The Next Catastrophe (do-gooder boomers are gonna bust those pension funds wide open)

[w¡n9Nµ7 §£@¥€r 123]

Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode.

Jon Entine | February 2009

...

State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.

From January to October 2008, defined benefit funds—those promising a predetermined amount of retirement money to the payee—averaged losses of 26 percent, according to Northern Trust Investment Risk and Analytical Services, making it the worst year on record for corporate and public pension funds. The largest public pension fund in the United States, the California Public Employees Retirement Security System (CalPERS), lost a staggering 20 percent of its value in just three months last year. In May 2008, Vallejo, California, became the largest city in the state ever to file for Chapter 9 bankruptcy, thanks largely to unmanageable pension obligations. The situation in San Diego looks worryingly similar. And corporations with defined benefit plans are seeking relief in Washington as part of a bailout season that shows no sign of slowing down.

If the stock market remains in a funk for even a few more months, corporations that oversee union pension funds and state and municipal leaders responsible for public retirement pools may be faced with difficult choices. First on the docket might be postponing cost-of-living increases and reducing health care coverage for retirees. Over the longer term, benefits for new employees will have to be shaved and everyone is likely to see an increase in personal payroll contributions. Corporations will have to resort to more cost cutting and layoffs of their own just to guarantee the solvency of their pension funds.

...

If you’re covered by a “defined contribution” plan, contributions are invested, usually by your employer and usually in the stock market, and the returns are credited to the employee’s account. Your retirement savings grow if the market rises or, as is the case now, bleed when it crashes. You carry the risk on your shoulders.

The risk shifts to the employer under “defined benefit” plans, in which future outlays are guaranteed. That seemed like a great idea for business as recently as 2007, when the market was rising and the pension funds of America’s 500 largest companies held a surplus of $60 billion. Now they’re at a deficit of $200 billion, with fund assets dropping like a lodestone.

The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, and those dire numbers are increasing.

Companies with defined-benefit pensions may soon find themselves choosing between making payroll or pumping money into their pension plans. If companies are forced to make up the shortfall out of their assets, which seems likely, that would send profits tumbling even more, further destabilizing the stock market. And even with a cash infusion, many businesses might still have to freeze or even cut benefits.

Both the corporations and the pensioners are victims of a market meltdown whose depth and duration almost no one predicted.

...

During the last 30 years ... baby boomers whose politics were forged in the 1960s and ’70s began using those pension funds to advance their social visions. ... Advocacy groups often used their clout to direct money into pet social projects with dubious fiduciary prospects.

...

Many union funds and larger state pension plans screen stocks and investment opportunities based on what are known as “socially responsible investing,” or SRI, principles. Instead of focusing solely on maximizing value, fund managers have used the economic clout of concentrated stock holdings to make a statement by divesting from companies that don’t make it through certain “sin screens.” These included companies involved with weapons, nuclear energy, tobacco, alcohol, natural resources, and genetic modifications on agriculture, many of which did well over the past decade.

Stocks of public companies deemed to have poor records on labor, environmental issues, women’s rights, and gay rights are also frequently screened out, as are corporations that do business with regimes that activists consider unsavory. In some cases, investments have been withheld altogether from some of the markets expected to best weather the current financial storm, including China and India, because of perceived transgressions.

...

“Investing in socially responsible stocks just because they are socially responsible is not—underline not—a valid investment thesis,” says Steven Pines, a senior investment consultant for Northern Trust.

...

If the goals of pension managers and retirees are not the same—as is often the case—then pension plans should not engage in social investing. In many instances, SRI amounts to union leaders or politicians gambling with other people’s money in support of ideological vanity.

...

Pensions are being dragged into treacherous waters by investors who consciously choose to direct their money in socially conscious ways. It’s a questionable risk for cautious times. The use of political criteria may be fine for affluent investors and activists who gamble their own money and assume the extra risk, but pension funds should be held to a higher standard.

Jon Entine is a columnist for Ethical Corporation, an adjunct fellow at the American Enterprise Institute, and a consultant on sustainability. His website is jonentine.com.

http://www.reason.com/news/show/130843.html

[Rocky_nBullwinkle 6]

Think Fannie Mae and Freddie Mac were a politicized financial disaster? Just wait until pension funds implode.

