| Dwindling Pensions, Endowments, and the Madoff Factor |
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| Wednesday, 21 January 2009 01:52 | |||||||||||||||||||||
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There was a time when the term “pension” conjured up images of a secure future and a worry-free retirement. Our grandfathers never doubted that their pension checks would be there when they needed them. But Wall Street greed, mismanagement and outright fraud have changed all that. A plummeting stock market is decimating pension fund assets and the sting is being felt far and wide. Losses affect company employees, universities, labor unions and state and city government workers all across major cities and small town America. And as if things were not already bad enough, in cases where there is insufficient money to cover pension benefits, taxpayers could be on the hook. Headlines across the country are telling the same bleak story; only the names, beneficiaries and locations are changed—carpenter unions, police and firefighters, educators, large corporations and more stand to lose. States from Rhode Island to California have run up estimated pension-fund losses of nearly $865.1 billion. Here are a few examples:
THE MADOFF FACTOR The financial carnage left in the wake of the $50 billion Madoff investment scandal has spread from charities and wealthy individuals to labor union pension funds. Here’s just a brief sampling of the endowments and pension funds that were victimized by Madoff. Endowment exposure to loss: • New York’s Yeshiva University: $110 million • New York University: $24 million • New York’s Bard College Endowment Fund: $3 million • New York Law School : $3 million Pension fund losses: • Fire and Police Pension Association Of Colorado: $60 million • Fairfield, Connecticut’s pension fund for 800 police, firefighters: $40 million • Danbury, Connecticut’s pension fund: $400,000 • Baltimore Maryland’s police and fire pension fund: $3.5 million • West Palm Beach, Florida Police Pension Fund: $838,000 • Syracuse, New York’s carpenters local union: $100 million to $150 million -- Plumbers and Steamfitters Local 267: $48 million. HARVARD’S ENDOWMENT LOSSES Harvard University announced that the market collapse has hit home. Their endowment fund fell about $8 billion from $36 billion, a loss of 22 percent. However, experts say the decline could be closer to $18 billion if the losses on the fund's illiquid investments are realistically appraised. Total losses for its fiscal year ending in June 2009 could be as much as 30 percent, its worst performance on record. CORPORATION LOSSES Pension funds at the largest companies are now under-funded by as much as $409 billion compared to a $60 billion pension surplus reported at the end of 2007. Mercer, a large pension-consulting firm, has been monitoring the plan losses offered by companies listed in the Standard and Poor's index of 1500 big corporations. It’s estimated that the S&P 1500 pension plans only had enough assets to cover 75 percent of their obligations, down from 104 percent at the end of 2007. It’s the steepest one-year drop in 20 years and could be even worse once the final 2008 numbers are released. When pension plans are under-funded, companies are required to make up the shortfall by adding additional money to the funds, something that usually takes several years. But new rules will force companies to make cash infusions far more quickly than in the past. As one might expect, companies have begun lobbying Congress to kill requirements to make these cash contributions. But even if Congress grants some level of relief, employees are still likely to see their benefits take a hit. Plowing more money back in to cover pension fund deficits may give the impression that employees are getting a cushion of added financial security. But there are hidden dangers and potential tradeoffs like reduced wages and benefits, or even eliminated jobs. In some cases, employers might be forced to cap the amount of pension benefits that have previously been allowed to accrue. And since many companies that offer standard pension plans also have 401(k)-style plans, it’s possible that we’ll see an end to company matching contributions, or that new employees will be barred from enrolling in defined benefit plans all together. Hitting the bottom line: Capital spending cutbacks Mercer estimates that 2009 pension expenses for the S&P companies will approach $70 billion, $10 billion more than in 2008. That means a $70 billion hit to corporate earnings—or an 8 percent reduction in annual profits compared with the previous year, a deficit that will show up on company balance sheets. In addition to falling share prices in today’s market, and the shrinking sales because consumers are pinching pennies, companies will also have to cut back on capital spending in order to cover their employee pension obligations. Less capital spending means a halt in future expansion, zero growth opportunities, more job losses, plants closures, and so on. These factors contribute to pushing stock prices lower, and increases the potential of weaker credit ratings and higher borrowing costs, assuming loans are even available. In the worst-case scenario, when companies are forced into bankruptcy, the federally chartered Pension Benefit Guaranty Corportation can step in and cover the shortfall. But this legal process frequently results in high-paid workers receiving smaller pension payouts than they had been expecting. If we’re in for a prolonged recession, one that delays a stock market rebound, companies won’t be able to rely on investment gains to bolster their pension plans. Because every part of our economy is linked to every other part, the ripple effect of reduced pension fund assets has far reaching consequences. Our parents and grandparents placed great faith in their pension funds and in the companies that offered them. A pension meant security for the golden years and nothing was considered safer. But once again, as we stress in our book, The Big Gamble: Are You Investing or Speculating? nothing is safe. No matter what you’ve assumed that you’ve done with your money, your savings, your portfolio or even your pension plans, at the end of the day, it’s all just speculation. |
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