Fed Feeling States' Pension Pain?

Via Pension Pulse.

MarketWatch reports, Pension Funding Relief Could Provide Between $19 Billion and $63 Billion Reduction in Required Contributions Over Five Years:

Employers
that sponsor defined benefit (DB) pension plans have the
potential to receive billions of dollars in temporary pension funding
relief as a result of legislation recently signed into law,
according to a new analysis by Towers Watson),
a global professional services company. However, while the law
may significantly ease financial pressures for some sponsors for
at least two years, employers face potentially larger funding
obligations after 2011.

Under the Preservation
of Access to Care for Medicare Beneficiaries and Pension Relief
Act of 2010 (the Act), employers with underfunded DB plans may
elect to amortize funding shortfalls for any two plan years
between 2008 and 2011 either over a 15-year period or by making
interest-only payments for two years followed by seven years of
amortization. Generally, DB sponsors are required to amortize shortfalls
over seven years.

"The
federal government has given employers the much-needed and welcome
funding relief they were seeking," said Mark Warshawsky, director of
retirement research at Towers Watson. "Despite some improvement
in the overall health of pension plans since the depths of the
financial crisis, employers had been bracing for sharp increases
in their DB funding obligations. Now, with the new law, employers
can breathe a collective, albeit temporary, sigh of relief."

The Towers Watson analysis projected funded status and minimum required
contributions for single-employer DB plans under three scenarios
for the five plan years from 2009 through 2013: the pre-Act
provisions and the two funding options under the new law. It did
not consider the impact of the law's so-called cash-flow rules,
which require extra pension contributions if executive
compensation or dividend payments are too large, and could cause
some employers to forgo the relief offered. The two funding
options were tested for all potential two years of relief over
the 2009 to 2011 period.

The analysis found
that, under the pre-Act provisions, the minimum required
contributions in aggregate would be $78.4 billion for plan year
2010, and would escalate to $131 billion for 2011 and approximately $159
billion for both 2012 and 2013.

Under the new law, however, required contributions would be reduced
between $19 billion and $63 billion, depending on which of the two
provisions and which plan years employers choose. The 15-year
amortization for 2010 and 2011 funding shortfalls offers employers the
maximum aggregate funding relief for employers over the 2009
through 2013 projection period; the seven-plus-two-year option
for 2009 and 2010 funding shortfalls provides the least amount of
relief. The analysis noted that for employers with immediate
cash-flow concerns, the seven-plus-two-year option for 2010 and
2011 may be the better choice to concentrate the relief, while
the 15-year amortization rule spreads the relief more evenly over
a longer period.

"The
pension funding relief law significantly eases some of the
financial pressures employers had been facing, at least for two years,"
said Mike Archer, senior consultant at Towers Watson. "However,
the choices that employers make now will have an impact on the
magnitude of their future pension funding obligations. In
addition, the new law's cash-flow rule included in the
legislation has the potential to make contribution requirements
more volatile for companies that avail themselves of the relief."

In a separate survey earlier this
month of 137 Towers Watson consultants on behalf of 367
employers, only one-quarter (25%) of plans are likely to elect
the relief. Many employers have concerns about the application of
the cash-flow rule and uncertainties around details of the new law;
others are pursuing aggressive funding policies, have good funded
positions or otherwise do not need relief. For those likely to
elect the relief, most employers intend to reflect it for plan
years 2010 and 2011 and use the 15-year amortization option.

More information on the analysis can be found at: http://www.towerswatson.com/fundingrelief.
These measures are just going to buy some time for US corporate DB
plans, many of which are de-risking while public plans are taking on
more risk to deal with their shortfalls.

But have no fear, Fed Chairman Bernanke feels states' pension pain:

As
commentators chew over the odds of a double-dip recession, the Fed
chief is focusing on a bigger problem: the ticking time bomb of state
pension and retiree healthcare obligations.

Bernanke's speech
Monday revealed nothing we didn't already know about the health of the
U.S. economy. It has a "considerable way to go to achieve a full
recovery," he told members of the Southern Legislative Conference in Charleston, S.C.

But
Bernanke was much more emphatic in sketching out the troubles facing
states whose finances have been hit hard by the recession. He cited
recent studies that put unfunded state pension liabilities as high as
$2 trillion and retiree health benefit liabilities at $600 billion.

The
states are running up these huge tabs at a time when many of them are
struggling to put together a budget for this year, let alone plan for
next year or a decade from now.

"This daunting problem has no
easy solution," Bernanke said, referring to the pension shortfalls. "In
particular, proposals that include modifications of benefits schedules
must take into account that accrued pension benefits of state and
local workers in many jurisdictions are accorded strong legal
protection, including, in some states, constitutional protection."

But
the pressure on governors and state legislatures to take control of
their financial futures is only building, Bernanke said. He urged state
government officials to begin making hard choices now, because they
are likely to get little help from a federal government hamstrung by a
"structural budget gap that is both large relative to the size of the
economy and increasing over time."

As grim as this picture is,
Bernanke sees a silver lining for those who find ways to solve this
monstrous problem. "The states have the opportunity to serve as role
models for effective long-term fiscal planning," Bernanke said. It's a
vacuum someone is going to have to fill one of these days.

Let
me repeat what I've often stated, the Fed's policy is geared towards
banks, keeping rates low so they can borrow cheap and invest in risk
assets all around the world. The Fed is hoping that reflation will
translate into mild economic inflation, thus avoiding any prolonged
deflationary episode which will hit banks' and pensions' balance sheets.

The
reflation trade is alive & kicking, which is why smart money
continues to buy the dips in equity markets. The doomsayers keep warning
us that another disaster far worse than 2008 is on its way, but they've
been wrong.

Something tells me that this is just another cyclical
recovery but with one important caveat. I was talking with a sharp
senior portfolio manager this morning who told me investors remain "far
too focused on the US economy when in reality, it's the Emerging Markets
that are leading global growth this time around."

According
to him, this is a "new post-war phenomena" that is propelling the global
economy ahead. His comment made me think that perhaps I should revisit Galton's fallacy and the myth of decoupling.
If structural decoupling is taking place, then it will have profound
implications for the way investors are currently pricing risk.

Comments

[ZackAttack]

A theory only an economist could love: Who needs full employment and rising wages when we can rig the stock market?

And, how quaint of me to think that the Fed's mandate - which I recall as "full employment consistent with price stability" - actually means anything. They should just change it on the public website to "prop up bank balance sheets, and to hell with everything else."

[Mercury]

Oh great, we're all getting a part in Godfather IV.

Nothing good will come from the Federal Government stepping in to pay your bills - especially when the chief executive turns out to not quite be the only honest politician from Chicago.

What we really don't need is for municipal governments to learn the lesson that there is absolutely no limit to how large they can grow their self-aggrandizing jobs and perks programs.  Uncle Sam will always make things whole.

[DarkAgeAhead]

At least one state government is undertaking that experiment now...New York, and it's ugly.

[exportbank]

There is no such thing as an investor - everyone is simply rolling the dice. Do a google search for how often a "trillion dollars" was used before 2007. A billion is now chump change. What we're seeing right now is a war against responsible people and we're way outnumbered by the financially insane.

[Pondmaster]

"The states are running up these huge tabs at a time when many of them are struggling to put together a budget for this year, let alone plan for next year or a decade from now."

When did ANY government entity plan for a year out , let alone a decade out . What a perposterous joke . More Fed propaganda . Bernanke is a dolt .