The ugly: Underfunded pension obligations
Lagging stock prices and a combination of lower investment returns and a dramatic increase in investment liabilities are all factors contributing to pension fund shortfalls in both private and public employee investment funds. How serious? In the private sectors in a report just released by the consulting firm Milliman Inc. finds American companies are dealing with shortfalls amounting to $80 billion plus.
Three companies, Ford, Exxon-Mobile and Verizon announced they will up contributions by $4 billion in 2012; and, they are also adjusting pension fund allocations to bonds rather than stocks. Other options are also in play. General Motors just decided to transfer the management of some of its pension plans to a third party and offering lump-sum buyouts.
Shortfalls in all public sector investment funds are even larger and extremely complex to rein in without painful consequences to all stakeholders. Last month, New York State Comptroller Thomas P. DiNapoli, announced a $2 billion shortfall in the New York State and Local Retirement System (NYS-LRS) with assets valued at $150 billion. The cause? Government accounting standards allow public pension funds to discount liabilities using the same high rate of return they hope to earn on investments. The higher that rate, the less money needs to be set aside now to cover benefits promised in the future.
In my opinion, we are witnessing a “perfect storm” fundamentally caused by to quote David Brooks in his recent column “The Debt Indulgence” by “pension promises that should never had been made in the first place” and, the ineptitude evident over the years in managing other people’s money.
What we are witnessing today was easily predictable. More than a year ago, Joshua D. Rauh, from the Kellogg School of Management – Northwestern University advised members of the U.S. House Judiciary Committee that without reform, “many large state pension funds will run dry, even if they achieve predicted 8% annual returns.” He further mentioned that the taxpaying public will bear a large share of a massive burden of unfunded legacy liabilities associated with state pension plans.
With November’s upcoming elections in mind, it might be helpful to ask those running for office where they stand on the three issues raised in this series of columns. (1) Will they (in 2013 as required by law) vote in favor of amending the state constitution to deny pension and retirement benefits from persons convicted of felonies? The good!. (2) Vote against more legalized gambling? The bad! And, (3) Support needed changes in law to restore realistic pension obligations? The ugly!
You have a right to know. .