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Will Pensions Ever Recover?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Karen Mazurkewich reports that according to a survey, plan sponsors worry about pensions:
The
swell of negative pension news continues. RBC Dexia released a poll
Monday revealing that the majority of Canadian plan sponsors are
pessimistic about the future of their pension plans.According
to their survey, 89% of defined-benefit plan sponsors are concerned
that the pension system is poorly positioned to deliver on its promises.
Just
weeks before the Dec. 17-18 meeting in Whitehorse between the
provincial finance ministers and Jim Flaherty, Minister of Finance, in
which pension reform will be a major topic, the RBC Dexia results
serves as yet another warning about the problems inherent within the
system.
The biggest concern expressed
by respondents is investment risk. With markets in a free fall last
year, 41% of plan sponsors expressed fears over bad returns. Not
surprisingly, their second-greatest fear is that plans will not
generate sufficient returns to offset obligations.
Despite
concerns over the pension system, the survey revealed some
contradictions. Despite their overwhelming pessimism, 72% of
respondents also rank Canada’s pension system as equal to, or better
than, other systems globally, and 8% believed our system to be inferior
to its global counterparts.
“There is recognition that it could
be worse and (we) don’t want to throw out the baby with the bath
water,” said Scott MacDonald, head of pensions, financial institutions
and client service for RBC Dexia. But he also said the fact that 20% of
respondents had no opinion on Canada and other approaches out there
reveals “a community out there lacking context.”
The RBC Dexia
poll comes on the heels of another plea last week by Keith
Ambachtsheer, director of the Rotman International Centre for Pension
Management. Using C.D. Howe Institute as his pulpit, Mr. Ambachtsheer
argued that Canada’s supplemental pensions, such as the Canada Pension
Plan, Quebec Pension Plan and Old Age Security, “are increasingly
showing (their) age,” and need to be updated.
“Pension plan
designs should target a post-work standard of living that is adequate,
achievable, and affordable,” Mr. Ambachtsheer said.
Several
provincial studies prove that almost half of middle and high-income
workers in this country will not be able to maintain their desired
standard of living in the next 10 years, he says.
In addition to
arguing that all forms of retirement saving should receive equal tax,
regulatory, and disclosure treatment across all sectors of the
workforce, Mr.Ambachtsheer has called for national, regional or
group-based supplemental pension plans for workers without an
employment pension plan.
“So far, three proposals to increase
pension coverage have gained currency in Canada over the course of the
last year,” said Mr. Ambachtsheer. The first proposal has been made in
various forms by Canada’s insurance and mutual-fund industries. The
second involves an expanded Canada Pension Plan, while the third option
is the creation of a new supplementary pension plan either at a
regional or national level.
He hopes the new Federal-Provincial
Working Group on Pension Reform will hammer out a supplementary pension
fund solution so Canadians will receive better coverage upon retirement.
“This is not a pie-in-the-sky pension vision, but an achievable big idea whose time has come."
Mr.
Ambachtsheer argued in his paper published by the C.D. Howe Institute
that Australia and other European countries such as the Netherlands
have solved their pension coverage problem by requiring all workers to
become members of funded workplace pension plans.
In the UK, Reuters reports record pension hole for world's biggest firms:
The
financial crisis saddled the world's 100 largest companies with a
record 220 billion euro (199 billion pounds) pension shortfall at
end-September, up from 20 billion at the end of 2007, a study released
on Monday said.
The
survey, compiled by consulting actuaries Lane Clark & Peacock
LCP.L, found that the average pension deficit for companies in the FTSE
Global 100 index increased by 1.6 billion euros during 2008.
The report highlighted Royal Dutch Shell, IBM and General Electric, which each saw deficit increases of more than 15 billion euros, contrasting with surpluses reported in 2007.
LCP
said that asset price gains during 2009 stemming from recovering
markets had not compensated for falling corporate bond yields which are
used to measure pension liabilities in company accounts.
Not
surprisingly, IFAonline reports that a quarter of occupational pension
schemes in the UK lack a strategy to monitor and mitigate risk, according to The Pensions Regulator:
Despite
nearly three quarters of schemes reporting they have a risk process in
place, only two thirds of trustee boards are very confident they are
properly guarded against specific risks.
Just two fifths of
schemes (43%) have confidence in the controls relating to data
transfer, though trust in internal management of fraud was higher with
two thirds (66%) being very confident in the process.
Larger
schemes were much more likely (91%) to have a risk strategy compared to
only 59% of smaller schemes, the figures from the Pensions Regulator's
fourth annual governance survey suggest.
Default occupational
schemes remain popular, however, with nearly two thirds of members
invested in such a fund, though this may reflect employee inertia
rather than the fund being suitable for the majority of members'
investment needs and attitude towards risk, says the regulator.
