Home' Trinidad and Tobago Guardian : June 1st 2014 Contents JUNE 1 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
INTERNATIONAL | SBG23
When workers retire, they need to know
that their pensions will not only last
for the remainder of their lives but
also will be robust enough to cope
with the ravages of inflation. Old-style
final-salary pensions did the trick, for
those workers lucky enough to have them, but the rise of
defined-contribution pensions means that workers are on their
own. Employers put money into the plans, but the payouts
depend on the plans investment returns.
This can be a lottery, as shown by recent statistics from the
Organisation for Economic Cooperation and Development. They
suggest that the retirement income, as a proportion of final
salary, that workers might have expected had they put aside
5.0 per cent of their salary for 40 years in a fund split between
60 percent in equities and 40 per cent in government bonds.
The calculation probably exaggerates the share of final salary,
because it does not allow for charges or the effect of post-
retirement inflation, but what matters here is the variation.
Compare the fortunes of Japanese retirees in the late 1980s
with those leaving their jobs today, or the similar contrast
between Americans who retired at the peak of the dotcom boom
and those who quit in 2012. This variability of outcome helps
explain why so many employers have been keen to discontinue
defined-benefit plans: Under such plans, they are required to
make up any shortfall.
Another way of illustrating the problem comes in a paper
from GMO, a fund-management company. Suppose a worker
invests US$1 in an asset with an average return of 5.0 per cent
a year, subject to an average annual variation of 14 per cent.
The mean pension pot after 40 years would be US$11. That
number is skewed, however, by a few outcomes in which returns
are exceptionally high. The median pot would be US$7 and the
most likely outcome, the mode, only US$3.40.
The most important thing for the typical worker is to avoid
the worst outcome, not to aim for the best. Yet, understandably,
few feel that they have the expertise to allocate their investments
accordingly. As a result many opt for what appears to be the
safe option, in the form of target-date funds in America or
default funds in Britain.
These funds are certainly much better than the choices
employees might make if left to their own devices -- placing
their entire portfolio in cash or in their employer s shares, for
example. Such funds generally follow a "lifestyle approach" in
which the bulk of the portfolio is invested in equities when the
employee is young and then switched into government bonds
as retirement draws near.
Is that the best strategy, though? GMO argues that the lifestyle
approach implicitly assumes that returns from asset classes are
constant over time. That is clearly not the case with government
bonds. Given the current yields of 2.0 per cent to 3.0 per cent
on Treasury bonds, long-term returns are likely to be far lower
than they were for an investor in the early 1980s, when yields
were in double digits.
However, GMO adds that it also is true of equities. Investors
can prosper if they invest more when shares are undervalued
and less when they are expensive.
The trick, of course, is to identify the moments when shares
are cheap or expensive. GMO favours the cyclically adjusted
price-earnings ratio, which averages profits over 10 years and
was popularised by Robert Shiller of Yale University in New
Haven, Conn. During the past 130 years, this ratio has ranged
between seven and 44 with an average of 16.
The Shiller p/e is not a particularly good short-term valuation
guide, but it works much better in the long term: There is a
60-per cent correlation between the starting ratio and the sub-
sequent 10-year return from equities; the higher the initial p/e,
the lower the return. That makes it potentially useful for the
long-term process of building a pension pot.
According to GMO s assumptions, if equity valuations are
normal, a 25-year-old would have a 90-per cent weight in
equities and a 65-year-old 40 per cent. When equities look
expensive, however, the weight would fall. On a Shiller p/e of
19, the 25-year-old would have a weighting of 45 per cent and
the 65-year-old only 25 per cent. Following this approach would
have reduced the chance of the retiree running out of money
by the age of 95 from around 50 per cent to 13 per cent.
Naturally, caveats are needed. Backtest enough theories and
you will arrive at a good result. We know the historical valuations
of equities in retrospect, but investors did not know at the time
what the range would be.
