Re: [TNF] Pension Crisis

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

 Bosses stiff retirees as 
 pension fund losses mount  
  (front page)
  
   BY MAURICE WILLIAMS  
In recent months a number of state pension funds and some of the largest
U.S. corporations have reported underfunded pension programs and massive
losses due to falling stock prices. Like a slow-moving hurricane, the losses
have demolished the retirement savings of hundreds of thousands of workers
and large sections of the middle class over the past couple of years.

State governments and companies have speculated in the stock market with employees’ pension funds, at a time when the markets have suffered their deepest plunge in value since the Great Depression. Any significant withdrawal from stock ownership by pension plans would rattle wealthy investors and undermine an already shaky stock market.

The nation’s largest pension fund system, California Public Employees Retirement System (CalPERS), has lost $43 billion since the end of June 2000. The assets of the fund, which provides health and retirement benefits for 1.3 million workers, dropped from $172 billion to $128 billion--a 25 percent decline. About 58 percent of the fund’s portfolio is invested in corporate stocks.

Another state pension fund hit by huge losses is that of New Jersey, which pays the retirement benefits of 600,000 state employees. Officials managing the state’s pension accounts invested aggressively during the Wall Street boom years of the 1990s, inflating the value of the fund’s assets to $94 billion. Since 2000, however, the pension fund has lost more than $26 billion.  
 
Corporate giants face pension crisis
Major corporations now saddled with pension deficits include Exxon/Mobil, General Motors, Ford, IBM, Delta Airlines, and Goodyear. Some, like Polaroid and Bethlehem Steel, have gone bankrupt.

Earlier this year GM, which has the country’s largest corporate pension fund, announced it would pour $2.2 billion into its pension plan to fill the $9 billion hole caused by stock losses. The move could bite into its pretax earnings by as much as $1.37 a share, depressing its stock even more. Since the auto giant made the announcement its stock value has stumbled, hitting a one-year low in September.

The two-and-a-half year decline in stock market values has created a yawning gap between corporate promises to pay pensioners and the value of assets used to finance this. During that time, 50 of the nation’s biggest companies have lost more than 90 percent of their combined pension surpluses. More than half of those businesses are running deficits, with nine of them at least $1 billion in the hole, reports Milliman USA, a Houston-based pension-consulting firm.

In a recent report by Credit Suisse First Boston, the businesses comprising the Standard and Poor’s 500 companies are facing a whopping $243 billion shortfall in pension funding by the end of the year. "Keep an eye out as we break past the end of the year," said Adrien LaBombarde, who conducted a pension study for Milliman USA. Pension problems "will be 10 times bigger at the end of the year, when the financial statements start showing this," she said.  
 
Pension funds shift investments to stock
Prior to the 1980s many public pension funds were prohibited from investing in the corporate stocks--a legacy of the 1929 stock market crash that precipitated the Great Depression.

The shift from bonds to stocks became more attractive as large company stocks netted yearly profits of 15 percent beginning in 1981, while treasury bills averaged 6 percent, asserted Thomas Healy, an advisory director at the Wall Street investment firm Goldman Sachs.

Many of the Fortune 500 companies reported earnings growth that came from pension income. According to one estimate, pension investments accounted for as much as 30 percent of those companies’ profits.

Guided by previous profits from stock investments, CalPERS recently announced it would continue its heavy reliance on stocks and modestly expand investments in real estate and corporate stocks. Board members said CalPERS would reduce its bond holdings, the least risky of investments. Such an investment strategy, however, could lead to even greater losses if stock prices continue to fall.

If the market decline deepens, lower earn ings may push down stock prices, further depressing pension assets and reducing profits. "The pain will begin to hit corporate bottom lines this year and next as hundreds of companies start recognizing the losses in their earnings report," wrote Seattle Times business reporter Alwynn Scott.

Over the past 20 years, employers have been shifting pension burdens onto the backs of working people. In the 1950s and 1960s workers in many workplaces had won pension plans that offered a fixed payout upon retirement, often described as a defined benefit pension plan. This plan is generally based on a formula using the years a worker has accumulated with a company, the worker’s salary, and age at retirement. Some 44 million workers are enrolled in defined benefit pension plans, whose financial contributions are the sole responsibility of the employers.  
 
Alternative pension schemes
As profit margins narrowed over the past two decades, corporations began promoting alternative pension schemes called defined contribution programs, which required workers to match company payments with contributions from their earnings to cover the costs of their living expenses at retirement.

These plans saved the bosses the cost of managing pension funds and premiums for federal pension insurance.

In 1982 bosses across the country began the so-called 401(k) accounts, in which workers set aside a portion of their pay in a tax-deferred investment account chosen by the employers, but there is no guaranteed benefit. The employers also found they could boost profit margins further by trimming the amount they contributed. Now many corporations put up less than 50 cents for every dollar set aside by workers, and many companies make their contributions in the form of their own shares instead of cash.

When Enron went belly-up, the bosses fired thousands of workers, leaving them with worthless 401(k) accounts and no health insurance. That financial debacle resulted in workers losing an estimated $5 billion to $10 billion in pension funds. A similar disaster decimated the retirement savings of employees of WorldCom.

About 55 million employees in the United States are now covered by plans like 401(k).

Delta Airlines, whose pensions are severely underfinanced, announced November 18 that all its U.S. employees hired after June 30, except pilots, would be enrolled in a "cash-balance plan" upon retirement instead of the company’s defined-benefit pension plan.

Retirees would receive a lump sum instead of monthly payments. This latest round of "cost-cutting" comes on top of $1 billion in previous cuts, which included plans to eliminate up to 8,000 jobs.

The pension crisis has already had disastrous results for many working people. Gary Gerdman, a machinist for 32 years who retired two years ago from Outboard Marine in Milwaukee, Wisconsin, lost $5,700 per year in pension income when this company of 10,000 employees declared bankruptcy eight months later. All retirees also lost their health insurance with the company, whose pension fund was declared to be underfunded by $73 million. "There was no warning," said Gerdman. "Even our union said there was so much money in [the company pension fund], we would never have to worry."  
 

Also:
http://www.cfo.com/article/1,5309,8334,00.html?f=features
http://www.iuoe.org/cm/pub_article.asp?Item=224
http://www.pbs.org/wsw/opinion/karen0918.html

And the problem is global:
http://news.bbc.co.uk/1/hi/business/2244441.stm


Henry C.K. Liu

keoughje wrote:

Henry,

 

Do you know of any list of all public "listed" companies

and their pension status?

 

I would expect this "crisis" to be solved by slight of hand ....

reducing benefits, shifting costs onto the employee [as has

started with health care which someday will likely be 100%

employee expense], delaying retirement, and changing the

pension system [as some companies are being allowed to

do to "reduce" benefits but in a sort of hidden way].  The

other choice would be to shift ever more onto the Federal

Pension fund but that would be a problem at some point.

<g>

 

Do you have any expectations of how this will play out?

 

Take care, 

 

Jonathan  

----- Original Message ----- From: Henry C.K. Liu

 

Between corproate bankruptcies and equity market collapse, the pension
time time has a very short fuse. Every corporation I am familiar is now
underfunded in its pension obligations. GE recently faced a strike over
the issue. Even law firms and colleges are in trouble as their pension
investment lose up to 60% of their value. This is one problem that
cannot be fixed with reflation, as it is a fixed income arrangement.,
even though some are inflation indexed.

It will be a campaign issue for 2004.

Henry C.K. Liu

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