|
|
|
|
Who We Are
Money Focus Mutual Funds Insurance Mortgages Taxes Step by Step Hot Topics Contact the Editor
Featured Site AfterHourTrades.com, Inc. Featured Columnist: |
Pensions: There is a problem with the way defined benefit plans currently operate. The promises
made were often done during better times - and by better I mean periods of
time when the company was flush with hope and the horizon seemed to be all
blue sky and green lights.
Companies and more importantly, the environments they operate in
change. Those shifts in operations are often done seamlessly by most of
the company. The exception to this shift in how business is done is the pension obligation. Companies promised pensions to employees as a way of retaining skilled help. The employees took that promise, the one that stated that when they no longer worked, they would be compensated for their loyalty to the business.
Secondly, companies go through distinct stages. They begin full
of hope and promise and a niche in the market that they believe they can provide
products, filling that need. In the beginning, it is all about growth. Employees are often asked
to wait until profitability before asking for long range benefits such as pensions. As the
company grows and the workers become more skilled, their value to the
success of the company becomes important. To retain these employees,
companies make promises of future pay outs that sometimes go well beyond a
pension check to include hard to estimate, health benefits.
These promises tend to doom a company's accounting especially if they
underestimate or fail to have a good fixed income offering to peg their
estimates on.
When the President did away with the 30-year long bond on Halloween of 2001, he
basically doomed a good deal of this country's pensions plans, many of whom were still reeling from the sudden and dramatic demise of the stock market. Many plan administrators, seeking some way to fix the enormous losses and stem any future mistakes needed something tangible and fixed - and long range. The move to do away with that bond wasn't the sole reason for the
problem, although without alternatives, it did exacerbate the issue. The
plans gambled during the heyday of the NASDAQ and paid
dearly when those stocks fell leaving an incredible source of revenue suddenly no longer on the books. Companies flush with stock market gains had been skimming surpluses from their pension plans and accounting for them as profits.
Once
that cash was no longer available, the company sought to make profits the
old fashioned way: raising prices and cutting help. The raising prices
proved to be difficult in the post 9/11 environment and the subsequent
recession that was felt. Leaning the workforce has left many of these
companies with little room to grow and fewer bodies to produce the growth.
Without help, pensions had less workers funding the retirees.
Consequently, many plans are currently underfunded and will likely
remain so for the near future.
Thirdly, pensions are not an obligation by law. The promises that
were made to employees are not legally binding. This lack of property
rights left many pensioners without anything when a company dissolves
itself into bankruptcy. In fact, the bankruptcy courts do not take those pension obligations into consideration when making their ruling. Without property rights, those promises mean nothing.
The fourth thing everyone should know is the precarious position many companies are in. When they do make promises, they are
required to make promises that they can keep.
This conundrum does not allow the company to make fraudulent
promises beyond of the laws that govern these types of plans.
But ironically, it is those same laws that encourage the promises be made even if the company
knows it may not be able to make the obligation true.
The fifth and most problematic is the $400 billion shortfall
currently reported by the Pension Benefit Guaranty Corporation or the PBGC.
Intended to act as a pension insurance policy that collects premiums to fund itself, the design is somewhat flawed. The premiums act as a buffer so if member companies, should they run into trouble, declare bankruptcy and/or dissolve, their employees and retirees will not lose
their entire pension. The PBGC usually is able to pay low end workers what they have been
promised. Upper end pensioners do not receive the full amount; sometimes those reductions in benefits can be as much as 50% of what they believed they should have been paid.
Those shortfalls will continue to grow as company after company line-up
for help, all blaming poor actuarial guesses. The problem lies from the inability of the PBGC to reach full funding through premium levels. They act as a tax on the business, making
profitability and full funding of their own private plans even more difficult.
Tax payers will be too busy bailing out state and local plans that are or will
face future underfunding to fund the PBGC. There is little likelihood that we can tax our way
out of this problem.
The sixth thing you should know is the solution, as usual, falls squarely on shoulders of the worker. Understanding these problem should make it easier top wrap yourself around the idea that the defined benefit pension plan is antiquated the way it is currently
operating. It should be considered a plan that will supplement your
retirement needs. To do that, it needs to be positioned as part of the
plan with the lion's share of the savings being done by the employee
outside the plan. Using IRAs or other savings will take some of the sting out of a default and the possibility that the plan will pay less than expected.
The average worker needs to do three things. They must begin to rein in those runaway spending habits, rethink their refinanced and/or long term
mortgage obligations, and begin to increase personal retirement savings. These are all worthwhile
habits that should be embraced by all workers whether their pension is fully funded or not - and they should do so the sooner the better.
|
