5 ms·

Why isn't it a solution to simply require pension funds to be fully funded, perhaps under a separate legal entity that's protected from raiding by PE firms? Wh

Why isn't it a solution to simply require pension funds to be fully funded, perhaps under a separate legal entity that's protected from raiding by PE firms? Why is it that the "unfunded pension" crisis always makes people question the second term in the phrase instead of the first?

tome 8y ago
I'd like to know the answer to that. I'm curious how it's legal to call something a "pension" without legal guarantees and professional oversight. Otherwise it's less a "pension" and more a "vague promise".
- mundo 8y ago
  A pension is a lot like a loan - a promise to pay someone something with your future earnings. The problem is not that people sometimes fail to repay loans when they go broke, it's that they sometimes manage to weasel out of paying them despite not being broke, and then pocket the money they were supposed to use to pay the debt.
  - closeparen 8y ago
    The consequences for the prospective retiree are the same regardless of whether the company is actually broke.
    - mundo 8y ago
      Sure. And if you lend me $100 and I refuse to pay it, you're out the money regardless of whether I'm living in a cardboard box or a mansion. But there's a case to be made that the law should allow you to collect your $100 in the latter case. Obviously it's a lot more complex in the case of a PE firm buying a struggling business. But at a high level, if the company has $X in debts, it is worth $X more to someone who thinks it's possible to weasel out of paying that debt than it is to someone who doesn't. And finding novel ways to make a company more valuable than its current owners think it is is kind of the whole MO of private equity. That's what's going on here - PE firms are finding novel ways to weasel out of paying pension debt, and pocketing the difference. And what people are complaining about is that in this case, the person who's out the money is not able to collect from the courts, despite the entity who ought to be responsible for the debt living in a mansion and not a cardboard box.
RestlessMind 8y ago
Why? I can think of multiple reasons. Some essentially boil down to human nature - short-term thinking, preferring politicians who make rosier promises ("assume high rate of return on pension investments and lower the taxes") against honest politicians ("increase taxes since current levels are unfunded"), etc Some are about societal changes no one can honestly predict - avg lifespans increasing (avg life expectancy in the US was 61 when social security was enacted), pensions were promised in 70's / 80's before globalization wave hit forcing Western companies to either die or compete with leaner overseas firms, internet and e-commerce bringing b&m retail apocalypse, etc. To find out true cost of funding a pension, try buying an annuity for the similar level of monetary coverage where seller has to do more due diligence. And that will show you the true cost, and my guess is that there is very little appetite to bear that cost in our society.
- grogenaut 8y ago
  I imagine it’s a lot like any other cash flow issue. It’s in no ones best interest to halt the company the instant it can’t meet its obligations by $1. You get a loan instead. But when do you halt the company?
  - Retric 8y ago
    Companies don't have a choice to pay their electric bill or not. They are given a choice to pay their workers via under funding pensions. Shockingly the second causes more problems, because companies will take out a loan to fund the first but quietly under-fund the second for years until a small problem becomes a huge one.
  - RestlessMind 8y ago
    Why not go the free-ish market route (with politically acceptable regulations like creditor protections) and let the owners decide how/when to halt the company?
    - grogenaut 8y ago
      The answer seems to be never halt the company in most cases, just split it up and write off parts. When did yahoo end?
pessimizer 8y ago
Because pensions tend to be things negotiated (usually with unions) in return for generally lower than prevailing wages, immediate pay cuts, or cuts in wage growth. Ultimately, it's exchanging $1.00 for $1.00 interest-bearing IOUs (that rise with inflation) - which is why business offers them. If they actually funded the IOUs, there would be no current benefit at all in deferring worker compensation. Under a government that allows pension debt to be discharged by bankruptcy, pensions are made to be ducked out on.
rayiner 8y ago
In large part because defined-benefit pensions have been mostly eliminated, and so the problems actually being faced today are all the unfunded obligations accrued in the past.
jandrese 8y ago
Congress did that to the Post Office and it nearly killed them. Worse, it made them less competitive with FedEx, UPS, DHL, etc... which further exacerbated the problem. You also see this with big legacy companies that slowly get throttled by their pension schemes and are undercut but new companies full of young workers. Automakers for example. We have been underfunding pensions for a long long time because people weren't supposed to be living so long and because cuts to the pension program aren't immediately visible so they're a tempting target for unscrupulous management.
- telchar 8y ago
  That's because Congress was trying to kill the PO, by making them fund pensions far in advance of what would be necessary to cover their obligations. "What if your credit card company told you: 'You will charge a million dollars on your credit card during your life; please enclose the million dollars in your next bill payment'... Well, that’s what the U.S. Postal Service’s requirement to prefund its long-term pension and healthcare liabilities is like."[0] [0] https://www.uspsoig.gov/blog/be-careful-what-you-assume https://www.uspsoig.gov/blog/be-careful-what-you-assume
lucas_membrane 8y ago
>> simply require pension funds to be fully funded << One reason not to do this mentioned in the article is that pension investments can decline in value. There should be an expectation that a pretty bad year probably will happen every few decades, maybe a 20 or 30 percent loss, and it would be unreasonable to expect a firm to reimburse its pension fund for losses within a single year when the economy may be very weak. (All of this presumes an annual cycle of reporting and validation of the appropriateness of fund levels and contributions.) The second reason is that when companies used to create or agree with their unions to create defined-benefit pension plans, the benefit formulas at retirement were usually based on years of service, not years of service under the plan, so the plans are born with a large unfunded obligation for the years of service that the current employees have already accumulated. Back when I did pension math, over 40 years ago, the typical (and government approved) way to deal with unfunded liabilities from either of these 2 causes (or any other), was to increase the employer contributions a little bit, so that the unfunded amount of the liability would vanish after 30 years. Because investment results, longevity, retirement rates, etc, would fluctuate, the amount of the extra contribution would be re-figured every year, and a few good years might eliminate the deficit. A shorter period of funding for the deficits, maybe 10 or 15 years, might improve the situation somewhat in some of these cases. But that is not a solution. Note the long discussion above about problems of state and local government plans. These are quite a bit different, because their are no greedy investors calling the shots for state and local governments, and IRS regulations about what plans qualify for tax deductions for the employer don't have traction in the public sector. In the private sector, these stories will become increasingly rare, as workforce unionization is very low, and virtually all the non-union plans have been replaced by 401k plans and defined-contribution pension plans that do not include any concept of an accrued benefit or unfunded liability. That is America's real pension scandal, but it is another story. The real problem is that the situation is too complicated. It is often very difficult to tell whether a company is being streamlined or being looted. Creating a comprehensive set of rules to prevent looting out from under a corporate or even multi-employer pension plan and a watchdog agency that could enforce them wisely for the benefit of workers would be a very ambitious project.

