On Pension Funds – several dumb questions

I note with interest that some pension funds will likely start a whole new process of trading risk, called lifespan swaps. In this model, a plan which has risk that its participants might live too long, can insure itself by doing a lifespan swap. If things go well for the pensioners, and thus ill for the pension, the insurance will help make up the shortfall.

I am reminded that AIG insured risky paper so it could be treated as cash, and when they needed to pony up the money, they went under.

So the dumb question is, if the insurer can make money, then aren’t the insured, overall, paying more than they need to? Individuals do this because they cannot afford to be the rare but heavy loser. Large pension funds should not have this perspective, eh? Conversely, if the insurer can not make money, they will simply go bankrupt. So it would appear that a large pension fund is either betting they lose, or betting they lose. Why would they do this?

The enthusiasm for any new kind of paper is infectious, and it also makes me sick. We cannot have carbon tax, but we may get carbon trading. We can have credit default swaps, until the paper pyramid collapses.

I note that a certain bank proudly tells its retirees that it put the maximum allowed by law into its pension plan to increase its funding.

So the dumb question here is, how did they ever get a law which limits the amount they can put in? No matter how good a year they get, they have prevented themselves from doing too much catch-up funding. Note that when the reverse is true, they are given extra years, five or ten, to sort-of plan to catch up.

Finally, another fine company proudly sent every employee an “about your company” update every year showing how they would retire, benefits, et cetera. Then they made their older employees a departure offer. At one meeting, it was asked how the company treated inflation. The answer was, historically, the pension plan has been inflated at .7 – seven tenths – of inflation. Being a recipient of this plan, I can assure you that it has never been increased, and the dental benefits are based on a dental fee guide from the year of the departure offer.

Even better, the company merged its defined benefit plan with its defined contribution plan, and somehow gave itself a four year contribution holiday, because there was surplus in the plan – due to its not being inflated, eh? When taken to court, it was judged that the company’s action in merging plans was illegal, but that it could not be undone. Since the company was in the computing business, and records must be kept for seven years, it is obvious that the old files could have been restored and the intervening transactions reprocessed. Perhaps legal opinions on what can and cannot be done in computing should not be decided by legal experts, but that is another rebuke to common sense, eh?

So here is the final dumb question. This (nameless) company appears to have lied to its employees about future pension increases, abused surpluses to increase profits at the expense of pensioners, and somewhat cooked the books to make it harder to see this in a clear court case. You’re waiting for the dumb question, and here it is:

Is this the level of integrity the employees should have expected?

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