Pension Problems and Insider Sales
August 26, 2003
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The Pension Benefit Guaranty Corporation (PBGC) was established in 1974 to protect pensions of workers and retirees enrolled in private defined-benefit plans. There are two PBGC programs. The single-employer program covers more than 34 million workers and retirees in about 31,000 pension plans. The multi-employer program insures pensions created through collective bargaining for more than one employer, usually within one industry; this program covers about 10 million workers in fewer than 2,000 plans.
The PBGC picks up the tab when private pension plans are unable to make good on their promises. And since it is a U.S. government agency it becomes a contingent liability of the government and taxpayers. Employers who are part of the program pay premiums to the PBGC, and can appeal to them to take over its pension plan if it goes bust or if continuing the pension plan will drive the company into bankruptcy. When the PBGC takes over the plan’s assets, it is responsible for paying benefits to current and future employees. However, beneficiaries do not necessarily receive their full pension, and there is a legislated maximum benefit of about $44,000 annually.
In the fiscal year 2002, the PBGC experienced a net loss of $11.4 billion, the largest ever in the agency’s history. This caused the PBGC single-employer program’s net financial position to move from a surplus to almost $8 billion in fiscal year 2001 (ending September) to a deficit of $4 billion in fiscal year 2002 (the largest ever). The multi-employer program is doing better with a net surplus of $158 million in 2002.
The major problem in 2002 was the recession of 2001 and the weak recovery, which has led to record numbers of terminations and new PBGC participants. With the recovery still weak and many pension plans underfunded, the PBGC’s financial condition is continuing to deteriorate and presently has an unaudited deficit that increased to $5.4 billion as of April of this year. As a matter of fact, 360 of the S&P 500 have defined benefit plans. Of these 360 companies 240 are underfunded.
The problems we have with this situation are three-fold. First, we are not expecting the recovery to last longer than this calendar year and may wilt before year-end. This will continue to cause deterioration of funding of the agency. Secondly, the actuarial assumptions are way too high (we dealt with this subject in past comments; check them out in our archives of 11/15/02 and 2/11/03).
The third problem we have is the fact that more and more corporations are asking the Labor Department for exemptions to contribute the stock of the same troubled companies to fund the underfunded pension plans. This has taken place with companies as large as General Motors and IBM as well as much smaller companies. However, this type of funding has just reached an all-time low when the stock of non-public subsidiary of Northwest Airlines was used to fund their plan. If this trend continues and the market drops as much as we expect, this contingent liability of the government (and eventually taxpayers) could exacerbate the decline.
Another area of concern we have that also was not touched on in the presentation in A.C., is the sentiment problem with insider selling. Presently, the ratio of insider sales to insider purchases is about $32 to $1. Insider selling is always greater than insider purchases, but this selling has just recently set a record. This ratio has risen above $20 to $1 fourteen times in the past ten years according to Thomson Financial. On ten of those occasions the S&P 500 has been lower six months later.
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August 26, 2003
....
The Pension Benefit Guaranty Corporation (PBGC) was established in 1974 to protect pensions of workers and retirees enrolled in private defined-benefit plans. There are two PBGC programs. The single-employer program covers more than 34 million workers and retirees in about 31,000 pension plans. The multi-employer program insures pensions created through collective bargaining for more than one employer, usually within one industry; this program covers about 10 million workers in fewer than 2,000 plans.
The PBGC picks up the tab when private pension plans are unable to make good on their promises. And since it is a U.S. government agency it becomes a contingent liability of the government and taxpayers. Employers who are part of the program pay premiums to the PBGC, and can appeal to them to take over its pension plan if it goes bust or if continuing the pension plan will drive the company into bankruptcy. When the PBGC takes over the plan’s assets, it is responsible for paying benefits to current and future employees. However, beneficiaries do not necessarily receive their full pension, and there is a legislated maximum benefit of about $44,000 annually.
In the fiscal year 2002, the PBGC experienced a net loss of $11.4 billion, the largest ever in the agency’s history. This caused the PBGC single-employer program’s net financial position to move from a surplus to almost $8 billion in fiscal year 2001 (ending September) to a deficit of $4 billion in fiscal year 2002 (the largest ever). The multi-employer program is doing better with a net surplus of $158 million in 2002.
The major problem in 2002 was the recession of 2001 and the weak recovery, which has led to record numbers of terminations and new PBGC participants. With the recovery still weak and many pension plans underfunded, the PBGC’s financial condition is continuing to deteriorate and presently has an unaudited deficit that increased to $5.4 billion as of April of this year. As a matter of fact, 360 of the S&P 500 have defined benefit plans. Of these 360 companies 240 are underfunded.
The problems we have with this situation are three-fold. First, we are not expecting the recovery to last longer than this calendar year and may wilt before year-end. This will continue to cause deterioration of funding of the agency. Secondly, the actuarial assumptions are way too high (we dealt with this subject in past comments; check them out in our archives of 11/15/02 and 2/11/03).
The third problem we have is the fact that more and more corporations are asking the Labor Department for exemptions to contribute the stock of the same troubled companies to fund the underfunded pension plans. This has taken place with companies as large as General Motors and IBM as well as much smaller companies. However, this type of funding has just reached an all-time low when the stock of non-public subsidiary of Northwest Airlines was used to fund their plan. If this trend continues and the market drops as much as we expect, this contingent liability of the government (and eventually taxpayers) could exacerbate the decline.
Another area of concern we have that also was not touched on in the presentation in A.C., is the sentiment problem with insider selling. Presently, the ratio of insider sales to insider purchases is about $32 to $1. Insider selling is always greater than insider purchases, but this selling has just recently set a record. This ratio has risen above $20 to $1 fourteen times in the past ten years according to Thomson Financial. On ten of those occasions the S&P 500 has been lower six months later.
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