Hostess’ Pensions and Modern Insanity

by JT McGee

Dear world, the pension is outdated.

It comes from a time when business was slower, more conservative, and more resistant to change…mostly because very little changed.

The pension is one of the most dangerous things in the world. It creates financiers of automotive companies, airlines, manufacturers, and governments. Defined benefit plans are some of the most dangerous things anyone could ever create.

Screw derivatives, these puppies are weapons of mass destruction.

If a financial planner sells you an investment and guarantees a return, he or she could go to jail. When union bosses require companies to guarantee returns years, decades, and even centuries into the future, they get away with it.

Here’s the thing: investors and business owners don’t want to screw with pensions. It complicates the investment process. So many excellent businesses have been ruined by extreme aggressiveness in pension accounting. There is only one way to provide a defined benefit to employees: know exactly how much the company make on capital in the pension (basically predict returns for the broad stock and fixed income market 40-50 years in the future), know exactly when every single employee will die, as well as how much their incomes will increase year over year forever.

Guess what? Projecting all these variables and coming up with a perfect answer is…you guessed it, impossible.

Let’s make a deal

There is a very logical way to deal with the defined benefit pension: get rid of it. Companies can instead contribute a certain amount annually to an employee’s 401k. That way the funds are the workers’ and completely untouchable. That way, the funds can be risked on the prospects of 500 or even 4000 companies, rather than a single company.

Pensions are great when a company manages to be profitable enough to fully fund them. But how many businesses last for a full generation? Very few.

So what’s the solution? Pretty simple – shift the risk of retirement from a company to the employee.

But again, it’s another one of those simple things that will never, ever happen. For whatever reason, unions and their members believe that people trained in manufacturing and manufacturing management should be able to predict the next 50 years of asset returns in the equity markets. The best full-time financiers in the world couldn’t do that.

You know, if Hostess, airlines, and manufacturers were staffed with excellent forecasters of what is impossible to forecast, something tells me they wouldn’t dedicate their capital to fixed low-return assets like factories and airplanes and invest instead in stocks and bonds of other companies. But hey, maybe they’re just irrational investors.

{ 5 comments… read them below or add one }

Kevin@Invest It Wisely November 19, 2012 at 08:48

Based on what I’ve read the whole thing seems unfair and downright criminal to me. That said, I agree with you, and all the companies that me or my friends have worked at do things in this way. There are no pensions; instead, the company offers to match your contribution into a retirement savings plan, and you retain control over that plan and can choose to invest in a variety of different funds, usually even including some lower-cost index funds. Even if the company goes bankrupt the money is under your name and is still yours.

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JT McGee November 19, 2012 at 11:09

There are about a billion and a half ways for a company to defer investments in a pension. It’s so easy for a company to change their pension modeling, suggest that they expect 10% returns on workers’ pensions instead of a more reasonable 5% figure, then take the excess and use it elsewhere. It’s not necessarily fraud, but it is sketchy.

401ks and defined contribution systems don’t have this problem, but no one seems willing to ditch a “guaranteed” pension for a self-directed investment vehicle.

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Money Beagle November 19, 2012 at 10:49

The sad fact is that many cities, municipalities, and other branches of government still offer the traditional pensions, and that as these obligations grow, the people that they serve will get less and less since the pensions come first. As much as I too yearn for a day where I could get a check every month from the company I worked for, it’s just not the reality in today’s world, and those who fight for it and think it’s normal are looking out only for themselves and not for how it affects society as a whole.

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JT McGee November 19, 2012 at 11:10

“The sad fact is that many cities, municipalities, and other branches of government still offer the traditional pensions, and that as these obligations grow, the people that they serve will get less and less since the pensions come first.”

That’s an excellent way to put it. I have no doubt that we’ll eventually conclude that the pension is the most ridiculous creation ever.

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101 Centavos November 20, 2012 at 08:04

Agreed. Union pensions might have not been the one factor that sunk American Airlines, but it was certainly a big nail in the coffin.
I have a defined-benefits pension offered by my employer. But… it’s a privately owned company, multi-generational, skilled management, profitable and well-funded. So yes, it meets the criteria you outlined above.

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