Pension Truth Telling
Wikipedia describes the Rashomon Effect, named after the 1950 classic movie, as the proper way to describe any situation "wherein the truth of an event becomes difficult to verify due to the conflicting accounts of different witnesses."
And so one wonders if the Rashomon Effect pervades in pensionland. After all, it seems that every day brings new headlines with gloomy news about pension losses. Can it all be bad?
Whether a pension crisis is upon us is an excellent question. Solving a problem is impossible without acknowledging its existence.
These thoughts arose a few days ago when a blog reader sent the following anonymous note:
Government plans are not covered by ERISA for sound constitutional reasons, state sovereignty, the 10th Amendment, etc. Take a closer look and you will see that most plans are soundly managed. They are also subject to multiple levels of state oversight. Don't buy the hype.
Importantly, one might have penned something similar about ERISA funds regarding what we read and hear. The focus of the newly passed Pension Protection Act of 2006 in all of its 907 page glory, and now awaiting Presidential approval, company pension headlines are often negative, replete with references to losses, rescinded benefits and/or impact on employee morale.
The National Association of State Retirement Administrators ("NASRA") has written extensively in support of municipal pension plan management. To illustrate, in an August 2, 2006 letter to federal lawmakers, they and other signatories wrote about the misperceptions of public pension finance and the benefits of a study by the Government Accountability Office to set the record straight.
There are fundamental differences between governments and businesses that result in critical distinctions between plans in each sector and the way in which they are accounted for and measured. These distinctions are often unknown or misunderstood.
Public plans are in sound financial condition and State and local governments take seriously their responsibility for paying promised benefits to their employees and retirees. Comprehensive State and local laws, and significant public accountability and scrutiny, provide rigorous and transparent regulation of public plans and have resulted in strong funding rules and levels. Public plans are backed by the full faith and credit of State and local governments. Additionally, a public plan participant's accrued level of benefits and future accruals typically are protected by state constitutions, statutes, or case law that prohibits the elimination or diminution of a retirement benefit, providing far greater protections than what is provided by ERISA or PBGC.
State and local retirement plan assets are professionally-managed and provide valuable long-term capital for the nation's financial markets. The $2.8 trillion held in plan portfolios are an important source of stability for the marketplace and are designed to withstand short-term fluctuations while still providing optimal growth potential.
The bulk of public pension funding is not shouldered by taxpayers.
The vast majority of public plan funding comes from investment income.
This author concurs that shedding more light on the financial health of public plans is a great idea. Ditto for ERISA funds.
Finger pointing is futile. Taxpayers, shareholders and plan participants just want to know what impacts their wallets.
1. Can I afford to retire?
2. Will my benefits be limited or, worse yet, pulled away once I've retired?
3. Will my taxes go up?
4. Will my equity investment fall in value because of a company pension problem?
Reasonable people want answers now, not later on when it's too late to do anything to salvage their financial stake. As mentioned many times before, a real dilemma is information - old, incomplete and/or difficult to interpret. (Click here to read "Will the Real Pension Deficit Please Stand Up?")
How can we get closer to the truth and then use it productively?
What ERISA provides that public plans do not have is restrictions on conflicts of interest as prohibited transactions (Sec 406). There are significant conflicts between trustees/senior investment staffs of state systems and institutional investment managers. Many trustees/ staff have never met an investment manager's American Express card they did not love. Wine me! Dine me! Pay for my trips and entertainment!
I believe this may be true in DB plans, but it is far from true in Government 403(b) & 457(b).Scott Dauenhauer, CFP, MSFP