nun
Thinks s/he gets paid by the post
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- Feb 17, 2006
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I don't see why a DB pension plan needs to be able to cover all current and future liabilities, so is the news about the underfunding of state DB plans just hype?
A well funded DB pension plan should fully fund the "current value" of all future liabilities. That is, the present value of the projected total future cost, pro-rated to employment years to minimize the steepening impact of final year service. It's hard to say if the news is hype, because it usually doesn't include the needed breakdown of real data, but most articles I've read don't have an acceptable definition of "well funded"I don't see why a DB pension plan needs to be able to cover all current and future liabilities, so is the news about the underfunding of state DB plans just hype?
MichaelB said:A well funded DB pension plan should fully fund the "current value" of all future liabilities. That is, the present value of the projected total future cost, pro-rated to employment years to minimize the steepening impact of final year service. It's hard to say if the news is hype, because it usually doesn't include the needed breakdown of real data, but most articles I've read don't have an acceptable definition of "well funded"
A well funded DB pension plan should fully fund the "current value" of all future liabilities. That is, the present value of the projected total future cost, pro-rated to employment years to minimize the steepening impact of final year service. It's hard to say if the news is hype, because it usually doesn't include the needed breakdown of real data, but most articles I've read don't have an acceptable definition of "well funded"
nun said:I've seen 80% funding as an ok level. But surely states and Governments are very different from companies when it comes to assets an the risk of bankruptcy so I don't get the push to have them 100% funded like private schemes.
I've seen 80% funding as an ok level. But surely states and Governments are very different from companies when it comes to assets an the risk of bankruptcy so I don't get the push to have them 100% funded like private schemes.
I don't see why a DB pension plan needs to be able to cover all current and future liabilities, so is the news about the underfunding of state DB plans just hype?
I don't see why a DB pension plan needs to be able to cover all current and future liabilities, so is the news about the underfunding of state DB plans just hype?
I don't see why a DB pension plan needs to be able to cover all current and future liabilities, so is the news about the underfunding of state DB plans just hype?
I don't know why government plans should be treated differently.
Take a state like CA where it is virtually impossible to raise taxes, we are already seeing a test case in Stockton bankruptcy. Who gets paid first the bondholders or the folks with a pension?.
While we haven't had a state go bankrupt yet, we are IMO only one financial crisis away from seeing CA, IL, or possibly RI, HI, or MI see a crisis in their pension plans, which could possibly result in a state bankruptcy.
Ignoring tax advantages, given my choice between buying a 30+ year bond in one of those states or a bond from Berkshire, Coca Cola, Exxon, or Johnson and Johnson I'll take the corporate bond every day.
The simple answer to your questions is YES...
All pension plans should be 100% funded....
The problem is with market drops... say a plan dropped 20% in the market downturn.... do you require the entity to fund the plan to get it back to 100% If so, that is a big hit to expenses... heck, it might be more than a company gets in total revenue... or a gvmt entity in taxes...
But what would you do now, when the market has turned and returns have been great the last few years Allow them to take the money out?
The devil is in the details..... but, I still say they should be 100% funded as a rule...
I've seen 80% funding as an ok level. But surely states and Governments are very different from companies when it comes to assets an the risk of bankruptcy so I don't get the push to have them 100% funded like private schemes.
I imagine a private plan could be more than fully funded, but maybe public plans cannot have a surplus against a rainy day. Complicated financial planning, these pensions.
Companies cannot just choose any discount rate they want...there are guidelines. I worked in a Fortune500 company Treasury department for 5 years. Although I was not in the pensions area, my very close colleague was and we talked about these things several times.And that's the rub. They could use an unreasonable ROR/discount rate to show that they are better funded. And let's not get into the inflation rate for those funds that provide for it.
States can not go BK... I don't know what happens when they can not pay their bills, but there is no law allowing them to BK...
Companies cannot just choose any discount rate they want...there are guidelines. I worked in a Fortune500 company Treasury department for 5 years. Although I was not in the pensions area, my very close colleague was and we talked about these things several times.
.....As a matter of fact if you are working for a company the closer to 100 % funding or if over 100% funding there is, the greater the incentive to end the plan, pay out the participants or move to an insurance company and drop the pension.
But fully funding a plan does change it's effectiveness in attracting and retaining employees. Employees may be attracted to a company with a DB plan, but if that plan is weakly funded they will tend to discount it. This is similar to bonus plans that provide conditional compensation. Companies with plans that pay regularly and consistently find that employees view the bonus as part of compensation when evaluating job offers. Companies that offer a bonus that pays irregularly or pays based on conditions outside of an employee's control find that employees don't consider the bonus, or discount it heavily, when evaluating job offers.
Well in theory sovereigns states can't go bankrupt either, but in reality they do default, hosing creditors in the process just as effectively as any bankruptcy court. A lesson that large depositors in Cyprus learned very recently.
But fully funding a plan does change it's effectiveness in attracting and retaining employees. Employees may be attracted to a company with a DB plan, but if that plan is weakly funded they will tend to discount it. This is similar to bonus plans that provide conditional compensation. Companies with plans that pay regularly and consistently find that employees view the bonus as part of compensation when evaluating job offers. Companies that offer a bonus that pays irregularly or pays based on conditions outside of an employee's control find that employees don't consider the bonus, or discount it heavily, when evaluating job offers.