tome 8y ago

I'd like to know the answer to that. I'm curious how it's legal to call something a "pension" without legal guarantees and professional oversight. Otherwise it's less a "pension" and more a "vague promise".

mundo 8y ago
A pension is a lot like a loan - a promise to pay someone something with your future earnings. The problem is not that people sometimes fail to repay loans when they go broke, it's that they sometimes manage to weasel out of paying them despite not being broke, and then pocket the money they were supposed to use to pay the debt.
- closeparen 8y ago
  The consequences for the prospective retiree are the same regardless of whether the company is actually broke.
  - mundo 8y ago
    Sure. And if you lend me $100 and I refuse to pay it, you're out the money regardless of whether I'm living in a cardboard box or a mansion. But there's a case to be made that the law should allow you to collect your $100 in the latter case. Obviously it's a lot more complex in the case of a PE firm buying a struggling business. But at a high level, if the company has $X in debts, it is worth $X more to someone who thinks it's possible to weasel out of paying that debt than it is to someone who doesn't. And finding novel ways to make a company more valuable than its current owners think it is is kind of the whole MO of private equity. That's what's going on here - PE firms are finding novel ways to weasel out of paying pension debt, and pocketing the difference. And what people are complaining about is that in this case, the person who's out the money is not able to collect from the courts, despite the entity who ought to be responsible for the debt living in a mansion and not a cardboard box.

