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Weak Pension Funds Become The Market's Latest Worry
Wall Street Journal (via The Post & Courier) ^ | 11/17/2002 | Cassell Bryan-Low

Posted on 11/17/2002 2:47:24 PM PST by rohry

Edited on 04/22/2004 11:47:32 PM PDT by Jim Robinson. [history]

Your own portfolio isn't alone in taking a hit. The stock-market swoon of recent years has taken a hefty toll on the investments made by company-run pension plans as well.

That's why investors are paying a lot closer attention these days to whether companies have sufficient money in their pension plans.


(Excerpt) Read more at charleston.wsj.com ...


TOPICS: Business/Economy; Editorial
KEYWORDS: business; economy; pensionfunds; stockmarket

1 posted on 11/17/2002 2:47:24 PM PST by rohry
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To: bvw; Tauzero; robnoel; kezekiel; ChadGore; Harley - Mississippi; Dukie; Matchett-PI; Moonman62; ...
More pension fund problems...
2 posted on 11/17/2002 2:49:55 PM PST by rohry
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To: bvw; Tauzero; robnoel; kezekiel; ChadGore; Harley - Mississippi; Dukie; Matchett-PI; Moonman62; ...
More pension fund problems...
3 posted on 11/17/2002 2:51:50 PM PST by rohry
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To: All
Sorry about the double post. I'm still getting error messages when I post...
4 posted on 11/17/2002 2:53:04 PM PST by rohry
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To: rohry
tick...tick...tick...tick. Just in case you haven't noticed yet, this is truly a timebomb waiting to go off. Not only will these companies not be able to declare the excess gains they made on theoir pensions, they are going to need to take cash earned from operations and make up the shortfall. I can almost guarantee many companies will buckle and fold because of this problem.

Anyone know if the gov't is on the hook if, for example, GM went bankrupt and couldn't pay the retiree benefits?
5 posted on 11/17/2002 3:07:56 PM PST by freeper12
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To: rohry
I don't see a problem, if they just buy and hold.


All the experts agree.
6 posted on 11/17/2002 3:14:49 PM PST by razorback-bert
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To: rohry
This is probably more serious than they are letting on.

Although it's been common knowledge for some time this is the first i've seen in the mainstream media acknowledging the problem.
7 posted on 11/17/2002 3:14:57 PM PST by dalereed
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To: rohry
I'm sure that the best and brightest on Wall Street are working on a plan to spin this problem into a positive for investors -- like, "Ford's pension plan BEATS THE STREET!! by only being $3 billion in the red instead of the $4 billion expected". "Ford is trading up 3 points on the good news".

Richard W.

8 posted on 11/17/2002 3:16:49 PM PST by arete
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To: freeper12
"Anyone know if the gov't is on the hook if, for example, GM went bankrupt and couldn't pay the retiree benefits?"

Only if the lamebrains in Congress vote for it. Part of the reason for the steel tarrifs was US Steel's massive pension obligations.
9 posted on 11/17/2002 3:19:12 PM PST by rohry
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To: dalereed
"Although it's been common knowledge for some time this is the first i've seen in the mainstream media acknowledging the problem."

Me too. That's why I posted it...
10 posted on 11/17/2002 3:27:04 PM PST by rohry
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To: freeper12
To the extent that these companies are "qualified plans" under ERISA, our tax dollars are on the hook to pay the vested portion of these retirement plans. I am associated with a small company which decided several years ago that we were more than willing to put significant dollars into retirement benefits for our excellent employees, but we were not in a position to guarantee what would happen to those dollars once they were invested. We created a defined contribution plan (a 401(k) plan) that called for more dollars to be invested each year (at least at the time), but that at the same time said that we would not guarantee an annual return on the dollars we invested. (The employees got to invest their own money as they saw fit.) At the same time we instituted a profit sharing plan that rewarded employees for the firm's results. The result has been encouraging. The employees have fared better as have the stockholders. Certainly the last couple of years have seen drops in the stock market, but as far as I can tell, most of our employees are better off than they would have been under the traditional defined benefit plans of the past. They will be much better off in a 2 or 3 year up market, which is bound to come sooner or later. I addition, the firms with defined benefits plans are more likely to lay off workers because of losses associated with the potential contributions they may have to make with defined benefit plans when the marked fails to perform as well as folks think it should.
11 posted on 11/17/2002 3:38:57 PM PST by Tom D.
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To: rohry
They already voted for it:

The Pension Benefit Guaranty Corporation

The Pension Benefit Guaranty Corporation (PBGC) protects the retirement incomes of about 44 million American workers in more than 35,000 private defined benefit pension plans.

