Thursday, June 14, 2012

The World's Growing Pension Pains

A few days ago, I posted an article on the dire situation currently being experienced by General Motors and their massively under-funded pension plan.  Recently, data from the United Kingdom shows just how critical the world's pension Ponzi situation really is since all nations with a large contingent of baby boomers share the same pension fate.   While I realize that this data is specific to the U.K., our current ultra-low interest rate and volatile stock market environments mean that pension plans around the world are struggling with their funding levels.

The United Kingdom's Pension Protection Fund exists to provide compensation to members of defined benefit pension plans when there is an event resulting in employer insolvency or when there are insufficient assets in the pension plan to cover its obligations either through under-funding or through fraud.  The Pension Protection Fund is funded by annual levies charged on all pension plans; this levy totaled £697 million in the last fiscal year.  Assets of the Fund are managed by a "who's who" of the financial world, including Goldman Sachs (who else?) and PIMCO.  The Fund holds a wide range of global bonds and equities, real estate, infrastructure, private equity and derivatives.  As it stands now, the Fund has total current and non-current assets of £7.115 billion and expects to have an investment portfolio of £17 billion by 2015.  

It its latest update, the Pension Protection Fund included this graph:

The 6432 pension plans in the Fund's index have a total deficit (i.e. under-funding) of £312.1 billion, up from £216.8 billion just one month earlier, an increase of 44 percent on a month-over-month basis.  Most concerning is the fact that this under-funding is up £287.6 billion on a year-over-year basis, an increase of 1173 percent.     The funding ratio of all pensions fell from 82.6 percent to 76.8 percent with total assets of £1030.8 billion and total liabilities of £1343 billion.  Here is a graph showing the rising gap between pension plan assets and liabilities:

Of the 6432 pension plans, 5503 plans were in deficit (85.5 percent of the total) and only 929 plans were in surplus (14.5 percent of the total).  Here is a graph showing the rapid decline in the number of pension plans in deficit and surplus over the past seven years:

One year earlier, there were only 4164 pension plans in deficit and 2268 plans in surplus.  At that time, the plans in deficit were under-funded by £93.7 billion and the plans in surplus were over-funded by £69.2 billion for a net under-funding of £24.5 billion.  In one short year, we now find that the pensions in deficit are under-funded by £313.9 billion and the few plans that are in surplus are over-funded by a relatively small £19.8 billion for net under-funding of £294.1 billion.

Here is a bar graph that shows the number of pension plans in deficit by month for the last seven years:

Notice that the number of plans in deficit is very close to the level seen during the Great Recession.

In no small way, those of us with pension plans (or savings for that matter), owe a word of thanks to Mr. Bernanke, Mr. Carney, Mr. King and other central bankers around the world.  Bond yields are at multi-generational lows as central banks desperately attempt to breathe some life into the world's economy.  The problem with today's pension plans is that, in this low interest rate environment, they have been forced to seek reasonable rates of return by increasing their risk profile.  This has meant that pension fund managers have been forced to invest in equities and, as we all know, equities are pretty much a surefire way to lose capital.  The biggest problem is that it is very difficult for pension plans to make up lost capital the closer that future pensioners are to retirement, an issue that all plans face with the first baby boomers hitting the magic age of 65 this year.

Here is a graph showing what has happened to both 15 year bond yields in the United Kingdom and the FTSE Index (the United Kingdom's equivalent of the Dow):

This one graph explains one part of the pension problem.  God help us if the stock market retraces its 2008 - 2009 footsteps!  The other part of the pension problem is demographics; for some reason or another, it seems that pension plan managers missed the fact that, as baby boomers retired, there would be fewer employees paying into a pension plan than there would be collecting.

And thus, the pension Ponzi scheme was born and died a horribly painful death.


  1. Stumbled upon your blog! You are quite informative about the many current economic situations. The pension situation does scare me. Since I graduated high school 1980, I still have over 15 years before I can "officially" retire and receive government benefits. I seriously have doubts that I will ever see any pension money from the government. Being single and never having any children, I do not have the option to live with one when I cannot afford to live alone. No...what I see happening for many like myself, is being forced to live in government controlled housing that would be at best nothing more than a internment camp. What may happen is something that like of the movie "Logan's Run" portraited or another one that comes to mind, "Solvent Green'. Look them up on the Internet and you will understand what I mean.

  2. Soylent Green is people!

    I've never really thought that government retirement benefits would be there for me despite the fact that I've paid into them my entire working career. That's why I call pensions a Ponzi scheme; the last ones in, pay for the rest.

  3. This is really informative. Thanks for sharing this.