The Pension Gap

[The Minsky Moment]

http://www.ft.com/intl/cms/s/0/eadf8220-2cbf-11e1-b485-00144feabdc0.html#axzz1iRhejrIR

Short version: corproate pension plans in the US now face a cumulative gap of $450 billion - ie the present value of their pension obligations exceeds the funding of their plans by that amount.  This is a bigger gap than at the height of the financial crisis. Cause is falling interest rates and poor US stock market performance.  Neither of which looks particularly likely to change in 2012.

One company to look at is GM because except for a bit of haircut, the post-bankrupt company assumed most of the old pension obligations.  New GM is basically a giant hedge fund managing a big securities portfolio, with some automobile operations bolted on.

[Caliga]

 

I bought in to the 'new' GM right after the IPO, and then sold the shares as fast as I possibly could at a $4/shr profit.  My brother is still holding on to them because he doesn't want to sell at a loss now.

[MadImmortalMan]

My brother is still holding on to them because he doesn't want to sell at a loss now.

It's surprising how common a response that is, and it's financially suicidal.




Anyway, the world's governments will go 8 more trillion dollars in debt this year. All those assets have to go somewhere. Recapping pension funds sounds as good a place as any. Until the bonds implode that is.

Dumb pensions.

[alfred russel]

And the Pension Benefit Guaranty Fund doesn't have the funds to cover the problems, but no one wants to do anything because that could bring down some companies or cause even more companies to drop their defined benefit plans. Hello another bailout.

[Caliga]

It's surprising how common a response that is, and it's financially suicidal.

He's relatively new to investing and thus is still making the greenhorn mistakes everyone has to make before they learn.

Anyway, I'm very proud of my mother in law for actually taking my advice (for once) and taking her pension from Yum!Brands as a lump sum payout.

[DGuller]

What discount rate is used to calculate those present values?  You can generate all kinds of pension disaster scenarios just by assuming a realistic rate of return.

[The Minsky Moment]

What discount rate is used to calculate those present values?  You can generate all kinds of pension disaster scenarios just by assuming a realistic rate of return.

From the article, I believe it reflects the discount rates actually employed by the companies for their own pension accounting purposes, which would suggest the gap may be understated.

[DGuller]

What discount rate is used to calculate those present values?  You can generate all kinds of pension disaster scenarios just by assuming a realistic rate of return.

From the article, I believe it reflects the discount rates actually employed by the companies for their own pension accounting purposes, which would suggest the gap may be understated.

Oh, shit. 

[Strix]

It is a sad state of affairs. Unfortunately the private sector can't do what state/federal government does i.e. raid the pension fund than make tax payers replenish it while increasing retirement age (to kill off a few).

[Ideologue]

It is a sad state of affairs. Unfortunately the private sector can't do what state/federal government does i.e. raid the pension fund than make tax payers replenish it while increasing retirement age (to kill off a few).

That's right.  That's why people who think the U.S. government should be run like a business or a household are capital-S Stupid.

[Sheilbh]

I blame the decline of private sector unions

[CountDeMoney]

I blame the decline of private sector unions

Pensions do not increase shareholder value.  That's all that matters.

[Valmy]

Ah well I am prepared to work until I die anyway.

[Admiral Yi]

One company to look at is GM because except for a bit of haircut, the post-bankrupt company assumed most of the old pension obligations.  New GM is basically a giant hedge fund managing a big securities portfolio, with some automobile operations bolted on.

I thought as part of the bailout the pension fund got handed over to the union.

[PJL]

Meanwhile there's an article on the BBC website effectively saying that public sector pensions in the UK are likely to be even better value than the private sector ones dispite the recent cuts, as the private sector is cutting theirs even faster....

Here's the article:

http://www.bbc.co.uk/news/business-16385381