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Benefits and Pensions MonitorWeren’t We Just Talking About Spending Surpluses?
Okay, it is official. Now that the mainstream press is talking about pensions, we have a certifiable problem. Of course, the Association of Canadian Pension Management seminar on the underfunding of pension plans came to a different conclusion, but how can you argue against the mainstream media? So the newspaper headlines scream out that, on the corporate side, we have a serious shortfall problem here, in the United States, and around the world. How big? Nobody knows for sure. Companies from British Telecom and British Airways to KLM and Marconi are coughing up unfunded pension liabilities daily. In the United States, Greenwich and Associates estimates the loss at $1 trillion (or, as a Washington friend used to dealing with large numbers calls it –“a trill”) in assets from U.S. pensions and endowments over the past three years, which has to lead to some pretty sizeable liabilities. My prize for going from riches to rags goes to the U.S. airline industry. In 1999, the eight largest airlines had a combined pension surplus of $1 billion. Today, it has a deficit of $18 billion. But, remember, this is the unfunded liability if every single one of those airlines declared bankruptcy and shut down today. Here are some rules to make sense of this new world. Rule #1: It Is Impossible For Most Mortals To Comprehend Very Large Numbers Back in my consulting days, we tried to make really big numbers make sense for the client, mostly by breaking them down into really small numbers. The typical example used everywhere is a building, ship, or area being described as ‘so many football fields long.’ In my case, the convoluted result was always something like ‘This tax increase is equivalent to the cost of a cup of coffee, if drunk by everybody in the province, including children, twice an hour, and never sleeping, until the next century when it increases to …’ I’m not sure this ever worked, but we’ll give it a try here. “The current dollar estimate of the shortfall in Canadian pension funds is so large that every one of the 20,000 readers of this magazine could each eat the almonds AND the macadamia nuts AND the bar of Toblerone found in their hotel minibar, and there would still be enough money left to pay off my mortgage and send each of you dear readers $12 million.” Does that help? Rule #2: Large Numbers Always Get Larger Think about the last merger or bail-out your company was involved in, or the last layoff announcement that you heard. Any estimates of deficits, layoffs, or other bad numbers seem to grow magically over time, or when new parties enter the picture and take a fresh look at the books. And speaking of books, still today some firms aren’t showing all of their numbers. Standard & Poor’s noted recently that many European blue chip companies aren’t disclosing their assumptions on future increases in pensionable earnings, nonpension obligations, and other actuarial assumptions. Expect some surprises when they do. Rule #3: Little Problems Become Big Messes Real Fast Think Enron/World Com/Nortel/Insert Your Favourite Company Here. The rise to the top can take many years, but falling off a cliff takes just moments. Just think of the pattern of any stocks you have successfully shorted. And think about how it seems as if we were just talking about what to do with those big pension surpluses. And while you are thinking, ponder what would happen with another three years of flat/down equity markets. Of course, things can change quickly in equity markets as well. Remember when over-exposure to Nortel was the topic on everyone’s lips? Rule #4: Big Numbers Lead To Big Changes Think of the numbers run up during the Savings and Loan crisis or junk bond losses, and the rules and regulations that followed. More recently, think about the New York State attorney-general and his continued hunting expeditions. So where does this lead? Who has the deepest pockets of all? Who is used to dealing with large sums of money on a daily basis. And whom do many of us think of as the ultimate saviour when financial plans go bad? I don’t want to make this Rule #5 yet, but I’m expecting some big government feet to start stomping soon. Jim Helik is co-author of the book “Energy Markets Risk Management,’ a textbook published by the Canadian Securities Institute. He also teaches at the School of Business, Ryerson University, in Toronto. |
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