The Pension Muddle
Sometimes knowing what is going to happen (or thinking you do) is like getting the booby prize. It’s just not fun. Back in 1998 and 1999 we participated in Y2K information meetings, where the audience could ask questions of the police chief, power company, etc. My part was to address the economic and financial impacts of what was unfolding. Back then, I knew that there was going to be a lousy investment market, so much so that I realigned my business away from the “buy-and-hold-is the only-way-to-invest” mentality that then gripped my industry. I moved into strategies that would Adapt to Changing Markets®. Back then when I mentioned the markets could get as nasty as 1973-74 when the S&P 500 index dropped 45% of its value, people thought I was crazy. Within two years it was happening and the S&P lost 48% of its value.
When asked if people should buy gold to protect themselves, I spoke of deflation when most folks had never heard of it, and said wait on the gold. Gold finally bottomed in the Spring of 2001.
The recent Prescott Daily Courier article, Corporate Pension Muddle Gets Progressively Ugly, August 29, 2004, reminded me of another topic of which I have glimpsed the future. Alan Greenspan addressed Congress recently and said that reform of pensions and Social Security were needed before we all had “abrupt and painful adjustments” thrust upon us. Strong words! The gist of the Courier article was how United Airlines was asking to terminate its “defined benefit” pension plan as part of its plan to get out of Bankruptcy. This is the type of pension plan where retirees are promised a defined income for the rest of their life. This is a huge liability for UAL. UAL hopes to the debt to its pensioners canceled by the bankruptcy court because the company simply can not pay it and survive.
United Airlines is the tip of the iceberg, though. Of the 500 companies in the S&P 500 index, 360 of them have this type of pension plan. In 2002, Credit Suisse First Boston estimated that the collective pension fund liability for the 500 companies is under-funded by $246 billion. Morgan Stanley estimated $300 billion. And these numbers are predicated upon the rosy investment earnings record of the 1990s continuing indefinitely. As we know, that isn’t happening. When investment returns fall short, the shortfall must be made up from increased deposits to the pension fund out of company earnings. The real problem is that the amount of pension funding required to make up current shortfalls and make up for poor earning years is greater than the core earnings of all 500 of the Fortune 500 companies.
If you think about this, a stark reality emerges. The shareholders of these 360 companies really own nothing because the pension liabilities of the company have eaten it all up, and the beneficial owners of all of the earnings will be the workers, not the shareholders.
I imagine Karl Marx must be smiling somewhere.
{mospagebreak title=Insurance Company Watch List}
Insurance Company Watch List
Since 1989 I have subscribed to The Insurance Forum, which is a newsletter published by Professor Joe Belth, an industry watchdog of long standing.
This is the only place I know of to see the ratings from all the major services. A company won’t tout bad ratings, and rating services don’t publish lists, so a good source of ratings on all companies is elusive-unless you get The Insurance Forum.
Their annual “Ratings Issue” just arrived, and I was surprised to see almost 1/3 of all 1,550 insurance companies showing signs of financial problems hence they are on the newsletter’s “Watch List”.
The last time I saw such a large group of insurance companies on the Watch List was in 1990, and a flurry of insurance company failures followed, including AAA rated Executive Life which, at the time it failed, was the 11th largest insurance company in America.
Fixed rate annuities and life policies become vulnerable in the event of an insurance company failure, so “heads up”.
If you want to see the list stop by the office, or call if you want the ratings on your insurer.
{mospagebreak title=HOPE HAS BEEN ON THE WAY FOR QUITE A WHILE.}
HOPE HAS BEEN ON THE WAY FOR QUITE A WHILE.
In the middle of a nasty political season, the politicians would have us believing that we are witnesses to the steep decline of civilization. No one can make ends meet or afford health care. Youth violence, drug use and teen pregnancy are rampant. Global overpopulation, poverty and starvation are at epidemic levels. Or is the truth actually something else?
The truth is simply this: In the course of human existence, there has never been a better time to be alive than right now. Period. Paragraph. Illustrating this are the following facts:
–In 1900 world life expectancy was 30 years old. Today it is 67 years.
–In 1970, 35% of the people living in developing countries were starving. By 1996 that number had shrunk to 18% and the United Nations forecasts that figure is still falling.
–Also according to the UN, global poverty dropped more in the last 50 years than in the previous 500 years.
–Life expectancy in the U.S. has increased significantly in all categories, with black men making the largest gain from 60 years old in 1970 to 68.2 years old in 2000.
–Despite all the publicity about the failure of public education in the U.S., Americans have never been better educated. In 1960 only 7.7% of the population held college degrees. Today, 25% of the population over 25 years of age have earned their degree.
–Partially due to more women entering the workforce, real household incomes rose dramatically between 1980 and 2000. White families rose 19% and black families 39%.
–Even with all the class warfare rhetoric in this years campaign, the fact is that 12.1% of American families are below the poverty line. In 1960 that number was 22.2%.
–Figures released by the FBI show the murder rate in the U.S. at 5.5 homicides per 100,000, down from a rate of 10.2 in 1980, almost a 50% decline in less than 25 years.
–Rates of teen suicide, teen pregnancy and youth violence have all shown steady decline during the past decade.
Overall, people are living longer, are safer, have more money to spend and having more fun then ever before. So turn off the news and the politicians and go enjoy yourself. Life has never been better. Source: Thanks to Mike Glasior.
So turn off the news and politicians and go enjoy yourself. Life has never been better.
Will Hepburn is a private investment manager who specializes in active investment strategies. He owns the Prescott Center for Adaptive Market Strategies, and is President of Hepburn Capital Management, LLC, a Registered Investment Advisor. He may be reached at 2069 Willow Creek Road in Prescott, AZ or by calling (928) 778-4000 or emailing Will@HepburnCapital.com.
Copyright 2004.
The information contained in this newsletter is derived from sources believed to be accurate. You should discuss any legal, tax, or financial matters with the appropriate professional. Neither the information presented nor any opinion expressed constitutes a solicitation for purchase or sale or any security.