12 posted on 11/17/2002 3:40:01 PM PST by sarcasm
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To: rohry
I was just reading on another site that in the event of a major terrorist attack, many banks and brokerages might declare a force majeure to cover their debt and options losses. It would also give pension funds an out of any contractural obligations. Could turn into a real lifeboat in case of a financial meltdown. We are hearing more of a "spectacular terrorist attack" now aren't we?

Force Majeure literally means "greater force". These clauses excuse a party from liability if some unforseen event beyond the control of that party prevents it from performing its obligations under the contract. Typically, force majeure clauses cover natural disasters or other "Acts of God", war, or the failure of third parties--such as suppliers and subcontractors--to perform their obligations to the contracting party. It is important to remember that force majeure clauses are intended to excuse a party only if the failure to perform could not be avoided by the exercise of due care by that party.

Richard W.

13 posted on 11/17/2002 3:44:21 PM PST by arete
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To: sarcasm
"They already voted for it..."

I didn't know that. Thanks for the post.
14 posted on 11/17/2002 3:47:48 PM PST by rohry
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To: arete
"I was just reading on another site that in the event of a major terrorist attack, many banks and brokerages might declare a force majeure to cover their debt and options losses."

How does it feel to be a piggy bank?

We'll soon find out...
15 posted on 11/17/2002 3:49:50 PM PST by rohry
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To: rohry
Kind of makes a person stop and think about things, doesn't it?

Richard W.

16 posted on 11/17/2002 3:53:22 PM PST by arete
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To: rohry
When are the union workers going to wake up and tell the dems to SHUT UP with obstructing the President in his effort to give the economy a big boost. They can't be so stupid as to think that power for the dems is more important than power for the American working people.
17 posted on 11/17/2002 4:44:21 PM PST by OldFriend
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To: rohry
This is a bit off topic. An excerpt from an International Herald Tribune article:

The Morgan Stanley numbers suggest that there's far more weakness in credit markets than most policymakers recognize. Morgan Stanley's managing director, J. Robert Maguire, noted that bond defaults in 2001 and 2002 have totaled over $180 billion, and that defaults in investment-grade bonds over the past two years have exceeded the cumulative total of the past 20 years. Credit quality has been dropping since 1995, Maguire said.
.
Overhanging the credit market, meanwhile, are severe weaknesses in the banking sectors of other key countries. "Japan, China and Germany - that's the whole world," said another top banking executive.
.
The scariest numbers involve those exotic financial instruments known as "credit derivatives," which have exploded in volume over the past several years, largely in response to the weakness in credit markets. According to Morgan Stanley, the value of these credit derivatives has grown from just $50 billion in December 1998 to an estimated $2.4 trillion in December 2002. The dot-com run-up was modest by comparison. It's a big, unregulated circus, and sensible analysts have been scared about the derivatives market for years.
18 posted on 11/17/2002 4:52:04 PM PST by Soren
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To: freeper12
Thre is a government agency called something like the "Pension Benefit Guaranty Corporation," rather like the FDIC etc, which appears to be empowered to bail out certain pension plans. I don't know who is /is not covered.

When steel companies have gone broke, such as LTV, I heard a great deal of weeping and gnashing of teeth over the loss of pensions, so I guess the answer is not simple.




19 posted on 11/17/2002 4:56:37 PM PST by hinckley buzzard
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To: hinckley buzzard
When steel companies have gone broke, such as LTV, I heard a great deal of weeping and gnashing of teeth over the loss of pensions, so I guess the answer is not simple.

They don't guarantee payment of the full pension.

20 posted on 11/17/2002 4:59:49 PM PST by sarcasm
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To: freeper12
Anyone know if the gov't is on the hook if, for example, GM went bankrupt and couldn't pay the retiree benefits?

Yep. See Pension Benefit Guaranty Corporation : "The Pension Benefit Guaranty Corporation (PBGC) is a federal corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of defined benefit pension plans, provide timely and uninterrupted payment of pension benefits to participants and beneficiaries in plans covered by PBGC, and keep pension insurance premiums at the lowest level necessary to carry out the Corporation's objectives. "

21 posted on 11/17/2002 5:03:16 PM PST by SauronOfMordor
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To: SauronOfMordor
The only question now is does the Pension Benefits Guarantee Corp have enough assets to cover all of these shortages?
22 posted on 11/17/2002 5:14:58 PM PST by BooBoo1000
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To: OldFriend
* They can't be so stupid as to think that power for the dems is more important than power for the American working people.

Oh yes they can!
23 posted on 11/17/2002 5:20:58 PM PST by jwh_Denver
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To: rohry; freeper12; razorback-bert; Tom D.; sarcasm; arete; hinckley buzzard; SauronOfMordor; ...
"Anyone know if the gov't is on the hook if, for example, GM went bankrupt and couldn't pay the retiree benefits?"

Says Tom D: "To the extent that these companies are 'qualified plans' under ERISA, our tax dollars are on the hook to pay the vested portion of these retirement plan"

Ok now wait a minute guys, here is what the statutes really say.

In the first place, all of these plans (both "pension plans"; defined benefit plans which are the subject matter of this discussion, as well as "profit plans"; defined contribution plans which are not the subject matter of this discussion) are "qualified plans" under section 401(a) of the Internal Revenue Code (IRC)--means the corporation gets to deduct contributions to the plan; no taxable income to the Plan on income earned; no taxable income to the employee until he gets a distribution.

ERISA--Employee Retirement Income Security Act is a set of statutory limitations on what can be done to beneficiaries of these plans, enacted about the same time as statutory authority for the Pension Benefit Guaranty Corp. PBGC guarantees that the employees get paid promised amounts by the plans--by that we mean guaranteed retirement income benefits--promised pension amounts--usually monthly or quarterly benefits; as opposed to "we will put money into a 401(a) plan and use it to buy investments and you get whatever is there when you elect to receive benefits" (profit plans; or defined contribution plans).

Many of these old line american companies (GM, F, IBM, S to name a few) have these pension (we will get you paid $X per month on the first of every month after you retire until you die; maybe you can elect to get the whole thing in a lump sum and roll it over into an annuity or broker's plan or whatever at the time of your retirement; but whatever, we will get you $X as determined under the Plan.) Those are guaranteed by PBGC--and they are pension obligations of the employer as a matter of employment contract law and under ERISA to the extent applicable. And it is these obligations that are the subject matter of this topic--the dot.coms have profit plans or defined contribution plans, most with 401(k) provisions, and they are not subject to this problem because they have not promised to pay anything more than what is there when the employee retires.

First credit on the line--GM. GM's promise and financial statement obligation; as Rohry and Artie have explained several times, GM has an obligation to its employees to put enough dough in the Plan so that together with earnings in the Plan, all as described in regulations and rulings under Section 401(a), the employees will get paid. At this point, in my view, many of these corporate employeers owe more than their net worth because the applicable regulations and rulings are too lax in terms of what they permit employer's to assume about future earnings on Plan assets in determining how much they are required to contribute to these Plans currently.

Congress has the power to change how much these employer's are required to get funded currently--and I have forecast here that Congress will do just that to put off the moment of truth at the point it becomes a real problem.

Back to PBGC. It is a government created entity which has guaranteed those obligations specified above which are real obligations (as opposed to the many defined contribution--profit plan type plans). BooBoo1000 raises one point--does PBGC have enough assets to really pay for all this? No. Probably not.

Are the taxpayer's on the hook for this? Last time I considered the issue, I concluded the answer to that is no also; because I thought this is not a "full faith and credit of the United States" type obligation. (If this part of the analysis is important to you, you should go hire a lawyer to figure it out for you.) So, if this becomes a serious problem, first expect Congress to act to reduce the current funding requirements (to keep the 401(a) ) qualification in place; then when it becomes a really really serious problem, see if Congress acts to make it a "full faith and credit obligation of the United States" obligation--bet they do not.

