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QE Adverse Side Effect #1: Corporate Pension Underfunding Hits Record $460 Billion Deficit, A $108 Billion Deterioration IN ONE MONTH

Tyler Durden's picture


US retirees better pray that their Schwab accounts will rise forever and ever, because if they rely on defined benefit pension plans, they are fucked. According to actuarial and consulting firm Miliman, in August 2010, the funded status of the 100 largest defined benefit
pension plans sponsored by U.S. companies dropped by $108 billion to a
10-year low of 70.1%
. Yes, that's a $100 billion + deterioration in one month! The culprit - Ben Bernanke - financial market performance was poor in August, but the main
reason for the decline in funded status was a large decrease in
corporate bond interest rates.
Who would have thought that pushing all markets so far from equilibrium could possibly have an adverse side effect. Soon, once pension funds like the Illinois TRS and others fold, and tens of millions of people who have diligently saved all their lives only to wake up one day and find they have no money left at all, their anger may finally rise and be rightfully directed at its just source: the corrupt slaveocratic inhabitants of the Marriner Eccles building. Expect to hear much, much more about this worst side effect of the Fed's flawed Keynesian solution to all of life's problems.

The assets of corporate pensions relative to their deficits, known as the funded ratio, fell to 70.1 percent in August, also the lowest in at least 10  years, from 75.6 percent the month before, according to the Milliman. Pension plan assets declined $17 billion last month to $1.076 trillion, a loss of 1.12 percent. The median expected monthly return for plans in the index is 0.65 percent for 2010, a yearly return of 8.1 percent.

It gets worse. As Bloomberg reports, "the shortfall is “like a silent heart attack,” said Kenneth Hackel, president of research and consulting firm CT Capital LLC and the former chief of fixed-income strategy at RBS Securities Inc. “People aren’t recognizing the symptoms until the patient falls on the ground.”

Corporate pension plans are a casualty of Federal Reserve efforts to keep interest rates low to prevent the economy from slipping back into recession.

As AA rated company bond yields, a benchmark in determining future liabilities, last month reached the lowest ever, obligations increased $91 billion to $1.54 trillion, Seattle-based Milliman said, without disclosing company names.

Contributions to the 100 biggest corporate pension plans increased to $54.5 billion in 2009 from $29.5 billion the previous year and compares with an average of $38.7 billion for the prior five years, Milliman said in an April report.

Companies may have to spend even more cash to fund their pensions, Hackel said.

“It’s a major, major hit for companies to take,” said Hackel of Alpine, New Jersey-based CT Capital. “Sponsors are going to need to step up their contributions massively.”

Corporate pension plans have deteriorated since the fall of 2008 as the worst financial crisis since the Great Depression caused investments to plunge, eroding the value of pension assets. The Standard & Poor’s 500 Index lost 37 percent that year, while U.S. corporate bonds lost 10.9 percent.

“Liability losses could dwarf even good investment gains,” said John Ehrhardt, a principal and consulting actuary in New York with Milliman. “It’s a cash flow issue, it’s a drag on earnings when you look at the accounting numbers, and it’s a hit to your balance sheet, which can cause all kinds of problems about loan covenants and everything else.”

And here is the data from the horse's mouth:

The funded status of the 100 largest corporate defined benefit pension plans dropped by $108 billion during August 2010 as measured by the Milliman 100 Pension Funding Index (PFI). The funded status decrease was primarily due to a significant decrease in corporate bond interest rates that are the benchmarks used to value pension liabilities. Though not as significant, the financial markets performed poorly in August 2010 as well. As of August 31, 2010, the funded ratio plummeted to 70.1%, down from 75.6% at the end of July 2010. This marks the lowest funded ratio recorded within the last 10 years for the Milliman 100 PFI. The last time the funded ratio was nearly this low was on May 31, 2003, when it was 70.5%.

August's $17 billion decrease in market value brings the Milliman 100 PFI asset value to $1.076 trillion, down from $1.093 trillion at the end of July 2010. The monthly asset performance was a loss of 1.12%. By comparison, the Milliman 2010 Pension Funding Study published in April 2010 reported that the median expected monthly investment return during 2010 on pension assets for the Milliman 100 PFI companies would be 0.65% (8.10% annualized).

The projected benefit obligation (PBO), or pension liabilities, increased by $91 billion during August, moving the Milliman 100 PFI value to $1.536 trillion from $1.445 trillion at the end of July 2010. The change was the result of a 45-basis-point decrease in the monthly discount rate to 4.78% for August (from 5.23% for July).

