Pension Funds Stick to 'Unrealistic' Return Assumptions

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Adrian Nenu
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Pension Funds Stick to 'Unrealistic' Return Assumptions

Post by Adrian Nenu » Sat Sep 18, 2010 7:02 am

http://online.wsj.com/article/SB1000142 ... Collection

The concern is that the reluctance to plan for smaller gains will understate the scale of the potential time bomb facing America's government and corporate pension plans.

"It's unrealistic," John Bogle, founder of mutual fund giant Vanguard, says of the return assumptions in place at most pension plans.

Pension funds at companies in the S&P 500 faced a $260 billion shortfall at the end of 2009, according to Standard & Poor's. Estimates of the fund deficits faced by state and local governments range from $500 billion to $1 trillion.
If the experts who run pension funds can be overly optimistic about future returns, maybe individual investors should take a more realistic view of potential returns as well. The past decade is a great example of what happens when expected returns don't show up. We may be in a long period of low returns for all asset classes. This has consequences which should be carefully considered.

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Quidnam
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Re: Pension Funds Stick to 'Unrealistic' Return Assumptions

Post by Quidnam » Sat Sep 18, 2010 7:23 am

Adrian Nenu wrote:If the experts who run pension funds can be overly optimistic about future returns, maybe individual investors should take a more realistic view of potential returns as well. The past decade is a great example of what happens when expected returns don't show up. We may be in a long period of low returns for all asset classes. This has consequences which should be carefully considered.
Agreed. I've always struggled with the notion of "expected" returns that seem to get plugged into every planning model without much further consideration.

Personally, I'm fairly agnostic when it comes to the future long-term returns of an asset class. I may assume, at most, a 1-2% real return over inflation. If that proves to be overly conservative -- great.

RadAudit
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Post by RadAudit » Sat Sep 18, 2010 8:22 am

I always thought that expecting high returns allowed corporations to reduce their contributions to the pension fund and report higher profits.

And, who knows? Higher returns might appear and you're golden. If low returns persist, the government will step in and bail out the pensioners.

But, maybe I'm just a Pollyanna.
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Post by Ron » Sat Sep 18, 2010 8:48 am

What's a pension :lol: ???

kenbrumy
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Post by kenbrumy » Sat Sep 18, 2010 8:52 am

RadAudit wrote:I always thought that expecting high returns allowed corporations to reduce their contributions to the pension fund and report higher profits.

And, who knows? Higher returns might appear and you're golden. If low returns persist, the government will step in and bail out the pensioners.

But, maybe I'm just a Pollyanna.
You are definitely a Pollyanna. The government is the worst offender.

The Feds can always print money so they can cover their very generous pensions as long as taxpayers don't attack with pitchforks over the deficits. State and local government entities have been playing a continuous shell game where they, for the most part, haven't worried at all about the size of their underfunding.

Underfunded pensions in the private sector are primarily the result of government regulations. The 80's LBO splurge was driven by a significant over funding of pensions during the boom years of the 1970s. Companies were making good profits then and they were building up pension funds to avoid cash flow issues in the inevitable down years. These assets, however, could be "captured" by an acquiring company when they terminated the existing pension plan. (I know this is true because it happened to me twice.)

Our enlightened law makers then attempted to address the issue by severely limiting the over funding than could occur to a very small amount. Therefore and inevitably, slower economic periods immediately result in serious underfunding of pensions unless the company chooses to implement severe economic limitations in other areas of its operations. Doing that would require eliminating otherwise sound operating units further hurting the company's long term potential.

So as a non-moderator, even I see that this has been a specific comment on government policy and is in violation of forum rules. However, I think this is an import aspect of the problem that people should know.

kenbrumy
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Post by kenbrumy » Sat Sep 18, 2010 8:53 am

Ron wrote:What's a pension :lol: ???
Those are those itty-bitty checks I will soon start receiving to cover my wine bill - as long as I stick to the Two Buck Chuck.

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Post by Ron » Sat Sep 18, 2010 9:12 am

kenbrumy wrote:
Ron wrote:What's a pension :lol: ???
Those are those itty-bitty checks I will soon start receiving to cover my wine bill - as long as I stick to the Two Buck Chuck.
Good 4 U :lol:

BTW, I do the same with my small VA disability check. So I guess I'm one of those folks on the "government dole" (although I guess I paid for it :roll: )...

- Ron

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Post by rmark1 » Sat Sep 18, 2010 9:23 am

'Agreed. I've always struggled with the notion of "expected" returns that seem to get plugged into every planning model without much further consideration.'

I suspect it's more like past returns that are plugged in without much further consideration.

yobria
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Post by yobria » Sat Sep 18, 2010 10:07 am

Thanks for the link. Given the agressive asset allocation of most pension funds, 7-8% isn't a completely unrealistic goal, though they will need some luck.

Nick

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Re: Pension Funds Stick to 'Unrealistic' Return Assumptions

Post by Wagnerjb » Sat Sep 18, 2010 10:13 am

Adrian Nenu wrote:If the experts who run pension funds can be overly optimistic about future returns, maybe individual investors should take a more realistic view of potential returns as well. The past decade is a great example of what happens when expected returns don't show up. We may be in a long period of low returns for all asset classes. This has consequences which should be carefully considered.
Adrian: these are long-term assets in the pension plans, and they reflect actual experience. This is EXACTLY what reasonable people do, and the SWR is a perfect example. With the SWR, we are looking forward for 30-year retirements, and we use actual experience over long terms to form our judgments on how appropriate the assumptions are. Same thing for pensions.

Nobody was complaining in the 1990's when these plans assumed an 8% return....and actually got 20% returns....so why the double standard today?

Best wishes.
Andy

kenbrumy
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Post by kenbrumy » Sat Sep 18, 2010 10:17 am

yobria wrote:Thanks for the link. Given the agressive asset allocation of most pension funds, 7-8% isn't a completely unrealistic goal, though they will need some luck.

Nick
This is a reasonable expected return without forcing it to be inflation adjusted based on the last century of data. I don't know of any private pension that is inflation adjusted which is why my pathetic pension checks keep getting smaller and smaller in inflation adjusted dollars. Forcing these funds to use lower returns based on the last 10 years isn't really justified unless you have a better crystal ball than I do.

Government bodies are much more generous since they are spending our money. They are almost universally inflation adjusted and frequently have benefit "kickers" that can be used to inflate the pension basis the year or two before someone retires. Hence, under funding is almost guaranteed.

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Post by Alex Frakt » Sat Sep 18, 2010 10:28 am

from the forum policies - http://www.bogleheads.org/forum/viewtopic.php?t=405
If readers can't do anything with the content of a topic other than argue about it, it does not belong here.

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