The pension crisis is intensifying. Bloomberg reports that according to European Central Bank Governing Council member Nout Wellink, the global financial crisis is not yet close to ending as U.S. house prices decline further and more areas of the economy become affected:
“No, I don’t think so,” Wellink said when asked if the crisis is over or about to end, during an interview with Dutch state broadcaster NOS. “New problems are emerging as a result of the worsening of the economy and problems could arise in the sectors such as commercial real estate and credit cards.”
Financial institutions worldwide have written off more than $1 trillion since the credit crisis began in 2007. Wellink, who also heads the Dutch central bank, warned that global economic development may slow as banks withdraw from emerging markets and focus on their domestic customers.
“That is a form of modern protectionism and the ultimate consequence is that the economic development in the world will become less favorable,” Wellink said.
Dutch financial institutions including ING Groep NV have been thrown lifelines by the Dutch government. ING said on Jan. 26 it will transfer the risk on 80 percent of its 27.7 billion euros ($35.5 billion) of Alt-A mortgage securities to the government, limiting further writedowns. The bank, which traces its roots to 1743, was the first to draw on a 20-billion-euro fund set aside to prop up financial firms.
‘Had About Everything’
“In terms of steps that have been taken, we’ve had about everything I think,” Wellink said, adding that the central bank is studying a possible extension for pension funds to recover their coverage ratio. The central bank will come with an opinion before the first of March and will be “pragmatic.”
Pension funds have suffered from the decline in equities and other assets amidst turmoil in the financial markets and falling interest rates. Europe’s Dow Jones Stoxx 600 Index sank 46 percent last year.
The Dutch central bank requires pension funds whose coverage ratio drops below 105 percent to file a recovery plan by April. The number of Dutch pension funds that fail to meet the requirement surged more than fivefold in the third quarter as stock markets fell, according to the central bank.
Can you imagine if U.S. and Canadian pension funds had to file recovery plans? In Canada, experts warn one big bankruptcy could wipe out Ontario's pension-plan safety net:
Ontario's unique pension-plan safety net that makes payments when companies go bankrupt is teetering on the edge of being wiped out and could fold if a large corporation were to go under soon, experts warn.
The provincial government is currently accepting comments on a report it commissioned in 2006 - which is the first review of pension laws in 20 years - and lead author Harry Arthurs concluded that the Pension Benefits Guarantee Fund, the only such program of its kind in Canada, could soon become history.
"I think one sufficiently large company or several large companies (going bankrupt)would cause the plan to go broke," Arthurs said in an interview, adding that the Ontario government is in no way required to save the pension-insurance program.
"They certainly have no legal obligation to bail it out ... and I think it's an interesting question - if there isn't enough money, what happens next?"
Since 1980, the Pension Benefits Guarantee Fund has provided pensioners with up to $1,000 per month in the case that a pension plan fails to provide its full benefit, or any at all.
The program is funded by corporate payments and had been run successfully for decades.
But the report notes it's increasingly common that companies are reporting high levels of unfunded pension liabilities - shortfalls in funds needed to pay out its pension requirements - and the provincial fund is threatened by a possible "shipwreck scenario."
That could occur if a bankrupted company with many employees flooded the fund with claims and the government found the shortfall too expensive to make up.
Similar fears have been raised in the past because of troubled companies like Algoma Steel, Massey Combines and Stelco, and special provisions were made by the government to keep the fund afloat.
But the plan last reported a deficit of $102 million, and there's no guarantee the government would be willing to again prevent a shipwreck scenario, said Simon Archer, a senior staff member of the expert commission that wrote the report.
He said a shipwreck scenario appears to be "pretty realistic" considering the plight of companies like Nortel (TSX:NT), and struggles faced by automakers, manufacturers and the pulp and paper sector.
"If the question is how likely is it, I'd say there's pretty good odds these days that there's going to be a major insolvency and that will put pressure on the PBGF," Archer said.
While pensioners with large corporations would likely be among the first to be looked after in the case of a government bailout, a failure of the fund is a scary proposition for employees with smaller companies, he added.
"The big guys are going to get attention one way or another but the little guys need this insurance system to keep their pensions in place," Archer said.
"Problem is, if you're a tiny little auto parts plant in Brantford or wherever, the government's not going to step in because you're not powerful enough, you're not big enough to attract political attention."
The report recommends that the government not only find a way to maintain the fund, but also boost its premiums to a maximum of $2,500 a month to reflect the current cost of living.
"Nobody loses a pension, what a good public policy that would be," Archer said.
The head of the Financial Services Commission of Ontario, which oversees the fund, was not made available for an interview.
A spokeswoman would not say whether the commission has estimated how many claims would prompt the shipwreck scenario outlined in the report, or how likely that outcome is.
An Ontario government spokesman also refused to comment until after the report's comment period ends at the end of the month.
