Pension Fund Losses: To Infinity And Beyond!

[vision-master]

kats,  the states and individual companies  are both under an obligation to provide a deferred benefit of X. Part of a contractual employment agreement  where the employee has already fulfilled has part of the contract  by providing the services under the contract.  
The contract  , ERISA and so forth , provide for payments to a Defined Benefit Plan for investment to meet the contracted  obligation to the employee. If the payments and earnings are insufficient to meet the full defined benefit in the future the employer is on the hook.

Yeah, the City could be on the hook. They are trying to merge with a State plan, but of course 'they' don't want a loser. I bet come 2010, the State Fund + the City will both be on the hook. There are like 10 ppl collecting benefits that are over the age of 100. My Father collected from the City after 30 years of service with 70% pay. I worked for a Boss that got 30 years service and retired at age 49. Not to bad, eh.  

I worked at this other place and a fellow worker said his Dad was a high ranking Navel officer and retired with 90% pay an free medical. The good old days.... 

[vision-master]

These laws are mainly outside the Internal Revenue Code. That is ERISA and MEPPA and others.  A 401(k) is not a defined benefit plan but a deferred  taxability of compensation arrangement.   There is also employment law at the state level that would kick in the moment Federal  supremacy kicked in from  repeal of Federal law.

Then politically repeal would be next to impossible especially after the last year.

I'm so glad I got 18 years of service in the public sector.

[wordnerd]

I live on SS and my "pension" plan.
All my life I put money into those progams - not because I "wanted" to - but because they took it out whether I agreed or not
I don't get a large SS check
nor do I have a large retirement check
Just enough to get by VERY simply if I am extremely frugal - no extras. Together they pay my house payment and car payment - a 1920 small bungalow (worth about $75,000 BEFORE the prices bottomed out) - and a 2002 car (worth about $5000) - and utilities.
And even then I still work part-time so that I can buy food.

I don't understand why so many of you do not want me to get back the money I put in. Why you would be happy if I were out on the street.

[vision-master]

I live on SS and my "pension" plan.
All my life I put money into those progams - not because I "wanted" to - but because they took it out whether I agreed or not
I don't get a large SS check
nor do I have a large retirement check
Just enough to get by VERY simply if I am extremely frugal - no extras. Together they pay my house payment and car payment - a 1920 small bungalow (worth about $75,000 BEFORE the prices bottomed out) - and a 2002 car (worth about $5000) - and utilities.
And even then I still work part-time so that I can buy food.

I don't understand why so many of you do not want me to get back the money I put in. Why you would be happy if I were out on the street.

bc they figure they ain't gonna have nothing come retirement years!

[Jeromie]

Well wordnerd, there are many millions in the same boat as you and I.   Taking everyone that has put in money by force like SS ans contributory pensions plus all thouse who has  contributions to a defined benefit plan as a condition of  compensation,  we become the most massive political faction of all.   The real possessors of political power with their stake  under full threat.

Now , just why are politicians bought off by special interests?  The answer is that these bought politicians   are always able to smooth  major political factions against those factions political best interests. The key to the payment is delivery of results against the mass interests. Failure to deliver is the manipulators greatest fear.  The politicians understand this better than anyone.  They go with the mass factions or keep the mass factions  quiet and accepting.   An unmistakable hit against the mass factions  destroys the ability to be bought off because they can no longer deliver. These people are out or bail to the interests of the mass factions to stay alive politically.

[donk]

Then politically repeal would be next to impossible especially after the last year.

Politically impossible, sure...but what happens if it is not possible for the company to pay?  When does this come to a head?  There are a ton of frozen Pension Plans here, BIG ones.  The advisors/broker on the Plans use the same tricks as any other financial institution to make them look solvent...what happens after a couple have to start dipping into the PBGC's funds?  I understand they are in worse shape than the FDIC. 

And as for DC plans...they are straight IRS codes, ERISA is more of regulation/oversight.  You change code 401 in any way, I'd think it'd just render ERISA irrelevant.  Sure, messing with people's retirement funds would be political suicide, I don't necessarily expect any of these laws to get touched until after it becomes apparent that the obligations are not able to be paid (ie--your distribution check bounces).

The Trustees/Custodians that hold these plans claim that even if they go under, the assets are not really the bank's and so they will be safe, your (30-60% diminished) retirment fund is separate from any bankruptcy.  But seeing first hand how the operations behind this shit works...anything is possible.  Back in 2004(ish), the brokers/TTEEs/etc got caught market timing, which resulted in SOX404 rolling out. 

It is unbelievable the lack of controls and/or oversight that is possible in these things.  I'd be verrry surprised if they do not use the funds similar to a reserve bank does with deposits, though that is a lot trickier than what the fund companies are capable of.  But ultimately, if they decide to keep an inflated (fraudulent) NAV, and the plan terminations or liquidations of fund options (especially Stable Value Funds and Money Market Funds with "guaranteed" prices) keep rolling in at the pace they are now, there could be the equivalent to a run on the bank, though in this case it is a run on the funds that make up the plan AND the custodian that holds the plan, not to mention the pain and/or destruction of the plans' recordkeepers, advisors, brokers, transfer agents, and every other party that gets their grubby paws on a piece of the action.  With all the turbulence you see with the MM funds these days, isn't this a possible scenario?