Now the implication of Tom D's post #11 is that 401(k) amounts are subject to PBGC guarantees--sorry to disappoint you Tom but I think not. Again, if this is important to a decision you want to make, better hire a lawyer to look at it.

Soren often has insightful comments on these topics and his #18, he thinks maybe a little off topic, is actually right on. This issue is part and parcel of an overall threat to the credit-money system. Probably the regulatory authorities can fight the pension plan issue off until there is a serious monetary problem.

I once suggested to Richard (Artie) that Congress is likely to get to the point where it permits the employeer to make payments adequate to pay current monthly benefits of these retirement amounts out of current assets, rather than jerk their 401(a) qualification. Congress thought that was ok for a long time with Social Security; why are private employer's any different?

24 posted on 11/17/2002 6:25:05 PM PST by David
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To: David
David -- of course you are right. Whenever the rules don't fit the need, then change the rules. We've seen it a hundred times so it shouldn't be any surprise when it happens. Margin requirements can be adjusted and bank reserve requirements can be lowered. Just change the rules.

Richard W.

25 posted on 11/17/2002 8:20:19 PM PST by arete
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To: BooBoo1000
The only question now is does the Pension Benefits Guarantee Corp have enough assets to cover all of these shortages?

It has as many 'assets' as the government is willing to seize from you, and you're willing to give up without a fight...

26 posted on 11/17/2002 10:00:04 PM PST by Gunslingr3
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To: SauronOfMordor
RE #21

When push comes to shove, everything will fall on government to deal with. Gov would yield enormous power at least temporarily.

27 posted on 11/17/2002 10:00:29 PM PST by TigerLikesRooster
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To: David
Your explanation is really, really good. So a pension is safe (for the pensioner); the government will collect and redistribute money or print new money to cover guarenteed benefits. But 401Ks are different...there are no promises.

What hasn't come up on this thread is what's new in the equation. That would be (1) baby boomer retirements coming up increasing the payout and (2) increased global competition for these older companies that have pension plans, making it harder to make a hefty profit to fund the increasing outflow from the plans.

If I were a bottom-line, profit oriented CFO I would spin off profitable sectors into new corporations that don't bring with them the pension obligations and let the remaining behometh die. The new spinoff can just lay off anyone who is getting close to pension eligibility. Then, the government will back those pensions and there will be no drain on profits.

Then, the government would have to increase money supply, which would create inflation at some point, I would think. The problem will never be solved, as those who pass laws and run things just don't look beyond the next election.

28 posted on 11/17/2002 11:15:08 PM PST by grania
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To: grania
The problem will never be solved, as those who pass laws and run things just don't look beyond the next election.

As long as you are robbing Peter to pay Paul, you can always count on Paul's support.

Richard W.

29 posted on 11/18/2002 5:22:54 AM PST by arete
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To: David
I had no thought that 401(k) results were guaranteed by the USA or any agency thereof. I thought that was the point. My main message was supposed to be that a firm (not the government) should legitimately be in the business of promising its employees that it will pony up a certain number of bucks to apply towards the employees' retirement, but it is a risky proposition to guarantee how investments of those dollars will work over the years. Sorry that I was not more clear.
30 posted on 11/18/2002 5:32:29 AM PST by Tom D.
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To: arete
LoyalToUnions
31 posted on 11/18/2002 5:59:13 AM PST by oldironsides
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To: oldironsides
Interesting article. I'm not surprised though. I expect union management to be corrupt and fleecing the dues payers is just part of business as usual for them. Good to see that it is getting some press attention.

Richard W.

32 posted on 11/18/2002 6:09:59 AM PST by arete
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To: rohry
This is not the biggest part of the pension deficit problem. Public sector pensions have lost beaucoup bucks and, as contractual obligations, may have to be made whole with tax increases. NJ and California are two of the worst.
33 posted on 11/18/2002 6:18:07 AM PST by ameribbean expat
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