Weak Pension Funds Become The Market's Latest Worry

Wall Street Journal (via The Post & Courier) ^ | 11/17/2002 | Cassell Bryan-Low

[rohry]

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.

[SauronOfMordor]

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. "

[BooBoo1000]

The only question now is does the Pension Benefits Guarantee Corp have enough assets to cover all of these shortages?

[jwh_Denver]

* 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!

[David]

"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?

[arete]

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.

[Gunslingr3]

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...

[TigerLikesRooster]

RE #21

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

[grania]

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.

[arete]

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.

[Tom D.]

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.

[oldironsides]

LoyalToUnions

[arete]

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.

[ameribbean expat]

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.