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Pension Troubles, Part One
The winning streak is over it seems. While only taking a modest downturn last week, the markets took a breather even with the huge inflows into mutual funds, a rebalancing of sorts spurred on by pension funds seeking to regain lost monies. This is a very risky way to build market momentum.
Many companies have taken the lead provided in cryptic detail by the Pension Benefit Guaranty Corporation to adjust their investment activities. PBGC has decided that bonds and stock-like instruments are not the way to go when trying to cover not only the growing number of future retirees but also the growing deficit in the plans of the companies they insure. Once thought to be a shortfall of $3.6 billion has now grown to a worrisome $11.2 billion. The problem falls squarely on the ability of PBGC managers to find a predictable investment to match their predictable pension payouts. Looking to the stock market, they found out this year, was not the way to go.
PBGC basically guarantees the pensions of many companies and unions using the premiums paid to invest in fixed income securities to cover future payouts. Current payouts are doing just fine as the corporation has taken over more than $35 billion in assets from defaulted pension plans, the lion's share invested in the stock market and used their modest 10% return on those investments to make good on the promises made by these companies. And therein lies the rub. Promises made by these companies and now some unions to their employees and members will not meet at the same place come retirement.
Aside from the market problems, companies have used pension plans as a sort of nest egg, writing IOUs to pay for revitalizing their businesses. This kind of dipping will result in some sort of government intervention and that we have found over the last three years will not be good for any of the players, from PBGC on down to those counting on those pensions. Citing a need for reform, Congress will squabble over the best way to accomplish this and we will, I fear, be the losers while the corporations will receive some sort of relief for their plans poor management.
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