RestlessMind 8y ago

Why? I can think of multiple reasons. Some essentially boil down to human nature - short-term thinking, preferring politicians who make rosier promises ("assume high rate of return on pension investments and lower the taxes") against honest politicians ("increase taxes since current levels are unfunded"), etc Some are about societal changes no one can honestly predict - avg lifespans increasing (avg life expectancy in the US was 61 when social security was enacted), pensions were promised in 70's / 80's before globalization wave hit forcing Western companies to either die or compete with leaner overseas firms, internet and e-commerce bringing b&m retail apocalypse, etc. To find out true cost of funding a pension, try buying an annuity for the similar level of monetary coverage where seller has to do more due diligence. And that will show you the true cost, and my guess is that there is very little appetite to bear that cost in our society.

grogenaut 8y ago
I imagine it’s a lot like any other cash flow issue. It’s in no ones best interest to halt the company the instant it can’t meet its obligations by $1. You get a loan instead. But when do you halt the company?
- Retric 8y ago
  Companies don't have a choice to pay their electric bill or not. They are given a choice to pay their workers via under funding pensions. Shockingly the second causes more problems, because companies will take out a loan to fund the first but quietly under-fund the second for years until a small problem becomes a huge one.
- RestlessMind 8y ago
  Why not go the free-ish market route (with politically acceptable regulations like creditor protections) and let the owners decide how/when to halt the company?
  - grogenaut 8y ago
    The answer seems to be never halt the company in most cases, just split it up and write off parts. When did yahoo end?

pessimizer 8y ago

Because pensions tend to be things negotiated (usually with unions) in return for generally lower than prevailing wages, immediate pay cuts, or cuts in wage growth. Ultimately, it's exchanging $1.00 for $1.00 interest-bearing IOUs (that rise with inflation) - which is why business offers them. If they actually funded the IOUs, there would be no current benefit at all in deferring worker compensation. Under a government that allows pension debt to be discharged by bankruptcy, pensions are made to be ducked out on.

rayiner 8y ago

In large part because defined-benefit pensions have been mostly eliminated, and so the problems actually being faced today are all the unfunded obligations accrued in the past.

jandrese 8y ago

Congress did that to the Post Office and it nearly killed them. Worse, it made them less competitive with FedEx, UPS, DHL, etc... which further exacerbated the problem. You also see this with big legacy companies that slowly get throttled by their pension schemes and are undercut but new companies full of young workers. Automakers for example. We have been underfunding pensions for a long long time because people weren't supposed to be living so long and because cuts to the pension program aren't immediately visible so they're a tempting target for unscrupulous management.

telchar 8y ago
That's because Congress was trying to kill the PO, by making them fund pensions far in advance of what would be necessary to cover their obligations. "What if your credit card company told you: 'You will charge a million dollars on your credit card during your life; please enclose the million dollars in your next bill payment'... Well, that’s what the U.S. Postal Service’s requirement to prefund its long-term pension and healthcare liabilities is like."[0] [0] https://www.uspsoig.gov/blog/be-careful-what-you-assume https://www.uspsoig.gov/blog/be-careful-what-you-assume

lucas_membrane 8y ago

>> simply require pension funds to be fully funded << One reason not to do this mentioned in the article is that pension investments can decline in value. There should be an expectation that a pretty bad year probably will happen every few decades, maybe a 20 or 30 percent loss, and it would be unreasonable to expect a firm to reimburse its pension fund for losses within a single year when the economy may be very weak. (All of this presumes an annual cycle of reporting and validation of the appropriateness of fund levels and contributions.) The second reason is that when companies used to create or agree with their unions to create defined-benefit pension plans, the benefit formulas at retirement were usually based on years of service, not years of service under the plan, so the plans are born with a large unfunded obligation for the years of service that the current employees have already accumulated. Back when I did pension math, over 40 years ago, the typical (and government approved) way to deal with unfunded liabilities from either of these 2 causes (or any other), was to increase the employer contributions a little bit, so that the unfunded amount of the liability would vanish after 30 years. Because investment results, longevity, retirement rates, etc, would fluctuate, the amount of the extra contribution would be re-figured every year, and a few good years might eliminate the deficit. A shorter period of funding for the deficits, maybe 10 or 15 years, might improve the situation somewhat in some of these cases. But that is not a solution. Note the long discussion above about problems of state and local government plans. These are quite a bit different, because their are no greedy investors calling the shots for state and local governments, and IRS regulations about what plans qualify for tax deductions for the employer don't have traction in the public sector. In the private sector, these stories will become increasingly rare, as workforce unionization is very low, and virtually all the non-union plans have been replaced by 401k plans and defined-contribution pension plans that do not include any concept of an accrued benefit or unfunded liability. That is America's real pension scandal, but it is another story. The real problem is that the situation is too complicated. It is often very difficult to tell whether a company is being streamlined or being looted. Creating a comprehensive set of rules to prevent looting out from under a corporate or even multi-employer pension plan and a watchdog agency that could enforce them wisely for the benefit of workers would be a very ambitious project.