Revisiting Whether a Pension Crisis Exists
On March 23, 2006, this blog asked "Is There a Pension Crisis?" wherein readers were requested to take a five question survey. On April 22, 2006, we reported the survey results in a post entitled "Retirement Blame Game Survey". Plan fiduciaries came up high on the list according to 38% of respondents. In the current sub-prime crisis environment, when many clamor for more regulation, it is interesting to note that U.S. Congress (41%), regulators (33%) and governors and state officials (31%) were seen as "culpable" for problems with the retirement system a few years ago. Perhaps not surprising, 54% of respondents in 2006 ranked the U.S. Congress highest when asked about who can fix things. Plan fiduciaries (regulators) were cited by 34% (29%) of survey-takers as empowered to make changes. A whopping 75% of questionnaire participants agreed that a Social Security crisis is upon us.
We'd love to get your feedback now, more than two years after we launched the original "pension crisis" survey. Click here to answer five short questions. Your responses will be kept private.
In the meantime, we asked a few folks what they think.
- Mr. Steven Fowler writes: "The public pensions are the hardest hit. The plans base their decisions on outdated and unrealistic life expectancy assumptions. Additionally, all pension plans are going to come under significant pressure as the baby boomer generation enters the retirement phase. This will create a significant draw on pension monies while also reducing cash inflows at a time when it could take several years to recoup losses related to the recent market downturn."
- Mr. Larry Steinberg writes: "Pensions, public and private, were in trouble before the stock market dropped 50% in value. Now it will only get worse, especially for people who are counting exclusively on those monies and have not saved elsewhere. Union pensions could actually be the worst off because they are not held to the same rules as private pensions." (Editor's Note: Taft-Hartley Act plans are considered ERISA (Employee Retirement Income Security Act) plans. I have asked Mr. Steinberg for clarification.
- Mr. Earl Butler writes: "The short answer is Yes, especially when you consider public pension plans. Most plans for firemen and police officers are overly generous and not fiscally grounded in reality. Given the second wave of the financial crisis (i.e. the tax revenue shortfall at the municipality level), it is foreseeable that either these plans will need to be revised or injected with capital as part of a stimulus package."
- Mr. Sanjay Bhasin writes: "The pension industry is currently hit with a double whammy. Increased longevity of pensioners is a fact of life. This has been reinforced by the recent issuance of the VBT2008 by the Society of Actuaries. However, not every pension scheme recognizes this, thereby leaving a 'hole' in its liabilities. Unless duration-matched, the assets of pension schemes are vulnerable to sharp swings in market conditions. If equities are deemed the best long-term inflation hedge and source of long-term economic growth, plan sponsors will have to live with the short-term volatility that comes with a heavy concentration in stocks. Higher liabilities and plunging asset values do not make for a happy future for the pension industry. Available data suggests that the situation is similar for most of the developed world. Consider that in the UK, nearly 8,000 funds being monitored have swung from a 10% surplus to a 10% deficit in the past year. Clearly, plan sponsors - whether private or public - have a problem on their hand, especially as relates to defined benefit schemes. Looking at things a different way begs the question. How realistic is it to require short-term valuations of very, very long-term assets and liabilities? The average duration of pension liabilities (active/retired/deferred) is clearly 20+ years. While the problem certainly cannot be ignored, does it make sense to lose sleep over monthly or quarterly fluctuations due to changing market conditions? There are sophisticated solutions (none of them inexpensive) to tackle the pension problem. However, a simple (rather simplistic) approach is to recognize longevity more accurately, and to the extent possible, duration-match assets. Equity investors are, by definition, exposed to market cycles and they should hope that the current downturn will be followed by an appropriate upturn. I will worry about myself when I am closer to receiving my pension. In the meanwhile, I do worry about my friends who are reaching pensionable age. More than the underlying assets of their pension schemes, the issue is whether the plan sponsor will survive the present crisis."
Well said gentlemen. Thank you for your erudite observations. For anyone else who wants to comment on the state of the pension industry, email PG-Info@pensiongovernance.com. We want to hear from you!
Don't forget to take our short (only five questions) pension crisis survey. Click here to begin.
