Thread: Twinkies

BTW, my example of Enron was not specific to pensions per se. Rather to illustrate the abuses management is capable of in cheating their employees while enriching themselves. An extreme example I admit, but valid nonetheless.

Originally Posted by JimmyHAD

The union supports the pension fund through the employee/employer contributions. Without those contributions ...... if every signatory company defaulted there will be no pension for the union members. Remember Enron and Kenny Boy, GW Bush's buddy ?

Jimmy, this is your comment. It looks pretty much pension-related to me. You can't take a criminal act like Enron, that had nothing to do with pension plans, and overlay it on a discussion about pensions. It doesn't fit.

Originally Posted by DaveW

Jimmy, this is your comment. It looks pretty much pension-related to me. You can't take a criminal act like Enron, that had nothing to do with pension plans, and overlay it on a discussion about pensions. It doesn't fit.

Sure I can ..... I did ......

Let's be clear, I see comments even on that article about venture capitalists raiding pensions, it is all completely false.

It is Illegal to remove dollars from a pension plan for anything other than:
1) after a plan terminates if it had more dollars than the plan had benefits (not likely to occur in today's environment)
2) if a plan has far more dollars than it needs to fund benefits, dollars can be taken from the plan to pay health benefits.

Absolutely i no scenario can a venture capitalist or anyone else take money out of a plan and use it for "profits" or "raid" it.

Qualified plans report to the IRS with an audit report every single year, and are also required to hold a bond that reimburses the plan if there is fraudulent activity (this is pretty rare, but in the event it does occur, plan is reimbursed).

The problem with pensions in the last 10 years has nothing to do with venture capitalists or offshoring businesses or any of that other catch phrase news article stuff. It has almost entirely to do with two things:
1) the interest rate environment that the fed has created (pensions are valued like bonds more or less, if the rate environment has declining rates, the value of the pension liabilities go up - for single employer plans. Multiemployer plans are slightly different).
2) the fact that pension trusts are not earning any asset returns. The trusts rely on those returns to actually pay benefits. If a $1billion plan expected to earn 80 million of asset returns this year, and instead it loses $50 million, that is a $130 million swing in assets that should have been available to pay benefits. The fix for that, if it doesn't come in the form of high future returns, is to extract more dollars of contributions from corporations, or to cut benefits.

1 and 2 can happen at the same time. For example, the interest rate environment may drop 1% in a given year, which could increase a typical plan's liabilities by 15%. If the assets earn 5% less than expected, in a simplified look, that might mean a plan just in one year is all of the sudden 20% underfunded. If that plan is a $1 billion plan (or more) that could mean all of the sudden the employer has taken on a $200 million liability for past benefits. They will be required to contribute enough to make up for that.

All of the sudden, there are less profits because contribution requirements eat into them. That drives down company equity (and the stock prices collectively), and that in turn makes returns worse. The only way out of it is to have economic growth to drive the market back up or to eliminate the plans.

You, me and everyone else who thinks they are not exposed to the economy have no clue just how dependent we all are on the value of the market growing and the need for company profitability. Without it, there is nothing to pay government pensions (which means higher taxes), corporate pensions (which means a lot of our benefits, not me unfortunatley - I work on pensions but don't have one), to provide investment income-related taxes to the government.

So...my job is a dying job. Providing a benefit that people have no clue how valuable it is to them, because of all of the risks and obligation the company takes on to provide. It is what it is, but let's try to be accurate while the ship sinks.

I've got all kinds of ideas for a viable pension system, and so do a lot of other people in my industry. I could very easily set up a model that spreads risk around to everyone involved so that one party isn't sunk as soon as returns are bad, but there is no political or regulatory system in the US that will take a realistic look at why companies are dumping pensions and how they can be fixed, so instead people will spend their time enjoying their 401k balance bobbing up and down, having no idea that the $130 million of obligation the corporation took on in my example above is something that is to the benefit of the participant....because when that asset return doesn't occur in the 401k, you have no recourse.

It looks like I broke up the party here.

Dave

I agree with your two points on what went wrong with pensions in the last 10 years and that it explains a huge part of why they are currently under funded. I would disagree in that a company not contributing to a fund, where it is contractually obliged to, is much the same as stealing from it. It amounts to the same thing one way or another.

Other things contributing to pension under funding include people living longer therefore drawing more out and full retirement benefits at ages 58 to 60. I makes you wonder where all the high priced help was when companies agreed to these pension schemes through standard labour bargaining practices. As you have said pensions are complicated and tricky by nature to set up to the point where the average worker has not much of a clue what is going on. Where was the high priced help that was supposed to keep companies safe from agreeing to unsustainable plans? Ignored by the people who control and run the company?

