Ben Bernanke's Latest Casualty: The Pension Plan

Tyler Durden's picture

With every passing day, the destructive consequences of Ben Bernanke's ruinous monetary policy on the broader economy become more and more apparent.

Nowhere is this more evident than the observation of a record high stock market - benefiting just a tiny portion of the population - correlating directly with the record number of Americans on food stamps - the wealth effect "trickle down", or lack thereof, for everyone else (not to mention an economic growth rate four years after the "end of the recession" that is the worst recovery in recorded history).

Less hyperbolically, this can be seen empirically in the anti-correlation between the US economy and corporate profits. Through his "central" scheming, Bernanke has turned the discounting paradigm on its face, leading to a world in which the market no longer "discounts" or anticipates any information or fundamentals, but merely cares about how big the next latest and greatest liquidity hit will be, and in which there is an inverse correlation between profitability and general economic well-being.

And so on, and so on: which is to be expected from a world gone upside down as a result of the biggest doomed economic experiment ever conducted on a global scale to preserve a system which can only survive following debt liquidation, and yet one which we are told day in and day out needs just a little bit more debt... to fix a problem resulting from record debt.

For the the latest "unintended casualty" of Bernanke and his ZIRP policy, we look at corporate pension funds, which as WaPo reports, are finally starting to crack under the weight of pervasive central planning, brought to the brink by none other than the Chairman's "good intentions."

On the surface this makes no sense: after all pension funds invest in assets - the same assets that Bernanke's policy of serial cheap credit funded bubble creation are supposed to inflate. And they do. The only problem is that pension funds also have offsetting matching liabilities: or the amount of money a company has to inject in order to cover future retiree obligations. And in a period of low discount rates brought by a record low interest rate environment, these liabilities painfully and relentlessly increase when discounting future cash needs.

Quote WaPo:

Assets held by pension plans of the firms that make up the Standard & Poor’s 500-stock index increased by $113.4 billion in 2012, according to a report by Wilshire Associates, a consulting firm. But largely because of low rates, company liabilities increased even more: by $173.6 billion. That left the median corporation’s pension plan 76.9 percent funded, with just over $3 of assets for every $4 of liabilities.


Low interest rates hurt firms that provide pensions in two ways: They are required to set aside more money to pay for future pensions even as the liabilities appearing on their balance sheets grow larger.

And therein lies the rub: because while the NPV of future benefits in a bubbly environment results in higher asset values, it is the plunging rate used in the DCF that is dooming companies to a slow, painful cash bleeding death as they scramble to prefunded already underfunded (and ever more so) liabilities.

Visually, this is as follows:

In brief: the longer ZIRP drags on, the uglier the monetary reality that private (for now) workers will have to face when they finally choose to retire.

“Low interest rates are certainly a significant issue for employers,” said Judy A. Miller, director of retirement policy for the American Society of Pension Professionals and Actuaries. “The lower the interest rates, the higher the value of the benefits you have to provide and the higher the required contributions.”

Fear not though: in a world in which the recovery is so strong, Mark-to-Market accounting for banks still has to come back four years after it was killed at the altar of central planning, corporations are the next to realize that out of sight means out of mind, and what better way to ignore the pension issue than to just move it "off the books."

[F]irms are moving pension liabilities off their books. Last year, Verizon Communications transferred $7.5 billion in pension obligations — about a quarter of its total — to Prudential Insurance, to limit its liabilities and bolster its financial profile. The move came after General Motors paid Prudential to assume $25 billion of its pension risks.

Congress is in on it too now:

Congress moved last year to provide relief from the pension damage being caused by low rates by allowing firms to temporarily use a 25-year interest rate average when calculating how much money they had to funnel into funds.


“It phases out over the next five or six years,” said Joshua D. Rauh, a Stanford University professor who studies pension plans.


But the relief does not change how pension liabilities appear on a firm’s balance sheet. In addition, firms could find that under the new law, their pension-related liabilities could quickly rise after 2013 unless interest rates return to more normal levels. This has dampened the appeal of the change for many companies.

Nothing like legislating 'magic' accounting into law, allowing companies to reap the benefit of low interest rates and soaring asset values, while pricing in the future benefits of inflation that will magically come (but not impair the asset values of course) and sweep all their underfunded liability concerns away.

Of course, since everyone is in on the scheme - most certainly the workers who stands to receive less and less the longer the lies are perpetuated - it has no chance of working. Instead, what companies are doing is simply cutting off the "welfare" illusion tentacle at the core, and finally starting to freeze pension funds.

That has left many firms to conclude that it is best to freeze their pension plans, cutting off contributions for current workers and making new employees ineligible for the benefit.


At ILM, which sells commercial insurance to building-supply manufacturers and retailers, the pension plan had been a source of pride in a benevolent company culture developed over 117 years.


“Personally, I think a pension is a tremendous benefit,” said Don W. Blackwell, ILM’s chief financial officer and treasurer. “This is a very valuable benefit to our employees. We did not want to take it away.”


But with the pension plan causing the firm to report a $8 million liability at the end of last year and with no end in sight for low interest rates, “we waved the white flag,” Blackwell said. “It was a waiting game and we blinked. We had no idea that interest rates would remain this low.”

There is still the hope and the illusion that as companies switch from traditional pensions to that most direct bubble beneficiary, the 401(k), that everyone will live happily ever after? Well no: here is the side by side comparison:

Once it froze its pension plan, ILM started to contribute 3 percent of each worker’s salary to a 401(k) plan. It’s something, but nowhere near enough to provide the same level of retirement security that the company’s pension did.


Blackwell said an employee with a $40,000 annual salary who received a 3 percent raise each year, set aside 7 percent of his pay for retirement and received a 3 percent company contribution would wind up with roughly a third less money in his retirement fund after 25 years than he would have with the pension plan.

In the private sector, surprisingly, some still prefer realism over lies:

Still, ILM employees are taking the pension fund’s demise in stride. “To be honest, I am surprised that the plan was not frozen a while back,” said Traci Barber, 42, a service center manager who has been with ILM nearly 13 years. “I was surprised when I took this job that it even offered a pension plan.”


Knotts, the firm’s vice president for human resources, said that many employees do not seem to understand the security that a pension’s guaranteed monthly payments offer in retirement. “When people get hired here,” she said, “they are not thinking about that. All of the questions are about salary and paid time off.”


She was among the executives who fretted over cutting the pension plan, deciding to back the decision even though she knew it is bad for employees. Keeping it, she said, would be even worse for the company.


David J. Riese, who retired as vice president of claims in 1997 after 16 years at ILM, said he values the security provided by his company pension. Current employees, he added, will not have it as good.

At least someone dares to admit defeat in the face of ubiquitous central planning. And as always, the private sector is the first to realize that in the New Normal, all workers will be worse off.

The question we have is how long until the same logic and methodology, which is absolutely universal, is transferred from the private to the public sector, and how long until the tens of millions of state and federal servants, most of whom do their tedious and menial tasks with a matched enthusiasm, only so they can reap the benefits of a luxurious lifetime pension upon early retirement, still based on a discounting math from the Old Normal?

Because the start of the unwind of the welfare myth, if only in the private sector for now, made worse by Ben Bernanke's endless tinkering in what was formerly a free market, should be making the guardians of the status quo very, very nervous... and certainly has the disciples of the Bismarckian welfare state delusion on their toes, because they can see very well what is coming down the road.

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Racer's picture

Pension fund liablitlities are well contained

WestVillageIdiot's picture

Who cares about liabilities?  All that matters are assets.  Just pump those up as high as possible and everything else will take care of itself.  Just ask Bernanke, Krugman, politicians, your neighbor, your dog.  Well, not your dog.  Your dog is smart enough to realize that ignoring liabilities is to ignore reality.

Is your neighbor smarter than a cocker-spaniel?  I doubt it, if your neighbors are like mine. 

ZerOhead's picture

You almost have to question the wisdom of putting money aside into a pension to begin with.

It's a Rehypothecation Nation out there which means you probably don't even own what you think you own and the actual effect of saving is just providing the Wall Street arsonists with yet more gasoline... all aimed at inflating the value of your bonds and fixed incomes away or stuffing you into a dogshit stock that's ready to go for a dump... oh... and skimming what precious little is left over in the process...

TuesdayBen's picture

Friend of mine just got a cushy Gubmint job at the Pension Benefit Guaranty Corp. Seems they are staffing up. Gubmint will end up controlling all as the statist boys work their poison. They will make this country very ill.

NotApplicable's picture

Yep, eventually PBGC will own ALL pensions as they collapse from ZIRP.

bank guy in Brussels's picture

Not surprising they arrest the 'little' people in America who are investigating things

When they even murder the big people who investigate corruption

Some dead Americans who maybe deserve a mention on the US 'Memorial Day'

Ten notable US national political figures, all found murdered or suspiciously dead - Senators, Congressmen, Federal Judge, Governor, CIA Director - after questioning corruption or disturbing US oligarch leadership ... since the 1963 JFK assassination

Two Congressmen, Thomas Hale Boggs, Sr, House Majority Leader, along with Alaska Congressman Nick Begich, killed in the same plane crash, 16 October 1972; Boggs was involved in JFK assassination investigation

Congressman Larry McDonald of Georgia was killed on 1 September 1983, booked onto the Korean airliner that was shot down over the ocean; McDonald had filed bills asking the US Congress to investigate the globalist bodies, the Trilateral Commission and the CFR (Council on Foreign Relations)

Former US Senator from Texas John Tower, killed in plane crash 5 April 1991, after criticising Reagan-Bush scandals

William Colby, former director of the U.S. Central Intelligence Agency, found dead 27 April 1996, laughable story he drowned after paddling his canoe by his Maryland weekend house; Colby had made revelations critical of US policies

Sonny Bono, singer from Sonny & Cher, Congressman on the key House Judiciary Committee, killed 6 January 1998, after gaining position to investigate corruption at America's highest levels, Bono handled files on judicial corruption and the CIA drug trade ... story that excellent skier Sonny went head-on into a tree ... even ex-FBI people say it was murder

US Missouri Governor Melvin Eugene 'Mel' Carnahan, killed in plane crash 16 October 2000, opponent of vicious US Attorney General John Ashcroft, Carnahan won an election even after being dead

US Senator Paul Wellstone from Minnesota, killed in plane crash 25 October 2002, after leading opposition to the US Iraq War

Former US Congressman Wayne Owens from Utah, found dead in Tel Aviv, Israel, 18 December 2002, while investigating the triangle of US-Israeli-Palestinian Authority corruption

US Federal Judge John Roll shot dead in Tucson, Arizona, 8 January 2011, shortly after ruling against Obama and the US gov't ... drugged up 'lone gunman' promptly supplied, 'confessing' and otherwise barely seen

Never One Roach's picture

<< $3 of assets for every $4 of liabilities. >>


Close enuff for Gubbermint work.

Chuck Walla's picture

Laws and rules make a scam into a system.


radwon's picture

Wait for it......


Wait for it.......





booboo's picture

"I don't run a car manufacturing company, I run a pension plan and insurance company"

Richard Wagoner President of GM 1998-2003

WestVillageIdiot's picture

"I run a hedge fund with a used car lot out back." 

Boris Alatovkrap's picture

"I am sell shrub and bush from back of used car"

Boris Alatovkrap, CEO Sputnik Fruit & Beverage Co., Minsk

disabledvet's picture

"and i speculate massively in real estate on the side. but don't worry...Tesla is the real evil one when it comes to Government bailouts. We only needed 100 billion." i mean honestly...this isn't Bernanke's fault...this is the retards "in charge of capitalism" who did this. theses pension plans should be swimming in money. they fired everyone didn't they! actual wages are DECLINING. benefits died over 30 years...EVERYTHING has been foisted on the Government to "save the rich people from their own excesses." give me a break. the whole thing is so ridiculous you really can't make it up. the only funny part is the REALITY that interest rates are "at or near zero forever" actually. if that's the global economy is deflating...and i fail to see how anyone can't see it as such...then obviously you need to be long "the war effort" so defined as their the only ones providing liquidity that is in fact be recycled back into the economy. "the rest of the planet gets the American consumer" who only has dimes and nickels right now. long dollar stores: if that new Ford maxi van can get "no fuel necessary" mileage then guess what...there's your winner. "the trucking industry will need to adjust."

TuesdayBen's picture

The gubmint foists obligations onto itself via policy set up to create failure, Gubmint rescue, Gubmint control. That is the MO of the statist. Capitalism is not at fault. Statism is.

cpzimmon's picture

Sorry...couldn't wait.

I said fuck you Bernanke immediately.

Seasmoke's picture

Well this one i consider a positive

fonzannoon's picture

Funny...the federal pensions can just siphon off tax revenue to maintain solvency. It's the corporate pensions that end up moving over to defined contribution plans and forcing participants to hold even more of their life savings in stocks and bonds. It almost seems deliberate....

LawsofPhysics's picture

"the federal pensions can just siphon off tax revenue to maintain solvency" - you are optimistic, doesn't one have to actually have a job in order to be "taxed"?

