Pension Woes Are Plans’ Own Fault
By Cam Hui on April 29, 2009 | More Posts By Cam Hui | Author's Website
Recently there has been much comment about problems at defined benefit pension plans - how underfunded they are, how they are the “next shoe to drop” in the financial crisis. Here is an example from Leo Kolivakis posted at Naked Capitalism.
Here is an equally fascinating earlier analysis from Leo Naked Capitalism:
Plan sponsors had two choices. They could retain the 60%-40% asset mix but fund at the minimum and run the risk of deficits in market down turns. Most of them never believed that their companies would ever go bankrupt and so they did not think they were putting their members’ financial lives at risk.
Or they could invest solely in fixed income assets. This removed the asset-liability mismatch and resulting windup risk but it also meant lower long-term investment returns. Lower returns meant either increased contributions in the order of 30% or 30% lower benefits or some combination thereof.
Pension plans were deliberately running asset allocation mixes of 60-40 (stocks/bonds) because it was the cheap thing to do and not for risk control (asset-liability matching) purposes.
In other words, much of the problems today at DB plans were the result of past decisions. The chickens have come home to roost.
Societe Generale Tells Investors How To Prepare For Potential “Global Collapse”
Month To Date Review Of The Market
Stock Picks For Monday: Nanometrics, Melco Crown Entertainment, MetroPCS Communications And Cell Therapeutics
Has Gold Just Broken Out Of Its Trend Channel?
One Reason Why The US Dollar Might Rise
Bay Street Stocks Slip Slightly Again - Canadian Commentary - 1 day ago
Stocks Close Mostly Lower Amid Disappointing Quarterly Results - U.S. Commentary - 1 day ago
Bay Street Stocks Linger Slightly Below Unchanged Level - Canadian Commentary - 1 day ago
Stocks Remain Stuck In The Red In Mid-Afternoon Trading - U.S Commentary - 1 day ago
European Markets Fall, Led By Banks, Oils - European Commentary - 1 day ago