Bob

These are just my personal thoughts about what may have happened, I can tell you exactly what i've done being on either side of the negotiation process.

I think a lot of companies have used pension negotiations in times that their cash flow wasn't as good as they'd like, under the guise that the cash flow issues were temporary and they wanted to keep peace with labor. If they couldn't offer cash, then they wanted to offer something else, and noncash items become the ticket.

In the US, the advisors doing the costing are not fiduciaries, and they shouldn't be, because they have no ability to actually force a client to do anything. In the case where pension increases were offered in lieu of cash, it's likely the professionals providing the numbers were responding to a multitude of different hypothetical scenarios and warned the principal ordering the consulting work that there were ongoing costs to improving benefits. The principal (be it a board, or whoever is on the corporate side) can take that information and do whatever they want with it, regardless of warnings, as long as they don't do something illegal. If they want to backload their cost of benefits, they can do it to the extent that it's legal to do so, and the unions have the same principals working for them on the other side of the table, and they know exactly the same thing as the corporate side. If corporate could've gotten away with offering no increases, that's what they would've done, but the union side is often as guilty in the process because the deal works something like "well, if you can't offer us cash, then you'd better offer us better retiree health and increased pension multipliers".

It's not as if the corporate side and their advisors did something without anyone knowing, and then slipped off for an alpine ski vacation in a private jet, celebrating with all of their ill gotten gains while the ranch burned.

I personally have always provided a full current present value of all future possible benefits earned on an increased benefit as part of a negotiation. If I tell you the current value of the increase for all future years of service for a closed group (current employees) and an open group (current and expected future) is $150 million, even though the cash contribution increase is only $10 million a year, you can't well describe that you didn't know the full value of a contribution increase of $10 million a year. That was always my view on it. People don't grasp annuity values or annuitized costs very well, but folks do understand a lump sum value. That is one of the reasons individuals would rather see a $50,000 401k balance than a $500 a month annuity, though for someone at retirement, a $500 annuity right now has a present value in the neighborhood of twice what a $50k 401k balance has and as an individual, you bear no risk (it is hard to describe to people just how valuable it is for someone else to bear the risk).

I've been on both sides of the table at different parts of my career. The negotiation process is brutal, but both sides are usually well informed.

Originally Posted by BobH

Dave

I agree with your two points on what went wrong with pensions in the last 10 years and that it explains a huge part of why they are currently under funded. I would disagree in that a company not contributing to a fund, where it is contractually obliged to, is much the same as stealing from it. It amounts to the same thing one way or another.

The last part here, the issue isn't whether or not someone didn't contribute to a fund when they had the money to, it's if they didn't have the money to make the contributions. That's sort of like calling it stealing if someone uses a credit card to pay for food and then can't afford to make the payments. It's hard to cast stones at someone when they literally don't have the money.

But the bigger point about that is that at no point did any of that involve going into a pension trust and taking money out. It just didn't happen.

If an employer stopped making contributions, then union and the administrator would know about it right away- it would be discussed with the trustees. Why is this all of the sudden a current issue? Why wasn't it before?

Dave

Yea, negotiations can be and are often brutal. Yea, both sides, at least at the top, are well informed. It seems not to be the case for shareholders or rank and file employees. They put their faith and trust in those at the top, on both sides, and appear to have been let down. It is fully understood that advisers to both sides on pension matters are only that, advisers nothing more. There is/was a failure at the top of the food chain.

No, it is not particularly hard to cast stones if somebody fails to pay an obligation because they have no money after having been fully and well informed by qualified advisers as to the possible consequences of going down that road. I mean we are are talking people at the highest levels of corporate management that supposedly did not get there by being uneducated in matters of finance. That is opposed to the average consumers who is likely not as well versed in things financial when dealing with credit and credit cards. In either case that is not an excuse and in one doubly so since they supposedly know exactly what they are doing or should do.

Assigning blame, in the short run, will do little good in fixing a broken system and it is broke for the present anyway. I do know that I would not trust the same wonderful people who navigated us into this mess to lead us out of it.

Bob

I can tell you exactly what happened in the automobile industry back in the 1970s and 80s. Those dirty union guys went into the board room and put guns to the heads of the corporate officers and said either sign it or die.

Actually back then the auto companies were making so much profit the important thing was running the assembly lines 24/7 and anything that might disrupt that was not tolerated. The mgmt back then didn't care about what might happen in 20 or 30 years. It was only about the bottom line back then. So, rather then risk a protracted walkout they caved in to the Union. If they had wanted to they could have let the union strike and they could have broken the union but they didn't want that.

You would find similar in state and local govt and many other industries. mgmt only worried about the present. The future was not their problem. Now the future has arrived.