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.

[rohry]

More pension fund problems...

[rohry]

More pension fund problems...

[rohry]

Sorry about the double post. I'm still getting error messages when I post...

[freeper12]

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?

[razorback-bert]

I don't see a problem, if they just buy and hold.


All the experts agree.

[dalereed]

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.

[arete]

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.

[rohry]

"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.

[rohry]

"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...

[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 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.

[sarcasm]

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.

[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. 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.

[rohry]

"They already voted for it..."

I didn't know that. Thanks for the post.

[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."

How does it feel to be a piggy bank?

We'll soon find out...

[arete]

Kind of makes a person stop and think about things, doesn't it?

Richard W.

[OldFriend]

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.

[Soren]

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.

[hinckley buzzard]

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.

[sarcasm]

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.