Over the last 12 months (September 2009-August 2010), the cumulative asset return has been 6.99% and the Milliman 100 PFI funded status has decreased by $162 billion, due primarily to lower trending discount rates. For these 12 months, the funded ratio of the Milliman 100 companies decreased to 70.1% from 77.8%.

What to expect for the rest of 2010

If, for the remainder of 2010, the Milliman PFI 100 companies were to achieve the expected 8.1% median asset return and if the current discount rate of 4.78% were maintained for the duration of the year, we forecast the funded status of the surveyed plans would increase, with a projected pension deficit of $457 billion and a funded ratio of 70.3%.

If asset returns were to increase/decrease by 200 basis points for the remainder of the year compared with the median asset return expectation of 8.1%, the projected year-end funded status would increase/decrease by approximately $7 billion.

If discount rates were to increase/decrease by 25 basis points by the end of the year relative to the current discount rate of 4.78%, the projected year-end funded status would decrease/increase by approximately $52 billion.


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Tue, 09/14/2010 - 11:14 | 580670 contrabandista13
contrabandista13's picture

Expectation, is the mother of all disappointments....  Who's yo daddy....?  

Tue, 09/14/2010 - 11:51 | 580794 Turd Ferguson
Turd Ferguson's picture

Is there any wonder why the Fed is in the market daily, hopelessly pumping it with cash to keep it afloat? Everything in our financial society, from life insurance to pensions to 401(k)s to reserve ratios to endowments to tax revenues to......I could go on and on but why? The Fed can not allow disinflation and a 5000 Dow.

But, in the end, they won't win. The laws of economics are just like the laws of physics. You may be able to suspend gravity for a while but eventually you fall. 

Tue, 09/14/2010 - 12:34 | 580941 HelluvaEngineer
HelluvaEngineer's picture

The way to stabilize it is not to friggin ramp it exponentially.  That will cause the inevitable crash, unless they're willing to step in and buy the whole thing.

Tue, 09/14/2010 - 13:16 | 581089 SheepDog-One
SheepDog-One's picture

Thats what Im talkin about, nature abhors a vacuum, things always must return to equilibrium, this snapback to equilibruim will be particulary violent and millions of people will die, if not billions.

Tue, 09/14/2010 - 13:53 | 581214 Clayton Bigsby
Clayton Bigsby's picture

reminds me of what somebody said about flying in a plane - "Taking off is optional.  Landing is mandatory."

Tue, 09/14/2010 - 15:10 | 581414 stewie
stewie's picture

Not necessarily, let me explain:

You can suspend gravity indefinitely by going into orbit :o)  And the laws of physics never get suspended, the effects are.  The effect of Gravity can be suspended here on earth for as long as you have energy.

Similarly, the effects of the laws on economics can be suspended for as long as you have economic energy, and that is called Fiat Money (or confidence in).  

IMHO, I don't see any reasons why we couldn't maintain that game indefinitely.  I'm not saying it will, but as the monetary aggregate increases, price level does as well, and that enables debtor to service their debt.  The trick is not to hurt creditors too much with fast inflation and maintain them as creditors.  As the increase in money aggregate gets exponentially bigger, everything else does as well, cancelling everything out.  Who cares if you owe 10 millions on a billion salary!

Tue, 09/14/2010 - 16:23 | 581611 UninterestedObserver
UninterestedObserver's picture

STFU Ben - it will never work

Tue, 09/14/2010 - 16:56 | 581682 stewie
stewie's picture

Very informative reply Chicken Little, thank you for this brilliant analysis.  

But sarcasms aside, why not?  

Tue, 09/14/2010 - 17:53 | 581795 UninterestedObserver
UninterestedObserver's picture

What sarcasm?

Tue, 09/14/2010 - 18:53 | 581932 stewie
stewie's picture

You might find this informative:

Tue, 09/14/2010 - 19:43 | 582023 mikla
mikla's picture

Jumping in, IMHO Stewie makes an interesting observation that I *do* tend to think about:

IMHO, I don't see any reasons why we couldn't maintain that game indefinitely.

Given the comparison (one can suspend the effects of gravity, but not suspend the laws of physics), one might wonder if this *can* be done with our current economic system (absent something really stupid, or possibly a black swan, which could always screw up even a good system).  In short, could today's economic system *actually* behave as a stable system?

