Personal Finance

Are private sector Defined Benefit Pension Plans basically legalized Ponzi schemes?

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  • Jul 17th, 2017 9:40 am
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May 11, 2014
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Raident wrote:
Jul 16th, 2017 11:07 pm
Nearly every company will fail someday - according to Wikipedia, there are only ~5,500 companies that are over 200 years old, the majority of which are small family businesses in Japan where the company's history is closely intertwined with the family's lineage.

Of course, no company is run with the intention of going bankrupt, but in a capitalistic society where time is nearly infinite, it's pretty much an inevitable end result. Sears, for instance, topped the Fortune 500 list back in the 1970s - who would've imagined that it would end up in such a pathetic state? Nonetheless, the lack of acknowledgement of this inevitability that makes me wonder if these pensions are Ponzi schemes.
Again, no. A ponzi scheme is blatant fraud and pension underfunding is corporate deficit and/or failure. So already by definition, they are not ponzi schemes... I dont understand your persistance in using this term. Most companies seeing the liability risk too great have switched new employees to reduced benefit plans or started defined contributions plans, limiting the liability of pensions in the future. New Air Canada employees are funded under a different pension benefit system, one that is sustainable unlike it's previous government-owned public service like commitments. Canada Post switched and new employees starting in 2010(might not be exact) have defined contribution plans.

Companies do go out of business. That doesnt mean their pension plans are underfunded or that they are ponzi schemes (which you really want to call them for some reason). Some businesses go out of business and some or all of their creditors still get fully paid (pension fund being a creditor). Bankruptcy can sometimes just be a cashflow issue.

And if these defined benefit plans are scams, try compiling a list of pension plans that have cut the benefits of retirees vs. plans that have continued to pay as agreed to their former employees. Despite the liability and cost, you will find more in the latter. Even some public service pension plans are self funded and have giant surpluses (eg. HOOPP, Ontario Teacher's, see the link in my second post) meaning they are more than funded and have extra money left.

Remember, a defined benefit plan doesnt even have to be that valuable. A defIned benefit plan could theoretically say they will give each retiree $1 per year and that makes it a defined benefit plan. A defined contribution plan could say that a company saves 50% of an employees salary each year. In this case, the defined contribution plan is much nicer. What makes or breaks a pension plan is whether what a company promises can be delivered or not.
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[OP]
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May 13, 2014
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Hmm, can you name one company that went out of business without being taken over by another company or bailed out by the government and still has a healthy pension plan? I looked at the list of 100 biggest pensions your posted earlier, and couldn't find any that are related to an entity which no longer exists.

As for whether or not deliberate failure to properly prepare for an inevitability constitutes blatant fraud or not, we might as well be discussing if corporate donations to political parties constitutes blatant bribery or not - we could argue semantics all day long and never get anywhere.

I agree with your premise on what makes or breaks a pension plan, but perhaps we have different interpretations of the term "defined benefit", in particular pertaining to the level of certainty of a guarantee?
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Raident wrote:
Jul 16th, 2017 10:05 pm
I think rocking23nf was implying that if a pension plan falls below 95% funded, regardless of how it happened, then the company should be forced by law to immediately make up for the shortfall using whatever means possible. Or in other words, if a company chooses to provide its employees with a defined benefit plan, then they should be ready to accept that pensions always come before profits.

Of course, in tough economic times like 2008 when stocks suffer a 40% tumble, it might mean pensions before survival as an otherwise healthy company might have to liquidate itself in order to shore up a pension that just lost 40% of its value. So I'm not sure how I feel about this, but then again, I'm leery of defined benefit plans in the first place.
Raident wrote:
Jul 16th, 2017 11:39 pm
Hmm, can you name one company that went out of business without being taken over by another company or bailed out by the government and still has a healthy pension plan? I looked at the list of 100 biggest pensions your posted earlier, and couldn't find any that are related to an entity which no longer exists.

As for whether or not deliberate failure to properly prepare for an inevitability constitutes blatant fraud or not, we might as well be discussing if corporate donations to political parties constitutes blatant bribery or not - we could argue semantics all day long and never get anywhere.