Jon Entine | February 2009

...

State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.

From January to October 2008, defined benefit funds—those promising a predetermined amount of retirement money to the payee—averaged losses of 26 percent, according to Northern Trust Investment Risk and Analytical Services, making it the worst year on record for corporate and public pension funds. The largest public pension fund in the United States, the California Public Employees Retirement Security System (CalPERS), lost a staggering 20 percent of its value in just three months last year. In May 2008, Vallejo, California, became the largest city in the state ever to file for Chapter 9 bankruptcy, thanks largely to unmanageable pension obligations. The situation in San Diego looks worryingly similar. And corporations with defined benefit plans are seeking relief in Washington as part of a bailout season that shows no sign of slowing down.

If the stock market remains in a funk for even a few more months, corporations that oversee union pension funds and state and municipal leaders responsible for public retirement pools may be faced with difficult choices. First on the docket might be postponing cost-of-living increases and reducing health care coverage for retirees. Over the longer term, benefits for new employees will have to be shaved and everyone is likely to see an increase in personal payroll contributions. Corporations will have to resort to more cost cutting and layoffs of their own just to guarantee the solvency of their pension funds.

...

If you’re covered by a “defined contribution” plan, contributions are invested, usually by your employer and usually in the stock market, and the returns are credited to the employee’s account. Your retirement savings grow if the market rises or, as is the case now, bleed when it crashes. You carry the risk on your shoulders.

The risk shifts to the employer under “defined benefit” plans, in which future outlays are guaranteed. That seemed like a great idea for business as recently as 2007, when the market was rising and the pension funds of America’s 500 largest companies held a surplus of $60 billion. Now they’re at a deficit of $200 billion, with fund assets dropping like a lodestone.

The Pension Protection Act of 2006 requires that companies keep the accounts fully funded over time, meaning that they have to have enough money to pay all of their retirees should they decide to withdraw their funds. Yet more than 200 of the 500 big-company plans are nowhere close to meeting that standard, and those dire numbers are increasing.

Companies with defined-benefit pensions may soon find themselves choosing between making payroll or pumping money into their pension plans. If companies are forced to make up the shortfall out of their assets, which seems likely, that would send profits tumbling even more, further destabilizing the stock market. And even with a cash infusion, many businesses might still have to freeze or even cut benefits.

Both the corporations and the pensioners are victims of a market meltdown whose depth and duration almost no one predicted.

...

During the last 30 years ... baby boomers whose politics were forged in the 1960s and ’70s began using those pension funds to advance their social visions. ... Advocacy groups often used their clout to direct money into pet social projects with dubious fiduciary prospects.

...

Many union funds and larger state pension plans screen stocks and investment opportunities based on what are known as “socially responsible investing,” or SRI, principles. Instead of focusing solely on maximizing value, fund managers have used the economic clout of concentrated stock holdings to make a statement by divesting from companies that don’t make it through certain “sin screens.” These included companies involved with weapons, nuclear energy, tobacco, alcohol, natural resources, and genetic modifications on agriculture, many of which did well over the past decade.

Stocks of public companies deemed to have poor records on labor, environmental issues, women’s rights, and gay rights are also frequently screened out, as are corporations that do business with regimes that activists consider unsavory. In some cases, investments have been withheld altogether from some of the markets expected to best weather the current financial storm, including China and India, because of perceived transgressions.

...

“Investing in socially responsible stocks just because they are socially responsible is not—underline not—a valid investment thesis,” says Steven Pines, a senior investment consultant for Northern Trust.

...

If the goals of pension managers and retirees are not the same—as is often the case—then pension plans should not engage in social investing. In many instances, SRI amounts to union leaders or politicians gambling with other people’s money in support of ideological vanity.

...

Pensions are being dragged into treacherous waters by investors who consciously choose to direct their money in socially conscious ways. It’s a questionable risk for cautious times. The use of political criteria may be fine for affluent investors and activists who gamble their own money and assume the extra risk, but pension funds should be held to a higher standard.