I remain long black markets and sharecropping.

fonzannoon's picture

the math does fail all around in the end. good point. Yet we sit around on here and contemplate when the fed is going to end qe and risk the probability that markets end up blowing their brains out one asset class at a time. It's absurd, and yet I see everyone on here fall for the possibility day after day.

knukles's picture

Goddammit Fonz!
I just golfed today with a whole buncha California public employee toadies who just now laugh at us, the rest of us in the private sector when we bitch about their pensions.  Way the hell too generous, Defined Benefit as a matter of course, with the most outlandish colas and additional years purchase/overtime plans... nobody anywhere is even close to this shit anymore and all they say is...

Are you ready?
You can see it coming, no?

Raise taxes to complete the funding for their benefits that they've worked so very hard for.
And they even truly know and admit its a fucking taxpayer ripoff.

Moreover, out here in the People's Republic (That being redefined as the government workers being the "People" that benefit from the "Republic" which has no bearing on the legislative/representative structure) the CalPers and CalSters systems do not even report as do their private counterparts, not marking worthless shit to market... keeping discount rates too high, over stating returns... Hell, the SEC recently took some public entity to task (fined them) for misrepresentation of financials to bond buyers for fucked up lies about pension liabilities....
And that practice is prevalent across the board.
And you all think the Detroit trustees going to Hawaii is outlandish?
These fucker pillage the plans ....

What a fucking mess.
And everybody talks about deficits, this is the straw that's gonna break the camels back...

Mark my words...

WestVillageIdiot's picture

Turn on your TV today and watch the over-the-top bullshit propaganda that accompanies Memorial Day.  It is obvious that the public unions, including the MIC, have bought the best publicists, marketers, and propagandists that money can buy.

"Support the troops"
Just pay no attention to the fuckers that are giving them orders or all of the immoral orders they are carrying out.  Just support the troops and shut your fucking piehole.  Otherwise you are an unpatriotic peace of shit.  Just ask the sheep.

Happy Memorial Day (sadly, not much of America left to memorialize)

disabledvet's picture

"spray and pray"...only this time it's with money. obviously if you're a California retiree you've knocked the cover off the ball here. Real estate values can't be printed...yet they're right back to bubble highs...and beyond...already. running surpluses. massive recovery in the tech sector. "house as ATM machine" is back with a vengeance. vineyards, public debt, IPO's, "special cash enhancements"...that place is swimming in money if you've got any. "last thing you want to be doing is working for a living" of course...unless it's a movie...or being an extra in one. don't even get me started on Texas. 12 billion dollar surplus? SICK! yeah, you want to build an Underground Economy all right. "finally someplace cool where people can relax for a change and not be bothered by tornado's and shit." make it part of their zoning code or something. most of the Texas real estate i saw was scrub brush. anywho...yet another "Wild West Americana thingy" underway.

knukles's picture

West Village...
I was just getting ready to spew forth.  Mrs K was looking for the Yankees game and while doing so, ran across the Nationals.  Washington Nationals.  They have their Memorial Day uniforms on.  With caps and numbers made of camouflage.  Desert pixel camo pattern.  Now that there is a real tried and true Good Olde American Memorial Day Color Scheme, no?

Not red white and blue, not any old other pattern, but desert camo.

FFS, it's a downright bit o propaganda and perceptions management, that Memorial Day is being Subconsciously Sold to the Public to be remembered as the Current Desert Pixel War of Terror.

Forget WWII or any of the others, anything before the Empire Americana...
What a perversion of free thought and ideals.

Binko's picture

The people who work at Calpers really just care about one thing: keeping their own salaries, benefits and future pensions on track. This means that maintaining the illusion of sustainability is the primary task. Since the state legislators also really just care about one thing: keeping their own benefits, perks, salaries, kick-backs, campaign contributions and future private employment opportunities on track they also will happily collaborate on maintaining the illusions. 

Basically there is not just one wizard behind the curtain. Their are 20 million or more government employees busily beavering away at shining up turds and convincing the public that everything is golden. 

