Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy Government PANICs! Sterling Collapses! - 19th Mar 20
Coronavirus Market Crisis - Nowhere to Hide! - 19th Mar 20
Coronavirus Most Likely GDP Economic Outcome for Q1 and Q2 2020 - 19th Mar 20
How COVID-19 Leads to 2008-Style Bank Crisis - 19th Mar 20
Coronavirus Impact on Global Economic GDP Numbers - 19th Mar 20
Bticoin Crash Big Channel Review - 19th Mar 20
Gold is Doing Its Job…Silver Will Come Back as a Safe-Haven Asset - 19th Mar 20
The Chartology of Coronavirus Deflationary Event - 18th Mar 20
Fed Slashes Rates to Zero and Introduces QE in Response to COVID-19. Will Gold Rally Now? - 18th Mar 20
Coronavirus - Nothing to Fear but Fear Itself - 18th Mar 20
The Stocks Bear Market Is Upon Us... Or Not - 18th Mar 20
US and UK Coronavirus Containment Incompetence Resulting Catastrophic Trend Trajectories - 17th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

How to Profit From the Growing US Pension Fund Crisis

Stock-Markets / Pensions & Retirement Jul 16, 2008 - 07:55 AM GMT

By: Money_Morning

Stock-Markets Best Financial Markets Analysis ArticleMartin Hutchinson writes: Welcome to the latest offshoot of the subprime-mortgage debacle: A burgeoning U.S. pension-fund crisis. Since the global financial crisis struck last fall, the largest 1,500 U.S. public companies have lost a combined $280 billion from their pension funds. Assuming the stock market doesn't move much from here, a typical U.S. company can expect its pension expense – a direct charge against profits – to increase between 20% and 30% in 2009.


With such a hefty burden ahead, it's not difficult to understand that this pension fund crisis will certainly exert a downward pressure on corporate earnings, and doubtless on stock prices, too.

But there is a silver lining: By choosing your stocks carefully, you can dodge this pension-fund crisis altogether. To make sound choices, it's first necessary to have some knowledge of pension systems, and the funding crisis that's brewing up like a summer squall.

Pension-Fund Proliferation Leads to Pension-Fund Crisis

The pension fund problem emanates from the huge expansion of pension funds after World War II, when companies saw additional pension promises as being cheaper than cash wage increases. And they were cheaper: Big industrial companies like General Motors Corp. ( GM ) were growing rapidly, meaning they had relatively young work forces who could be expected to pay pension contributions for many years before being eligible to receive pensions.

Add a certain amount of old-fashioned sloppiness in the accounting – for instance, the total value of pension liabilities didn't have to be reported at all until 1985, and have only been brought onto the corporate balance sheets under the recent pension-focused accounting rule, SFAS 158 – and you can see why defined-benefit pension plans, in which workers got a benefit based on a percentage of final salary, were popular with all concerned.

The defined-benefit pension system got into serious trouble in the 1980s – thanks to some developments from the decade before. Under the ERISA Act of 1974 , employers were forced to make payments to the Pension Benefit Guaranty Corp ., so employees would be paid if the employer went bust. As the 1970s wore on, high inflation (which led to higher wages, and therefore higher pension obligations) and lousy stock markets (which reduced the pension funds' returns), caused many defined-benefit pension schemes to become seriously under-funded, creating a major risk to employee benefits.

The Generally Lousy Moves of General Motors and General Electric

The aging work force didn't help: By 1980, GM had stopped expanding and was moving towards its current position, in which retirees outnumber active workers.

The industry's new solution was the so-called defined-contribution plans, such as today's ubiquitous 401(K) accounts, in which employers and employees combine to fund employee pensions. These had one modest benefit for the employee: They were much more “portable” than defined-benefit plans.

Under the old pension system, if you had completed 20 years at General Motors, you were basically stuck there until retirement. And employers really liked 401(K) plans, as well, for this new format meant that they were freed from being responsible for employees' welfare in retirement (a huge cost savings in the retirement area, thanks to the massive escalation in health-care costs, as it turned out). Employers also could generally substantially reduce the percentage of employee wages they devoted to pension contributions.