IMHO, I've concluded "no" (i.e., the system is inherently unstable).  Your (valid) assertion contains the poison pill:

As the increase in money aggregate gets exponentially bigger, everything else does as well, cancelling everything out.  Who cares if you owe 10 millions on a billion salary!

The Friedman "monetarist" idea is that you can multiply/divide the value of the currency unit, and everything would be the same.  However, in practice, it is not:  Wages are sticky, and existing contracts/agreements were denominated with assumptions that are increasingly untrue.

For example, wages don't rise with the rate of debt service.  (In real terms, the middle class is broke and getting decimated, and there's no possible/good economic nor political response to fix that by jacking up wages.)  As another example, as the interest rates change, one party on the existing 30-year bond is increasingly *screwed* (those are always zero-sum with an exponential penalty on one side).

That's the "short" response.  However, IMHO, the "long" response relates to my fundamental conclusion as to why sustained growth/inflation like this can't work, even if controlled by "smart" people with good motivation:

  1. People tend to think and speculate in terms of linear growth (e.g., wages).
  2. The existing system behaves in terms of exponential growth (e.g., leverage, debt service through the compound-rate-of-return).
  3. Societal productivity (e.g., the ability to produce "wealth") does not correlate to (1) nor (2).

The "very long" response relates to the friction in the system, and the "big pools" of things that accumulate and get unwieldy (e.g., when a rounding error at 0.0000001 will wipe out the entire solar system).  For example, blowing bubbles in real estate causes bubbles-and-vacuums in other strange places that cannot be controlled (nor anticipated).

So, I've concluded "No", the system even in its theoretical state is unstable (e.g., exponential != linear != productivity).  When you further throw in "reality" (e.g., government incompetence, fraud, corruption, regulatory capture), there's not a chance to pull this off.  People eventually figure out they've been screwed, and pull a French Revolution.

I give Europe a year, maybe two for the US.

Wed, 09/15/2010 - 07:21 | 582784 Popo
Popo's picture

True that. There is always an unintended consequence. But this article fails to mention a very important detail: corporate pensions are guaranteed in the USA by the federal government under the PBGC. This is the other side to this coin: many corporations have been planning on defaulting on pension obligations for years. Why sweat it, when you can throw up your hands and let Uncle Sam (ie: the taxpayer) foot the bill?

Tue, 09/14/2010 - 11:53 | 580804 Dr. Richard Head
Dr. Richard Head's picture

Your comment reminds me of conversations I have with my brother-in-law.  He is a police officer and he keeps talking about how in five years he is expecting 80% of his pay for the remainder of his life thanks to the wonderful police pension program. 

I asked him what would happen if the pension plan is underfunded because of the actions of the Federal Government and Steal Street?  What would happen is the promise is one where fingers were crossed. 

Good luck with that buddy. Better start harassing more civilians and shake them down some more because of loud stereos, speeding, window tinting, and other victimless crimes. 

I am still surprised he gave me an FOP card.

Tue, 09/14/2010 - 12:17 | 580879 three chord sloth
three chord sloth's picture

I've had the same conversation with a retired Port Authority cop I know. He thinks his pension/health care is rock solid, 100% golden.

I pointed out that he is not insulated from globalism like he thinks; the purpose of globalism is to eliminate the first world. I pointed out that his retirement package was promised in a first world nation and takes a first world tax base to support. As the private, taxpaying sector becomes ever more second/third world, eventually his retirement will be unaffordable. Guaranteed.

Cities and states will be forced to choose between funding essential services and paying retirees. The actual choice will not be hard at all; the retirees will take a big hit. The only difficult part will be spinning the blame away from the political class and onto the designated whipping boy, whomever that is down the road.

He hasn't spoken to me since that conversation back at the cookout on the 4th of July.

Tue, 09/14/2010 - 12:41 | 580960 Dr. Richard Head
Dr. Richard Head's picture

Add to the mix the fact that over 50,000 troops deployed in Iraq are now receiving "non-combat" pay and losing out on possible college reimbursement and you are starting to piss off the people with the guns.  People with guns that are very well trained. 

I believe Zimbabwe, during it's hyperinflationary collapse made sure to try and pay their troops and police according to the hyperinflationary rate.

I talked with a CIA recruitment guy a few weeks back and the military is not too happy with Obama at this point.

Things will be getting more interestinger as the pension schemes start to unravel for the gun slingers.

