Monday, April 27, 2009

Why 44 million Americans should get to know PBGC

On the same day that GM announced that it would be trading bonds for equity – a proposition that every pension fund manager must love to hear – it is notable to observe that we’ve had a mysterious one month hiatus in the PBGC stepping into guarantees of illiquid pensions. During the month of March, 4 large pensions were taken over and then, with little explanation, April appears to be passing with no more than a peep.

Now, you all know that I’ve frequently written and spoken on the much-larger-than-the-bank-failure risk in our nation’s pension programs for quite some time and you’ll note that no public official has stepped up to the plate to address this issue head on. In fact, the Obama Administration spent another $30 billion in attempt to bury the reckoning that will be triggered when AIG finally is forced to disclose the fact that it’s managed annuities are no more. But we shouldn’t worry. The Pension Benefit Guarantee Corporation has put the best minds on positioning their obligations for success in the hands of companies with an impeccable reputation for getting the market right. It has contracted management to BlackRock, Goldman Sachs, and J.P. Morgan who manage “very significant real estate and private equity allocations and supplement staff with a full range of services…at a fixed price”.

A little piece of data that would be helpful to realize is that the PBGC actuarial report (the “stress test” if you will for insurance companies) reported that, on September 30, 2008, their single-employer program exposure included $57.32 billion for the 3,850 plans that have terminated and $12.61 billion for the 27 probable terminations. This number was calculated prior to September 30, 2008. There is no evidence that it included things like the Bernard Madoff-triggered pension collapse of East River (taken over by PBGC on March 10, 2009. The anticipation of pension assumptions of Propex (3,300 pensioners on March 23, 2009) and Intermet (4,500 pensioners on March 13, 2009) are also rounding errors in the face of the massive automotive and supply chain challenges that lie ahead in the coming days and weeks.

PBGC seeks to reassure the American public that it’s in good shape (and is obviously well managed with BlackRock, Goldman, and J.P. Morgan) but there are some details that should be considered that may suggest another story. Let’s look past the fiscal year end deficit of $11.5 billion and the current $69 billion in known liabilities. Let’s also look past the recently reported 6.5% drop in returns on professionally managed assets. Rather, let’s look at the fundamentals that drive the actuarial data which is supposed to tell us that all’s in hand.

You’re welcome to review the fine print yourself (I would encourage that by the way) but it’s important to note that over the past nearly two decades, SPARR or the Small Plan Average Recovery Ratio, has dropped from 12.01% in 1991 to 4.26% in 2008. The SPARR is the percentage of assets recovered by the PBGC from plans that they have taken over in the year of termination compared to the outstanding liability assumed. So a dropping SPARR is a BAD thing. And, a dropping SPARR together with a negative asset return on managed funds is a really bad thing.

In short, if you still are scratching your head wondering why you keep hearing about things being “too big to fail”, realize that they are all being propped up to avoid the musical chairs conundrum that will soon be sitting at every dinner table. The real problem, unlike those economists who want to blame 1930’s economic theory for velocity and money problems, is the one no one has the courage or accountability to face. That is that we made a number of promises that are now in default. And, we will all have to understand that we all must find our way, together, out of this mess. It will begin by extending the table to those who are about to find out that what they were planning to live on isn’t going to be there.


  1. While I agree with your post, I am concerned that the failure of the pension funds will cause a significant social unrest. It is one thing for the Bernie Madoff's of the world (and their rich friends) to lose their disposable income through their own investment decisions. It will be quite another for the average man & woman to learn that their "insured" pension has gone missing. I am afraid that those people will not wait for the invitation to join anyone at the table, but rather grab their weapon of choice and begin making their own reservations as they look for those who lost their money.

    I am afraid there won't be the togetherness you correctly hope for.

  2. David, I regret having to ask this question since your blog is not about giving investment advice per se. But those with pensions do want to know: do we cash-out 401k’s and other long term vehicles and stay cash ready? If so, isn’t the greenback also at risk of become nothing more than Monopoly money?

  3. Great comments and questions - both. As I stated in my Arlington Institute Spring Side Chat II, I am deeply concerned about social unrest and believe that we need to be engaging in pre-emptive discussions about this BEFORE it happens. With respect to managed funds, the current equity management madness on the street - propped up by the pop media - is trying to get more participation in equities so that the last gasp of the hedge positions can pull the rug (and all the furniture) out from under the lay investor. As I've said numerous times, if the Obama administration was really interested in helping the average American, it would provide an asset rebalancing tax amnesty that would allow 401-k and other investment repositioning. I have advised removing money from any equity or bond position that relies on credit enhancement or from any company that is relying on bond/credit refinancing in the coming 3 quarters. With respect to cash, I still like currencies in countries with whom China is still doing business. I'm old-fashioned enough to believe that a nation's currency has some loose affiliation with its ability to transact value - something that the U.S. seems to have forgotten for the time being.

  4. Thanks, David. Really appreciate your generosity. Here's to hoping that monsignor Obama is listening.


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave