Over the years, California Commons has often revisited the topic of severely underfunded public sector defined benefit pensions, particularly that of the County of Sonoma. While the number of private sector defined benefit pension plans has dwindled over time, often those that still remain share some unfortunate similarities with many public pension programs, significantly overestimating the projections for fund earnings by use of an over-optimistic discount (interest) rate which then leads to declining funding ratios. Meaning too little money was deposited into the pension plans, with it not earning returns as high as projected, resulting in there not being enough money in them to pay retiree benefits promised.
According to “The sinkhole,”a recent Buttonwood column in The Economist, the consulting firm Mercer calculated that the funding ratio was down from 81% to 75% as the deficit rose from $315 billion to $484 billion among companies in the S&P 1500, even after contributions of about $50 billion last year. Apparently private sector executives delusions about projected returns may even exceed that of many public sector pension fund managers with research cited in The Economist revealing expectations of after costs 10% returns from the equities in their defined benefit pension-fund portfolios.
Believing that fair pensions should be fully funded to fulfill promises for retirement income, it’s disappointing, but hardly surprising that the private sector has dug an underfunded pensions hole akin to the public sector. Carefully matching fund assets with liabilities usually requires bond rather than stock investments. That means more up-front capital and foregoing the excitement equities provide for gambling on higher than realistic returns. Meanwhile taxpayers are at risk, obviously for public pensions, but also for private pensions due to the retirement payment protections provided by the Pension Benefit Guaranty Corporation.