Heard Off the Street: The pension time bomb may explode, or perhaps it's just a dud

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Heard Off the Street: The pension time bomb may explode, or perhaps it's just a dud

By Len Boselovic

Pittsburgh Post-Gazette, September 08, 2003

There is enough gloom pervading the topic of retirement funding without considering what impact the market's performance over the next few years will have on pension plans, Individual Retirement Accounts and 401(k) portfolios.

Recent trends have been encouraging. Through Friday, the Standard & Poor's 500 is up 16 percent this year. But there are market pundits warning of lean years on the horizon. If they are on the money, problems companies already are experiencing funding their pension plans will be compounded. Individuals who curtailed their retirement savings in recent years will be caught in the same squeeze.

The "lean years" prophets include legendary investor Warren Buffet. While most companies are assuming their pension funds will earn 9 percent or more annually, Buffett is assuming a 6.5 percent return.

"That certainly is more reasonable going forward," says Legend Financial Advisors President Louis Stanasolovich, a North Hills money manager who's in Buffett's corner.

So is David Hammerstein, chief strategist for Yanni Partners. The Downtown pension consultant is telling clients to expect stock market returns of about 8 percent for the foreseeable future vs. the 11 percent annualized returns it generated since World War II.

Pension funds also invest in bonds and other investments, so the overall return on their investment will be even lower. Yanni is forecasting median pension fund returns of 5.2 to 7.4 percent annually: 5.2 percent for portfolios with 20 percent stocks and 80 percent intermediate bonds and 7.4 percent for an 80-20 mix of stocks and bonds.

What does this mean for pension funds? Under Yanni's forecast, a fully funded plan would have to shift its asset allocation to 80 percent stocks in order to be fully funded five years from now. Investing in a 50-50 mix of stocks and bonds would leave a fully funded plan with only 94 cents for every $1 in pension obligations five years from now. Plans that are underfunded today could fall even further behind, forcing them to increase contributions, curtail benefits or terminate their plans.

"We hate to be purveyors of doom, but people have to be looking out at what could happen here," says Chairman James E. Yanni.

The Pension Benefit Guaranty Corp. is painfully aware of how many underfunded plans there are.

The federal agency insures pension benefits to nearly 44 million workers and retirees covered by more than 32,000 company pension plans. Last week, PBGC Executive Director Steven A. Kandarian told a congressional committee that the agency had a record deficit of $5.7 billion as of July 31 thanks to pension plans in the steel and airline industries that have been dumped on the PBGC. Single-employer pension plans are underfunded by more than $400 billion, he told the House Committee on Education and the Workforce.

Kandarian ticked off a host of reasons for the sorry state of affairs:

Active workers account for 53 percent of those insured by the PBGC, down from 78 percent in 1980;

Companies in the most mature, capital intensive industries that have the toughest time funding plans also have huge numbers of older workers and retirees;

People are living longer in retirement: 18.1 years for the average male today, vs. 11.5 years in 1950;

Pension funding rules prevent companies from increasing contributions when they can afford to and don't require weak companies to fund underfunded plans.

All of these factors are being weighed as Congress wrestles with the issue. For every alarmist, there's an expert who insists things aren't as bad as they seem.

The PBGC "has plenty of assets to pay liabilities for 15 to 20 years out," says Mark Beilke, director of employee benefits research for Milliman USA, a consulting and actuarial firm. Beilke says concern over pensions "is so overblown that it's ridiculous."

The American Benefits Council, whose members sponsor and administer employee benefit plans, says there are more serious threats than the PBGC's health. Top on its list is the interest rate used to value pension fund liabilities. Council President James A. Klein says the current rate is unrealistically low, which inflates liabilities and makes pension funds appear to be more underfunded than they are. If Congress doesn't raise the interest rate or imposes more onerous accounting and funding rules on pension plan sponsors, Klein warns more employers will terminate their plans and those that don't offer pensions won't initiate them.

So whom do you believe: The bears or the bulls? Those demanding wholesale reform or those who insist minor tinkering will get the job done?

In this case, what you believe isn't as important as what you do about it. Individuals have been forced to assume more responsibility for funding their retirements. Recent tax law changes allow larger annual contributions to IRA and 401(k) accounts as well as catch-up contributions for workers in their 50s.

Yet any number of surveys indicate the market's tumble prompted investors to do the opposite. When Vanguard surveyed employees covered by retirement plans it manages last year, the mutual fund company found participation among those eligible had fallen from 79 percent in 1999 to 76 percent in 2001. The average participant saved 7.2 percent of their income, down 1 percent from 1999.

While individuals have very little say about how much the government or their employer saves for their retirement, they do have a lot to say about how much they save on their own.

"Save the maximum allowed by law and find a way to do it," says Stanasolovich.