Tue, 09/14/2010 - 14:43 | 581332 Yophat
Yophat's picture

They are planning for that.....look at Obama's EO in January creating 10 governors to rule the (most likely) 10 FEMA regions.  Might investigate NORTHCOM while you are at it.

Trust me that option is well planned for!!!  You might think XE (Blackwater)...or any number of similar private contractors that rule the roost behind the scenes!

FYI - Obama is CIA!  So was Bush Jr & Sr....and Billy Bob Blythe the third was money launderer for CIA Mena AR cocaine flow!  The only one in the past 5 decades who wasn't pro-CIA was JFK and he didn't live long after declaring he was going to smash them into a thousand pieces (not to mention firing Prescott Bush's BBH banking buddy Allen Dulles....who ironically had the last laugh as a member of the Warren Commission).  Of course Reagan may have initially had issues but a member of the Bush family friends...the Hinckley's helped shape his views (actually it was the secret service agent who landed on him....unless of course you believe in those magic bullets).

Tue, 09/14/2010 - 11:17 | 580671 hedgeless_horseman
hedgeless_horseman's picture

Leo, I understand that a good plastic surgeon can effectively make you unrecognizable to your former clients and their beneficiaries.  Or you can hide out in Greece, where everyone is complicit.

I'm waiting for the echo from the insurance cos.

Tue, 09/14/2010 - 11:18 | 580685 Cognitive Dissonance
Cognitive Dissonance's picture

Exactly. The insurance companies, especially the life companies, must be peeing their pants right about now.

Tue, 09/14/2010 - 11:54 | 580807 AccreditedEYE
AccreditedEYE's picture

"Guaranteed Annuity? We guaranteed WHAT rate of return for HOW long?!!"

Tue, 09/14/2010 - 14:40 | 581330 EscapeKey
EscapeKey's picture

I was under the impression that annuity effectively is a bond/gilt, so the guarantee is implicitly the guarantee that the British/American/whatever government won't default?

Tue, 09/14/2010 - 14:57 | 581380 AccreditedEYE
AccreditedEYE's picture


Tue, 09/14/2010 - 14:55 | 581382 AccreditedEYE
AccreditedEYE's picture

It's a contract. (like a derivative) It is between the insurance company and the annuitant. As I'm sure you are already aware, they make promises to pay income for life, provide income off of high water marks, etc. All of these "promises" are backed by the full faith and credit of the insurance company, not the government. (However, who the hell knows...give the Fed enough time...)

Tue, 09/14/2010 - 12:23 | 580908 AnonymousMonetarist
AnonymousMonetarist's picture


Life insurance companies are a tricky beast.

Most of 'em were ignoring the 'toxic' assets long before it was cool to do so...

Also, take TransAmerica for example, per a conversation with a C-level fella awhile back if every life claim came due tomorrow they would only have to put out a total of ~8% of face.. the rest is hedged...well, at least they 'think' it's hedged :)

Tue, 09/14/2010 - 14:45 | 581348 Yophat
Yophat's picture

Gonna be a rude awakening on multiple fronts as the sheep get their anus hardwired!

Tue, 09/14/2010 - 11:29 | 580724 taraxias
taraxias's picture

I have it from a good account that Leo is already growing a Cretan style moustache practically hiding half his face. Hope to God, his clients don't recognize the other half.


Tue, 09/14/2010 - 11:17 | 580679 bob_dabolina
bob_dabolina's picture

Side effect #2:

The price of commodities. Who gives a shit about the price of food as long as DOW @30,000 is achieved and home prices remain unaffordable to most people.

Hungry and homeless citizens with IBM @50,000 p/sh. Good job FED and government, you got us really good this time.

Tue, 09/14/2010 - 11:17 | 580680 Ragnarok
Ragnarok's picture

Alarm bells and light bulbs should have sounded/lit-up when companies started to issue 100Y bonds. 

Tue, 09/14/2010 - 11:18 | 580686 HelluvaEngineer
HelluvaEngineer's picture

The damn boomers need a slap across the face.  Maybe they'll "get it" just before they go senile.

Tue, 09/14/2010 - 11:31 | 580726 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Boomers blew their own retirements. They blew their children's, grand children's and great grand children's inheritance and economic futures. I guess it is OK since they are the "special" generation from the '60s. Yeah, you changed the world........ for the worst. The road to hell is paved with good intentions.

Tue, 09/14/2010 - 11:55 | 580808 Id fight Gandhi
Id fight Gandhi's picture

They'll be in retirement as soylent green.

