Pension Buyouts: A coming trend?

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Pension Buyouts: A coming trend?

Postby umfundi » Mon May 07, 2012 12:56 am

Stay tuned. The end of defined-benefit pension plans, even for existing participants?

Ford has announced it will offer to buy out the pensions of thousands of salaried employees by offering a lump sum.

http://articles.latimes.com/2012/apr/28 ... n-20120428

"We believe this is the first time a program of this type and magnitude has been done in an ongoing pension plan," said Bob Shanks, Ford's chief financial officer.

If an individual elects to receive the lump-sum payment, the company's pension obligation to the individual will be settled. Ford said it was working with federal regulators on how to execute the plan. The payouts will start later this year.


I am retired from GM, with a defined-benefit pension. Interestingly enough, last week I got a call from Gallup, with a poll about finances. What it came down to, was would I accept a buyout of my pension for a lump sum of 8 times my annual pension amount? I said no. I have to believe this call was not a coincidence.

My rule of thumb is that I could buy an annuity that pays 6%. The lump sum would need to be 1/0.06 = 17 times the annual payment.

As I understand the pension laws, a company can buy an annuity to replace your pension and force you to take it. Given that, it is hard to understand how a company would offer a lump sum that is a better deal for you than the annuity they could force on you.

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Re: Pension Buyouts: A coming trend?

Postby lawman3966 » Mon May 07, 2012 1:08 am

umfundi wrote:it is hard to understand how a company would offer a lump sum that is a better deal for you than the annuity they could force on you.


It makes sense they would not offer a better deal than the annuity. But, the question in the Gallup poll raises the issue of whether a pensioner would accept a buyout that is worth less than the lump sum cost of an annuity paying what their pension does.

One thing that springs to mind is that if the pensioner feared that possible future bankruptcy that the company could use to discharge its pension obligations, the pensioner might be induced to hedge his/her risk that accepting a buyout if the offer were close to, but not quite at, the lump sum value of his/her current pension. This would be true only if the likelihood of liquidation of the insurance company were less than than a possible future bankruptcy of the company.
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Mon May 07, 2012 1:28 am

lawman3966 wrote:
umfundi wrote:it is hard to understand how a company would offer a lump sum that is a better deal for you than the annuity they could force on you.


It makes sense they would not offer a better deal than the annuity. But, the question in the Gallup poll raises the issue of whether a pensioner would accept a buyout that is worth less than the lump sum cost of an annuity paying what their pension does.

One thing that springs to mind is that if the pensioner feared that possible future bankruptcy that the company could use to discharge its pension obligations, the pensioner might be induced to hedge his/her risk that accepting a buyout if the offer were close to, but not quite at, the lump sum value of his/her current pension. This would be true only if the likelihood of liquidation of the insurance company were less than than a possible future bankruptcy of the company.

Another thing that comes to mind is that the pensioner knows their life expectancy is less than that which is the basis for the pension calculation.

If you have a good pension, it might be worth weighing the buyout against the perhaps very reduced benefit you would get from the PBGC, rather than from the company.

Also, I have not looked into what security there is for annuities purchased from an insurance company. I believe there may be some.

As we see with lottery winners, people choose lump sums over annuities all the time. Maybe Ford is banking on that behavioural aspect?

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Re: Pension Buyouts: A coming trend?

Postby lawman3966 » Mon May 07, 2012 2:00 am

umfundi wrote:Also, I have not looked into what security there is for annuities purchased from an insurance company. I believe there may be some.

As we see with lottery winners, people choose lump sums over annuities all the time. Maybe Ford is banking on that behavioural aspect?
Keith


The site below discusses the Guaranty associations that backup various types of insurance, including annuities. I reviewed the site some time ago, but haven't updated my knowledge of it recently. If memory serves, there is some rule to the effect that insurance companies are not supposed to mention the guaranty associations to their clients.

http://www.nolhga.com/

I haven't seen data on this point, but your report of people choosing lump sums over annuities doesn't surprise me. In my experience, most people drastically underestimate the value of a lifetime stream of income in relation to lump sums, especially if the pension income is inflation adjusted. At age 55, $ 1 million like a lot, and a $40K/year inflation-indexed pension sounds like a modest, even humble, income. However, according to data on the Elm annuity site, the $40K pension is worth more than $ 1 million.
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Re: Pension Buyouts: A coming trend?

