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Another threat to pension funding??
Old 05-03-2013, 12:09 PM   #1
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Another threat to pension funding??

I'm only DC, so doesn't affect me directly. But this change to traditional pensions still seems like a license for corporations to seriously underfund--
New Rule Signals Kiss of Death for Pensions - Yahoo! Finance
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Old 05-03-2013, 01:05 PM   #2
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I noticed that change on our last funding statements. It actually sounded kind of reasonable, but in the short term it didn't give me warm fuzzies to see the funding levels go down.
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Old 05-03-2013, 03:03 PM   #3
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Originally Posted by ERhoosier View Post
I'm only DC, so doesn't affect me directly. But this change to traditional pensions still seems like a license for corporations to seriously underfund--
New Rule Signals Kiss of Death for Pensions - Yahoo! Finance
+1 Some highly paid folks about to make personal pension decisions best be paying attention or they will be getting screwed later on...
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Old 05-03-2013, 03:19 PM   #4
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I do not see this as a major issue. Are you saying you really believe the long term rate of increase in interest rates for the next 25 years will stay the same as today or be closer to the average of the last 25 years? I just cannot see 30 year rates holding @ 2.8% for the next 30 years and I would never plan my expenditures on that basis.

What is important is the difference between the interest rate expected to be earned and the interest rate used to bring the long term liabilities to a present value. The larger that differential is the more risk in funding exists. IFRS rules in international accounting require they be the same.
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Old 05-03-2013, 03:22 PM   #5
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And how is this bad for the development of future pension plans? The government has made it more affordable and reasonable to have one and that means less will occur? The logic of the issue is escaping me.
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Old 05-03-2013, 03:26 PM   #6
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I saw this MAP21 disclosure on my last pension statement.

I don't think it's good, but I think it is rather silly to call this the 'kiss of death' for DB pensions (they're dying anyway).

I need to see if the PBGC has a statement on this. They should be against it, the more conservative the funding assumptions the less chance they will need to pay out. I'm not sure if the interest rates they are talking about are used to calculate an equivalent annuity (which are expensive in a low interest rate environment), or are used to calculate future gains on their investments.

In any case, the companies will be required to fund their plans. If they don't put the money in now, they will need to do it later. Bankruptcy is the only 'out' that I'm aware of.

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And how is this bad for the development of future pension plans? The government has made it more affordable and reasonable to have one and that means less will occur? The logic of the issue is escaping me.
Yes, I was thinking that also.

-ERD50
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Old 05-03-2013, 03:41 PM   #7
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And how is this bad for the development of future pension plans? The government has made it more affordable and reasonable to have one and that means less will occur? The logic of the issue is escaping me.
Look at it this way. Pensions are annuities administrated by many of the same financial institutions selling annuities to the public. Current annuities are paying relatively little by historical standards, and are certainly NOT priced using 25-yr ave historical bond interest rates. If you were w#rking decades for a company offering DB pension, would you want your DB pension to be seriously underfunded by reasonable accounting standards? Would you want a company to promise you a significant benefit (e.g. pension) there was real risk it could not deliver when the time came to collect?

And while you and I may not see 30yr bond interest rates holding at (or below) 2.8%, the buyers of today's 30yr bonds obviously disagree.
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Old 05-03-2013, 03:44 PM   #8
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Corporate Pensions Still Fall Short - Business Insider

This article notes that contributions to pension plans increased 16% due to the liability issue that this legislation addresses. Due to unnaturally low interest rates the liability calculation over the last 4 years has contributed to a need for 40% more in pension liabilities. Not salary increases or reduction in asset balances, those are actually growing steadily but the liability present value calcualation caused a 40% increase.

In other words in 2007 a company could have been fully funded with 100 million in assets and 100 million in liabilities. Company funds and asset increases lead to an asset balance even after payments in 2012 of 120 million in 2012 but liabilities are now 140 million resulting in an underfunded status of 14 percent. Are the pension plan participants in a worse position than they were in 2007?

Assume that in a few years interest rates went back to 2007 levels and now liabilities are again 100 million but market losses less contributions meant the funds were back at 100 million, does this mean companies are doing a better job?

All of this is accounting hijinx with a reporting agenda in mind. And because of the rules that are put into place instead of common sense corporations are attempting to exit this
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Old 05-03-2013, 03:54 PM   #9
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Look at it this way. Pensions are annuities administrated by many of the same financial institutions selling annuities to the public. Current annuities are paying relatively little by historical standards, and are certainly NOT priced using 25-yr ave historical bond interest rates. If you were w#rking decades for a company offering DB pension, would you want your DB pension to be seriously underfunded by reasonable accounting standards?
What this rule is referring to is the calculation of how much the annuity is going to be for, not how much can my money provide me.

Pensions are not immediate annuitities, they need to take actuarial averages of the work force, how long they will work, expected increases in salaries, the average life of the retiree, expected inflation rates and bring all those calculations back based on the liability interest rate to determine what the liability is. When a plan is "frozen" all those future costs and the liabilities that are calculated with an ongoing pension no longer exists, and most pension plans are suddenly seriously overfunded. This is why pension plans are being ended.
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Old 05-03-2013, 04:11 PM   #10
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Please note that this rule relates to funding - it doesn't at all change how pensions are accounted for by companies in companies financial statements.

While I agree that using current historically low interest rates to calculate funding requirements is onerous, I'm not sure if I'm keen on the 25 year average either.
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Old 05-03-2013, 05:10 PM   #11
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Originally Posted by ERhoosier

Look at it this way. Pensions are annuities administrated by many of the same financial institutions selling annuities to the public. Current annuities are paying relatively little by historical standards, and are certainly NOT priced using 25-yr ave historical bond interest rates. If you were w#rking decades for a company offering DB pension, would you want your DB pension to be seriously underfunded by reasonable accounting standards? Would you want a company to promise you a significant benefit (e.g. pension) there was real risk it could not deliver when the time came to collect?

And while you and I may not see 30yr bond interest rates holding at (or below) 2.8%, the buyers of today's 30yr bonds obviously disagree.
I found it interesting that the average holding period for treasuries of ten years and greater is just twenty days!
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