WestVillageIdiot's picture

Please don't use beavers in an analoy about public employees.  I don't think I should have to explain my reasoning on that one.  Never insult the beaver.

fonzannoon's picture

knukles I have some lib buddies and I can barely hear their rants about their entitled pensions anymore. To have to hear them rant about it while cheating at golf almost seems like you are begging to be abused.

knukles's picture

Nah.  I get 'em wound up on the pension thingie and then tell them that the next deal will be Chapter 11 in Federal Court where any contract can be abrogated and they'll lose everything.
(Harvey Penick's Needle... and then their game slowly unwinds as I collect the skins.... They don't argue with me anymore.  Neither do the neo-cons, for I just call their bullshit so they leave me alone...  LOL)

fonzannoon's picture

LOL I have told some of my buddies a similar thing. I don't think a word has been invented yet than can express the flash of anger that I see in their eyes.

fiftybagger's picture

That which cannot go on forever, won't.  You think the DHS needs billions of bullets for the tea party?  Think again.  Once those pensions go poof those leeches will be burning cars in the street.  I say open fire.  They deserve everything that's coming to them :-)

yellowsub's picture

It doesn't mention public pensions which is going to be guaranteed by you.

WestVillageIdiot's picture

But they are just "serving" the public.  They have earned it all.  From the surly bitch at the DMV, to the psychotic badge wearing cop that is busy shitting on your constitutional rights to the politician that is banging hookers (or pages) and selling you out at every turn.  I forgot to mention all of the teachers we are supposed to worship that can really only do well when the parents are highly involved in the process, thus taking credit more for the efforts of the parents than their own efforts.

Just keep paying and STFU ZHers.

malikai's picture

Don't forget the TSA, irradiating and molesting you so the terrorists don't have to.

They deserve their fair share of what's yours.

Everyman's picture

Wouldn't it be better if instead of "this is another causality of the Bernanke, that we get a "list"?  Can someone just make a list of all that Bubble Bennie has fucked up with his ZIRP and endless money printing, in tabular form.

knukles's picture

Let's make that easier...
Hows about a list of anything NOT FUCKED UP by ZIRP....

WestVillageIdiot's picture

I checked out Zillow for the first time in a long time today.  Prices in my hometown are indeed going up once again, and very rapidly.  I bet SNAP and EBT are also through the roof. 


FreeMktFisherMN's picture

21 years old here, and phyzz. PMs (and maybe scaling into some miners soon here depending on if one more big raid happens) will be my retirement account (doubt retirement will even be the case, though). The only thing I ponder even is whether I want to buy some platinum or palladium, to 'diversify' my portfolio of PMs, or just stick with silver which is a leveraged play on gold and is consumed/excellent conductor/antimicrobial, as well as some 1/10 ozt. gold coins. A bit different 'diversification' than the sheep modern portfolio theory/'risk-free rate'/LTCM models employ. 

Ben Jammin Bernanke's picture

Thats ridiculous. If you were retiring on a 10-20 year term Im right behind ya but you have no idea what your ideal retirement strategy will look like for a target 60+ years from now. Remember, world war ii only ended 70 years ago. Would you have been able to predict a reasonable retirement strategy for year 2000 from back then? The only thing you can say with confidence is that there is no telling how the next decade will change the (investment) world.

FreeMktFisherMN's picture

Bottom line is I'm not investing in paper promises. I'm saving in PMs, whose value over thousands of yrs. is that they store value.

LawsofPhysics's picture

Fucking idiots, rewarding irresponsible behavior is nothing new for the government/corporate fascist.  The socialization of private losses continues...


lunaticfringe's picture

Meanwhile, gravity still causes things to fall and the rich get richer. Same story, 1534  days later.

dolph9's picture

Pensions are broke, it's all a debt based lie.

You're "retirement" will move to being your savings and social security.  But savings in fiat money is a lie too, so then you're retirement will just be social security.  But social security will go bust paying for all the disabled, so that's a lie too.

So in the end, you will only retire on your physical precious metals, that's it.

debtor of last resort's picture

In the third world, many children are needed for the elders to survive. Maybe it's time to save some energy and go to bed early.

debtor of last resort's picture

OT, as we speak, Dijsselbloem told Portuguese pm that Portugal will get more time to solve debt issues, on msm. Next subject: a student loan is a good investment for the future.

solgundy's picture

it's "trickle up poverty"

I am Jobe's picture

Now if they can apply the ame logic to State and Federal , we will see the effects.

So when do states and federal employees see their Pensions disappear?


knukles's picture

At their funerals.  Unless of course there are survivor benefits.

slotmouth's picture

Prudential is the new AIG.

fonzannoon's picture

yes they are, and so is Met. Everyone scrambling for tbtf status.