The
regulator today launches a campaign to encouraging good governance and
administration and better management of pension scheme risks.
Pensions Regulator chief executive Tony Hobman says: "Good governance underpins secure pensions.
"Scheme
members entrust their pension savings into the hands of others to a
total estimate of more than £1trn in assets, often for decades of their
working lives.
"This campaign is designed to build on progress
made in recent years, recognising that trustees perform a critical role
in protecting and managing pensions, and are faced with challenges in
this difficult economic context."
Key Retirement Solutions reports that pension fund analysis shows recovery:
The
nation's pension funds could take a significant amount of time to
recover from credit crunch-induced losses, Trustnet has suggested.According
to a report from the investment specialist, the schemes have yet to
return to pre-crisis levels - although many have posted impressive
gains recently.A total of six funds have registered a 100 per cent-plus increase over the year to November 2009.
However,
pensions suffered across-the-board losses from near- unprecedented
stock market conditions with the credit crunch at its height during
2008. For example, the FTSE
100 stocks index dropped 35 per cent across the year and reached its
lowest level for over a decade this March.Speaking to
Trustnet, Neil Veitch, manager of the SVM UK Opportunities fund, said:
"As economies have stabilised and risk premiums reduced, it is earnings
that will be the next driver of the market over the next six months."We
are now looking for more sustainable growth or cyclical stories where
there are internal or external drivers, preferably both, to bring these
earnings through."Diminished pension fund values could result in some retirees using options to boost their incomes, such as equity release plans.
Trustnet's UK pension database covers around 7,000 separate funds.
Finally, I end this post on a sobering note. Andy Davies of Fair investments reports that pension funds hit by recession:
More than a third of consumers believe their pension funds have been depleted by the recession, Aviva has revealed.
Aviva's
research claims that the recession has also forced one in ten of its
customers to look for additional ways to supplement their retirement income to ensure they can maintain the quality of life they have become accustomed to.Meanwhile,
as a result of the recession, 23 per cent of people said that in the
past year they have had to cut their outgoings to enable them to save
enough for their retirement.Aviva's poll of more than
1,200 people approaching retirement also revealed that a quarter of
people have concerns about how they will fund their retirement in the
future.Around one in three people are worried about how rising
living costs will impact them in years to come, while 19 per cent of
savers are concerned that their pension pot will not be worth as much as they had originally planned.The
most worrying figure, according to Aviva, is that five per cent of the
respondents – the equivalent of more than three million Brits, admitted
that they will rely on part-time work to fund their retirement.Commenting,
Brian Bussell, director of pensions at Aviva, claims these figures
highlights how "important it is for people to start saving for
retirement as early as they can"."Understandably, the recession
has forced people to think about their retirement income and many have
realised that they may not have sufficient funds to live through their
final years in the comfort they have grown accustomed to," he said.Urging
people to start saving for their retirement as early as possible, Mr
Bussell added: "We would encourage people to make use of their full
range of assets, including investments,
state benefits, pensions and property, to make sure that they aren't
effectively cheating themselves out of the lifestyle they could enjoy."
It's
more than just about urging people to save more. The road to recovery
for pensions will be a long and arduous one. Plan sponsors are right to
worry because what goes up fast can come down even faster. And that
means the global pension hole will get wider as we move along, leaving
far too many people to fend for themselves at a time when they should
be enjoying their retirement.
»
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One of the major problems faced by people in defined benefit situations is that if their company goes broke ... their pension may well disappear.
One of my friends, a GM retiree, has been pretty worried for the past while. Had any of us suggested, say 5 - 8 years ago, that GM might be considering bankruptcy one of these days, we'd have been laughed out of town.
After the Enron debacle, I asked on a money management discussion board what lessons we might learn from it, then suggested that if some were buying stock in their company, that they might be well advised to move investment elsewhere when it was released, as many of the small workers in Enron thought that the company was in great shape.
And if their pension was managed/controlled in-house, that they try to have it carried by a third party, so that its assets would survive the possible demise of their company.
As it was, the Enron employees lost their job, the value of their company stock ... and their pension.
All in one fell swoop ...
... fingernail chewing time!!
ole joyful ... 25 years personal financial advisor
Jan Toporowski, a polish economist, wrote a nice book titled "The end of finance: the theory of capital market inflation, financial derivatives, pension fund capitalism". In that book, he argues that one can't sustain the bull market forever unless you have a positive net flow into the capital markets. The net flow has been contracting, unless one can bring in more AmWay type prospects into this system. Well, look at 30 year oldies, who hardly have any savings to invest in either via 401k or other means. What we have are bunch of leveraged finance guys, institutional investors, pension funds, riding each other.
We gonna see the eventual death of pension funds. That's why Bush wanted to privitize social security, so that that money can come into stock markets, where other ponzi players can skim off, the way pension funds were skimmed!!
Not by the time I will need the $$ (20 years)
As a member of the Boomers (and one who is preparing to "start my next life" - retire) I can only say I am totally disappointed in my generation who complacently sits back and lets the WS gang of hustlers rob their "nest eggs' with nary a cry for correcting (read "indicting") those responsible. Whenever corporate executives identify funds to give themselves massive bonuses, generally, unearned, they are diverting funds from shareholders. (Have you ever really tried to vote your proxy to remove someone from the board of directors? You only have the choice of agreeing, or withholding your agreement.) Saving more doesn't help one whit, as you see the debasement of the currency stealing the value of that hard earned money. The same with pension and social security payments. We can only watch BODs and governments steal that money and leave us with nothing. Where are the pitchforks and torches? Wait, I have to watch American Idol first. . . .
Sorry for your loss
Sell the stock(s) in the companies where you feel the boards are corrupt (just sell em all)
You want to see pitchforks anf torches? Make a good clip for the corporate owned media to run at 6:00 & 11:00. But it won't change anything.
A Canadian view here. I won't say I'm infuriated (because after all, what would that be worth?), but I am a bit shocked at the impudence in the overall coverage of the RBC Dexia poll. When I read published statements like this:
"A poll ... [reveals] that the majority of Canadian[s] are pessimistic about the future of their pension plans."
Neatly followed by an obvious mischaracterization of a 'contradiction' attached to data like this:
"72% of respondents also rank Canada’s pension system as equal to, or better than, other systems globally..."
And then to have such a misrepresentation wholly backed by a truly pithy expert opinion:
"'There is recognition that it could be worse and (we) don’t want to throw out the baby with the bath water,' said Scott MacDonald ...for RBC Dexia."
Who is 'we' in the above statement??? If it is to include ME, then I protest! Is the entire fabric of Canadian nationalism is now tied solely to being "not as bad off as the other (bigger) guys"? Such analysis is as worthless as it is untrue; even if we're not as bad off as the U.S. or U.K., the fact remains that we Canadians are NOT the big guys either... which is probably why we must play conservatively in the first place.
To extol the virtue of comparatively conservative play as if it is the POINT of the exercise is missing the obvious: we are still sinking in the same fashion, and in the same muck. Mr. RBC Dexia must nonetheless be profiting quite well with (or is very very scared and defensive about) the current arrangement of pension governance to so flagrantly misconstrue the findings of his own poll.
Leo, keep up the good work. You are gaining readership in my circle. We need real solutions and just "being Canadian" is NOT enough.
signed: ynot
I see this as continuation of the same systemic problem: overconsumption and undersaving. We (baby boomers) have under-contributed to pension plans since we started working (whether DB or DC), expecting to make it up with asset inflation and outsized returns. We can rationalize that we were encouraged to do this every step of the way, but really should have known that adequately funding our retirements, which were going to be longer than previous generations at a much higher expectation of quality (read spending/ consumption), was going to require a significant compromise on current consumption. I can only characterize the current knashing of teeth and bitterness as rationalization and willful blindness over our working lives. You're right, Leo, there is no way to make up for lost time or under-saving in the few years left. We can whine about fund manager/parasites over-charging and under-performing, but they shouldn't have had to chase yield to the limit in the first place. We wouldn't have needed them, their gimmicks or risks if we we had put enough into simple bond funds in the first place.
I agree that the Boomers spent too much and saved too little. But you're leaving out one important factor - Boomers were forced to subsidize their parents and grandparents overconsumption. Older generations only had relatively comfy retirments because they collected far more from Social Security and many DB plans than they and their employers had paid in. WRT SS, they collected far more in SS retirement benefits than they paid in (including interest, etc.), even if you include their whole FICA amounts and don't subtract out a reasonable premium for disability insurance (which SS also provides and which is fairly expensive). DB plans and (to a lesser extent) SS were essentially Ponzi schemes. Great for those in the early years but not so good for those retiring later. Yes, boomers overspent and undersaved. But so did our parents and grandparents. The USA has been kicking the can for many decades now.
I know this comment does not address the main point of this posting, but I am curious:
Anyone have any ideas regarding "[the] six funds [that] have registered a 100 per cent-plus increase over the year to November 2009."
PE, VC, and CRE holdings would still be getting marked down, no? And these pensions must have allocation policies that call for a certain amount of investment-grade fixed income exposure, some sectors which have also declined YTD. Even if they were 80% equity (and in C or LVS, not WMT or MCD) and commodity (choosing oil or sugar, but not natgas) then those risk assets returned ~125% for the fund to average a 100% return assuming the rest of the portfolio was nil...
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I think Warren Buffett is going to lose on those 2018/2019 S&P puts, so I don't think long-only pensions will fare any better. I think rage and rioting will be the bull market from 2010 through 2020.
