Tuesday, June 12, 2012

Pension Reserves (Musical Tribute)

Click to enlarge.

If the $14 trillion in pension reserves were growing (relative to wages) like they were from 1959 through 1999, then there would be 56% more pension reserves right now. That's $7.8 trillion below trend.

Milliman 2012 Pension Funding Study

Decline in discount rates drives pension plans to record deficits in 2011

For the first time in the history of the Milliman study, the allocation to fixed income exceeds the allocation to equities. This shift reflects both the strong outperformance of fixed income over equities in 2011 and the continued action of companies to de-risk their investment portfolios.

Source Data:
St. Louis Fed: Custom Chart


Stagflationary Mark said...

This brings me back to one of my favorite quotes. Simply replace panic with de-risk.

If one must de-risk then at least de-risk first.

That's basically been my motto since 2004, lol. Sigh.

Stagflationary Mark said...

Bonus Thought

The percentage of pension plan assets invested in equities decreased from approximately 43.8% to 38.1%, fixed-income allocations increased from 36.4% to 41.4%, and the allocation to other investments increased from 19.8% to 20.5% during 2011.

How do we get to 8% pension fund return assumptions using this allocation? Let's even be optimistic. We'll assuming 10% returns in aggressive stocks countered by 1.66% in super safe bonds.

38.1% making 10% (equities)
41.4% making 1.66% (10-year treasury)

That gets us 4.5% of the 8%.

What does the remaining 20.5% need to make to get the rest?


0.381*10% + 0.414*1.66% + 0.205*17% = 8%

Good luck on that one.

Stagflationary Mark said...

Correction: "assuming" should be "assume"

I rearranged the words and should have proof read it again before posting.

mab said...


I've got just one word for you:

Commodities & private equity (aka asset stripping).

Pension funds can bid up the prices of commodities for superior returns! As a bonus to their fiduciaries, they can fund asset strippers to gut future pension benefits, thereby reducing pension fund under funding!

It's a wonderful system. Just ask Mitt Romney, he knows all about wealth creation and job creation!

mab said...


Don't forget the OPEB shortfalls! They ain't chump change.

OPEB = Other post employment benefits.

Fritz_O said...

There's a related sad story to this one.

All the un or under-employed folks who are getting economic outpatient care (EOC) from their retired parents and grandparents still banking regular retirement benefits. When the EOC runs out (may they rest in peace) what becomes of those relying upon the EOC?

I don't mind saying, I fear the future.

Fritz_O said...

"Pension funds can bid up the prices of commodities for superior returns!"

Goldman Sachs says they expect a 29% return on commodities over the next 12 months.

That has me pouring money into commodities, after all, GS wouldn't pump and dump...

mab said...



From the link:

Companies have successfully shifted
a considerable amount of the risk associated with defined programs to set contribution programs, transferring the risk from the company to the individual. The result is a legacy program which
over the next several decades will mostly work its way out of the last bastions of the U.S. labor
market, and out of existence.

All hail the asset strippers!

Stagflationary Mark said...


Pension funds can bid up the prices of commodities for superior returns!

That's just crazy enough to work (until it doesn't)!

Stagflationary Mark said...


I don't mind saying, I fear the future.

Too bad we can't form a growth industry around that. If we could, I think it would go parabolic in the coming years. Sigh.

I can't remember the last time I had a really good night's sleep. That goes double for my unemployed girlfriend.

On a brighter note, I did something to help the economy today.

I ordered two music CDs and 30 button cell batteries from Amazon.com. The grand total for all of that was just $27.39. They will be delivered to my door for free.

If that's an indication of hyperinflation, then I really must be missing something.

And now for the darker side...

I didn't speak to anyone. No retail salesperson needed. I therefore didn't do much in the way of job creation. This also can't be good for my local RadioShack. As of today, they've permanently lost my button cell business.

Stagflationary Mark said...


All hail the asset strippers!

Welcome to the controllership society!

GRA - Asset Strripping to Trusts

Entrepreneur's Risk Goal
Own nothing but Control everything...

Stagflationary Mark said...

Speaking of RadioShack, I just looked at their stock price. I think it's time for a new post.

dearieme said...

The answer to the pension fund crisis was discovered by me in my twenties. I was the skipper of a rugby side. It was the custom after each home game that we each pay some modest sum into a kitty to buy jugs of beer for our opponents. One Saturday I got distracted, half my team vanished without paying, and I was left short of beer money. So I took what I had and bunged it into the fruit machine (one-armed bandit) in the bar. Whiz, whee, clatter, out the winnings poured. Solved!

Stagflationary Mark said...



(Other People's Beer Money)