underfunded pensions

[97guns]

just heard on my local weekend financial radio show that out of the 500 s&p 500 companies there are only 18 with pensions in the black, he also went on to say public pensions are underfunded by 1.3 trillion. do these numbers sound legit to you?

[thesimplemoneyblog]

Yes, these numbers are legit, unfortunately. Most pension plans have not had the returns they projected over the last ten years, so many of them are significantly underfunded. Despite low returns for the last ten to fifteen years, many of the pension plans have not reduced their future return expectations or if they have, they have only slightly modified it.

[97guns]

my local supermarket union is on strike, they want to take away the health beni's

[kv968]

just heard on my local weekend financial radio show that out of the 500 s&p 500 companies there are only 18 with pensions in the black, he also went on to say public pensions are underfunded by 1.3 trillion. do these numbers sound legit to you?

I'd say the numbers themselves are right but the methodology on how they determine if they're underfunded is flawed (i.e. the discount rate they use). A new law has recently changed this.

Basically the discount rate in this case is how much you anticipate making per year on your investments so you can see what the future liabillity is in today's dollars. The higher the rate, the lower your current funding has to be and vice versa.
In the past, companies had to use the 2-yr average of corporate bonds as their discount rate, but now, due to the new law, they can use a 25-yr average which seems more appropriate since it better matches their time frame for when they'll have to pay out the benefits.

For example, if you were to use the past 3-yr return of the S&P of ~13% in your yearly projections of what your investments will be worth when you retire in say 30 years you might be in a world of hurt come retirement since the longer, and more appropriate, average is more like 7-9%.

Public pensions on the otherhand are probably more severely underfunded because they're allowed to set their discount rate to whatever the expected return of their portfolio is. So instead of using the more conservative rate of a risk-less or near risk-less investment, they're using projected market returns and that's where their major shortfall is coming from since the markets aren't performing as expected recently. This too has recently been modified a bit so that some may have to use a lower rate also which means you're going to see even more underfunding in some public pensions.

[bjl584]

my local supermarket union is on strike, they want to take away the health beni's

Unfortunately, I don't see the workers winning that fight. I never really understood why low skilled workers like those in retail think that they could unionize and have any clout. They are so easily replaceable that there is nearly zero chance that a business will cave to their demands. Skilled electricians, machinists, mechanics, yes. I understand unionizing. Workers at a supermarket, no. It doesn't make sense.

[Nsmith508]

Scary