Why is a comfortable long retirement considered a sacred cow? Aside from the sweet spot, when has that ever been guaranteed? Tinkering with the pension plans won't change the market dynamics. When the economy tanks again, the shortfall will worsen. The workforce coming up behind the boomers are going to be clobbered because it will be horribly indecent not to care for ailing seniors who have run out of money. But there is only so much that can be squeezed from the beleaguered taxpayer. We have a generation of retirees who have been promised a comfortable retirement after paying into pension plans all their working lives and a younger generation who feel that they deserve all the same perks that their parents enjoyed. If (when?) there is a systemic failure, I see families reluctantly being reunited in a single home out of necessity. Leo is absolutely correct to be banging on the table to highlight this looming time bomb, except I'm not confident pension reforms will change the big picture.
so now old men work at supermarkets bagging groceries. what a strange land i live in.....
a simple answer. no. how can they? it is over now. losses too high. was this all by design anyway? think about it. the whole system was created to steal money. and so it has. they should have never allowed pension funds to get involved in the stock market. they gambled with people's futures and they lost big time. now when they need it, it is not there. i think all pension fund accounts will be dumped into one big social security type thing and at first it will sound good until the smaller checks start coming out. private pension funds are finished because they do not have the ability to print money, to replace funds that were lost...
No.
The way I see it, there was a sweet spot about 10 - 15 years ago, when retiring workers benefited from the long bull market in equities and interest rates were high enough to generate a decent annuity payment. I believe the markets were fooled into thinking this was the norm (I well recall that US corporations were using a equity growth rate of 10% pa, when calculating the solvency of their schemes..) but we have been in an era of low rates and stagnant equity prices. Given where we are in the economy, the only way we will see rates rise significantly is if the ability of governments to issue debt comes under threat and in this scenario, equities will suffer greatly. Add to this, the demographic split suggests funds will become net sellers of equities.
One of the greatest problems was that the trustees and advisors never understood the risks in the fund and nobody wanted to listen when things were going well. When equities declined, and rates fell and the solvency of the funds got hit from both sides, it was too late to do anything about it.
So, in my view, the idea of funds returning to "normal" is wrong, this was a unique period and the sponsors did not know how lucky they were.
I agree with most of what you say. I think this is far too generous at least in the USA: [quote]One of the greatest problems was that the trustees and advisors never understood the risks in the fund and nobody wanted to listen when things were going well. When equities declined, and rates fell and the solvency of the funds got hit from both sides, it was too late to do anything about it.[/quote]
ERISA was a Ponzi scheme from the get-go and most of the people involved in DB plans knew it. That was one of the first things I learned when I worked in the field in the 1970s and 1980s. The trick was to make the plan look overfunded primarly so that the employer could reduce contributions or even pull out money whenever possible and (very secondarily) reduce PBGC premiums. Truly fully-funded plans (using realistic interest rate and other assumptions) were undesirable since there was no penalty for using too-rosy assumptions and since it left less $$$ to invest in the business (lowering the stock price and the value of the company to insiders, among other things). Because prudent employers footed the bill for all the plans that terminated with insufficient assets, there was an additional incentive to underfund.
Many (I would guess almost all) trustees knew that their plans would be underfunded if they used interest rate assumptions that were realistic over the expected life of the plan. But given the way that ERISA operated, prudence was punished and kicking the can was rewarded.
By looking into financial history they might have recognized the bull market and found ow that there are bear markets too.
The fallacy was/is to assume a bull market forever.
Excellent comment and I fully agree, the idea of funds returning to "normal" is wrong, this was a unique period and the sponsors did not know how lucky they were.
"Mr. Ambachtsheer argued in his paper published by the C.D. Howe Institute that Australia and other European countries such as the Netherlands have solved their pension coverage problem by requiring all workers to become members of funded workplace pension plans."
Yes, and anyone who thinks this is anything more than a system designed to enrich government mandated asset managers and who thinks they won't be taxed upon withdrawal is severely fucking deluded
Pensions is what everyone depends on for retirement (assuming you were lucky enough to have one.) They must recover at all costs, and that is why getting the stock market to rise does a lot of good.
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Must and will are two different questions. The answer to the question asked is emphatically, NO! And for sure, not "at all costs".
And the debasement of the dollar will only make matters worse. A system of 'domestic only' currency is the only way to provide some assurance that pensions will yield something
to pensioners to live on any where near their former expectations.
The Harvard boys walked into Moscow Russia and looted it as Yeltsin let the Soviet system retirees across the country starve and freeze to death on the streets.
In 15 years The Beijing University boys will walk into Washington DC and some future puppet President will let the US Pension system collapse as American pensioners across the land starve and freeze to death in the streets.
NO.
Never in our lifetime.