Greedy improvident fuckers.

Tue, 09/14/2010 - 13:15 | 581084 DR
DR's picture

Boomers( oldest is 62) are just starting to collect what they have put into the pot over 30-40 years. The later boomers will find the pot empty. It is the boomers that will get screwed

Tue, 09/14/2010 - 15:32 | 581456 minus dog
minus dog's picture

I might feel sorry for them, but only in the same way that I feel sorry for all those retirees who get taken by Nigerian scammers.  

In the same way, but not in the same amount - both groups were sold on a scam, but unlike the poor fools taken by the Nigerians, the boomers should have known the numbers didn't add up. 

Tue, 09/14/2010 - 11:21 | 580690 Paper CRUSHer
Paper CRUSHer's picture

**"US retirees better pray that their Schwab accounts will rise forever and ever, because if they rely on defined benefit pension plans, they are fucked"**

LOL.Ho Tyler!

No point reading the rest of the article is there.I mean ya summed it all up right there.No conclusion needed.

Tue, 09/14/2010 - 11:48 | 580789 JLee2027
JLee2027's picture


Must be bad

Tue, 09/14/2010 - 11:58 | 580816 bronzie
bronzie's picture

"they are fucked"

actually, we could have stopped reading at that point

Tue, 09/14/2010 - 11:19 | 580691 SpeakerFTD
SpeakerFTD's picture

In your sunset years, we wish to welcome you to the SeaBreezes Retirement Villas and Serfdom Farms.  Spend your days luxuriating in the sun, working the fields to earn your supper and the evenings playing cards and sharing the gossip of the day with your friendly Cell Block Coordinator. 

Tue, 09/14/2010 - 12:37 | 580949 Saxxon
Saxxon's picture

For many, white bread honky retirement in the U.S. is already a vapid wasteland.  I have travelled widely in so-called disadvanteged countries and seen that the children take care of their parents; old age is respected; that village/farm life provides a continuum with nature and the proceeding generations that the pitifully cut-off and sterile retirement villas can never provide.

No way in hell I retire (Age 49 now) in the U.S.A. or any other honky First World country.  No way I retire at all, the way things are going.  I'm fine with that, things change and I would sooner kick it on a small rice farm with my chickens and home grown.

Tue, 09/14/2010 - 12:44 | 580968 SteveNYC
SteveNYC's picture

Thailand, here I come! Beautiful people, beautiful country, beautiful weather 9mths out of the year.....count me in!

Tue, 09/14/2010 - 12:58 | 581020 three chord sloth
three chord sloth's picture

We don't need to flee the country to find a better retirement model, just roll back a few years. It was only a generation or two ago that elderly parents routinely moved in with one of their children. Heck, we still call a small efficiency apartment added onto a house an "in-law apartment".

Tue, 09/14/2010 - 15:39 | 581473 minus dog
minus dog's picture

" I have travelled widely in so-called disadvanteged countries and seen that the children take care of their parents; old age is respected; "

And that is commendable.  I'm willing to bet those elderly did not buy into a giant ponzi scheme for decades, expect huge payouts, and then expect their children to keep paying for it while never collecting themselves.  Nor did they probably shower money left and right on boats and large houses while their children borrowed 120% of their tuition to go to college.

People are generally going to keep leaving their parents to their own devices.

Tue, 09/14/2010 - 11:19 | 580692 tony bonn
tony bonn's picture

yes babycakes, zirp is a two edged sword (same for currency debasement)

Tue, 09/14/2010 - 11:21 | 580697 HarryWanger
HarryWanger's picture

"Expect to hear much, much more about this worst side effect of the Fed's flawed Keynesian solution to all of life's problems."

Huh? From who? Pretty much won't hear a word about this anywhere other than here.


Tue, 09/14/2010 - 11:31 | 580733 taraxias
taraxias's picture

Well said, Harry.

Where have you been?

Tue, 09/14/2010 - 11:38 | 580760 HarryWanger
HarryWanger's picture

Busy, busy summer. Haven't been able to "gamble" much. A few dips in and out of AAPL and holding tight to my precious metals. Hope to get back to some real trading soon. 

Tue, 09/14/2010 - 12:00 | 580815 AccreditedEYE
AccreditedEYE's picture

"Harry... you don't know the POWER of the short side!! Join me against AAPL and we will destroy Steve Jobs and rule the market as father and son."  