Defined-benefit plans had something of a comeback in the 1990s, when inflation declined and the stock market rocketed ahead so fast that the under-funded pensions of the 1970s disappeared, and were replaced with over-funded pension plans, so that employers no longer needed to make contributions. The result was that many companies took holidays from making pension contributions, boosting their earnings, their stock prices and the value of their top management's stock options by doing so.

General Electric Co. ( GE ) even went further; it figured out a way in which it could make negative pension contributions, essentially withdrawing money from the pension fund, and boosting its earnings still further by doing so. GE Chief Executive Officer John F. “Neutron Jack” Welch (whose tenure at GE was from 1982-2001) never missed a trick - as that company's unfortunate shareholders, employees, and customers are only now discovering.

Possible Pension Profit Plays

Since 2000, stock market returns have been lousy. What's more, bond yields have declined. That's had the effect of raising the nominal value of pension liabilities, which are calculated 30-40 years ahead and then discounted back to the present day by some appropriate bond rate.

When you factor in the recent downturn, it's easy to see why defined-benefit pension contributions will be zooming up.

So, how do you deal with the pension-fund crisis?

Avoid the very well established companies with heavy defined-benefit pension obligations. Listen General Motors, I'm a faithful Buick driver. And I'll probably buy another Buick next time around (or maybe a Caddy if I'm feeling rich), and I'm rooting for you to succeed – even though most analysts feel that Toyota and others have you licked . And while I'll remain loyal to your products, that loyalty doesn't include investing my hard-earned savings in you. [For a related story on General Motors' latest woes, check out this report in today's issue of Money Morning .]

GE is one company whose stock I truly hate: In my opinion, General Electric should never have “diversified” away from dependable “drop-it-on-your-foot” electrical equipment and home appliances to fly-by-night finance - and I think GE stockholders have a rude awakening coming, part of which will come from the mess of their defined-benefit pension scheme.

Deere & Co. ( DE ) is a great company, in exactly the right business to make money right now, but you have to be aware that there's a defined benefit pension problem there, too, although only a medium-sized one.

On the other hand, I knew there had to be an advantage in investing in high-flying tech companies, and now I've finally found one. Most of them were founded after 1980 (even Microsoft Corp. ( MSFT ) was tiny before then), meaning that they don't have this pension problem – they rewarded their employees with stock options and kept pensions down to a skimpy 401(K) plan. Check the footnotes in the annual report to be sure, but I would think you're pretty safe in this sector, or in any company founded after about 1985.

International Business Machines Corp. ( IBM ), Xerox Corp. ( XRX ) and the telephone companies would be obvious exceptions, given that pensions may be a problem with these companies.

Finally, you can always invest abroad, where the problem generally takes an entirely different shape, since the demographic and economic patterns are so different. If you want an auto company, what about India's Tata Motors (ADR: TTM ), which is expanding fast and certainly has no great legacy pension problems. (It's worth noting that there are investor concerns that Tata won't have the capital to finance the expansion. But the market has discounted this at current prices, and the company has the giant Tata Group behind it).

If you want a bank, try Korea's Kookmin Bank (ADR: KB ), which has avoided both U.S. pension problems and the U.S. housing crisis.

In Brazil, the work force is young and most pension plans (the few that there are) are mostly of the defined-contribution variety, so consider a look at mining giant Vale (ADR: RIO ).

News and Related Story Links:

The Accounting Onion: FAS 158: Pension Accounting Crawls its Way Towards Reality.

Money Morning Market Analysis : Is Brazil “Investment Grade” for Investor's Money, Too?

Wikipedia: ERISA Act of 1974 .

Money Morning Market Analysis: Tata Targets Jaguar and Land Rover for Long-Term Returns .

Money Morning Market Analysis: GM Tries to Reverse Course, but Can it Catch Toyota?

Money Morning Market Analysis: GE Home Appliance Unit Sale Underscores Again That Corporations and Investors Alike Must Go Global to Succeed

By Martin Hutchinson
Contributing Editor

Money Morning/The Money Map Report

©2008 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 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