Jon Entine is a columnist for Ethical Corporation, an adjunct fellow at the American Enterprise Institute, and a consultant on sustainability. His website is jonentine.com.

http://www.reason.com/news/show/130843.html

Correct me if you can, before I find the article, but if I remember right, and enough large corporations fail, or even one, like say General Motors, and its affiliates, the payout by the Pension Benefits Guaranty Corporation would be about eight cents on the dollar?

--Bullwinkle

[Rocky_nBullwinkle 6]

On Feb. 12, 2008, the Board of Directors of the Pension Benefit Guaranty Corporation (PBGC) unanimously

adopted a new diversified investment policy to increase the likelihood that the Corporation will be able to

meet its long-term obligations. The PBGC currently has a shortfall of $14 billion, and faces the possibility that

someday it will run out of money. The overarching goal of the new policy is to help ensure that the PBGC will

be able to meet its obligations to the 1.3 million Americans who depend on it for their pension benefits.

Source

Some of it. Still looking.

[Rocky_nBullwinkle 6]

There is a widely shared presumption that the federal government would bail out P.B.G.C. if it became unable to meet its obligations for retirees. And the chance that P.B.G.C. will someday be unable to meet its obligations is real: at the end of September 2008, it reported assets of $63 billion and liabilities of $74 billion, for a shortfall of $11 billion.

In the old days — that is, before March 2008 — an $11 billion deficit would attract attention. P.B.G.C.’s deficit is small compared with that of A.I.G. or Citigroup, private sector companies that have garnered government bailouts, but there are reasons to be concerned that taxpayers will eventually be on the hook for a substantial bailout.

First, although P.B.G.C. reported that its unfunded liability fell from $14 billion to $11 billion last year, this forecast is not as rosy as it seems. The estimated present value of future liabilities dropped only because the agency used a much higher interest rate to discount future payouts. It discounts future payouts using an interest rate linked to corporate bond yields, which jumped in the credit crisis. To economists, it would make more sense to use a slow-moving riskless long-term interest rate to discount future payouts.

Second, the current recession and financial market meltdown will likely cause a jump in underfunded private pensions that fall in P.B.G.C.’s lap.

Third, earlier this year the agency’s board (the secretaries of labor, commerce and the Treasury) adopted a new investment strategy that took on more risk. Instead of investing around a quarter of its assets in equities and most of the rest in bonds, as it had been doing, the corporation’s board decided to allot 45 percent of the portfolio to public equities (both American and international stocks), 45 percent to fixed-income securities (a mix of corporate bonds and government bonds), and 10 percent to alternative investments (real estate and private equities).

The decision to move a large share of the portfolio out of safe assets like Treasury bonds and into riskier but possibly higher-paying assets like stocks has been controversial.

The decision would have proved catastrophic had it been immediately acted upon because the stock market has fallen so far. Fortunately, P.B.G.C. has been slow to act on its new policy. By my back-of-the-envelope calculation, had the agency fully adopted its new investment policy at the start of last year, it would have lost around 12.2 percent of its assets by September 2008. Instead, it lost “only” 6.5 percent, or $4.2 billion.*

Source

Getting closer.

[Rocky_nBullwinkle 6]

Just to take one industry with a lot of pensions: General Motors (GM) and Chrysler received a $17.4 billion government loan package in December. That money is expected to sustain the companies only through March 31. If GM, Chrysler, and Ford ("F") were to declare bankruptcy and roll their pensions over to the PBGC, it would mean 1.3 million more pensions for an agency that's already operating at a loss.

"We know that the Big Three's pension plans are underfunded by about $41 billion and that we would be responsible for about $13 billion of the underfunded benefits should they terminate," says Jeff Speicher, a spokesman for the PBGC.

The PBGC also has limits on the amount of benefit increases that it can insure, which "would mean a loss to the PBGC and also a loss to the workers and retirees," says Speicher.

Source

Can't find it. I give up!

--Bullwinkle

Edited February 1, 2009 by Rocky_nBullwinkle

[w¡n9Nµ7 §£@¥€r 123]

Can't find it. I give up!

--Bullwinkle

Regardless, you've made the point as far as I'm concerned