Tue, 09/14/2010 - 11:21 | 580699 mikla
mikla's picture

There must be some mistake here.  I remember *specifically* that my politicians promised me free stuff with *no* consequences.

I'm not worried, though.  I'm sure they will think of something.  </sarcasm>

Tue, 09/14/2010 - 11:26 | 580711 BobPaulson
BobPaulson's picture

Yeah, cuz, like, there's no way they could have seen this coming, otherwise they wouldn't have done this to the public they faithfully serve.

Tue, 09/14/2010 - 11:24 | 580703 MarketFox
MarketFox's picture

Destroy the SAVERS....

Destroy the COUNTRY .....

The Princeton Harvard Yale Club has F..d...the USA.....

Tue, 09/14/2010 - 11:24 | 580704 frankTHE COIN
frankTHE COIN's picture

Damn,I thought sipping my food thru a straw was gonna suck. Now i find out i wont be able to afford any food.

Tue, 09/14/2010 - 11:24 | 580707 LMAO
LMAO's picture


And poof, it's gone



Tue, 09/14/2010 - 11:31 | 580728 centerline
centerline's picture

LOL.  One of the best southpark clips ever.

Tue, 09/14/2010 - 12:20 | 580897 LMAO
LMAO's picture

I concur,

Plain and simple.....Poof!


I mean WTF is the use of the kind of Abacus, Fab Tourre Voodoo tranches BS way of explaining how a shitty deal really works?

"It's gone"


This is how it works, this is how we designed it to work.

I feel sorry for all the people who still believe they can look forward to retirement benefits and a promise of health-care provided to them.

Sorry peeps, by the time TPTB are finished.... Poof!


Or in good "Grayson" style: "Don't get sick" ...and if you get sick..."Die fast"



Tue, 09/14/2010 - 12:02 | 580834 bronzie
bronzie's picture

so much truth in humor - that's what makes it funny

Tue, 09/14/2010 - 11:27 | 580709 Bam_Man
Bam_Man's picture

ZIRP = Bankrupt everyone for the benefit of  the TBTF banks.

The Fed's exit strategy is a folder stuffed with one-way plane tickets (business class) to Uruguay for Bernanke, Greenspan, Summers, Geithner et al. They will all be fugitives from justice before this is over.

Tue, 09/14/2010 - 11:28 | 580721 BobPaulson
BobPaulson's picture

No way. How many times have you seen a bank puppet end up in stir dude? You joking? They will walk, as sure as night follows day. Even when TSHTF completely (French Revolution Event), the roaches find a way of disappearing in the light and reappearing on the side that's winning.

Tue, 09/14/2010 - 14:38 | 581323 DoChenRollingBearing
DoChenRollingBearing's picture

All that information is old!  I have been unable myself to find new info re Bush purchasew of land in the Chaco of Paraguay.

Might be a good investment because of the Guarani Aquifer...

Uruguay has some sort of secret banking last I heard, so that would be OK too.

Tue, 09/14/2010 - 11:26 | 580712 Slartebartfast
Slartebartfast's picture

Look no further for the recent flight of private capital from the stock market.  All these corporate pension plans are liquidating assets to make their check runs.

Tue, 09/14/2010 - 11:27 | 580715 A Man without Q...
A Man without Qualities's picture

"US retirees better pray that their Schwab accounts will rise forever and ever, because if they rely on defined benefit pension plans, they are fucked."


Actually, no, if it is a defined benefit scheme, they have a legal entitlement to the payments, regardless of how the fund performs.  The ones who are fucked are the shareholders, who are subordinate to the fund.  In BK, any shortfall is taken on by the "taxpayer"

My view, the reason why they are so blatantly manipulating equities is they have realized that the weak link in the QE, grand reflation experiment are pension funds

Tue, 09/14/2010 - 11:41 | 580768 chunkylover42
chunkylover42's picture

the pension has a duty to pay out benefits as long as assets exist to do so.  they can't pay out what they don't have, which is why we have the PBGC.  in that case, pension beneficiaries can expect to receive anywhere from 40-60% of their original "promised" payment stream, assuming the PBGC remains funded (not a sure thing by any stretch).

you are right that shareholders are taking it in the shorts, but so are retirees.

Tue, 09/14/2010 - 11:26 | 580716 lizzy36
lizzy36's picture

This will only get worse as ZIRP continue in perpetuity.

The one entity that benefits most from ZIRP:US Treasury.

