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Pick Your Pension Poison?
Via Pension Pulse.
Norma Cohen of the FT reports, Study sees end of road for final salary pensions:
Britain's largest employers shut down pension schemes at such a rapid rate over the past year that if the current pace continues, traditional final salary pension benefits will soon become a thing of the past, a new study has concluded.
The report, to be published today by Pension Capital Strategies and JPMorgan Cazenove, looked at pension disclosures for FTSE 100 companies as at March 31.
It found that total service cost - the cost of providing the current year's pension promises - had fallen by 15 per cent over the past year. The drop reflects a decline in the number of workers who are earning final salary benefits.
At that rate, final salary pensions in the private sector will no longer be available within six years.
"The fact that a 15 per cent reduction in ongoing pension provision has come to light . . . is perhaps one of the clearest signs yet that we are coming to the end of the road for final salary schemes," said Charles Cowling, managing director at PCS.
Mr Cowling said that the trend was likely to increase pressure on government to close the gap both between private and public sector pension benefits as well as that between the sums pensioners are likely to earn and those that they will need to stay out of poverty.
Over the past year, employers have been doing the previously unthinkable; closing their pension scheme to existing workers. Such a step does not eliminate big deficits on its own but it allows any future contributions to be devoted to paying down shortfalls, cutting risks to plan sponsors.
Separately, the report also found employers racing to cut the investment risks in their pension schemes. The average scheme's weighting in bonds rose to 50 per cent, up from 40 per cent a year earlier and 34 per cent two years ago.
Mr Cowling noted that the shift is even more striking considering the strong rally in share prices over the past year that should have shifted the investment mix more towards equities.
In 2009, pension schemes suffered record deficits as equities markets fell and rates on government bonds - benchmarks by which liabilities are measured - fell sharply. The adverse market moves underscored the risks companies undertake by investing in assets that do not move in line with liabilities.
"This indicates that companies are realising that taking equity risk in a pension scheme does not deliver value for shareholders," Mr Cowling said.
The study also found there has been a significant rise in deficit funding, in spite of the profit and cash flow pressures in which companies find themselves.
Last year, deficit funding totalled £11.1bn, up from £4.4bn the year before, an increase of more than 150 per cent.
But there has also been an increase in the number of FTSE 100 companies where the size of the pension scheme now represents a material risk to the business. Nine have pension liabilities that are greater than their market capitalisation, and two of these, BT and British Airways, have liabilities that are more than three times their market capitalisation.
I am not surprised with the findings of this study. First, I have already discussed how private plans are reducing risk while public plans are increasing risk. I expect the gap between private and public pension plans will reach a boiling point in the next five to ten years. There will be a major backlash over guaranteed public sector pension plans which are backstopped by taxpayers.
And politicians all around he world are taking notice. I was skimming through articles on Jack Dean's wonderful site, Pension Tsunami, and ran across an article by Monique Garcia of the Chicago Tribune, Pick your pension poison:
When lawmakers return to Springfield to finish the budget later this month, they'll be greeted by the same major holdup that caused them to head home in frustration last week — how to make a nearly $4 billion state worker pension payment.
All of the options on the table remain unpalatable. They could borrow, but taxpayers would be stuck covering hundreds of millions in interest. They could skip, but the pension system would lose billions in investment. They could delay until after the election, but that only puts off the problem. Or they could cut the budget elsewhere, but that's unlikely given the size of the payment.
"The pension is a big chunk of the overall budget," said Christopher Mooney, a political studies professor at the University of Illinois at Springfield. "That's why it's so attractive to get rid of it, to borrow, to not pay it. Suddenly, 'Wow, our budget situation looks much better.' But all those are stopgap measures; nothing that has come close to passing or even really being seriously considered is going to be a long-term fix."
Here's a closer look at the General Assembly's options:
Borrowing. Gov. Pat Quinn wants to borrow to cover the pension payment. It's what lawmakers did last year. But it also carries a high price.
Last year's pension loan will cost $330 million in interest over five years. This year, another pension loan would cost about $1 billion in interest over eight years, according to Quinn's budget office. But that's only if the state can secure an interest rate of around 4.5 percent, which some say might be too optimistic given the state's shaky financial footing.
Still, Quinn budget director David Vaught said that's the best route to go to make sure a pension payment happens. And Quinn has made it clear he will fight for the borrowing measure he says is needed to free up money to prevent cuts to education and elsewhere.
"The governor believes that lawmakers should step up to the plate here on this one," Vaught said.
