The Pension Benefits Guarantee Corporation has an informative website. Here's some quotes from them on the sorry state of single-employer plans in general, and the financial problems of the PBGC that "insures" them:
"As of September 30, 2005, the end of the 2005 fiscal year, PBGC reported a $22.8 billion deficit in the financial statements for its single-employer pension insurance program."
"The PBGC estimates that, measured on a termination basis, total underfunding in the single-employer defined benefit plans it insures exceeded $450 billion as of September 30, 2005."
"Most of the $450 billion of total underfunding is in pension plans sponsored by healthy companies that should be able to fund promised benefits over time. However, $108 billion of underfunding for vested benefits is in plans sponsored by companies whose bonds are rated below investment grade. . . . [Such] . . . companies are 20 times more likely to default on their debt obligations than investment-grade companies."
"Companies typically do not use a termination basis to calculate the plan funding status they report to participants. The main differences are in the discount rate used to calculate the present value of benefits, the expected retirement age used to estimate when benefits will commence and the amount of early retirement benefits that will become payable. Companies tend to use a higher discount rate that reflects expected investment returns or perhaps an average of past investment returns, and later expected retirement ages that do not assume increased rates of early retirement."
"The assumptions companies use to measure liabilities often understate the plan’s underfunding compared to its underfunding on a termination basis. As a result, participants in terminating plans often are alarmed to learn just how poorly funded their plan is. For example, Bethlehem Steel reported that its plan was 84 percent funded on an ongoing basis, but the plan turned out to be only 45 percent funded on a termination basis, with a total shortfall of $4.3 billion. US Airways’ pilots’ plan was 94 percent funded on an ongoing basis, but the plan was only 33 percent funded on a termination basis, with a $2.5 billion shortfall."
Source: Understanding the Financial Condition of the Pension Insurance Program (PBGC.gov)
- - - - -
Tieguy, You're right that if a pension fund's funding level falls severely enough, that contributing employers are forced by law to make emergency contributions to bring the funding level up above the critical zone. However, this rarely happens in multi-employer funds, because the same stock, real estate, bond, interest rate, market that goes down, always goes back up, although sometimes it takes its own sweet time. Even major downturns in the stock market are not as bad as they seem at first. Usually the market recovers partly right away, and recovers completely eventually. The DJIA is just now reaching its old record level as these exerpts (below) from an AP news report indicate. The various pension and health & welfare funds must surely be benefiting. They aren't out of the woods yet but they are not critical; there is no need for employers to make emergency contributions.
The trouble with investing is no one has a crystal ball. Investing involves risk. No one really knows how to consistently "beat" the market, though many imply they can. One pension fund looses billions, another doesn't, all because the first fund was invested in the market when it decided to go South, the other wasn't. This almost random game of chance is a wildcard in the pension world and can trouble single-employer and multi-employer funds alike. But the single-employer funds have the major additional worry that since they are totally dependent on just one employer, when it is in financial trouble, or bankrupt, the fund itself usually fails. Any airplane can develop engine trouble, but a single-engine plane will probably crash and burn.
Dow Ends Up 29 After Reaching Milestone
09/28/06 18:10 EDT
By ELLEN SIMON
NEW YORK (AP) - The Dow Jones industrial average reached a milestone Thursday in Wall Street's nearly seven-year recovery from corporate upheaval, economic recession and terrorism, briefly trading above its record high close of 11,722.98 set on Jan. 14, 2000.
The index of 30 blue chip stocks surpassed its record, rising to a high of 11,728.46 in early morning trading. Stocks closed only modestly higher amid a dearth of news that could motivate investors; still, it was the market's fourth straight advance.
The S&P, which gained 2.56, or 0.19 percent, to close at 1,339.15, is still about 188 points below its closing high of 1,527.46, but is at a 5 1/2-year high. The Nasdaq, which rose 6.63, or 0.29 percent, to 2,270.02, is not expected to approach its high close of 5,048.62 any time soon.
The last time the Dow stood at these levels, Wall Street was propelled by wide-eyed investors eager for a slice of the wealth being generated by the dot-com and housing booms. Traders raced to buy any stocks that looked remotely promising, catapulting the major indexes sharply higher.
But after early 2000, the market began to crumble, slowly at first as doubts about the high-tech boom set in. Signs of recession accelerated the decline, and then the Sept. 11, 2001, terror attacks and their aftermath, including earnings declines and losses in many industries, sent stocks plunging.
It didn't stop there - corporate scandals including the collapse of Enron Corp. and WorldCom Inc. also shook Wall Street. The combination of all these factors devastated stocks, sending the Dow to a five-year closing low of 7,286.27 on Oct. 9, 2002, nearly 38 percent off its record high close.
- - - - -
Cezanne, to clarify, any pension fund participant who permanently withdraws from the fund, (stops having contributions made on his/her behalf) simply abandons those contributions if they had not yet achieved Vesting Status. Vesting usually requires about five years of participation, although it use to require ten! Leave the fund even one hour before achieving vesting status and you are "voluntarily" abandoning all those tens of thousands of dollars. They are the property of the fund to be used to cover general expenses. This is like buying a ticket in advance to a movie or other event. If you leave before it ends, you don't get a refund if the fine print on the back of the ticket says you don't. The Law assumes you read and agreed to the terms even though we all know few actually read the fine print. This "no refund" policy is bad enough in relatively small matters like single ticket purchases, but is truly outrageous when applied to as many as five or ten years of pension contributions. In any event, UPS is obviously not subsidizing these non-vested people because they never collect a cent. Others who are vested are cashed-out for convience with a lump sum payment if their total retirement benefit is small. Still other vested retirees with more reasonable benefit amounts may opt to receive up to 10% of their benefit in the form of a lump sum, (with their monthly benefit amount reduced for life accordingly.) Still others may have their retirement benefit paid in the form of an annuity. My point is, any time the fund either doesn't owe someone a retirement benefit in the first place, or has already paid in full certain lump sum and annuity benefits in years' past, then how can anyone claim UPS is currently subsidizing them, and will be burdened to do so on into the future? Aren't such people's accounts closed, and no longer a factor?