Of course not, most people don't even know they have a 401(k), those that do "know" that the eternally cyclical market will always bring the NAV of those funds back to their "true" value, and they are all in it for the long run so they have plenty of time to recoop their losses.  Just like the one that says real estate never goes down, a house is ALWAYS a good investment, so goes the FACT that you must leave your money in your 401k, you are stupid not to contribute at least as much as your company matches...hey, with all the safew options they offer, YOU CAN'T LOSE!

[Jeromie]

One can always carry the  failure one step further.   If the companies cannot pay, we wind up  at an ultimate point.   The company files  for bankruptcy liquidation.   In that case, politically it is quite possible to see to it that all of the assets and business go to the  Defined Benefit Plan as a matter of  expediency.  All other creditors get nothing. There is where the politics enters to deny secured creditors where they get a  minority position in the emerged company.   One methodology is for the government to condemn the secured assets out and sell them to the new company .  There is the legal way preceded by the extortionate way.   The secured assets can only be sold for use  in a similar business for the  most part and thus the Defined Benefit Plan still has a lien on the secured assets that survives bankruptcy.   So secured creditor get nothing or a small piece of the stock. Even better, some secured assets are  are turned over to the  security holder to with as they please. Then turn the EPA people on them for clean up with the lien following them. My point, there are nasty political ways to deal with the recalcitrant. The GM  reorganization got very close to the foregoing.

 There is a another very big club remaining for the politically astute to use to  secure their property rights at the expense of other's property rights.  The Multi Employer Pension Plan Act imposes joint and several liability on all signatories to a Defined Benefit Plan.  That includes deficiencies  from a bankrupt or for future deficiencies applied to all signatories.    One of the big accounting firms was selling a tax position based on this  requirement that allowed immediate deduction of the ensuing years pension plan payments up to the 8 1/2 month limit if the Pension Plan was deemed underfunded even though the payments were for current contributions and were in no way payments for underfunded   past services . The IRS took a dim view of that one.  I was overruled on not  pursing this and I proved right and the firm got terminated from reviewing my tax practices.  They wanted the business for themselves. I knew it and torpedoed their ass successfully.  In short kill my tax department to get the business outsourced to them. There are ways and then there are other ways to deal with polecats.  My point is MEPPA all but guarantees that as a last resort the Defined Benefit Plans will own a company. It came close  in GM.  New GM plops and it happens to the entire industry?


Go back a few years and look at the standard Pension Plan footnotes in financial statements about being unable to calculate MEPPA  numbers because they cannot   be determined.  The IRC  covers deductibility of Defined Benefit Plan payments and their deferral from  current inclusion in taxable income. They do not set the liability. That is a contract between the  companies and the workers in a covered set of multiemployer workers. As in the UAW plans on behalf of all UAW workers.   

 Politically, we have here free  factions seeing which group is able to compel the state  to benefit their side of an adversarial proceeding.  Who has the best ability to subvert to their sides benefit. Fact of life.    Are the AFL/CIO  trade unions any different than Associated General Contractors in pursuing their factional agenda?  AGC can act through special purpose vehicles as a binding agent for their members just the AFL / CIO  trade unions act as a binding agent  through special purpose vehicles for their members.

It gets bad enough and each group goes for survival as we saw in Chrysler and GM this year.  Compared to what might be coming these examples might be quite gentle.

[donk]

Thanks for the response.  In regards to this:

My point is MEPPA all but guarantees that as a last resort the Defined Benefit Plans will own a company. It came close  in GM.  New GM plops and it happens to the entire industry?

I'm not quite sure I follow you (again, my concentration is on defined contribution plans so I am not as up to speed on the finer details of the regs on DB plans).  MEPPA basically makes the signers liable to pay all promised obligations?  Then PBGC is there as insurance if not?  Can you please clarify what "came close in GM" and what "happens to the entire industry"?  (I assume you mean auto industry--not DB plans?)

Also, on the DC side, is it realistic to think that the most likely answer is a change in legislation easing up on sponsors to fulfill their obligations if there is a large amount of terminations or if some of the Stable Value Funds (or other option that fulfills whatever "safe" asset requirement that they all seem to have)?  I've seen articles talking about how easy it would be for the governemnt to seize the "assets" in a plan, but what if they are all worthless?  I don't think that's unreasonable, considering the MM funds that have broken the buck and the SVFs I'm seeing at 85% Market Value vs the guaranteed value (of course, the same fund is now over 100% of GV, two weeks later, so in the end it all looks like bullshit to me).  Also, Mutual Funds can lose most of their value or fold during the best of times, nowadays I am getting flooded with notices about this one closing, that one merging, this one not open to new investors, 12 month hold on liquidations in that one...

I guess what I am getting at is, it does not seem to me that the gov would allow the situation to become obvious to the plebes, right now 401k and pensions and all that is boring and there are better stories to sell (executive comp seems to be the meme of the day).  Due to the personal nature of these accounts, J6P ain't gonna know there's a run on the mutual funds until they see the NAV of their options all drop to zero (or they are frozen from transfers on their accounts).  This is so outside of the realm of what any "normal" person thinks about (including the people sitting all around me right now, who's lives are to work on these things), it gets me thinking about what other nooks in the finance industry are out of view but can have such a direct impact on people's lives without them knowing it?  I know that my scenarios are ultra-doomy, but if I were to suggest that a MM fund was about to break a buck or that all 401k's would go down 30-60% in a quarter (and not recover after a year) people would think that is unbelievable.

I'm rambling now, but trying to put my thoughts out there with someone who has some insight to these things that DON'T just see business as usual...which is all that I am surrounded with.  Seeing how these operations work (I basically wrote the first draft of our SAS70 for my unit after maybe a year being in the industry) makes me question all the regulation and enforcement, when it comes down to it some stoned slacker or brainless pion can fuck some bigtime shit up at any given moment, and all the regulations in the world aren't going to put Humpty back together again....there is no guarantee that the victims will be made whole or the perps will be held responsibile.  A good example would be my bank...about 10-15 years ago the retirment services are was brand new, and we had bundled products as we had a recordkeeping peice as well as the TTEE/custodian piece.  We have always been a trust company, so we excelled at that, but recordkeeping sucks and is not lucrative, we sold the RK business, but on the condition that buyer (trust company) got our plans (which are large).  This was good in that the unbundled situation is great for getting rid of any conflict of interest, but hte fact remains that we could still be TTEE/custodian of our own plan, and we are bank with an investment arm as well (in fact, we are trying to get our plans back!).  Anyway, who knows who holds the JPM plan or the Citi plan or even worse, the goldman plan?  If they (or we) were self trusteed, what's stopping them from treating their plans like the govt treats social security?  I see many ways with my operational that this could easily be done, if someone high enough has the balls to let it go (we are a "small" business, so targets for the SEC, the big boys own the SEC so would not hesitate to do this).  Guess I can check the 5500's on freeERISA.com, hopefully that discloses the providers on the plan?  I'll be back...any insight (if you can comprehend any of my ramblings) would be appreciated.

[wordnerd]

My retirement is state government. I worked in Child Abuse

[vision-master]

My retirement is state government. I worked in Child Abuse

We are lucky. 

[Jeromie]

Pension Funds are always Defined Benefit Plans.   A completely different animal from Defined Contribution Plans which are savings vehicles. The real losses are in the major  Multi Employer Pension Plans and  State plans like  Calpers.


Multi  Employer Pension Plan sponsors are jointly responsible for providing the  Pension Benefit.   I was  often involved in bankruptcies of   
subcontractors that were signatories to  MEPP's.    The unpaid  pension plan contributions of a bankrupt are very first priority items  along with wages.  The other employers would be  responsible for a make good if the covered employees  permanently left the trade as a result of the bankruptcy. That is, they would be forced to make good the money to cover the rest of their  contributions to normal retirement.  Obviously,  everyone tries to avoid that including trustees of the pension plan.  The first thing that happens is that the older employees are snapped up by others except for the dregs like my brother in law who go back to the union hall. The trustees try to negotiate a settlement of MEPP claims from the bankrupt estate to cover the exit payment.  So the problem of mass exit from the Pension Plan by an employer presents a massive joint and several claim against the bankrupt estate.

 
Years ago there was a footnote about being unable to calculate the  accrual for exiting a pension plan.  I worked on just such a calculation with the accountants one year for an industry project just to see the magnitude of such an exit accrual and it was massive.  You leave the plan  you owe the exit contribution.  If there were  a mass failure as in any total cessation of the business of say a GM the rest of the industry signatories would owe the exit calculation and it would certainly be a claim against the bankrupt estate of GM. Since, the cessation of Gm would kill the subcontractors the exit cost of the subcontractors would be a claim against GM assets too. Subject to litigation which the plans would surely win, all the liquidation proceeds of GM up to 50 % of the expanded claim would go to the pension  plan.   The same claim would be against every other related  subcontractor bankrupt estate too.   The PP trustees may settle the claim and certainly would do so by simply taking ownership of the   bankrupt estates assets in a new corporation. Other than debt they would assume like suppliers and money owed the government all others would be frozen out with nothing.    In the cases of GM and Chrysler the pension liability was picked up  in the new corporations along with suppliers and the non pension Health  and Welfare plans became shareholders along with the government.


You can see from the foregoing why the government did what it did.    The next go round means the Pension Plan winds up as shareholder.