Comments on: Not good

By: OldeForce

OldeForce — Sat, 01 Apr 2006 08:49:28 +0000

wrangler5 hits it on the head. A good actuary – for a company that will let him/her give them the facts – will work from a somewhat conservative basis. What if more employees stay on and receive retirement benefits? What if salaries rise faster than expected? What if rates of return don’t meet expectations? (Had a case where a small-business employer never made half of the investments he said he was making. When one of the partners retired, they had to sell off the company! Made for an interesting lawsuit; as in, where did the money for investments go?) Too many companies would prefer to make assumptions that have them with extra funds – and the federal agency that “guarantees” your pension is far more likely to fail you than Social Security. [It's late, I'm tired, and that last part needs to be expanded, but not now!]

By: wrangler5

wrangler5 — Sat, 01 Apr 2006 05:56:21 +0000

The problem with talking about pension liabilities is that it’s almost impossible to talk about them sensibly in ways that ordinary (i.e., non-actuary) people can grasp. The “liability” that is bandied about in the press is the present value of payments that are expected to be due at various times over the next 50+ years. The number that gets reported to the government and to shareholders, and which may end up in the press, is based on a substantial number of estimates and assumptions (i.e., guesses) about how many of the currently employed will become eligible to receive payments, how much they will earn over the rest of their career (if the pension formula is based on individual earnings,) how long they will continue to work, how much they will be entitled to per month when they retire, how long they will live to collect payments after they retire, how much money is on hand today in the pension fund, and how much interest or other earnings the pension fund will earn before each payment has to be made.

If you guess wrong about any one of those assumptions, your calculation of present value will be off. And no matter what you guess today, next year you have to make all the guesses again, based on the employee facts as they exist next year, and come up with a new “liability.” A good actuary can come up with a set of “assumptions” that will put ANY company with a pension plan into the red, while another set would make most plans “solvent.” In order to come up with a “liability” number, as required by law, you have to make assumptions, but I believe it is true that NONE of the assumptions you make today will prove to be absolutely accurate.

This is not to say that we shouldn’t be concerned about pension fund solvency. ERISA did a service to the economy when it made pension funding mandatory and required annual reporting. But a pension fund’s “debt” to its participants is not anything like a company’s debt to its bondholders, or your home mortgage. So let’s just understand that, even though a lot of us think we understand our mortgage liability, we are poorly equipped to talk rationally about pension liabilities.

By: _Jon

_Jon — Fri, 31 Mar 2006 22:07:28 +0000

Yeah, it should be more visible.

Ford and GM regularly use their pension funds to “meet” their profit (or loss) projections.
They are legally allowed to go back a few years and adjust the net gain (or loss) of a pension fund in order to dick with their current year’s returns. Nice, huh?

If they wanted to be truly fair about it, they would open a 401(k) for each member represented in the retirement fund, then adjust company payments into those until they have met their obligations. It would cost the company a lot up front and a bit through a few years, but it would solve the “each car is costing us $1500 in retirement ‘legacy’ costs”.

Mark my words – GM & Ford are going to divest themselves of every sub-component that makes money, then declare bankruptcy so that they can drop their commitments to the union and the pension. Just like American Airlines did recently. That pension money will get eaten up in “filing fees and bankruptcy charges”. Look at what K-Mart got away with. Oh, the post I could write on that.

By: Joseph A Nagy Jr

Joseph A Nagy Jr — Fri, 31 Mar 2006 17:57:53 +0000

I have a 401K plan myself. I like it better then the idea of a pension plan. I don’t plan on staying at my current job any longer then it takes me to get myself out of debt. Then its back to school.

By: Kirk

Kirk — Fri, 31 Mar 2006 17:21:18 +0000

Almost all companies have already dropped the pension plan… (mine did for new hires)

It is usually a 401K or nothing.

You are on your own baby…

By: Manish

Manish — Fri, 31 Mar 2006 17:01:56 +0000

The treatment makes sense to me since the real yearly cost of a pension plan is the increase in pension liabilities, not what the company puts into the pension plan which is what the treatment is now. Right now, pension expense is treated on a cash-basis rather than an accrual basis in a company’s books.

As to the idea that companies will stop offering pension plans, largely I think that they should and move more towards 401(k) type of plans. Pension plans are better suited in a world where you found a job out of college and worked there until retirement. The math and funding gets screwy when people job hop whereby an older worker gets a bigger contribution towards the plan than a younger one with the same years of service at the firm. (And other reasons that are too wonkishly actuarial).