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Company pensions - something I don't get

mikeymikec

mikeymikec

Lifer
One of my relatives was working for a company for quite a few years, paying into the company pension scheme during that time. At some point (I think when the recent recession started), the company basically said, "guess what? there's no pension money".

There's another company in UK news whereby a British steel company that is experiencing difficulties has mentioned that their pension is in negative figures at the moment.

I just don't get this; admittedly I've only ever worked for one company that had a pension scheme (and most of my life - including at present - I've been self-employed), but the way they did it was to pay the money into a pension company's pension scheme, the employer paid as much as I did per month into the scheme, so there's no concept of the employer being able to dip into the pension just because say the company has hit on hard times.

I could understand it if it was explicitly agreed that the company's contribution to the employee's pension was based upon the company's performance that month, and that if the company falls on hard times, it can call on x% of the total pension fund, but who would sign in to such a scheme? You could easily have a situation whereby you hit say 55-60, everything is peachy with your pension and you set to have a comfortable (though not lavish) retirement, the next minute the company hits the rocks and takes a massive bite out of the pension. Other than the scheme I just described, it just seems that in the case of what my relative experienced or what's going on at that steel company, straight-up fraud has occurred.
 
All of the pension shortage cases I have heard of are because the recipients outweighed the contributors, mixed with a stock market recession.
If the pension fund dries up, there is nothing to pay out.
If the company goes bankrupt, the recipients are screwed.
 
mikeymikec said:
I could understand it if it was explicitly agreed that the company's contribution to the employee's pension was based upon the company's performance that month, and that if the company falls on hard times, it can call on x% of the total pension fund, but who would sign in to such a scheme? You could easily have a situation whereby you hit say 55-60, everything is peachy with your pension and you set to have a comfortable (though not lavish) retirement, the next minute the company hits the rocks and takes a massive bite out of the pension. Other than the scheme I just described, it just seems that in the case of what my relative experienced or what's going on at that steel company, straight-up fraud has occurred.
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It depends on the wording of the pension. The company could only be required to fund a percent of the 'required' funding on a given year and that seems pretty common in the US. I've seen some that only require 60% of the deemed necessary funding in a given year. Theoretically its to allow the company some flexibility in hard times that they are supposed to make up later but companies and states have failed to do that time and time again.

Another issue is the ridiculous ROI that many pensions depend on. Some plans require as much as an 8% ROI each year to meet their projected obligations. Sadly you aren't required to know any basics on investing or have any financial background when writing or negotiating a pension. Or - on the shadier side of things - increasing the planned ROI is a great way to increase pension payouts without the need for the organization or employees to actually put in more money (for a couple of decades at least. And by then it will be someone else's problem). The people who have the pension don't care about the false math - they just see that their payout got larger. Try to lower that ROI to a more reasonable and sustainable level and watch the uproar of the pensioners that their potential payout got reduced. They don't care that it means the pension fund is more solvent and likely to be around when they need it (See: Chicago Teachers Pension and Michigan's teacher pension)

The people in charge don't necessarily have to be financially minded either. Not to mention their susceptibility to the "We have a great investment opportunity for you! Just come to our free seminar in Fiji with our all expenses paid trip for prospective investors." shady sales pitch. Lots of stories out there on terrible pension investment decisions that good or educated managers would have avoided at all costs

And then there's the straight up fraud. Lots of people in jail or about to be in jail over Detroit's pension fiasco including the financial manager and auditor. If the management team writing the financial reports and the auditor verifying those reports are both in on the deal you're not going to find out the pension is fucked until its too late

While some people see a lot of flaws in the more common, self directed 401k system in the US at least you can avoid a lot of the pitfalls of a pension where you have absolutely no control over its negotiation, payout, investment choices and you're not nearly as large of a fraud target.

edro said:
If the company goes bankrupt, the recipients are screwed.
Click to expand...

In the US the PBGC will step in and help out a lot but it seems they are starting to show signs of financial pressure
 
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Exterous said:
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Good post, lots of info :thumbsup:

KeithP said:
The problem is not just for companies. California currently has 64 billion in unfunded pension liabilities.

http://www.wsj.com/articles/califor...e-larger-than-previously-estimated-1458351309

-KeithP
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Indeed, many if not most defined benefit plans are in trouble, at all levels of government. The only difference is that the government can always get more money to pay out more by raising taxes etc, while a company that goes kaput can really leave the retirees/recipients in a lurch.

IMO it should be mandatory for pension plans to be close to fully funded, and that those funds can not be used for other purposes or otherwise diverted. Also, defined benefit plans are headed for the way of the dodo, defined contribution is how it's going to have to be.
 
Pensions are like a pyramid scheme. More money has to be coming in than going out or it falls apart. Most companies figured this out and shifted the majority of retirements savings over to the employee responsibility.
 
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