Great Expectations
Most Canadian pension funds are banking on 7% annual returnsforever. Over the next few years, this unrealistic expectation will costthe respective governments and companies millions in shortfalls.In the USA, the California Public Employees Retirement Systemassumes it will earn over 7.75% annual returns. This false hope willresult in over $6 billion a year in lower than expected investmentincome, that will also have to be paid by the financially challengedstate (ie. taxpayers).Meanwhile, Thelma O’Keefe continues to quietly sock away 5% of herpaycheck each and every week and has no idea what all the fuss willbe about when she is eventually told her pension benefits will beslightly less than originally promised.Over 50 years ago, the average worker started to earn pensionbenefits and has been dreaming of working less, and golfing more,ever since. The Defined Benefit Pension Plan has been the rock of thisdreamy foundation and is certainly a costly beast to say the least.Once the auditors, actuaries, custodians, lawyers, administrators,consultants, performance measurement guys, trustees andinvestment managers have been paid for their services, is there littlewonder most of these retirement funds are running a little short.Yet , the primary reason most people fall asleep with even a slightmention of the words “pension funds” is due to the complexities andconfusion resulting from this cumbersome investment scheme.
However, after 3 quick espressos you’ll see that the entire pensionspectrum boils down to an educated guess as to how much moneythe pension plan will have to pay out to its retirees, and how muchmoney its investments will pay in to the pension plan itself.This “pay-out-in” dynamic is a precarious balancing act to say theleast. Should guesstimates for either one fall short, the difference willhave to be made up by tax payers for government pension plans, andby profits for company pension plans.It is widely known by now that practically every government in theWestern World is drowning in debt with no signs of growth anywhereon the horizon. Unfortunately, this looming pension funding problemcould not have come at a worse time for these governmentsupported pension funds.Meanwhile, most companies are certainly flush with cash and areinfinitely better off than their public pension fund counterparts.However, even this enviable position will not help due to theexpectations of great stock and bond market returns.Ever since the Western World pushed the debt envelope too far andproceeded to allow its governments to orchestrate one ill conceivedbailout after anot her, investors of all shapes and sizes – includingbillion dollar pension funds and the little old ladies, have had to pushtheir risk envelope too far and assume way too much risk in an effortto increase their investment returns.
Full report here.