4 ms·

Pension funds are generally defined benefit, as opposed to defined contribution. This means that they guarantee a retirement benefit. The problem with that is t

by bko 8y ago

Pension funds are generally defined benefit, as opposed to defined contribution. This means that they guarantee a retirement benefit. The problem with that is the companies often invest a portion assuming an unrealistic growth rate. The problem is worse when you consider that the effects of the underlying under-investment won't be felt until the current workers retire and start drawing on their funds. In other words, the people making the investment decisions today likely won't be around for the reckoning. This leads to a situation where a business today could be held hostage by employees from 30 years ago forcing current employees to suffer, prior employees to have their benefits cut and newer companies without these legacy costs to benefit. Defined contribution means the employer puts away a certain defined amount for every employee and the employee is entitled to that. This removes the risk of mismanagement of funds and gives employees responsibility to manage their own investments. An example is a 401k account. Most private businesses in the US switched over to defined contribution as its more sustainable and predictable. As an employee I also prefer defined contribution since my retirement is no longer dependent on the health of an employer a few decades from now.

C1sc0cat 8y ago
The DB deficit is mostly down to the accounting rules used I have had briefings (off the record Chattem house rules) for one of the UK's Largest DB schemes - One that recently sacked one of the Big 4 and now runs self managed. You do wonder if the Accounting profession deliberately altered the rules around DB pensions to allow employers to shut them down. Basically in the UK if the worst case scenarios that DB pensions have to match came true you would be talking about a major break down in civil society and making sure you had a shotgun to defend your stash of tinned goods.
- ljcn 8y ago
  > Chattem house Chatham House
  - C1sc0cat 8y ago
    oops my bad I have ben spelling it wrong for all these years
- lotsofpulp 8y ago
  The accounting rules were necessary to prevent understatement of liabilities, because as the previous poster wrote, today’s decision makers won’t be around when the problem happens 30 to 60 years into the future. Employers shut them down because insuring such risks decades into the future is too costly, not to mention the inability to reliably predict events that far into the future.
  - C1sc0cat 8y ago
    Ah yes but are the accounting rules fit for purpose or where the accountants lent on to adjust the rules to deliberately make the alleged deficit bigger to give the employers an excuse. If you think I am joking look at the recent audit scandals in the UK by the Big 4
    - AnthonyMouse 8y ago
      If anything it was historically the opposite. You had pension funds assuming guaranteed 8% returns. Compare this to actual returns on low-risk investments like treasury bills. You could historically get close to their targets with higher risk investments (although even then they were optimistic), but that involves the risk of losing a significant amount of the principal. Which doesn't mesh with providing a guaranteed payout to retirees. But if you stick to lower risk investments, the amount of the shortfall is enormous. So it was historically fraud. They guaranteed a payout and then did things that may have resulted in them not having the money. Once you do the accounting accurately and restrict yourself to investments that can't result in being unable to make the promised payouts, it turns out the cost of a guaranteed payout is large.
      - C1sc0cat 7y ago
        Why do you take what the accounting "profession" and employers /politicians at 100% face value - you don't see they may have an agenda here. and you are ignoring the fact that DB schemes are immortal or very very long lived.
        7y ago
pulisse 8y ago
> This leads to a situation where a business today could be held hostage by employees from 30 years ago forcing current employees to suffer This is a very loaded characterization. You're describing pension beneficiaries as using some kind of leverage ("held hostage") to extract resources that current employees might have a better claim to ("forcing [them] to suffer"). But defined-benefit pensions are a form of deferred compensation. Those employees from 30 years ago accepted lower wages in exchange for future pension payments, and the company received something of value (employee labor) on partial credit. So pension beneficiaries aren't extracting rents from the company. They're creditors of the company, literally. There's nothing untoward about them expecting payment, and if the company has mismanaged funds, they're not the ones to bear that risk. (If the company flourishes and increases in value, pension payments don't increase. If retirees don't benefit from the upside, they shouldn't bear the downside risk, either, which is just another way of saying that pension obligations represent a debt, not any kind of equity.)
- bluGill 8y ago
  > Those employees from 30 years ago accepted lower wages in exchange for future pension payments That might or might not be true. You can pay everybody well now and give them a pension, leaving the next generation to figure out how to pay out the pension that doesn't have any money in it. There are laws in place that try to prevent this.
- bko 8y ago
  > Those employees from 30 years ago accepted lower wages in exchange for future pension payments, and the company received something of value (employee labor) on partial credit That may be true, but that doesn't mean that another competitor without those legacy costs can come in and better compete, unless the benefit from being able to pay less for the workers from long ago is big enough to create a sustainable competitive advantage. I would also note that the term is likely much longer than many debt agreements (most debt is 5-10 years) and is not subject to the proper credit risk considerations as normal corporate debt. > There's nothing untoward about them expecting payment, and if the company has mismanaged funds, they're not the ones to bear that risk Employees are the ones that bear the risk as a company can always renegotiate or go out of business. I'm not sure where pension liabilities fall in bankruptcy, but I certainly wouldn't want to bet my retirement savings on my current employer's health 30 years from now.