I agree with your premise on what makes or breaks a pension plan, but perhaps we have different interpretations of the term "defined benefit", in particular pertaining to the level of certainty of a guarantee?
Easily. Many companies go under dissolutions.
One famous example is Soapstone Networks
http://m.marketwired.com/press-release/ ... 214417.htm

The stock was trading for less than the value of dissolving the comapny so people made money buying the stock and voting to break up the company and sell assets. The company as a business couldnt make money, but they have assets. They also had a pension plan and it was funded. Funds were paid to an insurance company to manage the remainder funds. (Was a shareholder as a trader a few years back).

As a personal anecdote, many large farms in Alberta are family run. When the children do not want to keep farming or the farm itself dooesnt make money, but the land and equipment itself is worth money, it is sold off. My father's employer's case, the business technically failed, but the pensions were funded. Just the land mortgage couldnt be paid based On the farm's profit. Since the owner's son didnt want to continue and there were no buyers, the land was sold for profit , everything was paid. My father's pension plan was stayed intact. They had the exact value rolled into an annuity from an insurance company which provides the same amount the pension would have paid out. He still has health benefits.

The thing in many cases is the plan itself disappears as an entity, but the plan's benefits are still paid out via contracting it through an insurance company. There is no reason for a pension plan to exist further more if no new contributions are made to it. So the pension plan for my father exists in that he lost no benefits, but rather than getting the farm to pay him a cheque, the cheque now comes from Sun Life.

The reasom why Im callIng you out on you using the term ponzi scheme is because for the sheer fact that you are pretty much calling all private sector plans a ponzi schemes (as per your post title) when evidence says otherwise. Pension plans that promise and have made good on the benefits promised despite business failure exist. I also argued the definition because many private companies offer defined benefit plans that are reasonable enough for them to pay out without bankrupting them. In these cases, there is no reason to thInk that they cannot meet the liabilities of the benefits they promise.

You also need to properly define the solvency ratio. 95% means that if the company was to stop any further contributions, the money set aside alone can cover 95% of the benefits promised. That doesn't include any assets a company that have value and can be obtained through creditor courts. And as long as companies are making the promised payments, there is nothing to suggest they will fail to meet 100%of the liabilities. Perhaps the company feels they can meet the obligations of their pension liabilities without actually putting aside the money. Perhaps that 5% short is better deployed in the company itself to produce more profits. Especially with today's low interest rates, setting aside the cash to buy bonds may not be the most prudent election of funds.

Either way, to call private pensions ponzi schemes to me is a bit ridiculous. If it was such a wide spread issue, I think we and the media wouldnt be so centred on specific cases like Nortel Networks or Sears Canada, but rather friends would be talkIng about their defrauded benefits from their company etc. This isnt trying to nitpick, but to answer what you posted and asked. I dont agree. Private pensions in itself are not scams. Sears Canada also didnt commit fraud. Their busIness failed. Nortel did perpetuate accounting fraud which in itself has contributed to the failure to meet the benefits they promised to their retirees. This specific case you could say was kind of a scam.
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[OP]
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First of all, thank you for providing the first concrete evidence in this thread that private sector pensions are actually viable. To provide an anecdote of my own, one of my cousins was indeed burned on a defined benefit plan when the company she worked for collapsed in 2010 and is looking forward to getting roughly $0 from it when she retires in a few decades. Thankfully, she only graduated and joined the company in 2004, so losing that part of her pension isn't as big a deal as it is for some of her former colleagues who were in their 50s at the time.

I nonetheless remain leery of the concept, however. Yes, some pensions are wildly successful and that's great - I'm happy for the teachers of Ontario, who probably don't need to contribute anything to their pensions right now - but many others were set up with flawed assumptions regarding life expectancy and rates of return on the stock market, and why is there no legal obligation for a company to fix that while it can still afford to do so? Rather, why does the government allow company managers to make those judgment calls as they please? Wouldn't there be much less of a conflict of interest if it were up to, say, the pension administrator to make those determinations?
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Raident wrote:
Jul 17th, 2017 1:12 am
First of all, thank you for providing the first concrete evidence in this thread that private sector pensions are actually viable. To provide an anecdote of my own, one of my cousins was indeed burned on a defined benefit plan when the company she worked for collapsed in 2010 and is looking forward to getting roughly $0 from it when she retires in a few decades. Thankfully, she only graduated and joined the company in 2004, so losing that part of her pension isn't as big a deal as it is for some of her former colleagues who were in their 50s at the time.

