Electronic Health Records EHR -- Term Paper
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). On the other hand, this asset liability matching [provoked] a move into bonds which, coupled with the low-interest rate environment, [meant] that pension funds [were] are also been forced to think harder about how to generate return." (6).
As a result, many pension funds, including many of those of non-profit companies that in the form of Defined Benefit plans, moved away from holding traditional equity portfolios. As Stewart explains,
"[r]ather than holding traditional equity portfolios, generating most of their return from 'beta' or market return (which can be easily and cheaply obtained via passive, index products), pension funds are increasingly rethinking their investment approach and searching for 'alpha' or excess return over the market. More absolute return mandates are being given to fund mangers, who are also allowed to go short as well as long. In addition, pension funds are progressively more prepared to invest in a broader range of products -- from emerging market debt or equity, high yield fixed income, property, commodities, illiquid investments etc. Hedge funds are increasingly used as instruments to facilitate this new investment approach." (6).
Stewart outlines the various risks that pension funds were taking on with this new strategy, including
Operational Risk: "Due to the potentially risky nature of their investments, hedge funds were originally designed for high-net worth individuals," (6). However, pension funds are managed on behalf of "potentially 'subsistence' savings of…low-risk tolerance pension beneficiaries." (6).
Return Measurement: Hedge fund returns are only available for approximately the prior 10 years, thus real long-term return data was not available to judge the true risk of these investments. With pension funds tasked with fiduciary responsibility for their participants' lifetime investment income, this was not adequate data for pension managers to have relied on.
Diversification: One argument used to justify investment in hedge funds was that they provided diversification to a portfolio that might previously have been dominated by equity securities. However, "The claim that hedge funds reduce risk via diversification as they have low correlations to traditional assets, particularly equities, is also disputed as hedge fund returns" (7) actually mirrored global equity markets, shrinking along side.
Increasing Compensation in Non-Profit Companies
Salaries for non-profit organization rank-and-file employees has remained relatively steady in recent years (and has even declined during the recessionary period of 2008-2009, according to the latest Association of Fundraising Professionals' (AFP) Compensation and Benefits Study. "The average salary for U.S. respondents decreased by 2.0% -- from $72,683 in 2007 to $71,199 in 2008. Average salaries for Canadian fundraisers decreased from C$74,376 in 2007 to C$71,511 in 2008 -- a 3.9% decrease." (NonprofitExpert.com). Although,
"many non-profits are beginning to understand that compensation goes beyond salary, and are strengthening other offerings, including health insurance, retirement savings plans (something that was almost non-existent in the not so distant past), professional development opportunities or tuition reimbursement, performance bonuses, and flexible work arrangements." (Koya Consulting).
All of these elements of the overall compensation picture serve to increase the employee benefit costs that non-profit organizations have to bear.
More significantly, compensation for executives of non-profit organizations increased during the years prior to the recession. In fact, executive compensation increased even faster than the rate of inflation. A survey by the Chronicle of Philanthropy showed that "Chief executives at the nation's biggest charities and foundations received a median pay increase of 5%, while inflation rose by 4.1%." (Barton & Gose). Prior to 2008, 2002 also was a high water mark year for non-profit executive compensation increases, with a 7.5% median increase. One key reason for this increase is the pressure for non-profit organizations to attract top talent, often from the for-profit world. Barton & Ghose report that "[c]harity boards are increasingly recruiting for-profit executives to make the switch to the nonprofit world, and some are now sweetening pay packages to lure out-of-town candidates who may need to sell their home at a loss as part of a move." Significantly, the rate of increase for non-profit executives even "exceeded the percentage salary increase earned by executives at for-profit companies." (Barton & Gose). Although, likely this is not because non-profit executives are better paid than for-profit executives overall, but simply are enjoying a faster rise in the market as non-profit salaries race upwards to try and compete with the for-profit sector. The Chronicle survey also showed that "[t]he median salary for chief executives at the organizations surveyed was $326,500, based on information from 249 groups that provided data for both 2006 and 2007. In 2006
the median salary was $308,800." (Barton & Gose).
Pension Protection Act 2006
Among other provisions, ERISA established minimum funding requirements for defined benefit plans. Prior to the Pension Protection Act (PPA),
"a defined benefit plan maintained a "funding standard account," which was charged annually for the cost of benefits earned during the year and credited for employer contributions. Increases in the plan's liabilities due to benefit improvements, changes in actuarial assumptions, and any other reasons were amortized and charged to the account; decreases in the plan's liabilities were amortized and credited to the account. Every year, the employer was required to contribute the amount necessary to keep the funding standard account from falling below $0 at year-end."
"In 2008, when the PPA funding rules went into effect, single-employer pension plans no longer maintain[ed] funding standard accounts" leading to potential increased risk for the Pension Benefit Guaranty Corporation. Thus, "[t]he PPA's primary focus was to enhance D[efined] B[enefit] plan funding and protect the Pension Benefit Guaranty Corporation (PBGC) from additional unfunded pension liabilities." (Employee Retirement Income Security Act).
The PPA was designed to "Reform the Funding Rules for Single-Employer Defined Benefit Pension Plans" (Title I). Specifically, the Act
"Amends the Employee Retirement Income Security Act (ERISA) to repeal existing funding rules for defined benefit pension plans for plan years beginning after 2007. Establishes new minimum funding standards for single-employer defined benefit pension plans, single-employer money purchase plans, and multiemployer plans. Requires employers to pay certain minimum required contributions." (Pension Protection Act, Sect. 101).
Additionally, the Act
"Amends ERISA to set forth funding rules for single-employer defined benefit pension plans. Makes the minimum required contribution for single-employer plans the sum of the target normal cost of the plan for the plan year, the shortfall amortization charge, and the waiver amortization charge. Allows funding shortfalls to be amortized over seven years." (Pension Protection Act, Sect. 102).
The PPA accomplished a number of valuable goals; namely, as Macey describes, it has "improve[d] the funded status of chronically underfunded plans (e.g., faster funding, benefit restrictions)," provided "greater transparency regarding Defined Benefit…plan funded status" clarified "some of the key uncertainties regarding cash balance plans, and enhanced opportunities for employers to design and implement automatic 401(k) enrollment provisions to improve employee retirement security." (1). With respect to the funding of defined benefit plans under the PPA, the requirement
"is simply that a plan must stay fully funded (that is, its assets must equal or exceed its liabilities). If a plan is fully funded, the minimum required contribution is the cost of benefits earned during the year. If a plan is not fully funded, the contribution also includes the amount necessary to amortize over seven years the difference between its liabilities and its assets. Stricter rules apply to severely underfunded plans (called "at-risk status")." (Employee Retirement Income Security Act)
The PPA also introduced some provisions that can become challenging for plans to follow when economic conditions are not favorable. As Macey describes, "[t]he PPA imposes new restrictions on a variety of benefit design and administrative aspects of pension plans and does so in a manner that is difficult for sponsors to deal with." (9). For example, by April 1 of each year for that calendar year's plans,
"the plan's actuary must certify that the plan's funded status at the beginning of the year is in excess of 80% in order to avoid restrictions on paying lump sums (and Social Security leveling benefits -- paying a temporarily higher amount until Social Security commences)." (9-10). Macey also points out that "[f]or severely underfunded plans that are less than 60% funded, the restrictions become more severe (freeze of further accruals, no lump sums, no payment of plant shutdown and other contingent event benefits, etc.). As a practical matter, development and submission of this certification within a short time period (i.e.,in the first quarter of the plan year) may be difficult because of data and other issues that the plan's actuary must address."
Plan sponsors have the option, in lieu of an actual certification by April 1st, instead "the application of the benefit restriction rules can be determined by subtracting 10% from the funded status as of the immediately preceding year." (Macey, 10). However, this provides only temporary relief.
Economic Crisis of 2008-2009
In 2007, a financial crisis in the United States began to emerge. "Beginning in the United States in December 2007… much of the industrialized world has been undergoing a recession, a pronounced deceleration of economic activity." (Late-2000s Recession). What precipitated the financial…
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