But Republicans have balked this time, a situation Quinn blames on his Republican rival for governor, Sen. Bill Brady, who says borrowing more would only add to the state's money woes. But Brady said he didn't need to convince his GOP colleagues that piling up debt is a bad idea.
"If (Quinn) wants to give me credit for killing his efforts to dig a deeper hole, I'll take it, but it's not necessary," Brady said. "Clearly, Gov. Quinn's failed policies of borrowing on the backs of our children are creating not only a record deficit of debt but also a poor job economy."
Skipping. Another option is to skip the payment altogether next year. That would result in billions in lost investment earnings for what is the most underfunded pension system in the nation. Some estimates put long-term losses as high as $37 billion.
The retirement systems are fighting back against that idea, which they say could drain pension funds faster than anticipated, though current beneficiaries will still receive their monthly checks without interruption.
Dan Long, executive director of the nonpartisan Commission on Government Forecasting and Accountability, warns that failing to make this year's payment would undermine recent highly touted pension changes aimed at saving billions in the coming decades by increasing the retirement age and reducing benefits.
"If you skip a payment, you lose the benefits of the pension reforms just made," Long said.
Cutting. This already has been tried, and it failed. House Speaker Michael Madigan, D-Chicago, perhaps to prove the point, called for a vote on a bill to cut nearly $4 billion. Ninety-nine of the 118 House members opposed it.
Delaying. Yet another possibility is that lawmakers delay the pension payment for six months, until after the November election. By then, voters will have picked a governor, and it would be up to the chief executive sworn in Jan. 10 to deal with the problem.
Rep. Frank Mautino, D-Spring Valley, predicts this is the path lawmakers will most likely take because there isn't enough support for borrowing. But he notes the state isn't likely to have any additional cash on hand in January, which means the pension payment problem will persist.
"It's the stark reality we have to face," Mautino said.
If Quinn is still governor, that could mean finally winning approval for the major income tax hike he's been pushing for more than a year. If Brady is governor, he said he would cut the budget and only borrow if the state's economic situation improves. But Brady would likely need support from Democratic lawmakers to make his plan stick.
"Buying time until after the election is a cynical ploy," Mooney said. "Somebody's going to have a problem."
What's going on in Illinois isn't unique. We are already seeing politicians from other states and countries picking their pension poison. They simply can't afford to delay tough political decisions. In this environment, if they don't pick their pension poison carefully, they risk killing their chances for reelection.
More worrisome, taxpayers risk being on the hook as public pension deficits balloon out of control. This is something which should concern us all because it will directly impact our future prosperity. It will also place an enormous burden on an already overstretched private sector which is increasingly called upon to support public sector pensions while their own pensions have reached the end of the road. Something has got to give as this situation is untenable.
***UPDATE: CalPERS asks for an additional $600M***
Cathy Bussewitz of the Associated press reports, Calif pension fund asks state for additional $600M.
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***UPDATE: CalPERS asks for an additional $600M***
Cathy Bussewitz of the Associated press reports, Calif pension fund asks state for additional $600M.
So, Illinois is a perfect case in point. Let me ask a hypothetical of Leo...
We know it has a tremendous budget deficit, something close to $13b out of a total $50b budget over the next two FYs. We know its pension system is vastly underfunded, at something like 60%.
So, knowing this as an investor, say I short its munis, or, perhaps, simply ignore them and Illinois has a bond auction failure. Of course, I haven't done this, but at the same time, I don't see why anyone in their right mind would buy Illinois' debt.
Would this count as a "speculative attack" in your book? Or would this be simply a matter of trading prudently on well-known fundamentals?
If states are unable to meet their payments, federal government will step in to help shore up their finances. Not sure if shorting munis is such a smart idea. There are many big heavyweights who love munis because of their tax advantages, but I am not an expert on this market.
Good article/topic Leo. Illinois is in a pretty sad state of affairs, because not only are they in a state of budget crisis, but their tax rates are already much higher than the national average, and as such, raising taxes will probably not result in an actual increase in tax revenue (ie., I think they're well past the point of diminishing returns).
I predict that they're probably just going to issue more bonds and kick the can down the road. Even if they elect a fiscal conservative governor, there's no way in hell the legislative bodies are going to accept austerity, and there's no way in hell the governor is giong to accept a tax increase.
A huge number of Americans are, in effect, lazy welfare queens that have been the beneficiaries of the early and middle stages of the fractional reserve lending crack-up boom.
If the middle-aged and older fail to curb-stomp the banking system, the chief profitable market will be in legal human trafficking to more business-friendly countries.
I'm on that job, by the way... 'tis time to starve the beast by shipping off the cradle.
The sinking of the UK private pensions was no accident, unforeseen market conditions, or greedy corporate leaders. Gordon Brown intentionally slammed the pension system as a way to raise taxes back in 1997.
"Pensions campaigners described the revelations — the result of a two year battle by The Times — as an absolute disgrace, and said that it showed the Chancellor “knowingly set about destroying” Britain’s pensions system.
Mr Brown announced the scrapping of tax relief on dividends paid into pension funds in his first Budget in July 1997, in the single biggest change to the pensions system in a generation. "
http://www.timesonline.co.uk/tol/money/pensions/article1593939.ece
The destruction of pensions outside of the the allmighty nanny state, and more entitlement money to hand out. Two birds, one stone. What's a socialist statist politician not to like?
I live in Illinois, but work in Evanston. I can probably move to Wisconsin to sidestep this train, but its going to be a mess here. The pols in this state have no back bone for doing what is right rather than what is politically acceptable to the powers that be.
This situation will not end well for Illinois. Quinn should only look at the rows of medical facilities recently built on the Indiana side of the Indiana-Illinois border to realize that his tax increase policies will not work.
I like the idea.
Pay the promised pensions - but tax those who benefit excessively to replenish the fund for those who come later.
hello all you ZHer's this is my first post.
I live in Illinois, and this can has been kicked down the road now for 10? years. Underfunding and borrowing to
suport the pension program.
The solution is not easy, and will cause pain. public employees must accept less pay. whether that be in wages, or benefits. They must realize that the private sector supports them and that is being gutted. The situation is
untennable.
My wages have been stagnant for 8 years now. But every year public employees get a raise. Usually not much, but 2 -3 % over eight years and it adds up to a lot.
I have not read our states constitution since high school, but I believe that there is something about the state not being able to cut pension benefits. Well, there is something that the state can due and that is tax the money back. There are a lot of double dippers here, people who work for one department for 20+ years, get a full pension, then work another 10 years or so for another agency and get another pension. I don't want people to live in destitution, when they retire. Pick a number 50k, 60k etc.
and after that number is reached, pension benefits will be progressively taxed to a high degree.
Don't think I'm picking on public employees. The middle class can no longer afford these prices.
Well put, its untennable. Yet vote on it you want...the score will be the same 99 of 118 will vote against. Easy to mock Greece for having a pathetic economic situation, not knowing better, or believing that you can run a perpetual increasing debt.... Absolutely nothing will change until the people in power are changed, simple answer to a simple problem of 'money grab'.
No one in the US private sector has any empathy for what happens to public pensioners. There is no more unsympathetic group in the country.
States are obligated to make their promises good. However, if they raise taxes to do so, there will be capital (and likely, human) flight. Nor will any citizen from another state will voluntarily back any other state's pension.
Therefore, pensions will either accept a state-specific cramdown (and probably yearly caps) or else all state pension systems will be nationalized covertly, against the will of the electorate.
Agreed.
Here's the correct option: Shut the pensions down, distributing to the members what's left to self-direct.
All pensions everywhere should be abolished. They are the best examples of unbounded/unquantified risk, dis-economies of scale, the "bezzle", and fraud.
The reality is taxpayers are subjected to an unbounded risk with pensions, and all pensions everywhere should be abolished.
That doesn't even get to ZackAttack's main point, which is that the private sector has no empathy because these benefits were too lavish all along.
I agree that state pension systems will probably be nationalized covertly (or overtly), but that also is wrong (all pension programs everywhere should be shut down).
I would like to see something like this happen with Social "security". I have resented over the years that money was taken from my paycheck ostensibly for my retirement, and that I am unlikely to see any of it if the current policies continue.
If it's any consolation, a portion of your withholding is deposited monthly in my savings account. For which I can only say: thanks.
Totally Agree.
I will not ever "retire" and collect a pension... not because I find the idea unattractive, but simply because I know this is not in the cards. I do not wish for any other to "hold and invest" my funds for me, nor do I wish to contribute taxes that go towards any such "investment" for public servants.
People so often get lost in the details of what to do in a system that is broken beyond repair. What to do is opt out, rely on self first - then family, and if need be friends and community. I feel the retirement/pension system is broken, so I choose not to participate. I will work until I die.
If you do not have the will to take care of your own life, your life will be "taken care of" for you in one way or another by those who seek to exploit you...
In Illinois, the private sector sees the handwriting on the wall and is just leaving--too bad the State can't just print money.