How risky are pension plans?

[Fuzzy]

Originally Posted by Jeremy Gold

...It might be useful to consider supplementary executive retirement plans (SERPs) which often have no better than general creditor status in bankruptcy. Certainly such a promise made by a weak company is worth less than the annuity that might be desired by the executive...

Sort of like the difference between the questions, "What would it cost to guarantee this stream of payments (from a viable fund/insurer/etc.)?" and, "What is this promise worth from this particular (insolvent/solvent/etc.) sponsor?"

If I could keep straight which side of the door he was on, I think this is what Dan is talking about with entry/exit prices.

So, why, if a government has taxing authority and is supposedly not gonna go insolvent, would anyone in his right mind say that the pension promise is worth less than what an ultimate insurer would charge? (i.e., discount at a higher rate) Is it because the questions have gotten mixed up and we're not really asking "What is the promise worth?" but "What do I have to invest now to pay this promise later if I assume that it will earn a high rate of return...and I don't care if someone else has to make up the investment loss if there is one?" ([sarcasm]Oops, I wasn't supposed to articulate that last part was I? [/sarcasm])

[Dan Moore]

Originally Posted by Jeremy Gold

We (Bader-Gold) did not limit ourselves to an exit model nor to ERISA qualified plans. We believed we were describing the liabilities for a continuing plan.

It might be useful to consider supplementary executive retirement plans (SERPs) which often have no better than general creditor status in bankruptcy. Certainly such a promise made by a weak company is worth less than the annuity that might be desired by the executive.

We did not rstrict ourselves to plans guaranteed by the PBGC nor by anyone else, so that we felt our observations had world wide applicability to pensions promised by companies to their employees.

It would be theoretically possible for the riskiness of pension liabilities to match the riskiness of a Treasury security, because pension liabilities are (in effect) collateralized, while Treasuries are not. You can't really know what the riskiness of pension liabilities is until you examine the data.

The PBGC balance sheet deficit / total pension PVAB on the PBGC basis is a good proxy for a cumulative default rate, with respect to PBGC-covered plans. This is because you are capturing actual and highly probable defaults, even though the plans were collateralized (i.e., the collateralization has already been taken into account). Probably > 90% of US FAS 87 pension liabilities are covered by the PBGC, and the remainder are mostly unfunded and therefore riskier.

As WW Situation has pointed out, if the stock market is going to tank further, this method overprices the collateral and understates the riskiness of pension liabilities.