Imagine what happens to a country that already matches every dollar of tax revenue with a dollar of debt, should interest rates actually revert to the mean.

Tue, 09/14/2010 - 11:32 | 580736 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

BOOOOM! Debt deflation collapse.

Tue, 09/14/2010 - 11:33 | 580738 taraxias
taraxias's picture

Shirley, pay the girl !!!!!!

Tue, 09/14/2010 - 11:32 | 580723 MarketFox
MarketFox's picture

You ain't seen nothing yet.....

The tip of the iceberg....

The best that the govt. could do is to implement meaningful policies....which are nowhere in sight....due to the brilliant Princeton Harvard Yale Club not being mentally capable........

Tue, 09/14/2010 - 11:39 | 580739 plocequ1
plocequ1's picture

There are no consequences when it comes to QE. The fed will continue doing it and the market will keep up it's projectory all the way to 36,000. That's all that matters to the Fed.

Tue, 09/14/2010 - 11:35 | 580746 Tic tock
Tic tock's picture

with M2 now racheting up, add hyperinflation to the mix.. I don't think we should have, like protests- more like night raves in the streets with everyone on kool-aid

Tue, 09/14/2010 - 11:35 | 580747 LeBalance
LeBalance's picture

The following is sweet prose, but.....

"US retirees (better pray that their Schwab accounts will rise forever and ever, because if they) [who] rely on defined benefit pension plans (, they) are fucked."

[is suggested for removal]

(small addition)

Result: "US retirees who rely on defined benefit pension plans are fucked."

Additional corralaries:

"said retirees that rely on paper assets are !!!!"

"said retiress that are not agile of mind pertaining to monetary science are !!!!"

Well, I NEVER!  (mostly on weekends, actually!)

IN ONE MONTH (....tears to my eyes at the brazeness....they are truly the Lord's servants.)

Tue, 09/14/2010 - 13:13 | 581074 SheepDog-One
SheepDog-One's picture


Tue, 09/14/2010 - 11:36 | 580751 Ragnarok
Ragnarok's picture

I wonder if the pensioners will even have to strike for their taxpayer funded bailout?

Tue, 09/14/2010 - 11:39 | 580763 sweet ebony diamond
sweet ebony diamond's picture

Nancy Pelosi will solve this problem with one stroke of a pen and a denture-filled smile.

Tue, 09/14/2010 - 13:20 | 581109 SheepDog-One
SheepDog-One's picture

Well, the pensioners can probably revolt but first theyll need a nap and someone to help with the flashing VCR clock first. THEN its armageddon!

Tue, 09/14/2010 - 11:38 | 580759 centerline
centerline's picture

This is a big part of what it is all about here.  Boomers retiring - pension funds.  Unsustainable requirements.  Much of the intent behind the manipulation, policy direction, etc. IMO is to keep the funds afloat as long as possible or all hell breaks loose.  However, pension funds are in trouble, so they are forced into risk profiles and leverage (puts them into shark infested waters - unstable places).  The next move will be all about cash flow.  When cash flow stops, it will be game over in a hurry.  That day is coming sooner rather than later.  Can't rob Peter to pay Paul much more...  That whole "government job is better than private sector job" playing field is going to get leveled to the lowest common denominator in a hurry.

Tue, 09/14/2010 - 11:49 | 580786 NOTW777
NOTW777's picture

what about public employee funds - even worse?

why are these corporate plans so bond heavy?


"The funded status decrease was primarily due to a significant decrease in corporate bond interest rates that are the benchmarks used to value pension liabilities."

Wed, 09/15/2010 - 07:27 | 582787 Popo
Popo's picture

Technically speaking, all these funds are public. Private pensions are guaranteed by the US gubmint under the PBGC.

THis is yet another stealth means of injecting liquidity into the system. The govt will pay the private pensions at the cost of those who don't have one.

Tue, 09/14/2010 - 11:50 | 580793 HEHEHE
HEHEHE's picture

The entire charade is killing retirees. 

Tue, 09/14/2010 - 11:54 | 580806 Internet Tough Guy
Internet Tough Guy's picture

Leo K will tell you the only retirement plan that counts is piling in chinese solars. Who needs interest income?

Tue, 09/14/2010 - 11:55 | 580811 espirit
espirit's picture

Another ponzi scheme doomed to failure. Grow, or grow small.

Tue, 09/14/2010 - 11:59 | 580820 Pillage
Pillage's picture

By any chance can we get a photo up of GLD chart today from Robo?

