| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
Because there was not enough money in the plan to do thisRECONSTRUCTION ARTIFICIAL INTELLIGENCE Why You Cannot Count on Your Pension Income Retirement Money or Foundation Grant and What to Do about It The fates lead the willing and drag the unwilling. Seneca PLAY IT AS IT LAYS Id like to thank you all for coming, said our host, the president of a $780,000,000 company, as he raised his glass to toast our dinner at the Bellagio Hotel, one of the planets more lavish casino-resorts. Even though we were there on our own dime finding out later that the two actuaries, who also brought their wives, had their expenses paid by our host we were surprised that this relatively small Florida company would foot the bill for its pension committee to meet at such a lavish location, particularly considering the circumstances. The purpose of the meeting was to discuss the companys pension plan, which promised to reward long-term employees by paying them a retirement benefit equal to 30% of their annual pay. Because there was not enough money in the plan to do this, meetings were scheduled, reservations were made, and we all found ourselves very apropos as it turned out in Las Vegas, the city built to escape reality. The appropriateness of a destination like Las Vegas to the examination of a pension plan, specifically categorized as a defined benefit plan, arises from a pension system that condones stacking the deck against those whom it was intended to benefit. The same sleight of hand that put Social Security in danger runs amuck in the arcane world of pension plans. No one asks too many questions. We see what we expect to see and hear what we want to hear. What we heard from the companys president during the morning meeting the next day was that revenues and earnings were way down. We heard about lousy cash flow and increasing competition. It would be a hardship for this company to make enough of a contribution to its pension plan to ensure that it could make good on its promises to continue to pay current retirees, plus those in line to retire, the income benefits that they have been promised in the years ahead. This announcement was not unexpected. Most companies face the same dilemma. Do you report cash flow as earnings, which can boost your stock price? Do you use it for bonuses to reward that new chief financial officer (CFO) or maybe yourself? Do you use it to expand and buy that new equipment to make you more competitive, or do you dump it in the pension plan? We thought we had been summoned because the company had decided to do the latter. Why else would we have been invited? After all, this company was not presently a client, but a prospective client, to whom we had laid out the new procedures that must be implemented to operate pension plans in this new investment culture in which we find ourselves. The infusion of cash, coupled with the new strategy we would help to put in place, would put things in order so that the company could keep its promises of paying retirement benefits. That the financial advisors who currently handled the plan were not in attendance led us to assume that they would soon be out of the picture. What actually took place is what happens every day in boardrooms, committee meetings, and hotel conference rooms across the country when the topic of discussion is an underfunded pension plan. The solution decided upon was as shifty as any card trick but more insidious, not only because it would affect peoples lives, but because it is dressed up in a comfortingly conservative suit of actuarial procedure which never seems to come under scrutiny. Here is how it works. Assumptions about the pension plans financial condition are made based on The number of employees who will receive benefits The benefits to which these people will be entitled How long the beneficiaries will live and require payments The disability rate for nonretired participants who may require benefits Turnover rate (how many people leave the company before they are entitled to benefits) The age at which people can retire The investment return (the higher the investment return as sumption, the less money the company needs to put in the plan; said another way, the more money the plan makes for itself, or is projected to make for itself, the better it is for the company that sponsors it) Once a year the actuaries selected by the company lump all of this together and pick a number to represent the hodgepodge. This is called the actuarial assumption. The other task appointed to the actuary is to select a cost method for funding the plan. The cost method is simply the way the amount of employer contributions to the plan are determined. So while those of us gathered around the conference table at the Bellagio munched our continental breakfasts, upon a command from the companys president, the actuaries pushed aside their gooey Danish and stood to present their actuarial assumption and their cost method. The sleight of hand comes next. You will understand how the trick is done if we give you a little background. The actuaries are advocates for the company. Just like any other vendor they are selected and paid by their clients to perform a service. That service is to ensure that the company that hires them gets to put as little money as possible into the pension plan. In the text Planning for Retirement Needs you can read this: The most important decision the plan actuary advises on is what cost method to use for a defined-benefit plan. . . . The right cost method should provide the plan sponsor with flexibility in funding and also meet the employer s tax objectives.1 Here is where reality and perception part. The reality is that actuaries do not wake up each morning worrying that retirees will have enough to live on. They worry that their clients will not be happy if they actually have to put any money toward the benefits they have promised their employees. They worry that they will be fired if they dont provide flexibility: What the actuary does is set up a situation where there is flexibility. . . . The actuary can maximize flexibility by setting up past-service liability vs amortizing past-service and futureservice costs together. Dodge, weave, juggle whatever it takes is okay. All that is required is that the funding standard account required by IRS regulations be satisfied in the end. It is no different from the corporate tax return prepared by the accountant. Because every available loophole and strategy are used to reduce the tax bill, what ends up on the return bears little, if any, resemblance to a companys real earnings. There is nothing illegal about this. We all do the same with our personal tax returns. The difference is that the way we do our tax returns will not affect anyones promised retirement benefits. Planning for Retirement Needs is not some renegade publication, but a balanced and thorough book that was required reading for us to obtain some continuing education credits. Within the industry it is understood that the actuaries allegiance is to the sponsor of the plan. It is understood that their projections are meaningless as they relate to anyone actually collecting any money upon retirement. Neither the plan actuary nor the choice of an actuarial cost method bears any relationship to the cost of the plan.2 It is most plan sponsors themselves, like our host at the Bellagio, who misunderstand the actuarys role. The solution he had ready at that breakfast meeting had nothing whatsoever to do with getting his companys plan to where it would be able to keep its promises. Instead he asked the actuaries to provide a solution by changing their assumption and their cost method. Obviously, this had all been discussed ahead of time because two new scenarios were quickly produced, neither requiring the use of any company cash. With no discussion necessary, a motion was made and voted on. Next, we were invited to take 10 minutes to discuss the market. The following was entered in the minutes of the quarterly pension committee meeting: Proposals were presented for our consideration by two vendors [meaning us, who both represent the same company]. Their recommendations were analyzed and reviewed and found inferior to the services we are presently receiving. We will continue to review all new services available in the marketplace to ensure that our employees receive the best possible return on their investment dollars. The meeting adjourned, and the president headed for the casino. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |