SEC’s new rules give US money market funds a floating feeling [Financial Times]

Coauthored with Theresa Hamacher

After years of heated debate, the Securities and Exchange Commission, the US regulator, recently adopted stricter rules for US money market funds. The new rules are intended to limit the potential systemic risks of money market funds by reducing the likelihood of runs on these vehicles.

The rules will have the biggest impact on money market funds serving institutional investors, which will have to move from a constant to a floating net asset value. The rules will also put pressure on most institutional and retail money market funds to impose liquidity fees and suspend redemptions during financial crises. But neither set of rules will apply to money market funds holding 99.5 per cent or more of government securities.

Thus, the two critical questions are what constitutes a government security, and what differentiates an institutional from a retail money market fund?

Read the rest at FT.com…

How to Not Outlive Your Retirement Savings [Real Clear Markets]

The U.S. Treasury recently amended its rules to encourage workers with retirement plans to purchase life annuities within these plans. Life annuities generally make fixed monthly payments from the date of retirement until the death of the purchaser.

For years, many economists have recommended that workers use all their retirement savings to buy life annuities in order to avoid outliving their savings. Nevertheless, few workers want to put their whole retirement nest egg into a life annuity.

Why? In one word, optionality. Retired workers want to have substantial resources available to deal with medical emergencies or unexpected disasters during their retirement years. Alternatively, retired workers want to bequeath any remaining savings at death to their families, friends and favorite charities. However, if workers buy a life annuity, all payments typically end at death — even if it occurs shortly after retirement.

To achieve their multiple retirement goals, workers should use PART of their assets within their retirement plans to buy a deferred life annuity that starts paying out at age 75,80 or 85. Then they would have the rest of their retirement assets available to deal with medical emergencies or to make bequests at their death.

Read the rest at realclearmarkets.com…

Unfunded Retiree Healthcare Benefits Are the Elephant In the Room

August 5, 2014 published in Real Clear Markets

Unfunded Retiree Healthcare Benefits Are the Elephant In the Room

By Robert Pozen

When Detroit declared bankruptcy last year, many critics blamed its more than $3 billion in unfunded pension liabilities. At that time, however, Detroit reported approximately $6 billion in unfunded retiree healthcare obligations. These were healthcare benefits promised by the city to its employees who retire before they become eligible for Medicare at age 65.

Detroit is not unique. The 30 largest American cities had over $100 BILLION in retiree healthcare deficits in 2013, as estimated by the Pew Charitable Trust. In that year, New York City showed the most serious retiree healthcare deficits at $22,857 per household.

The retiree healthcare deficits of the States were even larger in 2013 — a total of $528 BILLION according to the credit rating agency Standard & Poor’s. These unfunded healthcare obligations burdened both large and small states — for example, $7,206 per person in New Jersey and $6,152 per person in Delaware.

Why are these deficits so large? Reporting of retiree healthcare benefits began less than a decade ago — in the footnotes to the financial statements of state and city governments. Without public disclosures, these governments could promise healthcare benefits without being held accountable.

Even now, local governments are not required to establish separate trusts with advance funding of such benefits — as they are for pension obligations. As present, only 7 of the 50 States have set aside more than 20% of the assets needed to pay their future healthcare obligations to retirees.

But recent accounting proposals will bring to bear strong pressures on local governments to increase the advance funding and decrease the size of their retiree healthcare deficits. The Government Accounting Standards Board proposed in May that state and city government record these deficits as liabilities on their balance sheets — instead of just being disclosed in financial footnotes. This change is likely to hurt the credit ratings for the bonds issued by local governments with large retiree healthcare deficits.

As important, the Board would require local governments to use more realistic assumptions in calculating these deficits. To understand the significance of this proposal, let’s review the relevant accounting rules.

Local governments estimate their obligations to provide retiree healthcare over the next 20 to 30 years, and then bring back these obligations to their present value by applying a so-called discount rate. This discount rate is supposed to represent the rate of return that would be pretty much assured if local governments currently made investments to finance these long-term obligations.

Under the recent proposals, local governments would be required to use a discount rate equal to the interest rate currently available on high-quality municipal bonds. That would mean 3% to 4% in today’s financial markets. By contrast, local governments are now allowed to discount back their unfunded healthcare obligations at whatever rate of return they believe they will earn on their investments. That “expected” return is 7% to 8% for many local governments.

The lower discount rate required by the Board’s proposal would result in much higher retiree healthcare liabilities for many city and state governments — which would now be recorded on their balance sheets.

For example, Boston reported unfunded retiree healthcare obligations of $4 billion in 2009. In 2011, these obligations allegedly fell to $3 billion — mainly because the city increased its expected return and discount rate from 5.25% to 7.25% If that discount rate had stayed the same, the unfunded retire healthcare obligations of Boston would have risen to approximately $5 billion.

Therefore, many local governments are objecting to the adoption of the Board’s proposals. But these proposals are sound — local governments should assume conservative investment returns in discounting back their retiree healthcare obligations. If local governments are allowed to use their “expected” returns, they will make aggressive investments like hedge funds and run substantial risks of incurring large losses.

Residents of local governments need an accurate accounting of retiree healthcare obligations in order to curb their growth and provide more advance funding. Left unchecked, these obligations will have to be paid out of current tax revenues — thus, crowding out spending for education, public security and environmental protection.

Similarly, holders of municipal bonds need an accurate accounting or retiree healthcare obligations in order to assess the credit worthiness of bonds issued by local governments. Like Detroit, many cities and states will face such large obligations for healthcare and other payments to retirees that their ability to make good on their bonds will come into question.

In short, although the Board’s proposals are not a panacea, they provide the necessary foundation for significant reform of retiree healthcare plans. With accurate estimates of unfunded liabilities, citizens and investors can pressure elected officials to take concrete actions to address the healthcare promises made to retired public employees.

Pozen is the former chairman of MFS Investment Management, a senior lecturer at the Harvard Business School, a Nonresident Senior Fellow in Economic Studies at the Brookings Institution, and author of the book The Fund Industry: How Your Money Is Managed.

Fight Against Short-termism Is Misdirected [Financial Times]

What do the Prince of Wales, the chief executive of BlackRock and the Chief Justice of the Delaware Supreme Court have in common? All have spoken out against short-termism in business.

In their eyes, corporate executives are putting too much emphasis on profits over the next three to six months, and not enough on making investments that could produce sustainable growth over the next decade.

While there are legitimate concerns about short-termism, many of its critics misunderstand both its causes and effects. Many of their proposed remedies would undermine the legitimate rights of corporate shareholders.

Instead, to combat short-termism, corporate boards should lengthen the time horizon for determining executive pay and stop their executives from publicly predicting the next quarter’s earnings…

Read the complete article at FT.com…

Curbing Short-Termism in Corporate America: Focus on Executive Compensation [Harvard Law School]

The protest against short termism in corporate America is rising. Business and political leaders are decrying the emphasis on quarterly results—which they claim is preventing corporations from making long-term investments needed for sustainable growth.

However, these critics of short termism have a skewed view of the facts and there are logical flaws in their arguments. Moreover, their proposals would dramatically cut back on shareholder rights to hold companies accountable.

The critics of short termism stress how much the average daily share volume has increased over the last few decades. Although this is factually correct, this sharp average increase is caused primarily by a tremendous rise in intraday trading.

Please read more at blogs.law.harvard.edu…

Curbing Short-Termism in Corporate America [Brookings]

In “Curbing Short-Termism in Corporate America: Focus on Executive Compensation,” Robert Pozen, nonresident fellow with the Brookings Institution, lecturer at Harvard Business School, and former vice chairman of Fidelity Investments, evaluates numerous policy approaches to reduce short-termism including: (1) altering the compensation arrangements of asset managers and corporate executives; (2) constraining the rapid trading of stocks by public investors; and (3) limiting the influence of institutional shareholders on corporate governance.

After examining such solutions, Pozen arrives at the following conclusions:

  • The most effective way to curb short-termism would be to lengthen the time horizons in the compensation packages of asset managers and corporate executives;
  • Other effective measures to curb short-termism would be to limit “empty voting” by investors not owning shares and to discourage companies from publically projecting their quarterly earnings;
  • The proposals to constrain rapid trading, even if they reduced trading volume, would not significantly change the business plans of most corporations; and
  • The benefits from most proposals to reduce the governance influence of institutional investors would be outweighed by the costs of undermining corporate accountability.

There have recently been a number of prominent voices in the financial sector speaking out against short- termism. These individuals believe that short-term trading is driving bad corporate investment decisions and that directors should have longer terms and that activist hedge funds are bad. Pozen’s paper, however, raises serious factual questions about the link between short-term trading and corporate decisions, and criticizes restrictions on hedge funds and longer terms for directors as inappropriate solutions to whatever the problems are. None of these critics suggest, as Pozen does, that the key solution is redesigning executive compensation – he suggests moving to a 3-year measurement period for bonuses or force executives to hold on to half of their shares from options or stock grants.

Download the Full Paper at Brookings.edu…

Pfizer’s bid for AstraZeneca: It’s time to reform the U.S. corporate tax system [Fortune]

FORTUNE – The debate over Pfizer’s bid to buy U.K. drugmaker AstraZeneca is intensifying. Last week, AstraZeneca rejected Pfizer’s offer of $106 billion, even though it was about 7% higher than its previous bid.

As negotiations escalate, it’s worth taking a close look at Pfizer’s proposed merger into AstraZeneca (AZN) — with its tremendous implications for U.S. tax collections and tax policies. Pfizer’s (PFE) determination underscores how driven U.S. multinational corporations are to shift their domicile outside the U.S. Why? Unless they keep foreign profits abroad, the U.S. subjects them to a corporate tax of 35%.

As a result, more than $2 trillion in foreign profits held by multinationals are “locked out” of the U.S. These funds could otherwise be spent making critical investments in the U.S. economy, such as building manufacturing facilities, buying U.S. companies, or even paying dividends to shareholders. For instance, Apple (AAPL) recently borrowed $17 billion to pay dividends, despite holding more than $130 billion abroad.

Read more at finance.fortune.cnn.com…

Newest MIT Course for Professionals [Sloan Review]

How many hours do you work a week?

If you’re like a lot of managers, including many who attended the recent “Maximizing Your Personal Productivity” program at MIT Sloan Executive Education, your estimate might be between 49 hours and 58 hours.

Robert Pozen, a senior lecturer at the MIT Sloan School of Management and leader of the session, said when he speaks to groups, there’s usually a large cluster of people who say their work hours fall in this span. Some outliers claim as few as 80 hours a week for sleep and personal time, meaning they work 88 hours.

“People say they’re working so many hours because they have ‘so many things to do’ or they’re not productive enough,” said Pozen.

Please read more at sloanreview.mit.edu…