GMO is right, though. Now that workers have responsibility
for their own pensions, they need to think harder about where
to put their money and when to move it elsewhere.
@2014 The Economist Newspaper Ltd. Distributed by the
New York Times Syndicate
Calculating tomorrow's pensions today
the bigger profits and higher stock prices.
CEO pay remains a divisive issue in the US Large
investors and boards of directors argue that they need
to offer big pay packages to attract talented men and
women who can run multibillion-dollar businesses.
"If you have a good CEO at a company, the wealth
he might generate for shareholders could be in the
billions," says Dan Mitchell, a senior fellow at the Cato
Institute, a libertarian think tank. "It might be worth
paying these guys millions for doing this type of work."
CEOs are still getting much bigger raises than the
average US worker.
The 8.8 per cent increase in total pay that CEOs
got last year dwarfed the average raise US workers
received. The Bureau of Labor Statistics said average
weekly wages for US workers rose 1.3 per cent in 2013.
At that rate an employee would have to work 257 years
to make what a typical S&P 500 CEO makes in a year.
"There s this unbalanced approach, where there s
all this energy put into how to reward executives, but
little energy being put into ensuring the rest of the
workforce is engaged, productive and paid appropriately,"
says Richard Clayton, research director at Change to
Win Investment Group, which works with labour
union-affiliated pension funds.
Investors have become increasingly vocal about
executive pay since the recession. This has led to an
increasing number of public spats between boards of
directors, who propose pay packages, and shareholders,
who own the company.
These fights become public during "say on pay"
votes, when shareholders have an opportunity to show
they approve or don t approve of pay packages. Votes
are non-binding, but companies sometimes act when
there is clear disapproval from shareholders.
Petrello was the best-paid CEO largely because the
board of directors of Nabors Industries wanted to end
his previous contract. Under that contract, Petrello
could have been owed huge cash bonuses, and the
company could have paid out tens of millions of dollars
if he were to die or become disabled. The board changed
his contract following "say on pay" votes in 2012 and
2013 that showed shareholders were unhappy with
how Nabors paid its executives.
There have been other signs of shareholder concern
about CEO pay. This month, 75 per cent of Chipotle
Mexican Grill shareholders voted against a proposed
pay package for co-CEOs Steve Ells and Montgomery
Moran. Ells earned US$25.1 million in 2013 while Moran
earned US$24.3 million, a 27 per cent rise in com-
pensation for each. Chipotle spent US$49.5 million
on CEO pay last year, the fourth highest in the S&P
"Companies are now taking the time to think through
their pay practices and are talking more with share-
holders," says Hewitt of GMI Ratings. "There s still a
long way to go but pay practices are getting better."
To calculate a CEO s pay package, the AP and Equilar
looked at salary as well as perks, bonuses and stock
and option awards, using the regulatory filings that
companies file each year. Equilar looked at data from
337 companies that had filed their proxies by April
30. It includes CEOs who have been at the company
for two years.
One prominent name not included in the data was
Oracle CEO Larry Ellison, who is typically one of the
best paid CEOs in the country.
Oracle files its salary paperwork later in the year,
so Ellison was excluded in the 2013 survey data. He
was awarded US$76.9 million in stock options for
Oracle s fiscal year ending May 2013, according to
Among other findings:
• Female CEOs had a median pay package worth
more than their male counterparts, US$11.7 million
versus US$10.5 million for males. However, there were
only 12 female CEOs in the AP/Equilar study compared
with 325 male CEOs that were polled. TJX s Meyrowitz
was the best-paid female CEO in the AP/Equilar study.
She earned US$20.7 million last year.
• The CEO who got the biggest bump in compen-
sation from 2012 to 2013 was Rodney Sacks, the CEO
of Monster Beverage. Sacks earned US$6.22 million
last year, an increase of 679 per cent. Monster s board
of directors awarded Sacks US$5.3 million in stock
options to supplement his US$550,000 salary and
US$300,000 cash bonus.
Shareholders more involved
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