Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19
Will Labour Government Plant More Tree's than Council's Like Sheffield Fell? - 4th Dec 19
What the UK Economy GDP Growth Rate Predicts for General Election 2019 - 4th Dec 19
Gold, Silver and Stock Market Big Picture: Seat Belts Tightened - 4th Dec 19
Online Presence: What You Need to Know About What Others Know About You - 4th Dec 19
New Company Tip: How To Turn Prospects into Customers with CRM Tech - 4th Dec 19
About To Relive The 2007 US Housing Market Real Estate Crash Again? - 3rd Dec 19
How Far Will Gold Reach Before the Upcoming Reversal? - 3rd Dec 19
Is The Current Stock Market Rally A True Valuation Rally or Euphoria? - 3rd Dec 19
Why Shale Oil Not Viable at $45WTI Anymore, OPEC Can Dictate Price Again - 3rd Dec 19
Lib Dem Election Dodgy Leaflets - Sheffield Hallam Battle General Election 2019 - 3rd Dec 19
Land Rover Discovery Sport Brake Pads Uneven Wear Dash Warning Message at 2mm Mark - 3rd Dec 19
The Rise and Evolution of Bitcoin - 3rd Dec 19
Virtual games and sport, which has one related to the other - 3rd Dec 19
The Narrative About Gold is Changing Again - 2nd Dec 19
Stock Market Liquidity & Volume Diminish – What Next? - 2nd Dec 19
A Complete Guide To Finding The Best CFD Broker - 2nd Dec 19
See You On The Dark Side Of The Moon - 2nd Dec 19
Will Lib Dems Win Sheffield Hallam From Labour? General Election 2019 - 2nd Dec 19
Stock Market Where Are We?  - 1st Dec 19
Will Labour's Insane Manifesto Spending Plans Bankrupt Britain? - 1st Dec 19
Labour vs Tory Manifesto Debt Fuelled Voter Bribes Impact on UK General Election - 30th Nov 19
Growing Inequality Unrest Threatens Mining Industry - 30th Nov 19
Conspiracy Theories Are Killing This Nation - 30th Nov 19
How to Clip a Budgies / Parakeets Wings, Cut / Trim Bird's Flight Feathers - 30th Nov 19
Hidden Failure of SIFI Banks - 29th Nov 19
Use the “Ferrari Pattern” to Predictably Make 431% with IPOs - 29th Nov 19
Tax-Loss Selling Drives Down Gold and Silver Junior Stock Prices - 29th Nov 19
We Are on the Brink of the Second Great Depression - 29th Nov 19
How to Spot REAL Amazon Black Friday Bargains and Avoid FAKE Sales - 29th Nov 19

Market Oracle FREE Newsletter

UK House prices predicting general election result

Increased Pension Liabilities During the Coming Stock Market Crash

Stock-Markets / Pensions & Retirement Sep 12, 2019 - 01:33 PM GMT

By: Nick_Barisheff

Stock-Markets

Many Canadian companies have significant unfunded pension liabilities on their balance sheets. With the traditional 60/40 allocation to stocks and bonds, pension deficits may become unmanageable during the next market correction if they are not dealt with urgently. Governments can afford to ignore this looming disaster and act irresponsibly largely because they can print money; however, corporations cannot afford the risk of unfunded liabilities nor can they eliminate pension deficits as easily. We would like to take this opportunity to illustrate how these pension deficits can be taken in hand.

President Barack Obama’s administration racked up nearly as much debt in eight years as in the entire 232-year history of the US before he took office. He entered office with $10.7 trillion in total debt, and he bowed out with the country owing $19.9 trillion. That’s an average tab of $1.15 trillion a year.

Under President Donald Trump, the debt has continued to climb. The $2.18 trillion increase works out to about $1.05 trillion a year, or slightly less than the pace Obama set.


While the magnitude of direct debt is a formidable problem, unfunded liabilities are a much bigger predicament—promises that the government has made that need to be paid in the future. As of 2019, total unfunded liabilities in the US, consisting of Social Security and Medicare liabilities, amount to $122 trillion. To put this into perspective, it works out to over $380,000 per US citizen. This hidden liability brings the total debt-to-GDP ratio to 120.15%.[1]

Compared to the US, Canada’s total household debt seems much smaller at $1.8 trillion, plus unfunded liabilities for Canada Pension Plan, Old Age Security and Medicare adding another $2.2 trillion, for a total of $4 trillion. This is only slightly less, proportionately, than the US, but it still equates to $243,000 per citizen, or 97% of GDP.

The biggest problem hidden under the surface is unfunded pension liabilities in private and government pension funds. In Canada, total pension assets are $1.63 trillion. According to Bloomberg, 103 companies listed on the TSX have unfunded liabilities of $15 billion. While many companies have switched to defined contribution plans for new employees, there are still many grandfathered defined benefits plans for past employees. These liabilities are part of corporate liabilities on the balance sheet, and they have a negative impact on the company’s share price. While the large pension funds that have in-house portfolio managers also own real estate and infrastructure, the smaller pension funds only hold the traditional 60/40 portfolio of stocks and bonds. According to Willis Towers Watson, a global advisory, broking and solutions company, the average return for global pension funds in 2018 with a 60/40 allocation was -5.7%, and this disappointing performance was during the longest bull market in history. Over the past ten years, it averaged 4.46%[2]; however, even these returns were below the target benchmark, resulting in growing pension liabilities. Adding to pension shortfalls is increased longevity, reduced birthrate and the increase in retirement in the largest sector of the population. When pension funds were initially set up in the 1950s, there were 16 working employees per retiree. In 2030, however, after the last baby boomer turns 65, there will be only about 2.3 workers per beneficiary.