Postby Mudpuppy » Mon May 07, 2012 2:12 am

umfundi wrote:I am retired from GM, with a defined-benefit pension. Interestingly enough, last week I got a call from Gallup, with a poll about finances. What it came down to, was would I accept a buyout of my pension for a lump sum of 8 times my annual pension amount? I said no. I have to believe this call was not a coincidence.

It sounds like they may be conducting a market survey to see what most people would accept for a pension buyout. As lawman said, there doesn't need to be a correlation between what the average person would accept and what actually makes good financial sense for the person. The point of market surveys (and I had the displeasure of having to code one up when I worked IT at a telemarketer before going back to graduate school, so I have some tangential experience with this) is to offer randomly offer a "prize" from a pool of "prizes" to each caller to determine what is the "optimal prize" (e.g. the lowest cost "prize" that has the most impact). For this survey, the "prize" is how big the pension buyout would need to be.
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Re: Pension Buyouts: A coming trend?

Postby Wagnerjb » Mon May 07, 2012 9:08 am

umfundi wrote:Stay tuned. The end of defined-benefit pension plans, even for existing participants?



Hi Keith. This is more about how the pension obligation is paid, and is less about terminating any obligation that the company already has....so I read less into this than maybe you did about companies terminating plans (that train has already left the station).

I am wondering what the "first" is here? It is the first time people have been bought out who are already receiving monthly benefits? Is it the first time people still working have been offered a Lump Sum? Personally, I think this is great. People now have more options, and that makes them better off. Those who are concerned about the creditworthiness of their employer can take the Lump Sum and turn around and buy an immediate annuity (from several different insurance companies, lowering credit risk). Those that prefer their company-paid pension can just say No Thanks.

Best wishes.
Andy
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Re: Pension Buyouts: A coming trend?

Postby Muchtolearn » Mon May 07, 2012 9:28 am

I expect to see this more and more. A company will be in better shape when shortly down the road they can have a pension and retiree health liability of ZERO. I anticipate that the Fortune 50 company from which I can collect a defined benefit pension (but keep delaying for no real reason) will get these off the books. They are 105% funded. Also, I expect they will give retirees some lump sum to go away and be rid of them for health care costs. Can you imagine if they could just run businesses as businesses like they used to and not have all of that effort on retirees. (I have nothing against retirees as I am nearly one.)
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Re: Pension Buyouts: A coming trend?

Postby Frugal Al » Mon May 07, 2012 9:52 am

This is just more of the ongoing pension de-risking that is taking place in corporate America. Many provisions of the Pension Protection Act of 2006 are pushing companies to get to fuller funding, faster, as deadlines are upon them.
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Mon May 07, 2012 10:27 am

Wagnerjb wrote:I am wondering what the "first" is here?


See the OP, where you have Ford's definition of "first".

I actually feel quite comfortable with my pension. For GM to change it now they would essentially have to go bankrupt (again). The closer I get to age 65, the smaller the hit I would take if the PBGC were to take over the pension. (I retired early with a really good deal. If the PBGC had come in when GM previously went bankrupt, I would have lost about 50%.)

So, it will be interesting to see what the deal is, if it materializes. The real big deal for the auto companies is their pension obligation for their hourly employees, but that is covered by the labor contracts.

Best wishes,

Keith
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Re: Pension Buyouts: A coming trend?

Postby jack1719 » Mon May 07, 2012 12:22 pm

This is just more of the ongoing pension de-risking that is taking place in corporate America. Many provisions of the Pension Protection Act of 2006 are pushing companies to get to fuller funding, faster, as deadlines are upon them.

I think that hits the nail on the head...companies by law have to be at a certain high funding level in there pensions due to the Pension protection act of 2006,if you can get someone to take a buyout(buyouts are almost always by choice)you relieve yourself of that obligation..
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Re: Pension Buyouts: A coming trend?

Postby Wagnerjb » Mon May 07, 2012 1:08 pm

umfundi wrote:I actually feel quite comfortable with my pension. For GM to change it now they would essentially have to go bankrupt (again). The closer I get to age 65, the smaller the hit I would take if the PBGC were to take over the pension. (I retired early with a really good deal. If the PBGC had come in when GM previously went bankrupt, I would have lost about 50%.)



I have been with my employer for 29 years now, and I have a traditional defined benefit pension plan. My understanding (from talking to HR) is that over 99% of employees at my company take the Lump Sum benefit when they retire. It may be that the HR rep with whom I spoke was referring to salaries employees only. But in talking to my colleagues I have yet to find a single individual who will (or did) take the monthly annuity. My company is very large and stable so I don't think the propensity to the Lump Sum is based on the potential for bankruptcy. I am not totally sure why, but the culture here is that the ability to take a Lump Sum is like the right to bear arms. Once our CEO mentioned the potential for some benefit plan changes at a town hall, and more than one employee blasted out, "don't take my Lump Sum away!".

Best wishes.
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Re: Pension Buyouts: A coming trend?

Postby g$$ » Mon May 07, 2012 1:18 pm

My rule of thumb is that I could buy an annuity that pays 6%. The lump sum would need to be 1/0.06 = 17 times the annual payment.


I think you priced a perpetuity here. You need to take into account mortality as well. Actuarial equivalence for someone age 65 at 6% is around 11. If you're older, it would be less.

http://www.benassist.org/WebForm1.aspx
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Mon May 07, 2012 1:24 pm

Wagnerjb wrote: My understanding (from talking to HR) is that over 99% of employees at my company take the Lump Sum benefit when they retire.

Andy,

That is fascinating! Can you provide any details or examples?

All I would be interested in is:

Lump sum amount as a multiple of annual pension (without survivor benefits)
Age at retirement

Here in Detroit, lump sums are rare. They are only offered to people who have earned a retirement benefit, and who leave the company well before retirement age.

Best wishes,

Keith
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Re: Pension Buyouts: A coming trend?

Postby teacher » Mon May 07, 2012 1:41 pm

I expect those not aware of the Pension Benefit Guarantee Corporation protections will jump at the chance to take the gold and run. Putting it in an annuity seems counterproductive because workers can receive up to $4,500 per month (or $54,000 per year) who retired at age 65 at the end of 2011 under PBGC's insurance program for single-employer plans. The cut-off is adjusted for inflation. Most would fall under that amount.
http://www.pbgc.gov/
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Mon May 07, 2012 4:42 pm

teacher wrote:I expect those not aware of the Pension Benefit Guarantee Corporation protections will jump at the chance to take the gold and run. Putting it in an annuity seems counterproductive because workers can receive up to $4,500 per month (or $54,000 per year) who retired at age 65 at the end of 2011 under PBGC's insurance program for single-employer plans. The cut-off is adjusted for inflation. Most would fall under that amount.
http://www.pbgc.gov/

This is scary for me, but getting to be less so. I retired in 2008 at age 57 with a pension of $5862 / month, with survivor benefits. If my pension fund had gone in the hole then, my PBGC benefit would have been at most $2057, a loss of 65%!

Today, I am 61, and my benefit would be $3308, a loss of 44%. If I were 65 (today), the payment would be $4188, for a loss of 29%.

In 5 years time, I will be over 65 and, with inflation, the hit will be only about 13%. But, as I said, GM will have to go bankrupt again.

The post above, about the act of 2006, is very interesting. Given 2008, etc., it is very reasonable to think that any company with a "fully funded" plan would try to simply wipe that obligation off its books. Offering a lump sum is one option, forcing an annuity is another.

We will see how this all plays out. I think people like me, salaried employees at companies like GM and Ford are only the first wave. Next will be represented (union) employees at these same companies. Maybe this will even reach to the public sector in a few years.

Best wishes,

Keith
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Re: Pension Buyouts: A coming trend?

Postby tetractys » Mon May 07, 2012 5:38 pm

I was just given a pension. But this was one option, the second option being a half pension combined with a not so cheap 457(b). Note that the second option is the default, and the one being pushed. Of course I looked at both options carefully, and without going into detail here, will say the first option was the better choice by far. The second option has potential as a better plan; but it's a gamble that would rely on a 15% contribution to markets returning something like 4%+ real into the distant future.

From my viewpoint I agree, there is a movement away from pensions... and into the clutches of the fee based market. -- Tet
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Re: Pension Buyouts: A coming trend?

Postby cherijoh » Mon May 07, 2012 6:25 pm

I have a fixed benefit pension from a previous employer which I will able to take when I reach 60 (or as early as 55 with a significant hit). I also have a fixed contribution plan (4% of salary) from my current employer that is phasing out as of July 1st. It will still accrue interest, but no more pension credits. In its place, the company will put 2% of salary in the 401K (no employee contribution necessary). The company also matches 1:1 up to the first 5% of salary each employee contributes as it did before the pension change.

I am certainly not complaining since I know many companies have no pension plan and a much less generous match. But I am amazed at how many of my fellow employees acted as if the change were no big thing - or viewed it as an improvement! These folks are all college graduates and several have MBAs, but they are mostly a lot younger than me. I think a lot of them assume that retirement is somthing they don't have to worry about planning for until it is just around the corner!

To get a feel for how much your pension is worth if you were eligible to draw it today and were offered a buyout, see http://www.immediateannuities.com/. They have a calculator based on state, age, and gender which will give you either a monthly benefit if you supply the lump sum or the lump sum if you provide the monthly benefit.

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Re: Pension Buyouts: A coming trend?

Postby larryswedroe » Mon May 07, 2012 6:32 pm

There never should have been defined benefits plans in the first place. Companies are not in the business of providing investment guarantees and certainly tax payers should not be either (for public employees)
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Mon May 07, 2012 6:43 pm

larryswedroe wrote:There never should have been defined benefits plans in the first place. Companies are not in the business of providing investment guarantees and certainly tax payers should not be either (for public employees)
Best wishes
Larry

Larry, with 20/20 hindsight, you are correct.

It is interesting how in the USA, pensions and health care became the responsibility of the employers, and not of the state (as in Europe).

Even more interesting is that these now unsustainable benefits were the invention of the companies, not of the workers or their unions.

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Re: Pension Buyouts: A coming trend?

Postby Wagnerjb » Mon May 07, 2012 6:57 pm

umfundi wrote:
Wagnerjb wrote: My understanding (from talking to HR) is that over 99% of employees at my company take the Lump Sum benefit when they retire.

Andy,

That is fascinating! Can you provide any details or examples?

All I would be interested in is:

Lump sum amount as a multiple of annual pension (without survivor benefits)
Age at retirement



Keith: I just ran the retirement calculator at work. If I retired at age 55 (next month) after 29 years of service, my Lump Sum would be roughly 18.25 times my annual annuity (single life annuity). Keep in mind that the Lump Sum payout is very sensitive to interest rates. If rates climb my annuity won't change but the Lump Sum benefit would....thus the multiple would be lower.

Best wishes.
Andy
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Mon May 07, 2012 7:29 pm

Wagnerjb wrote:If I retired at age 55 (next month) after 29 years of service, my Lump Sum would be roughly 18.25 times my annual annuity (single life annuity). Keep in mind that the Lump Sum payout is very sensitive to interest rates. If rates climb my annuity won't change but the Lump Sum benefit would....thus the multiple would be lower.
Best wishes.

Andy,

On the face of it, that sounds like a very equitable choice.

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Re: Pension Buyouts: A coming trend?

Postby Jack » Mon May 07, 2012 7:47 pm

This buyout proposal is the mirror image of the adverse selection problem for health insurance companies when required to take all customers. For health insurance, the healthy bail out leaving only the sick behind which increases the insurance company's losses, leads to higher rates and more people bailing out as the spiral continues.

A defined benefit program is the mirror image. If they offer a buyout, the sickest will take the bailout because they get a lump sum leaving only the healthy behind which increases the average longevity of those remaining, which increases the company's costs. Defined benefit programs offering a buyout have the same adverse selection problem as health insurance but in the opposite direction, with the sick bailing instead of the healthy.
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Mon May 07, 2012 9:00 pm

Jack wrote:This buyout proposal is the mirror image of the adverse selection problem for health insurance companies when required to take all customers. For health insurance, the healthy bail out leaving only the sick behind which increases the insurance company's losses, leads to higher rates and more people bailing out as the spiral continues.

A defined benefit program is the mirror image. If they offer a buyout, the sickest will take the bailout because they get a lump sum leaving only the healthy behind which increases the average longevity of those remaining, which increases the company's costs. Defined benefit programs offering a buyout have the same adverse selection problem as health insurance but in the opposite direction, with the sick bailing instead of the healthy.

Jack,

Are you from the planet Vulcan?

A cynic might say, let those who make the bad choice do it. I can force the remainder out at an average price.

I don't think that is really the case. I think companies will want to just shed these obligations.

Keith
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Re: Pension Buyouts: A coming trend?

Postby GregLee » Mon May 07, 2012 9:46 pm

umfundi wrote:Maybe this will even reach to the public sector in a few years.

A version of it got to the public sector in Hawaii back in the 80s. I and other state employees were offered the opportunity to withdraw the accumulated cash values of our pensions and then go on a modified pension plan for the remainder of our employment, with reduced benefits when we eventually retired. It seemed like a good offer at the time, and I think that quite a few of my fellow workers took the deal. The popular opinion at the time among those of us thinking about our financial futures was that the defined contribution plans of the private sector folks were a great deal for them, since they could invest their retirement money as they wished in stocks or real estate, or whatever, and presumably make much more than we poor public employees ever could, stuck as we were with our DB plans. We were told that the state's actuaries had advised the state to reduce its long term liabilities.

I sure was tempted by the state's offer, but I figured and estimated, and finally decided that the pension COLA, perhaps 1.5% at the time (I can't recall exactly) made it probably a better deal, in the long run, to reject the offer and stick with the original DB plan.
Greg, retired 8/10.
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Re: Pension Buyouts: A coming trend?

Postby Tuxx » Mon May 07, 2012 11:09 pm

Well that would solve this "problem":

The 100 largest pension funds run by public U.S. companies had a record funding shortfall of $326.8 billion at the end of 2011
http://www.reuters.com/article/2012/03/ ... GM20120329

Amazing how when you hear the - corporations are sitting on record cash levels, that is bullish for stocks - yet no one ever comes back with....but what about their unfunded penions?

Unless their pension is fully funded, they should not be able to buy back stock so executives exercise options at higher levels. :mrgreen:
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Re: Pension Buyouts: A coming trend?

Postby Tuxx » Mon May 07, 2012 11:12 pm

jack1719 wrote:This is just more of the ongoing pension de-risking that is taking place in corporate America.


You can bet wages will not go higher to make up for the end of pensions.

I been banging this drum for years. Pensions will go the way of the dodo. Be prepared.
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Re: Pension Buyouts: A coming trend?

Postby joe8d » Mon May 07, 2012 11:13 pm

Tuxx wrote:Well that would solve this "problem":

The 100 largest pension funds run by public U.S. companies had a record funding shortfall of $326.8 billion at the end of 2011
http://www.reuters.com/article/2012/03/ ... GM20120329

Amazing how when you hear the - corporations are sitting on record cash levels, that is bullish for stocks - yet no one ever comes back with....but what about their unfunded penions?

Unless their pension is fully funded, they should not be able to buy back stock so executives exercise options at higher levels. :mrgreen:


:thumbsup
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Re: Pension Buyouts: A coming trend?

Postby Wagnerjb » Mon May 07, 2012 11:34 pm

Tuxx wrote:Unless their pension is fully funded, they should not be able to buy back stock so executives exercise options at higher levels. :mrgreen:


Uh....if the executive exercises his company-granted stock options at higher prices, doesn't that mean the you and I - the shareholders - are also benefitting from higher stock prices? I want the executives of my companies to run them with capital discipline and solvent financial positions. If that means retaining cash rather than wasting it on unprofitable projects, that's fine with me. I also expect them to meet their legal responsibilities to the pension plan.

If the executives can create value in the company and raise the stock price, I see no reason to deny them their contractual compensation.
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Tue May 08, 2012 1:45 am

Tuxx wrote:no one ever comes back with....but what about their unfunded penions?


Tuxx,

I would disagree with that. At least at GM, pension funding has been an ongoing issue ever since the Feds required full funding (or at least accounting) about 15 years ago.

Some years ago, a GM executive quipped that GM is an insurance company that makes cars as a sideline. If you looked then at their obligations for health care and pensions, that was not a bad characterization. Even now, they have huge obligations. It seems, at least to me, that the UAW is now no longer a labor union, but a health care insurance company.

It also seems the incentive for companies now might be to fully fund their pension obligations, and then shed them through buyouts and other means. I can completely understand that. There is, of course, a long potential discussion about what "fully funded" means, and what the accompanying accounting standards are.

As this landscape changes and evolves, we should all strive to be informed.

Best wishes,

Keith
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Re: Pension Buyouts: A coming trend?

Postby Mrs.Feeley » Tue May 08, 2012 2:06 am

Some years ago a relative who was retired on a pension he had earned from working forty-some years at the same mill was offered a buy-out when the employer was bought out. He may have also been offered an annuity, I don't know the details. At the time financial advisors stormed the mill town in rampaging herds, probably advising the lump-sum option. He ended up with one such advisor and his lump-sum buy-out ended up in a collection of individual stocks, mostly high-tech purchased at the height of the dot-com bubble. Can you say Enron and Worldcom? He's now living off Social Security and in a trailer.

I think pension buy-outs are certainly going to become increasingly common as companies try to shed these expensive, often under-funded obligations. The tragedy is that it will become one more opportunity for normally reasonable people to be taken advantage of and to make very bad decisions about their finances and futures.
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Re: Pension Buyouts: A coming trend?

Postby VictoriaF » Tue May 08, 2012 8:32 am

Jack wrote:This buyout proposal is the mirror image of the adverse selection problem for health insurance companies when required to take all customers. For health insurance, the healthy bail out leaving only the sick behind which increases the insurance company's losses, leads to higher rates and more people bailing out as the spiral continues.

A defined benefit program is the mirror image. If they offer a buyout, the sickest will take the bailout because they get a lump sum leaving only the healthy behind which increases the average longevity of those remaining, which increases the company's costs. Defined benefit programs offering a buyout have the same adverse selection problem as health insurance but in the opposite direction, with the sick bailing instead of the healthy.


This is a very clever comparison. Note that in each situation the provider's cost increases, in the first case it's a company providing health insurance, in the second case it's an employer providing defined benefits.

Victoria
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Re: Pension Buyouts: A coming trend?

Postby Wagnerjb » Tue May 08, 2012 9:08 am

Mrs.Feeley wrote:The tragedy is that it will become one more opportunity for normally reasonable people to be taken advantage of and to make very bad decisions about their finances and futures.


Nothing makes my blood boil more than to hear about a retired couple being taken advantage of by a slick financial salesman. This issue isn't confined to pension Lump Sum payments, as employers are preferring to contribute to the employee's 401k plan instead. The 401k plan poses the same risks for abuse. I hope we see 401k plans offer annuities to retirees, as I believe that reduces the risk of mismanagement or abuse...especially for those with little financial savvy.

Best wishes.
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Re: Pension Buyouts: A coming trend?

Postby Frugal Al » Tue May 08, 2012 9:41 am

Thanks for the Reuters article, Tuxx. I ran across this WSJ article a few days back but the link doesn't always work. I've included an excerpt. I'm amazed at the forecasted rates of return some of these companies are still using.
http://online.wsj.com/article/BT-CO-201 ... 10313.html
May 4, 2012, 11:25 a.m. ET
MARKETWATCH VIEW: Pension Fund Move to Bonds To Help Keep Interest Rates Low
Of the 16 biggest U.S. corporate pension funds, each with more than $20 billion in liabilities, "every single one holds a smaller percentage in equities than they did two years ago," said Bob Collie, chief research strategist at Russell Investments consulting group.

"It's been a pretty substantial shift. It's definitely not something that everybody is doing in lockstep, but allocations are becoming less risky and more oriented to matching liabilities."

Ford, for instance, in its 2011 annual report, announced a big change in its target allocation for its pension fund, saying it expects to put 80% of assets in fixed income over the next several years. In 2010, the auto maker targeted 45% in fixed income.

