April 1, 2009
For those of you who think your pension is safe, here’s some (bad) food for thought:
Apparently, the Pension Benefit Guaranty Corporation (PBGC) who I believe currently manage Delta’s failed pension among others (fact check?) put their premiums into riskier investments over the past few years and the deficit, which was $11B according to the article, could now be substantially higher (as an interesting side note, my former B-school professor, Zvi Bodie is quoted in here – he taught me a lot about what “risk” is).
The PBGC is an entity created by ERISA (Employee Retirement Income Security Act of 1974) which collects premiums from private pensions in exchange for insurance against the failure of the offering company to fund it. Historically, they invested the premiums collected into safer bonds, but with poor bond yields, the previous fund manager felt investing more aggressively would make up for the shortfall – however the risk is proving quite large – just when they might need the money, it is potentially lost.
THIS IS THE SAME PROBLEM FACING SAVERS IN TODAY’S FINANCIAL LANDSCAPE, AND ESPECIALLY SENIORS, WHO HAVE SAVINGS – BECAUSE THE FED HAS RATES AT ZERO, SENIORS (AND APPARENTLY FEDERAL PENSION INSURANCE PROGRAMS ALSO) INVEST MORE AGGRESSIVELY TO MAKE UP FOR LOST YIELD!!!
This very much upsets me as the Fed punishes savers to bail out the foolish. The ramifications of low rates are being felt all over the economy. Municipalities, pensions, seniors, savers of all kinds are getting punished due to the Fed’s actions -and they take more risk than they should to make up for low bond yields. Don’t worry though, the printing press will bail out this problem too (Printing Press = Gov’t borrows money and Fed buys the bonds with created money).
Action Plan – some alternatives to consider: if you can roll out your pension, you may want to do that (not giving advice just a suggestion). You certainly want to keep tabs on what your company (or city employer) is up to in regards to their financial strength. If you’re offered a generous buyout, you may want to take it. Hopefully this is some good food for thought!
Note: if you are concerned about pensions, I have a good resource of pension news on my website – see the link to the left for Pension Tsunami and give it a click (under “great Resources”).