Kjellquist Blog

Interesting article today on the next economic shoe to drop – defined benefit pension fund under funding! One cynical comment before my thoughts on pension plans

What has happened to the concept of capitalism and markets? With the way EVERYBODY is running to Washington I should have invested in DC hotel rooms and be selling DC-bound airline tickets on eBay! From this story and every other one I have read in the past many weeks, it is easy to see our economy is really run by Washington! Ok, I know your reaction is “Duh, where you been dude?”!

On with my pension plan prediction. In principle I understand the problem. Defined benefit pension plans take company contributions (and in some cases employee contributions) and invest the contributions for the future pension payments. The amount required to be contributed is based on employee age (time to expected retirement), investment performance and payout provisions (defined benefit). Obviously, with the latest developments in the equity markets, pension fund values have been hit badly. Thus, companies need to contribute more and these dollars come from current revenues.
So much for the simple stuff.
Wouldn’t you expect that with an obligation to pay your pensioners a defined benefit in the future a prudent company would invest the fund assets in a conservative manner? Not necessarily according to the NYT article

“…so they [our congressman] wrote the law to encourage conservative investing. The law does not specifically ban volatile pension investments,….”.

Interesting; so companies can gamble on the market thus reducing the amount of their contributions! Thus, if a company assumes an 8% return it can halve the contributions compared to a more conservative 4%.
But, and this is a big BUT. If they lose the gamble to bring their pension to full funding and it

“… suffers losses big enough to throw it off the seven-year path to full funding, then it no longer gets seven years — it has to achieve 100 percent funding right away.”

Here comes the part I love and boy, wouldn’t I like Las Vegas or Atlantic City to work this way. The companies knew the rules, took the gamble i.e. made the bet and are now facing big loses. So what do they want to do. CHANGE THE RULES OF THE GAME!!
That’s right

“Many of the companies now calling for relief have sprawling, mature pension funds with obligations so big they can dominate the companies’ own financial performance. Mr. Zion has identified nine big companies whose pension obligations are more than five times the size of their single largest liability on their balance sheets; six have signed the letter: the NCR Corporation, I.B.M., Rockwell Collins, the ITT Corporation, Northrop Grumman and the Pactiv Corporation.”

It continues to be even more complex because many of these companies have frozen pensions also. Frozen pensions (not be confused with closed pensions) are pensions where obiligations are NOT continuing to grow! BTW, they are seeking relieve for these pensions also! Why not, XMAS is just around the corner especially in Washington!
BTW, closed pensions are pensions accepting no new members but as long as the current population continues to work fund obligations grow.
So, what will be the reaction by industry to this experience whether they get relief or not. Obviously, shift the risk to employee and make the pension costs definable! Enter the defined contribution pension. Already a national trend.
In a speech to the US Chamber of Commerce in 2004 Bradley D. Belt (Executive Director, Pension Benefit Guaranty Corporation) described it this way.

“Traditional defined benefit pension plans, based on years of service and either final salary or a specified benefit formula, at one time covered a significant portion of the workforce, providing a stable source of income to supplement Social Security. The number of private sector defined benefit plans grew through the 1960s and ’70s before reaching a peak of 112,000 in the mid-1980s. At that time, some 40 percent of Americans workers were covered by defined benefit plans.
Since then, there has been steady erosion. Over the past two decades, the number of defined benefit plans has fallen by 75 percent to just over 31,000 plans today. Moreover, just 1 in 5 workers—20 percent of the workforce—now participates in a private sector defined benefit plan. Notably, no new plans of significant size have been established in recent years.”

Defined contribution pensions (401k-based and others) are plans where the employer puts in a fixed amount based on salary usually matching a portion of employee contributions. The ENTIRE risk for the value (payout) at retirement is borne by the employee! Thus, my prediction – the COMPLETE demise of defined benefit plans.
Based on yesterday’s S&P 500 performance this type of plan (employee) would lose 45% this year. Looked at your 401k recently? And the company, NOTHING except maybe an e-mail expressing concern and advise to take a long term view!

Welcome to the future!

Last time you saw something like this was probably on Capt Kirk’s wrist in Episode 3 of Startrek. This picture isn’t from a Paramount pictures web site but rather the latest announcement from Parvus corp. That’s right in as little 12 weeks you can have one of these gems for your very own.

What’s new is that the unit meets the harsh military shock & vibration environments as well as electromagnetic interference requirements.

Here are the key specifications:
Processor — Marvell PXA 270 416MHz
* Memory — 256MB RAM; 128MB flash
* Expansion — SD memory card interface
* Display — 3.5-inch VGA (640 x 480) color touchscreen; shock-resistant; optional night-vision compliance
* Keyboard — cursor pad and virtual QWERTY onscreen keyboard
* Pen input — stylus
* LEDs — power, charge, WPAN, WLAN, alarm
* Audio — AC97 codec; integrated mic and speaker; optional 3.5mm stereo or microphone sockets
* USB — 1 x USB Device port; 1 x USB Host port
* WiFi — IEEE 802.11b/g
* Bluetooth — Class 2; optional swap-out for ZigBee
* GPS — 12-channel receiver; DGPS and SBAS (WASS, EGNOS) support; optional swap-out for GPRS cellular radio
* Other features — accelerometer; biometric fingerprint reader; optional electronic compass
* Operating temperature — -4 to 140 deg. F (-20 to 60 deg. C)
* Shock and vibration — meets MIL-STD-810F (Methods 516.5, 514.5C-17)
* Weight — 1.4 lbs (645 gr)
* Power — 3.6V Li-Ion hot-swappable battery; optional AC adapter for 100-240V AC 50-60Hz 400mA input
* Operating system — Linux, based on kernel 2.6

It’s a little heavy and RAM is abit on small size for today’s apps but look at all you get on your wrist! From my experience with the eeePC, a trooper in Iraq could get a lot done with this gem. Of course, with the march of technology we can look forward to more capabilities, smaller and cheaper.
The specifications don’t list battery life but the commercial version is up to 8 hours. It has an AC adapter. I hope it comes with a LONG cord! A vehicle adapter wouldn’t be too bad.
I’m not sure of the pricing for the militarized version but the commercial version (Zypad WL100) is about $4000. Startrek tech doesn’t come cheap, at least not for a little while. Just remember cellphones!

I normally stay away from certain subjects and one of them is gun control. Living in South Carolina I usually avoid the subject like the plague but the state of South Carolina has gone over the top. The state legislature and a recent tragic shooting in Reston have spurred me to writing. South Carolina has decided that all merchants should have a good day on Black Friday (day after Thanksgivng). This includes the state gun dealers. So why not have a sales tax holiday on rifles, shotguns AND handguns.

“This two-day sales tax holiday applies to purchases of handguns, rifles and shotguns and will take place every year on the Friday and Saturday after Thanksgiving. This year the Second Amendment Sales Tax Holiday will take place on November 28th and 29th of 2008. Information concerning the Second Amendment Sales Tax Holiday will be published later this year.”

BTW, I commend Gov Sanford for vetoing this bill (though not for gun control reasons) but unfortunately the legislature overrode his veto!
So ya’ll come on down to South Carolina for the discount. But remember give thanks on Thursday.

Now for the tragic side of mass gun ownership. I frequently hear that guns don’t kill, people kill. Absolutely right; friends, relatives, neighbors and young clean-cut, law-abiding graduate engineers kill, as recently occurred in Reston, VA! My point with this story is that if the kid did not have a 9 MM handgun a taxi cab driver and father would be alive today. A young engineer would not be watching the rest of his life disappear in a thoughtless instant.