Ford also reclassified public equity as part of the other 20% of growth assets it's targeting, which will include alternative investments, hedge funds, real estate and private equity. In 2010, it targeted 30% in public stocks and up to 25% in alternatives.

Not-so-great expectations

Still, a big part of these pensions' attempts to meet funding needs is simply requiring lower expectations on returns.

"People are gradually bringing them down," Collie said. Of the 16 biggest funds, six have reduced their return target from 2010 to 2011, he said. About half still aim for 8%.

Dow Chemical said it expects returns of 7.82% in 2012, down from 8.18% in 2011, according to a regulatory filing.

Lockheed Martin reduced its return target to 8% in 2011 from 8.5% in prior years. General Electric reduced its target to 8% for 2012 and 2011, from 8.5% in 2010.

Companies will have to continue lowering those expectations, to around 6%, said Campbell of Quantitative Management Associates.

Besides traditional bonds and their low yields, many pension managers are also shifting into alternative asset classes that offer better returns. Those include international equities, emerging market debt and equities, or real estate as well as Treasury futures, derivatives like swaps, and sometimes simply lower-rated corporate bonds, advisers said.
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Re: Pension Buyouts: A coming trend?

Postby Jack » Tue May 08, 2012 10:14 am

Wagnerjb wrote:Nothing makes my blood boil more than to hear about a retired couple being taken advantage of by a slick financial salesman.

Note that the company does not save one dime of expense if they offer a fair buyout. The present value of a lump sum and a defined benefit annuity are the same and a company should be indifferent to which they provide.

The company only saves money if they offer a bad buyout, worth less than the annuity. This is a case of a company taking advantage of asymmetric information, hoping the employee makes a bad decision. The government and taxpayers back pension plans with insurance so they have an interest in this. The government should require buyout offers to be fair, financially neutral and have the option of a third-party annuity.
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Re: Pension Buyouts: A coming trend?

Postby HardKnocker » Tue May 08, 2012 10:29 am

I think a great number of retirees would take the lump sum buyout even if it is not equitable.

The prospect of a large sum of cash would be irresistible to most.
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Re: Pension Buyouts: A coming trend?

Postby Frugal Al » Tue May 08, 2012 10:47 am

Jack wrote:Note that the company does not save one dime of expense if they offer a fair buyout. The present value of a lump sum and a defined benefit annuity are the same and a company should be indifferent to which they provide.

The problem is that not all buyouts are totally fair, but that doesn't make them illegal. I got a buyout offer with actuarially equivalent choices, but the default choice of doing nothing and waiting to collect a monthly payment at age 65 was glossed over, the monthly payment I'd receive at age 65 was nowhere on the document. The companies have quite a bit of leeway with how they approach these issues. They just have to comply with generous interpretations of the law and treat all participants within the pension class the same; however that is not even true, because the age of the prospective pensioner allows for different valuation methods. I definitely wouldn't want to take a buyout just before the company decides to change its funding to account for a 6% rate of return instead of their assumed 8.5%. Obviously it behooves them to get participants to take the buyout before they change their assumptions.

Depending upon the "take" (% of participation), during the buyout offer period, there can be subsequent buyout offers after an appropriate amount of time passes. Companies even point out that there's a possibility future offers may be LESS than the current offer. In general I'd doubt that would be the case unless there is severe underfunding and too many people subscribe to the buyout offer, but federal guidelines are supposed to prevent that scenario.
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Re: Pension Buyouts: A coming trend?

Postby George-J » Tue May 08, 2012 11:38 am

larryswedroe wrote:There never should have been defined benefits plans in the first place. Companies are not in the business of providing investment guarantees and certainly tax payers should not be either (for public employees)
Best wishes
Larry

I also agree. But how do we get out now? I don't see it.
Some clear views of the current conundrum - from the Current Economist (May 5th 2012)- Buttonwood -- Stuck in the middle

How low real interest rates hurt pension funds

“DON’T save,” say the governments of rich countries as they worry about demand in economies that are hovering between sluggish recovery and recession. Their injunctions are aided and abetted by central banks, which are keeping interest rates negative in real terms (ie, after inflation), a policy that transfers wealth from savers to borrowers.

