Comments on: Pension assumptions hitting the wall

By: Dave S (pension actuary)

Dave S (pension actuary) — Sat, 24 Jan 2009 13:48:45 +0000

To piggyback on comments so far:
1. New US federal statutory rules starting in 2008 require US qualified defined benefit plans to use for funding a periodically federally-published set of yield curve derived rates that currently average around 6%. So the 8% is moot with respect to funding these plans starting in 2008.
2. Under US Statements of Financial Accounting Standards 87, 88, 132R and 158 for reporting of plans on plan sponsors’ financial statements, sponsors select a discount rate for purposes of discounting future streams of pension payments. This assumption is usually set in a manner not much different from the rates in (1) above. Sponsors also must select a long term rate of return assumption on plan asset growth. This rate has typically been in the 7.5% to 8% range. Perhaps it should come down slightly but remember two points: (a) it is meant to be a very long term assumption as noted in earlier comments. In this regard, 8% may not be far from the mark. (b) It really has nothing to do with what has happened with investments to date; it applies to investment results only going forward.

By: Gary

Gary — Fri, 23 Jan 2009 14:24:13 +0000

The major issue in this debate is who needs to be worried. Plans like the State of NC pension plan are well funded. Funds like the State of Rhode Island are down around 50% unfunded liability and in serious long term trouble having a legal mandate to annually pay down the debt. If there is a shortfall for paying next years existing benefits plus the obligation to pay down the amortized debt payment, and the markets are trading flat, it is estimated that RI’s required annual taxpayer payment could reach $500 million. RI is currently choking on an entire budget shortfall of $350 million. Imagine what happens when layering an additional $500 million appropriation to that amount.

By: Jeff

Jeff — Fri, 16 Jan 2009 23:20:59 +0000

I can get an apparent 15% or more return in this country by avoiding income taxes on investment income. If my broker agrees not to report the income then I have the option to report it or not. Someone may have been doing this “undectected” for many years. There is no stability in an 8% return. Who would disagree? An intelligent investor would recognize that a dollar saved is a dollar earned. Some fifty billion dollars seems to agree with the strategy if not the outcome. This whole thing is just so obvious that no one will believe it. Ask a “victim”. The silence is deafening.

By: charlie robertson

charlie robertson — Fri, 16 Jan 2009 18:32:24 +0000

It is interesting to see the comments from wealth bankers and journalists now telling us not to expect the returns we have seen in the past and explaining that we may have to save more.

I think in reality this is just speculation for the long term and a statement of the obvious in the short term.

Given the spurious advice we have had from such ‘experts’ in the past I dont think the opinions or quotes are worth the paper they are written on.

By: Jolly Roger

Jolly Roger — Fri, 16 Jan 2009 08:02:16 +0000

So the inherent value of productive assets is worth nothing? Sure if you’re not willing to sit down and actually produce something - and then not bust your ass selling what you make to someone who doesn’t want to buy anything you make anyway. Lifetime income has value but as penny dividends the economy of scale incentive isn’t there.

By: Damon

Damon — Fri, 16 Jan 2009 05:42:37 +0000

Companies still viable from a production standpoint will be the essential aspect of a greater economic recovery. Jobs are retained by companies whose business models do not over-rely on investment-related capital. Certainly a downturn hurts everyone, as consumer spending decreases, but Cmon people. We all knew massive consumer debt to finance greater consumption was Madness.

Perpetual growth is not a tenable assumption.

As several reasonable people have pointed out already, INVESTMENT growth is entirely relative to current price, which fluctuates. Buy low, sell high.

We must remember & carry forward the lessons of Enron, Tyco & Worldcom. Bernie Madoff is merely the latest chapter. The common thread is using the PERCEPTION of value to scam everyone who believes it. Behavioral economics is the lesson we need to learn.

I see no intrinsic value in the reflection of a stock price. I see how many fools want a piece of the action. Show me a company that produces a good product, for a good price, with good market placement, & I’ll show you a company that will sell that product & survive in this economy. Provided they did not ruin themselves in the markets or with the various retirement savings debacles.
Thank you everyone for intelligent comments.

By: Don

Don — Thu, 15 Jan 2009 18:01:08 +0000

Companies that are still viable from a production standpoint do not necessarily have investment value. I guess for traders, it is a bit like buying a share for $20 and then selling it for $20 thirty years later. But in such a scenario, the net result is the same if I buy the share for $0.002 and sold it at $0.002. So there is no inherent value in the investment. Or if you really do own a business where you just make enough to pay the employees, and there isn’t a whole lot left to pay yourself, obviously the right thing to do would be to close the business. The problem is that nobody would buy it from you since it is worthless.

By: Curmudgeon

Curmudgeon — Thu, 15 Jan 2009 17:17:56 +0000

By the way, if we get a melt this afternoon, I may move 10% back in at the close..

By: Don

Don — Thu, 15 Jan 2009 17:13:56 +0000

If you own a company that makes just enough to cover materials, labor and other routine costs - ie, there is no profit or loss - the investment value of that company is $0. Nobody would buy that company from you. It makes no sense to put in $1 only to take out $1 at a later date. We face a systemic decapitalization of Western markets due to the maturity, efficiency and saturation of various key sectors. This presumption of growth in faulty. Repent now.

By: Curmudgeon

Curmudgeon — Thu, 15 Jan 2009 16:33:58 +0000

Best Comment? Most delusional, definitely! Dave has conveniently picked 1970 for his 39 year (?) rate of return. How’s that 10 year looking, Dave? The S&P has gone from 1286 to 823 (as of right now..). Anyone 45 and under who has funded a 401K and followed the lemmings into the “sensible” equity strategy is negative at almost any entry point over the last 20 years. For the love of God, please stop listening to the professional thieves known as investment advisors. I am 43 and my wife is 41. I have been timing the market for the past 18 years as we funded our 403B and 401K. (In addition, my main conventional pension is in a multi-employer plan that was still marginally overfunded on 1/1/09; they were at 131% mid-year. I can’t take credit for that one, but I’m damn glad it’s there!) Buy and hold is economic slavery. You are not Warren Buffett. Obviously, I don’t hit every extreme but it is really not that hard. My most recent major move was go to cash in October 2006. I was a bit early, but thank God we were out for this debacle. We had zero equity exposure for two years. I moved 25% back in (about $100,000) in November at about the S&P 850 mark. I missed the brief drop into the 700’s. At the time, it was a longer term move, but when the sucker’s rally moved over 930 I sold it all, hitting the peak this time with the close on 1/2/09 (I can only settle at the closing price- it’s TIAA-CREF). So now I’m looking for another gradual entry. I’ll hold from these levels if things stay steady, but I think there may be a long time frame to move back in. Stop being a sucker!