The Nortel bankruptcy and other bankruptcies are also pressuring Britain's Pension Protection Fund which will see its deficit double to more than a billion pounds – prompting warnings that the government sponsored fund could be forced to dramatically increase its levy on solvent pension schemes:
The high-profile collapses of telecoms group Nortel Networks, high-street retailer Woolworths and china manufacturer Wedgwood, will cost the fund about £500m according to independent pensions consultant John Ralfe.
The PPF – which is UK-government-sponsored but employer-funded – takes over the running of underfunded final salary pension schemes if their sponsor ceases trading. At its annual results in October 2008 it revealed that it had a deficit of £517m.
Mr Ralfe warned that the dramatic rise in the deficit is likely to place further pressure on the PPF.
"It might have been possible to plug a £517m deficit but given we are just going into a recession, it is difficult to see how it will square the circle," he said. The PPF levy for 2009/10 has already risen to £700m, but industry experts fear that considering the size of the pension plans now seeking entry into the PPF, levies may have to rise even more sharply in future years.
Rachel Vahey, head of pensions development at pensions provider Aegon, said an increase in levies on schemes where the sponsor is still solvent could lead to more defined benefit schemes closing. "There is a fear the levy will go up again if more schemes with a higher proportion of members near the capped compensation payment fall into the PPF. The danger is that higher levies could mean more schemes end up going into the fund," she said.
Danny Vassiliades of pension consultancy actuaries Punter Southall agreed: "Even the PPF would not have imagined it [the number of insolvencies] to be on this vast scale. This means they are accepting more pension scheme liabilities without necessarily the assets to cover them. The ensuing deficit can only be recovered by a greater levy on the existing defined benefit schemes," he added.
The PPF takes over the pension assets of companies which have collapsed and have an underfunded defined benefit scheme and will pay pensioners a maximum of £27,770 a year. It is also funded by charging an annual fee to solvent companies with a final salary pension plan.
The pensions lifeboat currently pays the retirement benefits of 20,750 people across 68 schemes but is experiencing a difficult time due to the vast number of corporate collapses.
Besides Nortel, Woolworths and Wedgwood, in the past few months a string of failed businesses like investment bank Lehman Brothers have asked for entry into the fund.
A spokesman for the PPF said the scheme was designed to withstand companies going out of business. "This is what we are set up to do," he said. "The PPF is robust. We have got enough money to pay compensation for the next 25 years."
I doubt the PPF scheme is as "robust" as they think it is to withstand the tsunami of corporate insolvencies that will hit them in the next couple of years.
In Australia, the pension system is reeling from the meltdown:
Australia, long regarded as a model for global pensions reform, has some explaining to do after the markets meltdown, and not just to its own citizens. Having forced Australians over the past two decades to trust in markets to provide for their old age – and tempted other nations to go down the same path – it is watching horrified as a big chunk of its retirement savings go up in smoke.
Last year's plunge in financial markets has wiped out around a quarter of Australia's nearly $1-trillion (U.S.) in pension fund savings in real terms, according to Organization for Economic Co-operation and Development data, a figure surpassed only by the vastly bigger economies of the U.S. and Britain.
Australian pension funds lost about $200-billion in the first 10 months of 2008, compared with $300-billion for the U.K. and a staggering U.S. loss of $2.2-trillion, the data showed. Over 10 years, figures for Australia still show positive returns but even local industry figures point to the worst decade in 30 years.
As a result, Australians who never dreamt of queuing up for a state pension are now doing just that, feeding a crisis of confidence in a pension model that has served as a trail blazer for other nations around the world, from Asia to Europe.
“My superannuation [pension] fund has been trashed,” said Bob Partington, 60, a former bottling industry executive who went into semi-retirement in 2006, aiming to play more golf and live mainly on a pension drawn from his retirement savings.
“My fund has gone down between 40 and 50 per cent. … I was coming up for retirement and now I can't retire,” he said from his Sydney home where he has started a business consultancy to help make ends meet and support a family of five.
Mr. Partington is a baby boomer, one of the ‘60s generation that is putting enormous strain on pensions systems in rich countries worldwide. He and his contemporaries are the reason Australia was among the first to overhaul its pension system about 23 years ago, shifting to a compulsory system of private savings.
He isn't even among the hardest hit. Unlike Mr. Partington, who is still not poor enough to qualify for a state pension, other Australians who amassed large sums of retirement savings now need state handouts to get by, a situation that the Australian system was designed to avoid.
The rate at which people are resorting to the state pension jumped by about 50 per cent in the December quarter, according to The Sydney Morning Herald, from around 2,000 a week in October to 3,000 last month as Australian and global markets nosedived.
“That's because self-funded retirees are starting to drop below the threshold value for receiving the age pension,” said Theresa Kot, president of the Association of Independent Retirees, which is lobbying for reform of the pensions system.
The age pension, available at 65, is rationed depending on an applicant's assets and income and it is worth up to about $1,100 Australian ($892 Canadian) a month. It represents only about a fifth of workers' average final salary at retirement, according to the OECD data, which in policy terms is a sign of success.
Without a mountain of private savings, it would have to be much more. But as that mountain shrinks, the question of raising the age pension is becoming a burning political issue, along with tighter regulation of private retirement savings.
The retirees' association has called on the government, which had already embarked on a pensions review in May, to ensure better regulatory oversight of the kinds of investment products that pension funds can invest in.
“Our crisis of confidence is not so much in the funds,” Ms. Kot said. “Our crisis of confidence is with ASIC [the securities regulator], which has not been prudent in monitoring the markets and monitoring the products,” she added.
Australia's pension system rests on three pillars: compulsory savings by employers who contribute the equivalent of 9 per cent of wages into individual pension accounts, voluntary contributions by workers and, lastly, the state pension.
Many other countries have studied the Australian experience, sending fact-finding missions Down Under from Europe, Asia and South America in a search for ways to boost savings and ease the burden of aging populations on state finances.
Britain was one of them. It legislated last year to adopt a new pensions scheme from 2012 that carries some Australian hallmarks; namely, a compulsory savings scheme where employers must contribute into workers' pension funds with the workers bearing the investment risk.
Like Australia before it, Britain is weaning workers off defined benefit schemes – where employers promise to pay retirees a proportion of their final salary – and
moving to a world where retirees are left with a basic state pension and their retirement savings that are at the mercy of markets.
But British-based independent pension consultant John Ralfe said faith in the Australian model was now very thin on the ground, even though an Australian industry survey last September showed satisfaction with fund returns still running high at 80 per cent, down from 87 per cent a year earlier.
“As we approach 2012, even if we are then through the recession, people will say: ‘I'm not going to save 3 per cent because I need to pay down the mortgage or I need to hunker down, and even if I do save 3 per cent, hell, look what happens when you put your money in the stock market. It disappears,'” Mr. Ralfe said.
Finally, in the U.S., a pension crisis in the making:
State Comptroller Thomas DiNapoli tried to find a bright spot in his latest report on the state's $154 billion pension fund. Wait, no. Make that $124 billion pension fund. Hold on. This just in: $121.7 billion.Mr. DiNapoli offers that at least the fund isn't bleeding as badly as it had been. Small comfort.
The year-end numbers underscore what was apparent before they even came in: The fund surely didn't do any growing last year. Nor did the separately run teachers' retirement system, whose value plunged from $105 billion two years ago to $75.3 billion at the end of 2008.
That's bad news for school districts, state and local governments, and the taxpayers who support them. They all pay into the systems, which must be maintained at a certain fiscally responsible level. If investments don't keep up, taxpayers have to make up the difference.
Because the performance is averaged over time and the market had been doing well until 2008, contributions are projected to remain level through September 2010, in the case of the teachers' system, and through the end of 2010 in the case of the state and local system. But given the recent declines, it's looking as if substantial contribution increases are in store barring a major market turnaround.
That would likely mean higher property taxes, regardless of whether taxpayers can afford them.
This is a crisis in the making, but one that doesn't have to happen.
Now is an excellent time for state leaders, school and municipal officials, unions, public employees and retirees to get ahead of the potential problem and deal with an issue that has long been avoided: the increasingly high cost of New York's generous public employee benefits.
Is it realistic today, for example, for public employee pensions to have automatic cost-of-living increases, a rare benefit pushed by both former Gov. George Pataki and Comptroller H. Carl McCall when times were flush? (Teachers get this, too.)
Are employee contribution levels too low? Is it prudent for teacher contracts to have built-in annual longevity increases for the bulk of a teacher's career, above and beyond negotiated raises? Is it time for state government perhaps one of those sorely underused legislative committees to look at how these systems compare with the private sector?
While some optimistic souls suggest the economy might turn around later this year and we certainly hope it does the stakeholders should not wait until the pension bills come due and try to manage in crisis mode.
The result could be school and government layoffs, sharp tax hikes, or a combination of both.
Unlike last year's downturn, which hit the market fairly quickly, the pension problem won't hit for almost 20 months. It would nice if decision makers didn't consider that 20 months to dawdle.
Public employee and teacher retirement funds are sharply down.
Leaders and unions must reexamine generous benefit packages.
They should also examine how their pension funds were being recklessly managed with high exposures to equities and alternative investments.
Many U.S. state and corporate plans invested in alternative investments at the height of the bubble, which left them highly exposed to the collapse of these investments.
It's easy to focus on those "generous benefit packages," but they should also examine their own failures in protecting against systemic and downside risk.