“Save,” say those same governments as they contemplate the ageing of their populations and the potential strain on the public purse. As encouragement, they offer tax breaks to those who put money aside to fund their retirement.

Pension funds are caught in the middle of these contradictory messages, and they are suffering. In Britain the Pensions Regulator, which oversees corporate schemes, recently relaxed its guidelines to help funds that are heavily in deficit.
The same policies that have forced down government-bond yields have forced up the cost of providing pensions. Offering a pension is like incurring a debt, since it involves the promise of a series of future payments. When pension funds calculate the value of their liabilities, they therefore use a bond yield to discount future payments. As bond yields fall, the liabilities rise.
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Re: Pension Buyouts: A coming trend?

Postby Jerilynn » Tue May 08, 2012 11:11 pm

Jack wrote:
The company only saves money if they offer a bad buyout, worth less than the annuity.


Bad for the employees/retirees but good for the shareholders.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Re: Pension Buyouts: A coming trend?

Postby umfundi » Wed May 09, 2012 2:46 am

Jerilynn wrote:
Jack wrote:
The company only saves money if they offer a bad buyout, worth less than the annuity.


Bad for the employees/retirees but good for the shareholders.

So, it's a game, in the sense of "Let's Make a Deal".

Usually, I would think, pension beneficiaries are at a disadvantage. How would they know?

With a company the size of Ford, I imagine the field will be more level. I am sure the press will get hold of it, and will analyze any buyout offers the company might make.

As I have said, my understanding of the law is that a company may purchase an annuity to replace your pension, and force it on you. That said, it seems that any buyout offer will be worth less than a replacement annuity.

The question might not be, "Can I use the buyout to purchase an annuity that replaces my pension?" It might be, "Can I use the buyout to purchase an annuity that provides more than I would get from the PBGC?" For an early retiree, that is a dramatically different question. (See my previous post.)

So far as they companies are concerned, if their pension plan is "fully funded" with an expected return of 8.5%, I would imagine they would seek to shed the liability. Does anyone think 8.5% is a realistic expectation?

Best wishes,

Keith
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Re: Pension Buyouts: A coming trend?

Postby GregLee » Wed May 09, 2012 1:20 pm

umfundi wrote:Usually, I would think, pension beneficiaries are at a disadvantage. How would they know?

Union.
Greg, retired 8/10.
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Re: Pension Buyouts: A coming trend?

Postby Wagnerjb » Wed May 09, 2012 2:17 pm

umfundi wrote: Does anyone think 8.5% is a realistic expectation?




I do. If you asked people in 1979 (after a relatively dry spell) what a realistic expectation was, they would probably have laughed at 8.5% as well. But the equity total returns for the next two decades were well over 10%. We need to judge the expectation on longer-term data and less on the recent (poor) experience. The Vanguard S&P500 index has a total return of 10.61% over the past 36 years (since inception). If the rate you are quoting is a mix of equities and fixed income, I may feel a little differently

PS: I don't deny there can be political and other motives for setting a pension assumption rate, but I am not as sceptical as you on whether 8.5% is reasonable or not.

Best wishes.
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Re: Pension Buyouts: A coming trend?

Postby Frugal Al » Wed May 09, 2012 4:59 pm

Wagnerjb wrote: If the rate you are quoting is a mix of equities and fixed income, I may feel a little differently

That's the whole point of the article excerpt posted above, corporations are moving to more fixed income. Indeed, many are finally moving off of their 8.5% targets.
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Re: Pension Buyouts: A coming trend?

Postby Jerilynn » Thu May 10, 2012 1:58 am

umfundi wrote:
With a company the size of Ford, I imagine the field will be more level. I am sure the press will get hold of it, and will analyze any buyout offers the company might make.


Keith


No doubt the union and the press will analyze the offer. What I'm saying is that even if it's a 'bad deal', a lot of those workers will opt for the lump sum now vs. a better deal down the road.
Cordially, Jeri . . . 100% all natural asset allocation. (no supernatural methods used)
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Locked

Postby Alex Frakt » Thu May 10, 2012 3:42 am

This is not an investing issue. General economic policy questions are off topic on this site.
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