions" 

Netspar Discussion Paper No. 04/2010-010

KASIA KARPINSKA, affiliation not provided to SSRN
Email: k.karpinska@uu.nl
KENE HENKENS, Netherlands Interdisciplinary Demographic Institute
Email: HENKENS@NIDI.NL
JOOP SCHIPPERS, affiliation not provided to SSRN
Email: J.Schippers@econ.uu.nl

Retirement is characterized as a dynamic process that can designate different outcomes: from early retirement to re-entry to the labour force. Recent studies on the Dutch population show that a substantial number of early retirees re-enter the work force after early retirement. Yet others do not succeed, even though they want to return to the labour force. The question arises as what are the factors that affect managers’ likelihood of hiring early retirees. In this study we aim at explaining which individual and organisational characteristics affect managers’ decisions. To answer this question, a vignette study among Dutch managers and business students was conducted. Profiles of hypothetical early retirees were presented to the respondents who were asked to make specific employment decisions. The results show that hiring early retirees is of low priority to managers and students, and depends to a large extent on organisational forces such as personnel shortages and the age of the retiree. This study suggests that despite equal opportunities policies, age discrimination is still present on the Dutch labour market.

"Income of the Elderly Population Age 65 and Over, 2008" 

EBRI Notes, Vol. 31, No. 6, June 2010

KENNETH J. MCDONNELL, Employee Benefit Research Institute (EBRI)
Email: MCDONNELL@EBRI.ORG

The U.S. retirement income system - including employment-based retirement plans, Social Security, individual savings, and post-retirement employment - can be assessed in part by examining the income of the current elderly population (age 65 and older). This paper reviews the latest available data on the older population’s income (from the U.S. Census Bureau’s March 2009 Current Population Survey) and how it has changed over time, as well as how the elderly’s reliance on these sources varies across demographic characteristics. In 2008, Social Security was the largest source of income for those currently age 65 and older, accounting for 39.8 percent of their income on average. Pension and annuities income was 19.7 percent, income from assets 13.0 percent, and income from earnings was 25.6 percent. Nearly all individuals (89.2 percent) age 65 and over were receiving income from Social Security in 2008, while 55.3 percent received income from assets, 35.4 percent received income from pensions and annuities, and 20.4 percent received income from earnings.

The PDF for the above title, published in the June 2010 issue of EBRI Notes, also contains the fulltext of another June 2010 EBRI Notes article abstracted on SSRN: "Examination of the Short-term Impact of the COBRA Premium Subsidy and Characteristics of the COBRA Population."

"The Optimal Investment Policy for the Pension Benefit Guaranty Corporation" 

KATARZYNA ROMANIUK, Université de Paris 1 Panthéon-Sorbonne, Universidad de Santiago de Chile
Email: romaniuk@univ-paris1.fr

The Pension Benefit Guaranty Corporation (PBGC) registers a preoccupying financial condition since 2002. The existing literature has not yet dealt with the definition of the PBGC’s optimal portfolio policy. This paper builds a theoretical framework for defining its optimal asset allocation in a continuous-time stochastic world. We first recognize the PBGC’s put seller nature and derive optimal portfolio rules inspired by the option hedging literature. We then build a model characteristic of any asset-liability manager, like the PBGC or equivalent bodies in other countries, a defined benefit (DB) pension fund or a defined contribution pension fund subject to a guarantee. The model implementation only requires the availability of the given institution’s balance sheets. We propose an application using the PBGC’s reports in the period 1995-2009. The optimal risky asset proportion, composed of the speculative fund and the cash flow and liabilities hedge terms, appears as low, as the second and - especially - third terms exert a downward pressure on the speculative portfolio component. We eventually compare the asset-liability management principles of the PBGC and a DB pension fund and conclude that, though both institutions have a comparable optimal portfolio structure, their asset allocation differs in the effect of the liabilities hedge fund. Due to a different nature of the PBGC’s and DB pension fund’s liabilities, the corresponding hedge fund decreases (increases) the optimal risky asset proportion in the case of the PBGC (DB pension fund).

"Good Disclosure Doesn’t Cure Bad Accounting – or Does it? Evaluating the Case for SFAS 158" 

CATHY BEAUDOIN, University of Vermont
Email: CBeaud9956@aol.com
NANDINI CHANDAR, Drexel University - Department of Accounting and Tax
Email: chandar@drexel.edu
EDWARD M. WERNER, Drexel University - Bennett S. LeBow College of Business
Email: emw38@drexel.edu

This paper investigates whether the newly required recognition of pension asset and liability amounts under SFAS 158 is incrementally value relevant in its first adoption year (2006) relative to the same amounts which were previously only disclosed to both equity investor and credit rating agency decision makers. In equity valuation models, we use a sample of 878 firms (1,756 firm years) offering DB plans in 2005 (disclosure year) and 2006 (recognition year), and find no incremental association with market prices of newly recognized amounts under SFAS 158 over the same information that was disclosed pre-SFAS 158. Our credit ratings tests, using a sample of 428 DB firms (856 firm years) for 2005 and 2006 also show no differential impact of recognition over disclosure. Overall, we find that equity investors price the formerly disclosed pension liability while credit rating agencies do not, regardless of whether such information is recognized or disclosed in the financial statements. Our results are consistent with efficiency in both equity and credit markets with respect to pension information and suggest that SFAS 158 has not changed the way market participants use pension-related financial statement