Saturday, October 20, 2012

Is Your Pension At Risk?

Is your pension at risk? Most companies have a product or service from which other lines of business can grow. Ford has cars and trucks, and Dell has computers. In the developed world as companies realize how costly guaranteed pensions can be, and how they impact profit, we are seeing pensions change. Although the shift to defined contribution (DC) schemes has been clear in America since the early 1990s, the financial crisis has accelerated this trend. Indeed, many Western firms no longer offer defined benefit schemes to new employees. Instead their far stingier cousin, the DC scheme, is the only option for fresh recruits as companies limit future liabilities.

During the Presidential campaign both Barack Obama and Mitt Romney raised concerns about underfunded pension programs as poor management has led many pension systems to seek bailouts. State pensions have reached deficit levels of $767 billion in the U.S. The largest 100 corporate-defined pensions have hit $454 billion in unfunded liabilities.The blame for the underfunding of retirement systems, on the public level, lies generally with legislatures, which have raised pension benefits to unaffordable levels while failing to contribute enough to properly fund obligations. They've also kept assumed return rates high, making plans appear better funded than they are. Private companies have simply promised too much to workers that are living longer at a time that business pressures are changing.

In the UK stock market turmoil and record low interest rates have left workers nearing retirement with private pensions worth substantially less than those who finished work three years ago. New figures show that overall pension incomes are now 30% lower than they were three years ago when the government began attempts to boost the economy through quantitative easing. Peter McDonald, a partner in the pension practice at PwC, warned that those retiring this year would be left "between a rock and a hard place", forced to defer claiming a pension until the market picks up. With stock market turmoil set to continue and this week's resumption of the Bank of England's quantitative easing program, injecting another £75bn of new money into the economy, annuity payouts are set to shrink further. The FTSE has fallen by about 15% since May, which has cut the value of many workers' private pensions schemes.

Pensions are also under attack in Canada where the Harper government has decided to tighten up and reduce many of the gold-plated retirement packages that MPs and public servants have enjoyed for decades. This follows the government's decision to raise the age of eligibility for the Old Age Supplement to 67 from 65. The government could not ask Canadians to take a hit, while allowing elected officials and public servants to conduct business as usual. Under the new terms, MPs will pay 50 per cent of contributions to their pensions or $39,000 a year compared to $11,000 now. They won't be able to collect a full pension until age 65, as opposed to 55. After just six years of service, MPs are eligible to receive one of the richest pensions in the country, courtesy of taxpayers, who have been contributing $24 for every $1 an MP puts into the program.

There is a new normal when it comes to investing that many have not accounted for, moderate portfolios these days are hoping for an annual gain of 5 to 7 percent. The likeliness that they will consistently earn 7.5 percent on a conservatively managed portfolio, as anticipated by its fund managers, is unlikely. Lately the markets have been hooked on monetary morphine and ignoring fundamentals. Many of the financial structures we have built are on flimsy foundations or unsustainable. If the wheels come off the financial system pension plans will take a direct hit. To those who base their future on money coming from these monthly payouts I urge caution, prepare to take a "haircut" or worse.

 Footnote; This post dovetails with many of my recent writings. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged. The posts below may be of interest,

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