The current low level of interest rates poses a big challenge to pension plans with benefits guaranteed by their corporate sponsors. These pension plans have a difficult time earning a decent return from high-quality bonds with relatively low risk.
In response, Congress has recently revised the rules for calculating the obligations of corporate pension plans. But these revised rules allow corporate pension plans to assume that they will earn unrealistically high returns. As a result, many corporate sponsors will not contribute enough to meet their likely benefit obligations to retirees.
Read the rest at RealClearMarkets.com
Co-authored with Theresa Hamacher.
Private pension funds across the world are finding it more difficult to meet their obligations to future retirees. In July 2012, the 100 largest US private pension funds faced a $533bn shortfall, according to the consulting firm Milliman. In the same month, private pensions in the UK faced a £283bn shortfall, according to the government’s insurer of pension plans.
Read the rest at FT.com
The transportation bill that Congress passed this summer is financed, in part, with a budget gimmick: Lawmakers changed the funding rules for corporate pension plans. These changes help the federal budget in the short term by reducing the tax deductions that corporations take for contributing to these plans — thereby reportedly increasing their taxable income.
Read the rest at washingtonpost.com
Government workers’ pensions may sound like an obscure topic, but it’s front and center in some of the most rancorous of today’s political discussions. Retirement benefits for public workers are at the heart of the conflict between state and local governments and the unions representing their workers — and how that conflict gets resolved will affect investors in the municipal bonds issued by those states and cities. Let’s take a look at the looming public pension crisis, its effect on municipal finance and how accounting reform might help.
Read the rest in the Washington Post
There’s a controversial cost-offset provision in the highway bill currently being debated in the Senate; it would effectively allow corporations to make smaller contributions to their pension plans. And since a smaller contribution means a smaller tax write-off, tax revenue would increase by $7 billion over ten years. Although the bill itself is certainly not headed for an easy passage, this provision has raised some interesting—and complex—issues related to pension accounting.
Here’s a video of my appearance yesterday on Bloomberg’s “Bottom Line” program with Mark Crumpton. We discussed some of the problems with the federal pension system.
Watch the video
2011 was a tough year for private defined benefit pension plans (DB plans). According to a report from Credit Suisse, the funding gap for the DB plans of S&P 500 companies rose from $250 billion at the end of 2010 to $450 billion at the end of 2011. Note that this is much higher than the shortfall during the peak of the financial crisis, which was estimated at $274 billion.