What is astonishing to me, after having read dozens of white papers and reports written by the most prominent pension fund consultants, is that not a single one even mentioned gold or REITs as an asset class, let alone recommended a portfolio allocation. This is very surprising, since REITs have been the best annual performing asset class, followed by gold. Stocks and bonds have trailed behind for over 40 years. The average annual return for gold since 2000 has been 9.9% per year in US dollars, far in excess of the 4.46% average return for pension funds.  Gold’s 10-year return averaged 10.5 % in all currencies. It must be reiterated that gold and REITs were never even mentioned in any of the papers on portfolio allocation.

It is hard to believe that, even though almost everyone agrees with portfolio diversification, no one actually does it. There are seven asset classes: cash, stocks, bonds, commodities, real estate, precious metals and alternatives. Most pension portfolios only hold two asset classes—60/40 stocks and bonds. According to business management consultants Ibbotson Associates, Inc., stocks and bonds have been correlated since 1969 and, as a result, will not reduce losses in a broad market correction.

If you analyze gold with an open mind, you will find that it is less volatile than most of the DOW components and it reduces portfolio volatility and improves returns with allocations between 10% and 20%. 

The BIS, OSFI and FDIC have all rated gold as a zero-risk asset equal to US dollars and US Treasuries.

At national discretion, gold bullion held in own vaults or on an allocated basis to the extent backed by bullion liabilities can be treated as cash and therefore risk-weighted at 0%.” Bank of International Settlements (BIS)

“Gold held in an institution’s vault(s), or held in trust (i.e. monetary gold) now qualifies as a 0% risk weighting for risk-based capital purposes.” Office of the Superintendent of Financial Institutions (OSFI)

“A zero percent risk weight to cash owned and held in all of a banking organization’s offices or in transit; gold bullion held in the banking organization’s own vaults, or held in another depository institution’s vaults on an allocated basis to the extent gold bullion assets are offset by gold bullion liabilities.” US Federal Deposit Insurance Corporation (FDIC)

Gold’s primary benefits are most prevalent during financial market declines, as in 2008. Equities declined by about 40% and mining stocks by 21%, while gold increased by 26%.

The problem facing most Canadian public companies today is that they have accumulated unfunded liabilities during the largest bull market in history. Currently, we are on the precipice of a triple bubble in stocks, bonds and real estate. The current bull market is the longest in history, and most conventional valuation metrics show that stocks are grossly overvalued. A major market correction is overdue, and many experts believe it will be worse than the 2008 financial crisis. Some believe that it will be worse than the market crash in 1929.

Following a conservative example, if 60% of the $171 billion of pension assets allocated to equities decline by 40%, as they did in 2008, unfunded liabilities would increase by the amount of reduction in assets. If interest rates rise, many bond portfolios will also suffer significant declines. Pension equity assets could decline by $41 billion to $130 billion, while unfunded liabilities increase from $15 billion to $57 billion.

This could have a major impact on both the stock price and executive bonuses during a correction, as $41 billion would be added to company liabilities that would have to be paid for out of earnings over ten years.

The BMG Diversified Hedge Fund (BMG Hedge Fund) is designed to avoid losses during the coming correction by being invested in gold bullion only. At the completion of the correction, it will reallocate into a truly diversified portfolio of stocks, bonds, REITs, gold and silver.  It will invest in the ‘best of the best’ underlying Canadian and US funds that have outperformed their indexes and their peers for the past 10 years. The BMG Hedge Fund will also have the benefit of buying these underlying funds at the completion of the correction at significant discounts. The table below is a back-tested example of what would have happened if this strategy was followed during the 2008 crash. This model portfolio didn’t suffer any annual losses. The average annual return was 25.4% at a standard deviation of 14.35 and a Sharpe Ratio of 1.66. In addition to capital gains of over $91,000 for a $10,000 investment, the dividend yield would have been an additional $15,000.

Corporate CEOs can continue to follow the failed advice of their pension consultants, or decide to follow an alternative fully diversified strategy that will correct the problem of unfunded pension liabilities.

[1] https://www.usdebtclock.org/

[2] https://www.oecd.org/daf/fin/private-pensions/Pension-Markets-in-Focus-2018.pdf

To download PDF version

By Nick Barisheff

www.bmgbullion.com

Nick Barisheff is the founder, president and CEO of Bullion Management Group Inc., a company dedicated to providing investors with a  secure, cost-effective, transparent way to purchase and hold physical bullion. BMG is an Associate Member of the London Bullion Market Association (LBMA).

Widely recognized as international bullion expert, Nick has written numerous articles on bullion and current market trends, which have been published on various news and business websites. Nick has appeared on BNN, CBC, CNBC and Sun Media, and has been interviewed for countless articles by leading business publications across North America, Europe and Asia. His first book $10,000 Gold: Why Gold’s Inevitable Rise is the Investors Safe Haven, was published in the spring of 2013. Every investor who seeks the safety of sound money will benefit from Nick’s insights into the portfolio-preserving power of gold. www.bmgbullion.com

© 2019 Copyright Nick Barisheff - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules