Saturday, May 21, 2005

Why pensions are becoming even scarcer

This is a response courtesy of the owner of WC Varones' blog to my post why pensions are becoming even scarcer. Since peoples' pension plans are at stake (under funded) and companies are filing for bankruptcy, WC has graciously offered some good advice that we all should be aware of about our respective companies. Before Grad school, I was in a pension plan, which guaranteed me a 10% annual growth rate. For some reason, I thought this was a little high, but I never thought they could be deceiving me in any form or fashion. In order for anyone to guarantee a 10% annual growth rate, you have to assume that they are projecting at least a 10% growth rate on their investments (stocks and bonds). Now I have to seriously consider rethinking the idea of leaving the money in this plan although I get a statement ever year with the new 10% adjustment added. WC has some very interesting things being discussed on his blog. It is a must read...

Comment by WC Varones

Most of the PBGC commentaries avoid getting at the root cause of the problem: unrealistic pension assumptions. Extremely loose accounting standards basically allow companies to make up whatever numbers they want when forecasting investment returns. So if a company wants to stop putting money into its pension plan, it just says, "No worries! We believe our pension investments will grow 10% per year forever. So we don't have to fund the pension plan any more!"To see how unrealistic these return assumptions are, do the math.

Assume a typical 60% stock / 40% bond pension plan. If the fund is earning 5.1% on its bonds, a full percentage point over the 10-year Treasury yield, it has to earn more than 13% annually on its stocks to make the total fund return 10%. With dividend yields at a sickly 2%, that means we'd need earnings growth of 11% annually for the long term. How the entire stock market grows earnings 11% annually in an era of 3-4% GDP growth is beyond me.If you are an employee of a company with a traditional pension plan, or if you are a shareholder, find out what your company's pension return assumptions are. They are in the annual report. If it's anywhere near 10%, you're not dealing with an honest company.
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