TFTF

Our Nuts Are in Danger

October 11, 2019

Life would be so much easier if we didn’t have to worry about our financial futures. Though I suppose we don’t have to worry. Animals don’t. Squirrels instinctively store away nuts and thus live through winter without much thought.

We humans have retirement winters, and we’re more sophisticated than squirrels. We generally outsource the job of managing our nuts/money to professionals. All well and good if we save enough and if the professionals do their jobs right. As we saw last week, the elected squirrels who run Social Security haven’t evolved to face changing conditions. Our Social Security nuts are in danger.

But the problem is even bigger. Today I want to continue this theme using some recent corporate news as our springboard. Economic changes have made future planning increasingly difficult for government retirement systems, private pension plans, and individual investors. How do you generate a reliable income stream for an uncertain but potentially lengthy lifespan in a world where interest rates are barely above zero and possibly below it?

The easy answer is “save more,” but that strategy has limits. We all have current expenses. Yes, we can live simpler lives, but we can’t save 100% of our income. Yet that’s what it will take in some scenarios.  

If you’re starting to envy the squirrels, you aren’t the only one.

Big Gaps

Remember “defined benefit” pensions? That is the kind of plan in which the employer guarantees the worker a set monthly benefit for life. They are increasingly scarce except for small closely held corporations. My US accountant has set up well over 1,000 defined benefit plans, including two for me. His primary customers are dentists. The same rules apply for small closely held businesses as for large corporations. These plans can be great tools for independent professionals and small business owners.

But if you have thousands of employees, DB plans are expensive and risky. The company is legally obligated to pay the benefits at whatever the cost turns out to be, which is hard to predict. The advantage is you can use some hopeful accounting to set aside less cash now and deal with the benefit problems later. The problem is “later” comes faster than you would like, and procrastination can be a bitch.

At some point, the risks outweigh the benefits, which is why few large companies have open DB plans these days. But the plans are often still in effect for older workers, and the amounts are large and frequently underfunded. Companies are slowly dealing with the problem.

And that brings us to the lesson for today. On October 7, General Electric (GE) announced several changes to its defined benefit pension plans. Among them:

  • Some 20,000 current employees who still have a legacy defined benefit plan will see their benefits frozen as of January 2021. After then, they will accrue no further benefits and make no more contributions. The company will instead offer them matching payments in its 401(k) plan.
  • About 100,000 former GE employees who earned benefits but haven’t yet started receiving them will be offered a one-time, lump sum payment instead. This presents employees with a very interesting proposition. Almost exactly like a Nash equilibrium. More below…

The first part of the announcement is growing standard. Employers prefer 401(k) plans because they transfer investment risk to the employees. Other than the matching payments—which end when the worker quits or retires—the company has no future obligations.

The second part is more interesting, and that’s where I want to focus.

Suppose you are one of the ex-GE workers (and I’ll bet I have some readers in that group) who earned benefits. As of now, GE has promised to give you some monthly payment when you retire. Say it’s $1,000 a month. What is the present value of that promised income stream? It depends on your life expectancy, inflation, interest rates and other factors. You can calculate it, though. Say it is $200,000.

Is GE offering to write you a generous check for $200,000? No. We know this because GE’s press release says:

Company funds will not be used to make the lump sum distributions. All distributions will be made from existing pension plan assets in the GE Pension Trust. The company does not expect the plan's funded status to decrease as a result of this offer. At year-end 2018, the plan's funded ratio was 80 percent (GAAP).

So GE is not offering to give away its own money, or to take it from other workers. It is simply offering ex-employees their own benefits earlier than planned. But under what assumptions? And how much? The press release didn’t say.

If that’s you, should you take the offer? It’s not an easy call. First, you are making a bet on the viability of General Electric. In September 2000, GE stock traded at $58+ per share. As I write this it is $8.45. The board has slashed dividends and the dividend yield is now only 0.47%.

As of April, GE had $92 billion in liabilities in its pension plan, on assets a little below $70 billion. Commendably, the company is “pre-funding” $4–5 billion into the DB plan. As we will see, however, this is chump change to the actual obligations.

In various ways, the choice GE pensioners face is one many of us will have to make in the coming years. GE isn’t the only company in this position. You’re still affected even if you don’t have a DB plan. Lots of people are reaching retirement age to find they only have 80% (and often less) of their “fully funded” amount. They have to fill the gap somehow. Most often, that means reducing expenses or working longer, if you’re able.