by bko 8y ago

C1sc0cat 8y ago

The DB deficit is mostly down to the accounting rules used I have had briefings (off the record Chattem house rules) for one of the UK's Largest DB schemes - One that recently sacked one of the Big 4 and now runs self managed. You do wonder if the Accounting profession deliberately altered the rules around DB pensions to allow employers to shut them down. Basically in the UK if the worst case scenarios that DB pensions have to match came true you would be talking about a major break down in civil society and making sure you had a shotgun to defend your stash of tinned goods.

ljcn 8y ago
> Chattem house Chatham House
- C1sc0cat 8y ago
  oops my bad I have ben spelling it wrong for all these years
lotsofpulp 8y ago
The accounting rules were necessary to prevent understatement of liabilities, because as the previous poster wrote, today’s decision makers won’t be around when the problem happens 30 to 60 years into the future. Employers shut them down because insuring such risks decades into the future is too costly, not to mention the inability to reliably predict events that far into the future.
- C1sc0cat 8y ago
  Ah yes but are the accounting rules fit for purpose or where the accountants lent on to adjust the rules to deliberately make the alleged deficit bigger to give the employers an excuse. If you think I am joking look at the recent audit scandals in the UK by the Big 4
  - AnthonyMouse 8y ago
    If anything it was historically the opposite. You had pension funds assuming guaranteed 8% returns. Compare this to actual returns on low-risk investments like treasury bills. You could historically get close to their targets with higher risk investments (although even then they were optimistic), but that involves the risk of losing a significant amount of the principal. Which doesn't mesh with providing a guaranteed payout to retirees. But if you stick to lower risk investments, the amount of the shortfall is enormous. So it was historically fraud. They guaranteed a payout and then did things that may have resulted in them not having the money. Once you do the accounting accurately and restrict yourself to investments that can't result in being unable to make the promised payouts, it turns out the cost of a guaranteed payout is large.
    - C1sc0cat 7y ago
      Why do you take what the accounting "profession" and employers /politicians at 100% face value - you don't see they may have an agenda here. and you are ignoring the fact that DB schemes are immortal or very very long lived.
      - 7y ago

pulisse 8y ago

> This leads to a situation where a business today could be held hostage by employees from 30 years ago forcing current employees to suffer This is a very loaded characterization. You're describing pension beneficiaries as using some kind of leverage ("held hostage") to extract resources that current employees might have a better claim to ("forcing [them] to suffer"). But defined-benefit pensions are a form of deferred compensation. Those employees from 30 years ago accepted lower wages in exchange for future pension payments, and the company received something of value (employee labor) on partial credit. So pension beneficiaries aren't extracting rents from the company. They're creditors of the company, literally. There's nothing untoward about them expecting payment, and if the company has mismanaged funds, they're not the ones to bear that risk. (If the company flourishes and increases in value, pension payments don't increase. If retirees don't benefit from the upside, they shouldn't bear the downside risk, either, which is just another way of saying that pension obligations represent a debt, not any kind of equity.)

bluGill 8y ago
> Those employees from 30 years ago accepted lower wages in exchange for future pension payments That might or might not be true. You can pay everybody well now and give them a pension, leaving the next generation to figure out how to pay out the pension that doesn't have any money in it. There are laws in place that try to prevent this.
bko 8y ago
> Those employees from 30 years ago accepted lower wages in exchange for future pension payments, and the company received something of value (employee labor) on partial credit That may be true, but that doesn't mean that another competitor without those legacy costs can come in and better compete, unless the benefit from being able to pay less for the workers from long ago is big enough to create a sustainable competitive advantage. I would also note that the term is likely much longer than many debt agreements (most debt is 5-10 years) and is not subject to the proper credit risk considerations as normal corporate debt. > There's nothing untoward about them expecting payment, and if the company has mismanaged funds, they're not the ones to bear that risk Employees are the ones that bear the risk as a company can always renegotiate or go out of business. I'm not sure where pension liabilities fall in bankruptcy, but I certainly wouldn't want to bet my retirement savings on my current employer's health 30 years from now.