Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 35
Pension plan scandals will be the next big thing.
[ With thanks to bigcaat for getting me going.
http://boards.fool.com/Message.asp?mid=21095000 ]

That was the original post that got me started but I want to talk about the crisis brewing in general and how our govt is wimping out in mass.
I am surprised it hasn't been one already.

Of course Congress prolonged the scam of underfunded pension plans by stretching out for 2 more years, underfunded companies to pay up. In 2 years we will probably be right in the midst of a huge recession and some big companies will be in danger of going under.

Charley has mocked me on this but I am going to repeat it.
I believe GM's and F's debt will eventually be worthless, shareholders will get nothing, the pension plan will be insolvent and disolved (The PBGC will take over - Pension Benefit Guaranty Corp (which is the US govt and therefore you the taxpayer), and bondholders will eventually own the company for pennies on the dollar.

It seems this will take longer to play out than I thought, but there is absolutely no way GM can ever pay back its pension and medical plan deficits while losing its ass on cars, losing market share every year, and only being able to sell cars at all with massive rebates and 0% financing). This ponzi scheme is about over.

http://www.globalaging.org/pension/us/private/2004/underfund.htm
http://www.frbsf.org/publications/economics/letter/2003/el2003-16.html

Since PBGC was created in 1974, the airline and steel sectors have accounted for more than 70 percent of the agency's claims, though they have just 5 percent of pension plan participants.

Bottom line: Airline workers, Steel workers, and car workers are gonna get screwed.

Canadian perspective
http://www.businessinsurance.com/cgi-bin/news.pl?newsId=3803
As the result of recent pension plan underfunding, 18% of the survey participants that sponsor defined benefit plans have terminated at least one of their plans or have converted it to a defined contribution arrangement, the study found. For another 11%, such a change is either underway or planned, according to the survey.

Mish note: defined benefit plans will eventually be toast everywhere: US and Canada both. Risk is being shifted from the company to the employee.

Thirty-nine percent of Canadian chief financial officers said they believe Canada has a pension crisis but say it is largely cyclical and unlikely to become permanent, while 20% say they believe the problem is likely to persist beyond the next few years. However, 29% do not see the situation as a crisis, according to the study.

[Amazing. 39% of CFO admit a huge proble. That is amazing. At least they are not in denial in Canada. At any rate they think it is cyclical... Yeah right - mish]

This one is interesting
http://edworkforce.house.gov/hearings/108th/fc/pensions102903/osboehner.htm
Hearing on “The Pension Underfunding Crisis: How Effective Have Funding Reforms Been?

As we all know, a 'perfect storm' of historically low interest rates, the stock market decline of recent years, and an increasing number of retirees has led to a pension underfunding crisis that is threatening the future of the defined benefit pension plan system.

While this is not the first time we have seen significant pension underfunding problems, we have not faced a dilemma with the severity as the one we currently face. There is a sense of urgency to this underfunding crisis because of a growing consensus that it is putting the pension benefits of American workers at risk.

This financial health of defined benefit plans and the federal agency that insures them, the Pension Benefit Guaranty Corporation, have been widely reported. The PBGC announced earlier this month that it has accumulated an $8.8 billion deficit, by far the largest in agency history.

On top of that, the number of employers offering defined benefit pension plans has declined from 112,000 in 1985 to just more than 30,000 last year, and more and more employers are freezing or terminating their plans and either shifting to 401(k) defined contribution plans or stopping offering pension plans to their workers altogether.


I am pleased to note that the House recently acted on a bipartisan basis to address this pension underfunding crisis in the short-term by passing a two-year pension funding fix – the Pension Funding Equity Act – by a vote of 397-2 on October 8th.

Mish note: text from here on out is my own rant
That is the part that galls me.... A two year extension.
Why should there be ANY extension. Why shouldn't pension plans be fully funded every quarter of every year?

Republicans and Democrats alike wimped out and sold US Taxpayers and pension plan participants down the river in a corporate handount. It delayed pension plan funding for 2 years, and most galling increased the pension plan assumptions about what % returns their plans will make. That increase in "assumptions" decreased plan liabilities (on paper) contributing to the "improvement" seen in underfunding. Note that the Pension Benefit Guaranty Corporation (a US govt entity) was against this assinine bill. I am going to guess that Ron Paul was one of the 2 no votes. I wonder who the other was.

Perhaps many of you were not aware of this tax gimmick. If a company "assumes" the return from a pension plan is going to be 10% (and lets say plan funding was needed at 8% to meet obligations) that company gets to report shareholder increased EARNINGS of 2% of the amount even if the plan only returned 6% and there was an actual pension liability. Please read that again, and as assinine as it sounds, companies are indeed reporting increased "earnings" off of underfunded pension plan liabilities! Clearly this tax law needs to be totally changed.

Instead a law that was passed that delayed the day of reckoning AND loosened the requirements on the assumptions that could be made by companies! It is the most assinne thing in accounting that plan assumptions take precidence over actual numbers, and that "earnings" benefit from assumptions even if in reality the assumptions terribly missed their mark. BTW many companies, most notably IBM have used this trick to meet earnings estimates. They need a penny, they get it by bumping up assumptions on estimated pension plan returns! I suspect there will be a lot of "one time" writeoffs on this mess somewhere down the road, at a total cost in of hundreds of billions.

The whole thing is totally disgusting. No make that sickening.

Mish
Print the post  

Announcements

When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.