Are we there yet?
While traveling to New York City the other day on Metro North, I sat behind a little boy who kept asking his parents the same question that many in the pension field are pondering.
The issue of what end game applies is noteworthy, especially now that Congress has adopted pension reform.
In "Looking for Cash, Congress Finds Some in a Corporate Pension Rule Tweak," New York Times reporter Mary Williams Walsh (June 28, 2012) describes the parts of the just passed highway bill that could force costs upward for American businesses. For one thing, sponsors will be able to stretch out their cash outlays to buoy underfunded defined benefit plans over time. As a result, tax-deductible contributions will be smaller in the next few years, taxable income will be higher and federal tax coffers will go up by an estimated $9.4 billion over the next 10 years." In addition, insurance premiums that companies pay to the Pension Benefit Guaranty Corporation ("PBGC") will be higher to the tune of roughly $10 billion in the coming decade.
The news is troublesome for numerous reasons.
For one thing, employees, retirees, creditors and shareholders are going to find it even more challenging to assess the true cost to companies that offer benefit plans. As a result, they could be in for a nasty surprise later on if reported performance numbers are overly optimistic and mask a large liability that eventually will require cash. Second, the increased PBGC premiums are slated for general revenue which means that incremental dollars may never be available to pay participants of troubled sponsors because they have already been spent elsewhere. Third, using corporate pension plans as a national piggyback to pay for other programs goes against the nature of the trust arrangement that was put in place with the 1974 creation of the Employee Retirement Income Security Act ("ERISA"). Fourth, measuring pension risk and managing it effectively requires those in charge to have a good handle on the economic objectives they are seeking to satisfy. Chief financial officers ("CFO"s) and treasurers could be doing an excellent job of mitigating relevant uncertainties but not be rewarded if capital market participants emphasize accounting numbers that do not capture what is really going on.
Dr. Susan Mangiero, CFA charterholder, certified Financial Risk Manager, Accredited Investment Fiduciary Analyst and author of Pension Risk Management for Pensions, Endowments and Foundations will continue to write about pension risk management. There is a lot more to say.