I nonetheless remain leery of the concept, however. Yes, some pensions are wildly successful and that's great - I'm happy for the teachers of Ontario, who probably don't need to contribute anything to their pensions right now - but many others were set up with flawed assumptions regarding life expectancy and rates of return on the stock market, and why is there no legal obligation for a company to fix that while it can still afford to do so? Rather, why does the government allow company managers to make those judgment calls as they please? Wouldn't there be much less of a conflict of interest if it were up to, say, the pension administrator to make those determinations?
I think it is because there is no real reason to because most private enterprise have to follow established accounting rules anyway, and so any major shortfall would be a huge blow to confidence,(ie not making creditors and equity investors happy). And if such rules were to apply to private enterprise, then governments would likely also have to follow those rules. (there would be cries of foul should governments be given less stringent rules. Also, government or public service pensions are actually less funded and higher potential liabilities at the moment.

And to just correct something. Just because a pension solvency ratio is over 100%, doesn't mean that current employees don't have to contribute. Ontario Teacher's has a 102% meaning that if the pension was to stop taking contributions and people could no longer add years of service, they would be able to pay all outstanding pension liabilities to plan members and still have 2% left. That is why teachers and employees of other plans still have to contribute because they are contributing for the pension service they are accumulating. Plans like HOOPP that have a ratio of 122% have to now consider reducing contribution rates or to increase pension benefits because they have more than enough to cover and are getting close to the 125% limit set by the CRA.
On the same token, a pension with solvency ratio less such as 85, or 90% doesn't mean that the pension is insolvent. It means at current, the amount that is accumulated in the pension trust is insufficient to cover current liabilities. As long as the company pays out the pension liabilities out of current working assets and capital, or later contributes into the plan, there is no problem. Solvency ratio is rather a way to assess risk and stability of a pension plan, but not necessarily if it will survive.
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Good discussion - where not sure why only private pension plans are under discussion: DB plan generally are under pressure. A well-known public fund in Ontario needed to switch from "honor the promise" to "being fully funded" by essentially cutting benefits to retirees or face the music.

Here are the limitation and challenges for DBs overall:
* Slowing contribution pool - technology improves, to do a piece of work does not require anymore 10 people as example, it takes 1. Those 10 people even though relied on the promise (even with contributing), now there's only 1 member to pay. 10x is a little extreme but serves example here to my point. This technology acceleration would continue in my view
* People living longer - even though a number of data is collected via actuarial tables, the contribution rates that convert to liability for the sponsor generally look at past data for people living much shorted than some will due to improvement of medicine.
* Low interest rates and risk-profile of investment - majority of the DB pools ran with assumptions of contribution and withdrawal and growth. Like ROI of 5% annually to allow sustainable pay-outs to members without dipping into capital - that's is under pressure as even CPP is facing some major headwinds to in that side. Some funds change their investment strategy (like CPP to do active investment) which inherently is a change of risk-profile to earn enough bucks.

So for those of you being retirees now it's still a level-playing field but I worked in 2 places already with DB - and with my horizon of 25y+ to earn anything, for me I assign ZERO value to such promise.
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Raident wrote:
Jul 16th, 2017 10:05 pm
I think rocking23nf was implying that if a pension plan falls below 95% funded, regardless of how it happened, then the company should be forced by law to immediately make up for the shortfall using whatever means possible. Or in other words, if a company chooses to provide its employees with a defined benefit plan, then they should be ready to accept that pensions always come before profits.

Of course, in tough economic times like 2008 when stocks suffer a 40% tumble, it might mean pensions before survival as an otherwise healthy company might have to liquidate itself in order to shore up a pension that just lost 40% of its value. So I'm not sure how I feel about this, but then again, I'm leery of defined benefit plans in the first place.
The various pension benefit standards Acts address this, but they always give the sponsor many years to address a solvency deficiency. None that I am aware of require plans to be in a state of constant solvency.

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