Tue, 09/14/2010 - 12:16 | 580874 americanspirit
americanspirit's picture

I'm sorry, but people who hate working so much that they can't wait to retire and live without working are the problem. They have been so easy to con for so many years that this entire pension industry has been built on making promises to them that were never meant to be kept. Actuarial projections ( AKA Ponzi schemes) are based 100% on the herd continuing to act like the herd. I am 70 and have worked all my life and love what I do so I intend to keep on keeping on until I start drooling on my bib and CRS syndrome blinks out my lights. Nobody is guaranteeing me shit - I either keep producing what people want to buy or I find a nice bridge to live under.

Tue, 09/14/2010 - 13:05 | 581039 crosey
crosey's picture

Hot damn, I like your spirit!  You're sooooooo right.  A pension sounds nice, but it's snake oil, and ignores the ordered chaos in which we live.

No funeral for me either.  I'm just going to wander off into the woods and give the coyotes and bears a nice meal.

Tue, 09/14/2010 - 13:12 | 581069 DR
DR's picture

What do you do for work?


Do you collect SS?

Tue, 09/14/2010 - 12:21 | 580901 vote_libertaria...
vote_libertarian_party's picture

Well explains why stocks and bonds are up in Bizarro World.

Massive pension shortfalls = massive sales to pay pensioners = good for stocks and bonds???


Tue, 09/14/2010 - 12:33 | 580935 DavidC
DavidC's picture

"By the pricking of my thumbs
Something wicked this way comes."

Macbeth, William Shakespeare.


Tue, 09/14/2010 - 12:52 | 580994 SheepDog-One
SheepDog-One's picture

Retirees are definitely fucked at this point no matter what.

Tue, 09/14/2010 - 12:55 | 580999 ShatteredArm
ShatteredArm's picture

Someone help me out here...  Why do pension plans take a hit because corporate bond yields decline?  Doesn't that mean the corporate bonds actually increase in price?  What am I missing?  Is it because they're having to buy additional bonds with the lower coupons?  It doesn't seem like the difference in the interest received on bonds purchased since QE could alone account for $100 billion in one month.  Do they own assumable bonds that are forcing them to buy new bonds at a higher price?  Please excuse my ignorance about corporate pensions and bonds.

Tue, 09/14/2010 - 17:04 | 581709 zuhoobie
zuhoobie's picture

Pension plan liabilities are valued via referencing the liability cash flows to a portfolio of high quality corporate bonds.  When bond yields decline, the plan is essentially valued using a lower discount rate, which pushes up the plan liability (the reasoning is, since a defined benefit liability cashflow looks like a bond's cashflow, they can be swapped, or matched out). 

Although Plan liabilities are tied to bond yields, pension plan assets are not invested in long duration bonds.  Rather than duration match the Plan and eliminate the interest rate risk, CFO's/CEO's prefer to invest in risk-seeking investments.  So, if the pension plan is invested in 100% duration matched bonds, its no problem if interest rates change. If the plan is 100% S&P500, then as yields decline, it becomes more expensive to buy those bonds to match the Plan liability. The liability implicitly goes up, but the S&P 500 - well - who knows where it goes...

Tue, 09/14/2010 - 13:10 | 581059 doomandbloom
doomandbloom's picture

if a pension fund is underfunded...then does it become a Ponzi scheme?

Tue, 09/14/2010 - 13:18 | 581097 americanspirit
americanspirit's picture

Fair question DR - I'm a writer and I work for my readers. Yes I get a very small SS check that I've used 100% to buy silver for the last 5 years. Won't miss SS if it goes away, but I sure do like all that 'free' silver.


And thanks Crosey - see you in the woods. I'll bring the last bottle of wine. Been saving my 1979 Lytton Springs Zin just for the occasion.

Tue, 09/14/2010 - 14:00 | 581228 kevinearick
kevinearick's picture


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Parabolas, parabolas, everywhere a parabola …

Tue, 09/14/2010 - 14:24 | 581287 sbenard
sbenard's picture

There are always unexpected consequences that occur because of Feddling in the financial markets. We are now beginning to see some of them.

Both monetary and fiscal authorities are playing god with our economy, treating it like a giant guinea pig for their experiments. One day, they are certain to do something that will cause a catastrophe. It is inevitable. Their hubris is mindbogling!

Thu, 10/07/2010 - 06:21 | 631677 Herry12
Herry12's picture

I found lots of interesting information here. I love zerohedge.
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