Where will it end
Things almost get to a point with these companies where the real question is how do they manage to line their own pockets if the state of pension financing has not been met.
They blame low rates for deficit conditions, I think any company that wants more relief should agree that if there company goes bankrupt the pension plan is first in line.
The company doesn't get to chose who is first in line. Bankruptcy law determines that. Ultimately up to parliament to change the laws if that is wha they think should happen.
I am well aware of that my point is should any company want a special deal their board should be willing to give up first rights.
Following quote from Finance Minister Flaherty that I agree with 100% :
At the end of the day, these are pension funds that need to be worked out between the employers and their employees. Itís a private matter
From a tax payer perspective, that is exactly what the position of the govt. should be.
(Now if only they bring their own pension plan along the same lines as well, that'd be nice )
As for pension holders being "first in line", as long as the corporate bond yields rise adequately to reflect that, there shouldn't be any problem.
Exactly Harold would they gamble on the yield with their money being first rights.
i'm not sure what first rights you think the board can give up? Current bondholders or other lenders might be a little miffed? Any prospective borrowing costs could well be prohibitive if an insolvent pension scheme gets first call on the assets of a company that is not doing well? I think we can all sympathize with pensioners who get short changed, but the solution is complicated.
Originally Posted by Daniel A.
Last edited by Square Root; 2012-08-07 at 10:56 AM.
- new accounting standards have dramatically changed how future pension obligations are calculated and reported.
- persistent low interest rates have a huge (HUGE) impact on the present value of future pension obligations.
These two factors explain virtually all of the rationale for the pension deficits we are seeing now. Put another way, in the absence of these two factors, we would not be seeing pension underfunding at anything like the current rates.
So the question (to my mind) is not whether pension funds have been mismanaged, but instead is one of how people should think about pension valuation. All other factors held constant (i.e., with no changes to the funding ratios of pensions), were pensions in "better" shape when the accounting rules did not require the same mark-to-market accounting for future obligations as they do now? Were pensions in "better" shape in higher interest rate environments reduced the future cost of money?
MG I'm not clear on this thought.
So the question (to my mind) is not whether pension funds have been mismanaged, but instead is one of how people should think about pension valuation.
Even when yields were high the number of pensions running deficits stood around 65-70 % .
Yes, but yields have almost nothing to do with calculating the PBO (pension benefit obligation). Here is a very basic (Investopedia) article on the underlying mechanics of pension accounting:
Note that it starts with the phrase, "Pension fund accounting is complicated and the footnotes are often torturous in length."
W/r/t understanding how interest rates impact the PBO, read this paragraph from the link [NOTE: for pension accountants, "discount rate" = "interest rate"]:
In regard to our first concern - the economic status of the liability - we want to look at the funded status that equals the fair value of plan assets minus the PBO. The two key assumptions that impact the PBO are the discount rate and projected rate of salary increases. A company can decrease its PBO (and therefore, increase its funded status) by either increasing the discount rate or lowering the projected rate of salary increases. You can see that PepsiCo's rate of salary increase is fairly stable at 4.4% but the discount rate dropped to 6.1%. This steady drop in the discount rate contributes significantly to the increased PBO and the resultant under-funded status.
In a nutshell: when interest rates are effectively zero, the PBO (present cost of future pension obligations) skyrockets. When discount rates increase, the future obligation, calculated on a present-value basis, decreases. This is a very basic mechanic of pension fund obligations, and is analogous to the relationship between bond prices and interest rates.
Corollarary: if interest rates were to increase, the funded status of pension plans would "magically" improve, even with no other changes to any other component of the pension plans.
So what happens when it is not a corporation that has the pension shortfall.
I could be mistaken, but I am pretty sure that is part of what the teachers unions are having to negotiate in regards to the TDSB wanting to reduce deficits and shortfalls. Should today's taxpayer be on the hook to cover the pension money shortfall, just because it had be previously agreed to with the teachers unions. (I am not against teachers or anything, just a semi current example that came to mind)