Even More Pension Trouble

I’ve been writing about problems with pension funds for a while. Finally the problem is becoming publicly serious enough that it is gaining the attention of the mainstream press. (The problem isn’t growing – awareness of the problem is growing. The problem is already huge.)

Companies that promise employee pensions are required to set aside enough money to cover their future pension obligations. During the big stock runup, pension funds grew faster than the obligations, and companies TOOK MONEY OUT of the funds, increasing their apparent profit. Now that stocks are in the process of returning to reasonable levels, the companies need to put that money back, plus enough to cover additional shortfalls. This means that the companies must report lower profits, reducing their stock price.

An additional component is that companies must calculate future obligations, which involves forecasting the rate of return the funds will receive on the money they have. Companies have been using very high rates of return for these forecasts. The higher the forecasted rate of return, the lower the amounts they need to have in the fund now, and the money not put into the fund goes to the bottom line, which raises their stock prices, which means executives get huge bonuses. (See where this is heading?) They’re using forecasts of 8.5% returns!

This is my most recent entry about the pension problem. It references earlier entries