A but sure thats just because they assume 8% growth in their investments p.annum…
Why? because thats the historical 200 year average
Why? Because interest rates averaged a similar amount and credit grew a similar amount
But interest rates are no-where near that now and credit is contracting, not growing, so how do they expect to make 8% going forwards?!?
“Hmmm, agh sure it will all be fine in the end, just believe us, we are the experts”
What is the average assumed growth rate in these defined pension funds?
They should be outlawed.
For a good example of how defined benefit schemes can leave a huge hole in your accounts, the history of Chrysler, Ford and GM’s schemes are quiet an education. They consistently adjusted growth rates and discount rates to amend the actuarial values of assets and liabilities in the fund to suit them.
Yeah and one of the reasons for sub-prime RMBS was that they offerred returns that matched the requirements of pension funds to grow at 8%. There’s no shite product that doesn’t have a willing buyer and there’s a degree to which willing buyers create the market.
The auditing of these schemes is ridiculous. GM had to reduce their growth rates as the big bad auditor said so, so they amended their discount rate and actually benefitted…auditor said fine. Genius at work.
Funny thing about pensions is if you dont put it in you cant get it out, as far as the private sector variations of these go they are doomed and I’d love to know what these schemes will do to pay the people who have an ‘entitlement’ (theres that word again) to one of these when they retire in the future.
As for the public sector variation of the defined benefit pension this should have been called ‘the communist pension scheme’ as few benefit from it but everybody pays for it and eventually these will have to go the way of the dinosaur as well. I think the thread title may have to be changed from ‘in deficit’ to ‘screwed’.
Out of curiosity, do any of you know what basis is used to calculate solvency liabilities because from your posts it would appear not?
Still, why let facts interrupt a good story?
Banjaxed tacked on to the end will have to do 
lacba.org/Files/LAL/Vol32No7/2639.pdf
bloomberg.com/apps/news?pid= … 5vEJn3LpVw
thisux.com/2011/03/07/the-bi … -collapse/
Subprime RMBS sliced and diced in CDOs were structured to appeal to pension and insurance companies. The AAA tranches were last to be repaid, so durational risk was removed. Meanwhile, the AAA rating ensured that pension funds and insurance companies could invest in them.
These are ‘facts’ that are not disputed anywhere else, so perhaps you’d like to give some clue as to what makes you expert enough to raise questions about them?
On the rate of return, I think 6% is the normal rate that is used in projections - brokerzone.ie/pdfs/pension_c … anaged.pdf
I believe this to be excessive based on current and projected inflation rates within the eurozone.
Anyway, this accountingnet.ie/financial_r … rinter.php seems to support McQueen’s position.
Who cares how the liability is calculated? Its just an accounting policy. Common sense tells you that if your investments return less than you originally assumed they would, eventually you will have a serious problem.
**Outlawing defined benefit schemes does not benefit the employee. **
The typical costs p.a of a DB scheme assuming no deficit is in excess of 25% (40-60% for public sector employees).
Typical employee contribution 5-8%
The employee does not bear any of the risks associated with the scheme. If anything goes wrong the employer must make up the difference (assuming he has not gone bankrupt). For example, people living longer, assets not preforming, pension levies (paid by the company), etc.
The funding deficit in Irish schemes today is a primarily as a result of people living longer and the poor investment returns. Regardless of the reason for the deficit the company remains liable.
Any Irish employer who is still providing this type of scheme needs his head examined. The company receives little thanks from employee but carries a huge risk.
Closing the scheme to existing and new members eliminates all the risks and will in all probability vastly reduce his costs.
However one big advantage of outlawing these schemes would be the huge reduction in the costs of Public Sector pensions
Of course the biggest defined benefit scheme of them all - public service pensions - is still going strong, thanks to us all subsidising this huge cost of a bloated unreformed unaffordable public service.
In the longer term a 6% equity investment return is not unreasonable!
2% expected inflation + 4% equity premium.
However the illustration you are quoting refers to a managed fund which typically only invested 40-60% equities.
+1
Japan has had an Equity Risk Premium of over 5% for the last 20 years (beit with negligible inflation)…Yet its stock market continues to drip lower. Japans GDP has gone nowhere over that same period and there has been little money/ credit growth. Japans stock maret is the cheapest in the world relative to its inflation rate
At the end of the day. The stock market is a function of the amount of money out there, which is a function of the amount of credit extended to an economy in the first place.
Why? people need money/credit to buy goods that companies produce. Companies may be able to squeeze higher margins in the short term, but to a limit, as one companies cost cutting is another companies revenue loss.
Its a simplistic model, but it is no conincidence that the US stock market has grown by exactly the same amount as US credit growth since they started reporting it properely 70 years ago. Yes, there have been episodes where it grew alot more (1995-2000), but also episodes where it grew alot less (2000-Now). Net net, they grew by exactly the same amount
I guess my point is that Japan has its own issues for sure…but its still worth noting what can happen to a stock market when the underlying economy spends 20 years deleveraging after a decade or so of excess. Its 20-30 years of pay-back time
Deleveraging is the curse of the stock market.
Here we are sitting with record amounts of debt, debt which propelled the stock market to where it is now. I find it hard to believe we will see 6-7% average returns over the next 20-30 years when its obvious we are entering a phase of slowly whittling that debt down
I could be wrong though. The problem of not providing a 6-7% returns is so big now as we have conditioned ourselves to depend on it, that the powers that be will try every trick in the book to keep the juices flowing.
Whether they succeed or not is another question!
Are you referring to the Irish, European or World stock market?
I don’t understand your point about credit. Surely for every borrower there has to be a lender!
Are you referring to the Irish, European or World stock market?
I don’t understand your point about credit. Surely for every borrower there has to be a lender!
Yes…but that Lender (the banking system) has the ability to create more credit the faster money moves around the system
Credit can ultimately be created out of thin air if banks are allowed go nuts. The main restriction being how much “leverage” the banking system is allowed to take. Several Ceedit Derivatives were created to get around those rules over the last 10 years
There are several blogs on this site explaining the “credit creation process” pretty well
And I was referring more to the US stock mkt, being the most developed one. The Irish one is a useless baramoeter of anything. Iseq being effectively an Irish propertly lending ponzi scheme once you strip out the Ryanair, CRH and Paddy Powers of this world!!
I’m not disputing that happened in the US, but as this thread is about the solvency of DB schemes in Ireland I was asking if you knew what assumptions are used in solvency valuations here, there are more than one. Do you know?
I find it interesting that people on here are quick to criticise without actually knowing the facts, and no expertise is needed to be able to tell that.
The article is about solvency liabilities yet your first link above is to personal projections and your second is to proposed changes to accouting valuations, you’re confusing 3 very different things.
The assumptions used in the Minimum Funding Standard are heavily prescribed so companies cannot “amend the actuarial values of assets and liabilities in the fund to suit them”. The assumptions will vary from scheme to scheme depending on the nature and duration of the liabilities.
I think you’ll find if you actually reat the article you claim supports McQueen’s position you’ll find that it talks about how current bond yields must be used to determine the assumptions used for accounting purposes. There are very small bands in which assumptions can move and they must be signed off by the actuary and auditor. Talk of using an 8% discount rate is nonsense.
It’s kind of hard to respond to a comment as ridiculous as that.
It’s kind of hard to respond to a comment as ridiculous as that.
Ok maybe my comment was a bit flippant and for that I apologise…
However, the small point I am trying to make is that while all these actuarial assumptions have their uses in creating some form of year on year accounting NAV etc, they are still just assumptions and exposed to the hard realities of the future (which no-one can predict), and which may return a very different result.
In many ways, it reminds me of a Banks Earnings report, the biggest determinant being “projected” loan lossess. Its all fine unless the reality of the future transpires to be very different…suddenely banks find themselves under-capitalised and some suffer an even worse fate. Anglo being the perfect example of a bank that was making a billion using flawed provisioning assumptions, 18mos later it wrote off 35bln or so and was effectively bankrupt.