Thursday, 10 February 2011

Why Aren't They Screaming?

Why aren't the pension plans screaming blue murder?  Why aren't they foaming at the mouth and demanding justice?  Why are there no dire predictions about the millions of retired people who rely on fixed rate investments in an era where interest rates are being kept artificially low to stimulate the economy?

And they are hurting.  Really.  Here is a recent communication from a pension plan to its members (altered only to remove anything to identify the actual plan):

The Pension Board has been carefully monitoring the funded status of the pension plan. As previously announced, the Pension Board’s decision not to increase the pension benefits, although difficult, was necessary to maintain the plan’s “fully funded” status.

The combination of a challenging investment environment, historically low interest rates, and the maturing demographics for the plan means the Pension Board will be examining options and strategies to best ensure the sustainability of the pension plan for the longer term.  The Pension Board has also commissioned an ad-hoc committee to coordinate investment strategies to support the plan’s pension commitments. This committee’s efforts will ensure optimal support for the plan’s long-term sustainability. This systematic approach—in-depth researching of all available options—underscores how seriously the situation is being taken.  The Pension Board is keenly aware of the importance of keeping the benefit meaningful for retirees and of maintaining the affordability of the pension plan.

Keeping plan members informed of all decisions that impact the pension plan is a priority of the Pension Board, and any changes will be fully communicated to members as soon as details are available.

In pension circles, there is talk about how to ease the rules so that employers can take longer to fund the deficits in their plans.  Pension liabilities are increasingly seen as a heavy burden on large employers.  I am seeing an increased emphasis on defined contribution plans as opposed to the traditional defined benefit plans, as employers seek ways of sharing the risk with their staff.

Pension plans are traditionally long term, conservative investors, with as much as 40% of their investments in bonds and other fixed rate interest bearing investments.  The current low interest rates are unfairly punishing their performance, particularly when their pension liabilities, which stretch decades into the future, are being discounted at a different rate than they are earning.

Someone should be screaming!