2 ms·

Just off the top - * Everyone gets lumped into the same risk tolerance bucket * Big funds tend to make big purchases which on their own can move markets, whic

by teej 9y ago

Just off the top - * Everyone gets lumped into the same risk tolerance bucket * Big funds tend to make big purchases which on their own can move markets, which is bad. You see this more with sovereign wealth funds than pensions though. * You can’t always trust the fiduciaries of the pension to make smart decisions. See 2008. * Pensions often come with a defined benefit which relies on younger people paying the benefits of older people. Often these benefits were calculated with very stupid future growth projections in mind. * Private company pensions often require the company to stay solvent for the pension to stay solvent. That isn’t always a safe assumption * People are living longer which further screws up the math that many pensions were set up on * Sometimes, workers or employers negotiate for changes to pension benefits. Those changes won't necessarily be net positive for everyone the pension covers.

wahern 9y ago
Federal law requires private employers to keep their defined benefit plans fully funded. That is, for every employee with a vested pension benefit the company must have deposited enough assets _today_ to ensure the pension can pay the accrued benefits _tomorrow_. IIRC, the regulatory agency (PBGC?) mandates a fairly conservative rate of return when calculating liabilities, which is one reason why corporations ditched pension plans. It's possible to game the system, but you really have to work at it. The merger craze of the 1980s and 1990s was in no small part driven by attempts to raid pension funds. When companies merged you could merge the pension funds, and the merger provided opportunities to argue that the merged pension was overfunded. (Timing, choice of partner, shuffling of staff around, and tweaking of contracts so benefit accruals were postponed just long enough to raid the pension fund.) The new found cash in tandem with the supposedly lower liabilities provided companies huge one-time gains on their books, which fueled bonuses for C-suite executives (especially CFOs), who would then quickly move on before it all unraveled. In any event, defined benefit plans in the private world aren't pyramid schemes. That's unique to the state governments because the pertinent federal law doesn't apply to them. Even though companies can screw with pensions if they try, it's still far more secure than 401(k)s. Just ask anyone who retires shortly before a recession. Or ask anyone who lives in Chile, which has had individual retirement savings accounts for decades. A fully funded pension scheme is basically an annuity. If you have a 401(k), as you approach retirement you're _supposed_ to be rolling it over to an annuity anyhow. That's the rational thing to do. But nobody does it because, well, people don't behave rationally when left to their own devices. Similarly, pension plans often deduct significantly more in wages than people voluntarily do with 401(k)s. Upwards of 20-30%. People systematically underestimate how much they need to save for retirement. Consider that social security effectively taxes you at 12%, but even if it stays completely solvent it's only going to provide a bare minimum income.

by teej 9y ago

wahern 9y ago

Federal law requires private employers to keep their defined benefit plans fully funded. That is, for every employee with a vested pension benefit the company must have deposited enough assets _today_ to ensure the pension can pay the accrued benefits _tomorrow_. IIRC, the regulatory agency (PBGC?) mandates a fairly conservative rate of return when calculating liabilities, which is one reason why corporations ditched pension plans. It's possible to game the system, but you really have to work at it. The merger craze of the 1980s and 1990s was in no small part driven by attempts to raid pension funds. When companies merged you could merge the pension funds, and the merger provided opportunities to argue that the merged pension was overfunded. (Timing, choice of partner, shuffling of staff around, and tweaking of contracts so benefit accruals were postponed just long enough to raid the pension fund.) The new found cash in tandem with the supposedly lower liabilities provided companies huge one-time gains on their books, which fueled bonuses for C-suite executives (especially CFOs), who would then quickly move on before it all unraveled. In any event, defined benefit plans in the private world aren't pyramid schemes. That's unique to the state governments because the pertinent federal law doesn't apply to them. Even though companies can screw with pensions if they try, it's still far more secure than 401(k)s. Just ask anyone who retires shortly before a recession. Or ask anyone who lives in Chile, which has had individual retirement savings accounts for decades. A fully funded pension scheme is basically an annuity. If you have a 401(k), as you approach retirement you're _supposed_ to be rolling it over to an annuity anyhow. That's the rational thing to do. But nobody does it because, well, people don't behave rationally when left to their own devices. Similarly, pension plans often deduct significantly more in wages than people voluntarily do with 401(k)s. Upwards of 20-30%. People systematically underestimate how much they need to save for retirement. Consider that social security effectively taxes you at 12%, but even if it stays completely solvent it's only going to provide a bare minimum income.