Ticking Sound May Be Your Pension Fund

MSN Money/CNBC/Reuters ^ | October 26, 2002 2:28:00 PM ET | Pierre Belec

[arete]

bizarre assumption of companies like GM, which are not operating in the real world, with expectations that their pension investments will grow by 10 percent.

The pension fund issue seems to be the new hot media issue. Is it a warning?

Richard W.

[arete]

FYI

Comments and opinions welcome.

Richard W.

[PGalt]

Thanks for the post, interesting.

[pacpam]

A thumbnail with lots of fill-ins required. A company is required by law to fund their retirement system. It must be added to regularly to cover future retirees as well as continue to pay out current retirees. If a fund is invested and earning - on paper - equivalent to what should be added, a company can defer 'real' money and call that deferral a profit. Crunch comes when 'paper' profit disappears because now fund is underfunded in real dollars.

If companies were honest - dream on - they would put real money into the fund all along, without regard to investment dividends, and never had a problem. But, in the quest to look good, they fudge and now they pay - or pay it back that is.

[DeaconBenjamin]

This seems like the 4th or 5th place I've read these warnings. So they are now being picked up by the mainstream press?

[arete]

You are welcome. Lot of people aren't paying attention to what is going on and one day they are going to be in for a big surprise. Cash is king and gold is better.

Richard W.

[arete]

This seems like the 4th or 5th place I've read these warnings. So they are now being picked up by the mainstream press?

Kind of makes a person wonder what has sparked this sudden attention to the details by the press and air media, doesn't it?

Richard W.

[DeaconBenjamin]

Particularly as it is not entirely a new phenomenon. In the late 1970s I remember hearing about the Washington Post Board of Directors receiving bonuses reflecting the budgeted contribution to the Washington Post pension fund because Washington Post stock had performed so well, the expenditure was not deemed necessary. Evidently no consideration was given to the possibility that such paper gains might later be lost just as easily.

[ex-Texan]

"By one account, 50 of the biggest American companies have seen 90 percent of their pension surpluses go up in smoke during the bear market..."

It is worse that that. Very conservative projections.

More likely all companies are facing vastly worse projections ....

[imawit]

So now we now your colors !

Green (Cash is king) and gold.

[imawit]

Anybody check out the corporate bond market ?

Suppose GM & Ford made bond offerings in the 20% yield range ?

Would any one show up ?

This is one way of offsetting the cash need. Toss it into the future by a few decades. One added benefit is that bonds trump stock if you wound up having the wrong auto maker.

Cheez just think how many Cadilacs or Lincolns you might all of a sudden own.

[imawit]

Bonds ?

Of course don't let this stop you, get some Diamler and Toyota and Ferrari and Rolls bonds too. Like they say, not all eggs in one basket.

[ChiefKujo]

Stop complaining. The government will save us all.

[chuckles]

One of the things I read awhile back was many of the biggest mutual funds lost BIIIIG time in one week. They owned several companies like TYCO, WCOM,AOL, and others that lost 20%, 30%, 50%, all in one week. Several trillion was gone at once, and it was the beginning of mutual fund withdrawals, so they were forced to sell to pay the people. Then they went into dirivitives to try and salvage their positions. I haven't heard anything since, but this was some Fiedelity and Vangaurd funds. I have heard that some funds will close but they gave no names. I hope people with these funds are keeping up with their prospectus'. They may be under water and can't pay if there is a run. Maybe with the recovery, there has been some shifting to better stocks. It's like Cigna was the other day. You can't loose $28 in one day on a core holding and make that up with your other stocks.

[arete]

One of the things I read awhile back was many of the biggest mutual funds lost BIIIIG time in one week

Yes, back in July, many mutual funds took a big hit both to their portfolios and redemptions. Initially, a couple of novice spokesmen for some funds appeared on CNBC and expressed concern about the forced selling into a falling market. That lasted about two days and then the mutual fund industry slammed the information door shut, put the novices in a back office and sent out the old hypsters to say that everything was just fine and how now was a good time to buy, buy, buy.

Ever since then, there has been little reported on the health of the mutual fund industry although I did hear that as many as 500 funds have either been liquidated or merged into other funds this year. John Bogel of Vanguard fame commented that he thought that the number of funds would be cut in half. That cause quite a stir for a couple of days, and then that story was buried.

Don't expect much honesty and truth coming from the financial management business. They are losing investor money at a record clip and are charging management fees to do it. What can they say?

Richard W.

[Paulie]

"Cash is king and gold is better."

I also understand that other individual investors, whom some would consider them to be the 'smart money', have long been heavily weighted in natural resources (dircet investment and buying pure nat resource stock plays), in addition to the things you've mentioned.

[STONEWALLS]

"Kind of makes a person wonder what has sparked this sudden attention to the details by the press and air media, doesn't it?"

perhaps it's because the members of the media are starting to feel a little cold wind blowing on the back of their own necks and thinking "...hmm, wonder what kind of shape MY pension fund is in?".....pension fund concerns take on a very personal dimension in a hurry....

Good luck to everybody!!

Stonewalls

[Soren]

I was just explaining this issue and the difference between defined contribution and defined benefit pension plans to my wife at breakfast this morning. She was a good sport, but I got that look that says "boring husband alert". I said, you married an actuary, what do you expect?

[rohry]

This from the James Joyce Table:

US core earnings 'inflated by 45%'

By Andrew Hill in New York

Published: October 24 2002 5:00 | Last Updated: October 24 2002 5:00

Pension and stock option accounting helped boost reported earnings at big US companies by about 45 per cent in the year to June, according to Standard & Poor's.

S&P will on Thursday publish its calculation of "core earnings" for the S&P500, the blue-chip index of the largest US companies. It deducts stock option costs from reported earnings, and excludes adjusted pension income.

According to S&P, core earnings for the four quarters to June 30 were $18.48 per share, compared with reported earnings of $26.74.

But the credit rating and financial information group cautioned that the divergence between core and reported earnings was particularly wide in the year to June, because of depressed markets and poor operating performance.

Even so, S&P's calculations are likely to fuel the growing debate about the reliability of corporate earnings.

"To me, the earnings numbers should reflect the way the world is, not the way we would wish it to be," says David Blitzer, S&P chief investment strategist.

S&P calculates that adjusted net pension income was worth $6.54 per share in the year to June and a further $5.21 would have been deducted if all S&P500 companies had treated stock option costs as expenses.

[Nick Danger]

The pension fund issue seems to be the new hot media issue. Is it a warning?

No, it's an election tactic. You're supposed to get all worried about your pension and vote Democrat. The Democratic politicians are having a Hell of a time getting anyone to pay attention to them, so the Democratic media is trying to fill in the gap. You won't be hearing any more about this after the election. It's just the media shilling for The Party.