Rising Pressure

When GE says its plan is 80% funded under GAAP, it necessarily makes an assumption about the plan’s future investment returns. Here’s what they say in the 2018 annual report.


Source: GE

I dug around and found the “expected rate of return” was 8.50% as recently as 2009, when they dropped it to 8.00%, then 7.50% in 2014, to now 6.75%. So over a decade they went from staggeringly unrealistic down to seriously unrealistic. They still assume that every dollar in their pension fund will grow to almost $4 in 20 years.

That means GE’s offered amounts will probably be too low, because they’ll base their offers on that expected return. GE hires lots of engineers and other number-oriented people who will see this. Nevertheless, I doubt GE will offer more because doing so would compromise their entire corporate viability, as we’ll see in a minute.

In any case, more companies will do such things and affected workers won’t be happy. We’ll see the same in state and local government pensions, which are often even more underfunded and have even more absurd investment projections. These are becoming untenable and lump sum offers like GE’s help highlight that fact.

This, in turn, will raise pressure on plan sponsors to reduce those projections, which will increase the amounts they must contribute to their plans, which (for the corporate ones) will reduce earnings.

See where this is going?

We are right now entering an earnings season that may not be disastrous but doesn’t look too impressive, either. It is getting harder to justify the valuations investors place on many stocks.

If you take out the buyback activity from companies themselves, and the index funds and ETFs that buy indiscriminately as yield-starved investors give them more cash, who is really buying stocks in any major way? And what happens when they stop buying? If you’re holding stocks, you better have an answer.

Victoriously Breaking Even

In last week’s Social Security discussion, I noted a fatal flaw in ideas to convert the system into private accounts. Two flaws, actually: 1) Most people don’t know how to invest successfully and 2) now is a terrible time to learn.

(Note, that probably doesn’t include you. You’re reading this letter so you have at least some basic economic and financial literacy. But you represent maybe 5% of the population.)

I dislike saying “it’s different this time” but it really is. Today’s conventional investment wisdom came from an era when there was this thing called “risk-free rate of return.” Everyone could count on earning something, though perhaps not much, without risking it all. Inflation might erode your principal over time but you could at least see it coming.

Now there is no such option. Banks and Treasury securities pay zero, almost zero, or slightly below zero in some places. Don’t like it? Start adding risk. That is your only choice now.

We are in a world where simply breaking even counts as a victory… and that is a serious problem if you need to fund a long retirement.

My friend John Hussman’s September letter, Going Nowhere in an Interesting Way, is a fascinating and important read on this topic. (Over My Shoulder members can read my annotated version here.)

Hussman’s main point: It’s folly to assume stocks will continue performing the way they have in recent years. First, the last two decades haven’t been so great. The S&P 500 total return since 2000 was just 5.4% annually and getting there took the most extreme valuations in US history. He calculates that assuming 4% nominal growth in economic fundamentals and a historically normal valuation 20 years from now, average annual gain for the next two decades will be -1.0%. Yes, that’s a negative sign.

Ok, that’s just stocks, you may say. I’m a bond guy. Fair enough. So maybe instead of -1.0% you’ll earn a positive 2%. That still makes real growth difficult.

Investment math is actually pretty simple if your return assumption is 0%. Calculate how much you need to retire, and save that much. Hussman does it more elegantly.

Suppose an investor has accumulated a lump-sum of savings, and wants to finance a long-term stream of real, inflation-adjusted spending. How large must the initial “endowment” be, as a multiple of annual spending, to finance those future outlays, assuming that it’s passively invested in a conventional portfolio mix (60% S&P 500, 30% Treasury bonds, 10% Treasury bills)?

As a convention, we assume a 36-year horizon, representing a 64-year-old investor hoping to fund spending over a potential 100-year lifespan. There’s nothing special about that horizon, and we obtain similar results using any horizon beyond about two decades, because long-dated distributions have very little impact on the total present value.

The chart below presents our estimate of the Endowment to Spending Multiple going back to 1928. The equity market return estimates are based on the Margin-Adjusted P/E before 1950, and the ratio of nonfinancial market capitalization to corporate gross value-added after 1950. The bond market return estimates use the yield to maturity on long-term Treasury bonds at varying horizons.

You’ll notice that the current E/S Multiple is over 31, which basically says that if you insist on passively investing a lump-sum in a conventional portfolio mix in order to fund your retirement, you’d better already have nearly all the dollars you hope to spend, because the prospects for significant long-term capital growth from present valuations are dismal. Contrast this with 2009, when the estimated E/S multiple was 18, or with 1982, when the E/S multiple fell to a record low of 9.

A pretty dismal outlook: If you want to fund an income stream, your lump sum should be 31X the annual income you seek.

But Wait, There’s More

At the risk of sounding like Ron Popeil of Ronco fame (But Wait, There’s More!), whom readers of a certain age will remember nostalgically, there is more. Sadly, you can’t buy it on late-night television.

The reality is simple. Valuations are high and returns based on historical numbers do not suggest anything close to the 6.75% GE expects, let alone the ridiculous numbers public pension plans expect.

I asked mi buen amigo (I’m trying to learn Spanish) Ed Easterling of Crestmont Research to send me his latest numbers. Based on historical numbers using the Shiller model (other models would be slightly worse) it looks like this. We are currently in the top decile.

Get that? Historical returns based on 110-year models suggest future returns will be anywhere from -1.8% to +3.6%, from where we are today. Note that 3.6% compound is the top end past historical performance. Also note that I have continually cited academic arguments that the debt situation that we are in today, both as a government and privately, preclude the potential for above-historical-average growth, suggesting lower growth is more likely.

Then quickly, let’s look at the seven-year projected returns from GMO:


Source: GMO

Note that these are real returns and not nominal returns. So GMO is actually projecting seven-year returns somewhere around -1.5%. Still quite ugly.

What happens when we have a recession? Remember those ugly things? Pension plan assets suffer a major hit and unfunded liabilities soar! Do you really think central banks can forestall recessions forever? When they are already at the zero bound? Look at the historical frequency, again from Crestmont Research.


Source: Crestmont Research

We are in the first decade to have no recession in, well, forever. Think we can dodge that bullet in the 2020s? Gods forbid, what happens if we have two? The stock market goes sideways for a really long time. Kind of like the 2000s. Then what does GE’s 6.75% return assumption look like? Especially in the zero-bound world of bonds? The answer is “burnt toast.”

Let’s generously assume a 2%+ dividend yield from where we are today. But the chance of a multiple expansion is damn near zero. The Shiller multiple is already 28.6X. (Yes, I get that you can spin P/E multiples numerous ways, but Nobel Laureate Bob Shiller does as well as anybody to reduce the spin.)

GE has $92 billion in pension liabilities offset by roughly $70 billion in assets, plus the roughly $5 billion they’re going to “pre-fund.” But that is based on 6.75% annual return. Which roughly assumes that in 20 years one dollar will almost quadruple. What if you assume a 3.5% return? Then you are roughly looking at $2, which would mean the pension plan is underfunded by over $100 billion—and that’s being generous. GE’s current market cap is less than $75 billion, meaning that technically the pension plan owns General Electric.

This is why GE and other corporations, not to mention state and local pension plans, can’t adopt realistic return assumptions. They would have to start considering bankruptcy.

If GE were to assume 3.5% to 4% future returns, which might still be aggressive in a zero-interest-rate world, they would have to immediately book pension debt that might be larger than their market cap.

GE chair and CEO Larry Culp only took over in October 2018. We have mutual friends who have nothing but extraordinarily good things to say about him. He is clearly trying to both do the right thing for employees and clean up the balance sheet. He was dealt a very ugly hand before he even got in the game.

GE needs an additional $5 billion per year minimum just to stave off the pension demon. That won’t make shareholders happy, but Culp is now in the business of survival, not happiness.

That is why GE wants to buy out its defined benefit plan beneficiaries. Right now, the company is on the wrong side of math. It doesn’t have anything like Hussman’s 31X the benefits it is obligated to pay. Nor do many other plans, both public and private. Nor does Social Security.

To be clear, I think GE will survive. Its businesses generate good revenue and it owns valuable assets. The company can muddle through by gradually bringing down the expected returns and buying out as many DB beneficiaries as possible. But it won’t be fun.

Pension promises are really debt by another name. The numbers are staggering even when you understate them. We never see honest accounting on this because it would make too many heads melt.

And again, a recession is probably coming in the next year or two. The Treasury yield curve has been inverted for three months now and Campbell Harvey, who pioneered that indicator, says it is “flashing code red.” This will further aggravate the pension problem.

If I am a GE employee who is offered a buyout? I might seriously consider taking it because I could then define my own risk and, with my smaller amount, take advantage of investments unavailable to a $75 billion plan.

We are like a football team facing a very tough schedule. Winning will take a solid team working together. Going it alone will be difficult in the 2020s.

Announcing “7 Deadly Economic Sins” Week

Regular readers know my “Things to Worry About” list is pretty long: unsustainable national debt, the fact that nearly 50% of all corporate bonds are teetering on the edge of the BBB cliff, power struggles between competing nations, the insanity of Modern Monetary Theory, a growing partisan split in the US and Europe, an exceedingly hostile US-China relationship, and the threat of negative interest rates.

I think all of these warrant taking a closer look, so October 14–20 will be “7 Deadly Economic Sins” Week at Mauldin Economics.

Seven of my closest friends and I will sit down for thoughtful conversations with our own Jonathan Roth. You probably already know them: Louis Gave, Grant Williams, Peter Boockvar, Lacy Hunt, George Friedman, William White, and Samuel Rines.

They’ll all give you their take on the root causes of the coming global economic crisis.

On Monday, we will start the week with me talking about the deadly economic sin of Lust. Please watch for my emails throughout the week so you won’t miss this special treat.

New York and Butterflies

Other than being in New York October 21 and thereabouts, I’m trying to stay close to home. And when I say home, I can now say that I have finally closed on my home here in Dorado Beach East, Puerto Rico. Getting a loan here is kind of like a Spanish soap opera unless you are willing to pay the going rates. I am paying close to 6%, a far cry from the 2.375% mortgage I had in Dallas. Seriously, there is an opportunity for a jumbo mortgage lender in Puerto Rico. Under 5%, you can sweep the market. Refi’s will line up. On solid loans.

The eye doctor says I am okay and so back to the gym tomorrow. Patrick Cox and Terry Coxon are coming this weekend to discuss funds focused on biotechnology investments. It will be a fascinating weekend of speculation.

And finally, one picture from the butterfly sanctuary my wife Shane has literally created in our home. Seriously, she is raising butterflies, mostly Monarch but also a few other species. It is fascinating to watch them go from eggs to caterpillars to cocoons to butterflies. Here is one of her babies…

And with that glorious image I will hit the send button. You have a great week while we all contemplate a lower-return future. And figure out how we beat the average.

Your creating a team to control our future analyst,

John Mauldin

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patrick@legacypg.com

Oct. 16, 12:48 p.m.

throughout my 30+ year career as a FINRA licensed rep, I’ve seen the decline of the DB plan.  This is an excellent analysis.  It does not address a couple of important considerations for the “pensioner”.  the lump sum gives him/her flexibility and can protect the family against an early mortality.  It makes sense though to “shop” the lump sum in the world of private annuities to see what is possible.  usually I see lump sums buying less income in the annuity world but the questions about the viability of GE’s underfunded plan are put to rest.  good articke

Gary McConnell

Oct. 14, 10:57 a.m.

Two comments
1. I’m not quite clear on the definition of a “former” employee who is not yet receiving benefits. Why wouldn’t they be getting benefits? Are these workers laid off over the years?
2. GE has another big cost problem facing them: environmental cleanups and lawsuits related to industrial sites they have closed down. Here is a story about a plant in Canada that once employed 8,000 and was passing asbestos out the back door. https://www.cbc.ca/news/business/asbestos-peterborough-general-electric-cleanup-1.5283683

jack goldman

Oct. 13, 11:32 a.m.

You miss a simple point John. We transitioned from a real economy making real stuff with real money, gold and silver, to a fake economy making fake stuff (Facebook, Amazon, Netflix, Google, Wall Street) making fake stuff, with fake money, Federal Reserve debt notes after August 15th, 1971.

It took $250,000 principal to pay $3,000 per month at 18% interest in 1980 when promises were made. It takes $3,600,000 to pay $3,000 per month in 2010 at 1% interest when promises are due. Who pays the difference? The pensioners retire as multi millionaires. Someone must pay. Who pays? The pensions are 14x more valuable from 1980 to 2010. Who pays the 14x? I don’t want to pay, that’s for sure. 

It’s the time value of money. Bonds have outperformed stocks by 500% since 1980 due to falling interest rates. Now we have a day of reckoning. Who pays for the promises now that the time value of money and fake computer credits have changed? US Treasury issues real money, gold and silver coins. Federal Reserve issues fake money, debt note money, computer credits, of no real value. Who pays?

Dow is down 35% from 1966 to 2019 in real money, ounces of gold. Dow is up 2,500% in fake money, debt notes. The issue is we are now a fake economy using fake money to get fake measurements. Businesses that make real stuff are in real trouble in the fake economy. Fake businesses are doing great. Can Trump fix it? No. We need a reset. We are over valuing the fake because it can be replicated for free and real stuff has to be made in the expensive real world. This is why educated people don’t have children. We will resolve it with a war.

grgricht@gmail.com

Oct. 13, 12:14 a.m.

John, I always enjoy reading your weekly Thoughts.  I retired last year from a career as a pension actuary and I felt it was important to correct part of your analysis of the GE situation.  Tax qualified pension plans (and the GE plan is certainly a qualified plan) are strictly limited on the interest rates that can be used to cash out pension benefits.  This link has applicable rates from the IRS website: https://www.irs.gov/retirement-plans/minimum-present-value-segment-rates.  There is really no way of using rates higher than these.  In GAAP accounting, the Expected Return on Assets assumption is used only to calculate actual vs. expected return on trust assets for the year, not for any present value calculation purposes.  The discount rate is supposed to represent the single rate at which liabilities could be settled either by purchasing annuities from a “safe” insurance company or by cashing the benefits out using an acceptable actuarial basis.

Regards,
Gregg Richter

pwright72@yahoo.com

Oct. 12, 7:52 p.m.

Hi John,

Thanks for another great letter.

You are right to point out the risks and challenges associated with an environment of persistently low investment returns.

I wonder if you would agree with the idea that, if it were possible to improve economic growth and returns on capital investment over time, this might be helpful.

I hope you’ll indulge me on a simple idea.

If there is an investor or business owner who invests $1 million and earns 5% annual returns on it, they will receive a pre-tax return of $50,000.  If the tax rate is 20%, the after-tax return (after $10000 tax) will be $40,000.

(For simplicity I do not differentiate here between income and capital gains).

But if the same investor earns 10% returns at a tax rate of 40%, the after-tax return would be $100,000 - $40,000 = $60,000. 

That is to say, their after-tax returns at 10% pre-tax are better than their after-tax returns at 5% pre-tax, even despite the higher tax rate.

It is worth noticing here that in this case the government’s incentives are aligned with the investor’s.  If the government increases the tax rate to 40% and the returns are the same as previously, they will double their tax revenue (40% of $50,000 is $20,000).  But if the returns on investor’s capital increase to 10%, the government has quadrupled their tax revenue (they now receive $40,000 with 40% tax rate and 10% return, compared to $10,000 with 20% rate and 5% return).

So the point is, under certain circumstances, and as long as the numbers remain reasonable, if an investor can rationally believe that government policies have at least the potential increase his ability to earn a favorable return on his investments going forward, which I acknowledge is a big ask, it may be in an investor’s business / financial interest to accept a higher rate of taxation.

(Yes, I just said that out loud.  Stop snickering).

So then, what, if any, government policies might theoretically be expected to improved returns on capital for investors and business owners? 

Traditional policy proposals for stimulating demand and economic growth include fiscal stimulus and infrastructure spending.

For fiscal stimulus, the idea of this is to put money into the hands of people who are likely to spend it.

I actually think this is a good idea, and it should be done.

But at the same time, though, if the problem before us involves improving returns on capital investment, I’m not sure how much help this might be.

The impact of any fiscal stimulus program, even a fairly comprehensive one such as a universal basic income (which is a policy I favor), is limited by the size and growth of the population.  And, any increase in demand for goods and services that is brought about by such a policy, will simply feed back into the same markets that we already have.  If Ford is able to sell a few more cars, or United a few more plane tickets, probably an increase in demand of this kind is not going to be sufficient to move the dial much on investment returns, in a world where somewhere between $15 and $25 trillion USD of global debt carries negative yields.  Ford, for example, could likely make those extra cars without needing to build any new factories.

In terms of the infrastructure spending, this is another approach that is often suggested, especially as relates to adjusting the economy away from fossil fuels and dealing with climate change, etc. 

Again, I have no objections to this idea and I think it should be done.

But, from a perspective that is oriented only toward improving investment returns, this kind of strategy may also have limitations.  Building / restoring infrastructure and adjusting the economy away from fossil fuel energy is basically a re-tooling operation.  It may be that such an operation will create investment opportunities in some areas; it may also destroy capital / reduce opportunities in other areas.  And, as daunting a task as it seems at the moment, at a certain point the job will be completed.  And, over the longer term, there is little reason to expect much contribution to economic growth and to investment returns, once the job has been done and the re-tooling is complete.

So in this way, if I am correct in my above assumptions, while both fiscal stimulus and infrastructure spending may be good policies for many reasons, it may not be realistic to expect that, in and of themselves, they will contribute much to long-term improvements in economic growth and on returns to capital.  And, as such, an investor or business owner who reviews these policies may choose to support them and to accept increased taxation to fund their implementation, for any number of very good reasons.  But, she might not rationally expect that these policies will necessarily result in enough of an improvement to her pre-tax return, to where it will be in her strict financial or business interest to support them.

Development of the space economy, on the other hand, may be different.

If people are going to live in space, they will need all of the things that people need anywhere; food, water, shelter, health care, transportation, communications, entertainment.

However to provide any one of those things in space, on the moon, on Mars, etc., is not currently easy to do in any kind of volume.

To do so will require developing solutions, which will require investment.  Lots of it.

And, there are potential gains to be made.

A company, for example, which develops a technique for mining water ice on the moon and refining it for use in support of a colony of 10 or 100 or 1000 settlers, will be in a good position to sell a lot of ice when the population reaches 1 million.

A company that develops a technique for turning lunar basalt into construction materials and building habitats at reasonable cost, may be in a good position to sell real estate.

Etc.

And, you ask, why would people want to go to the moon, or Mars?  Why does this have value?

Why is an iPhone worth $1000, or a European cruise worth $20,000?  Why is a ticket to the moon or Mars worth $10,000 or $100,000?  Why is a habitat or building in space worth $1 million or $10 million?

Because someone is willing to pay that much for it.

And why would anyone be willing to pay that much for it?

Because in space is where the new opportunities are.  It is where people can go places where no one’s ever been.  They can build things that have never been built.  They can patent new products and technologies that will make them rich.  They can find new ways of doing things and new ways of living.

And, as the problems are solved, as solutions are found to the practical issues and to the health and safety concerns, as costs go down, more people will want to go.  It will be a growth market.

But, enough.

The point is, this, maybe, is a way for investors and business owners to receive enough of a return from government policy, to where it will be in their interest to accept higher taxation.

Growth, as always, is the answer.

If there is growth, we might even expect that, over time, a lot of the problems you mention will just simply go away.  They will be easily solved by some sub-committee.

Also, regarding our various geopolitical challenges.  In this context what would they mean?  China is a big market, for example, but the space market is potentially much bigger.

If America is at the leading edge of this sort of thing, we will do well in the future.

Strength, as they say, is the critical value.  Because strength makes all other values possible.

Many thanks for listening and I apologize for the length.

Best Regards,

Pete Wright
Chapel Hill, NC

jehart17@hotmail.com

Oct. 12, 12:36 p.m.

John, regarding the rather dire outlook for future market gains based on the Schiller P/E data, shouldn’t current and future results adjust for the growth of highly profitable low asset companies like Google and Facebook?  These are profit machines that justifiably trade at higher P/E’s than traditional capital intensive businesses, and they push the average P/E’s higher than historic levels.  In other words, this time it’s different.

Rick Roesler

Oct. 12, 11:36 a.m.

Best. Headline. Ever.

William Daugherty

Oct. 12, 11 a.m.

John, there was much info about your Yen-contrived mortgage. From today’s note it appears that that has been unwound. I’d certainly like to hear details results. I doubt that I am alone in this.

ted.jaroszewicz@gmail.com

Oct. 12, 8:50 a.m.

Correction to my prior comment. GE’s “Other Pension Plans” are 83.3% funded. My error. Sorry about that. And that’s on a GAAP basis. TJ

ted.jaroszewicz@gmail.com

Oct. 12, 8:44 a.m.

John. The amount that GE can offer its “Terminated Vested” former employees is specifically proscribed by federal law. GE cannot set the amounts. Each former employee gets offered an amount based on their specific benefits, and their actuarily calculated lifespan. This is then discounted by a rate set by the IRS (changed monthly). The company can’t negotiate the deal - it’s determined by the law. The beneficiary can only say YES or NO.

GE’s Pension Plan’s GAAP funded status as of their last 10K is 73%. However, the Statutory funded status, which they say is 80%, is calculated using a smoothed, 25 year average yield curve. This was a change made in the law that recognized the problem you’re describing in today’s piece. The statutory funded status must be at least 80% before the buyout, AND after the buyout. You’d have to get a copy of their Actuarial Report to see how they calculated the 80%, but it’s probably not using the current AA bond rate, which the GAAP calculation uses.

This is complex stuff that requires tremendous input from Actuaries and PBGC consultants. I say all of this based on experience with this type of plan that CRUSHED one of my businesses.

Thanks. TJ

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