American pension funds begged for relief from having to top up their accounts:
Pension funds at Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies have joined the parade of businesses seeking relief from Congress amid this year’s economic meltdown.
Instead of money, they want legislation to suspend a federal law that would make them pump billions of dollars into retirement plans to offset stock-market losses as many struggle to find enough cash just to stay in business. They’re pressing Congress to consider the issue this week before this year’s session adjourns.
It’s another difficult question of mark-to-market vs. whatever-other accounting! Frankly, I think the entire defined-benefit paradigm is dead – or if not dead, should be.
In a rather chilling development, specific bank credit decisions are being politicized:
Illinois Governor Rod Blagojevich said today the state would suspend its business with Bank of America Corp. until the lender restores credit to the shuttered Republic Windows & Doors company in Chicago where workers are staging a sit-in.
Blagojevich commented at a news conference after meeting with employees who have stayed at the factory since Dec. 5, when it closed after the bank canceled its line of credit. Illinois does “hundreds of millions of dollars” in business with the bank, he said.
Three-month US T-Bills are now trading at less than a beep:
The Treasury sold $27 billion in three-month bills at the lowest rate since it starting auctioning the securities in 1929 amid record demand for the safety of U.S. debt during the worst financial crisis since the Great Depression.
The bills were sold at a high discount rate of 0.005 percent, the Treasury said today in Washington. At last week’s auction, the bills drew a rate of 0.05 percent. The government received bids for the bills totaling more than triple the amount sold.
There is a report of another chapter in the BCE saga:
BCE Inc. told would-be acquirers that it received an auditor’s opinion showing the company would be solvent after the C$52 billion purchase by Ontario Teachers’ Pension Plan and a group of U.S. private-equity firms, according to two people briefed on the matter.
The opinion, delivered by PricewaterhouseCoopers LLP, is contrary to an analysis by rival accounting firm KPMG LLC.
Hmm … I wonder if the same deal can go the Supreme Court twice!
Sorry, folks! I’m just plain out of time, so there is no volume or price-change table today. I will point out though, that the SplitShare sector was on fire today, with strength pretty much across the board.
| Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30. The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index. |
|||||||
| Index | Mean Current Yield (at bid) | Mean YTW | Mean Average Trading Value | Mean Mod Dur (YTW) | Issues | Day’s Perf. | Index Value |
| Ratchet | N/A | N/A | N/A | N/A | 0 | N/A | N/A |
| Fixed-Floater | 7.09% | 7.43% | 87,773 | 13.18 | 6 | +1.6424% | 744.9 |
| Floater | 9.56% | 9.85% | 68,374 | 9.53 | 2 | +0.4077% | 370.8 |
| Op. Retract | 5.53% | 6.99% | 141,821 | 4.05 | 15 | -0.1799% | 978.1 |
| Split-Share | 6.94% | 13.23% | 71,831 | 3.94 | 14 | +6.0720% | 885.9 |
| Interest Bearing | 9.17% | 18.04% | 56,659 | 2.87 | 3 | +2.7985% | 798.7 |
| Perpetual-Premium | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
| Perpetual-Discount | 7.76% | 7.88% | 206,837 | 11.55 | 71 | +1.7398% | 712.9 |
| Fixed-Reset | 6.07% | 5.42% | 1,125,193 | 14.41 | 16 | +1.3936% | 987.2 |
Frankly, I don’t see the pension funds begging for “regulatory Forbearance” to be “just another” argument about mark-to-market. I see it as an ongoing piling up of systemic risk by the politicians.
Like the regulation of Fannie Mae and Freddie Mac, which only got worse over the past 30 years (mostly due to political pressure), the defined benefit (DB) pension system is creaking toward collapse. Pension plan assets have been hit hard by global stock market declines, especially the vast majority with 60+% allocation to equities. Firms are lobbying for regulatory forbearance on their pension plans, so they don’t have to top them up next year with cash.
This is a real dammed-if-you-do and dammed-if-you-don’t situation:
If the regulators DON’T allow postponement, the DB pension is almost certainly dead (except in the public sector where it seldom has to be accounted for). If firms do contribute cash to the DB plans, they will report lower profits and have less cash to weather the crisis — bad for the stock market.
One positive from choosing this direction is that extra pension plan buying in weak equity markets could provide support to the stock market as well as future plan upside that could lower future pension costs. [The firms have the power to kill their DB plans, but choose not to use such a spectacular, though perhaps needed, defense]
If the regulators DO allow postponement of actions to address the DB pension shortfall, they increase the long run shakiness of the private pension system, and increase the probability that the government will have to bail out private pensions in the future. This is bound to continue encouraging the wrong type of pension provision behavior and postpone rational behavior.
My position is that there is already too much regulatory forebearance in the pension system For example, despite my estimate since 2002 that equities should only be counted on for a long run return of 5-6% (2% dividends plus 1.4-2% long run EPS growth + 2% Inflation at constant P/E), large firms like Pepsico and many others continue to “cook the books” with pension asset growth assumptions equivalent to 10-13% from equities. Given a financial system already under enormous stress from a variety of directions, government will end up holding this bag if/as/when it all goes wrong. It is time to draw the line on added systemic risk.
In my world, the firms would get a break by not having taxes increased, so they should use some of this to fund pension plans and realistic pension plan accounting would be introduced soon. Politicians will do the opposite – increase taxes (hurting corporate cash flow and earnings), spend the money bailing out weak competitors and then provide long-lived regulatory forbearance to pension plans that increases the risk they will have to bail them out with even more public money. Sweeping things under the rug gets votes, but doesn’t help people plan for the future.
I believe DB pensions are a good thing, in general, but nobody is pricing them correctly for the ten-tupling of post-retirement life expectancy since they were invented. It takes 20% of salary to provide a 70% retirement benefit and another 10% of salary to index it for inflation. The current system is going to hit the wall even if the already-bad book-cooking doesn’t get worse.
More forbearance brings the next Fannie/Freddie scale disaster closer.
I will certainly agree that pension fund regulation is procyclical. Regulators have been loathe to interfere too much with return assumptions, but maybe it’s time they did! However, that will still leave a mark-to-market procyclicity in the system unless they start getting really fancy – too fancy, I suggest – by adjusting future expected returns counter to the immediate past.
Some funds have been trying to evade the mark-to-market rules by piling into private equity with, shall we say, mixed results. Politicians should be examining this unintended consequence; I suggest that it is contrary to the public interest to introduce a bias away from the public capital markets.
Perhaps what is needed is some kind of market made by the insurers, whereby they would guarantee future benefits for a fee. It would have to be a pretty fat fee, though and doesn’t really solve the procyclicity problem as much as shift it to the financial world away from the real one.
The root problem is that long term benefits cannot really be guaranteed without some procyclical volatility creeping in somewhere. The easiest solution is simply to offer DC – and if Joe Lunchbucket wants a guaranteed seg fund, then he can have it and pay for it.
Unfortunately Joe Lunchbucket would have to pay 3.5% or more for a guaranteed seg fund, which would eat up more than half the expected returns.
Pensions are an important public policy issue because people who can’t afford to retire may become expensive wards of the state. Investing is complex and not easily understood by the vast majority of people who need pensions. The Canadian investment industry is quite predatory, with some of the highest MERs in the world.
What we need are more pension options that take the onus off the employer – TIAA-CREF comes to mind. It is DC, but at least ultra-low cost. Even Ontario Teachers’ Pension Plan is low MER (0.1%) and not really guaranteed by outside parties. It tries for DB (now collecting 24% of salary) but has the flexibility to get real and change benefits or contributions if there isn’t enough money.