The stock markets have rebounded and, for nervous pension managers, not a minute too soon. For managers of defined benefit plans the stock markets’ plunge, over the previous three years, has resulted in many sleepless nights. Defined benefit pension plan managers must ensure that they can maintain the retirement funding level that has been promised to the plan participants. When the stock market is in the doldrums, the returns to the portfolio are either non-existent or negative.

So, What’s the Problem?

The problem with all of this is there won’t be enough money in the pension plan to pay the hoard of people about to retire. Add to this, the fact that because of the bull market in stocks during the 1990s, most pension plans have been heavily weighted toward stocks (most pensions allocate between 70 and 80 percent of their portfolios to stock) and you can see a potential problem lurking. With the market surging in the last year, worried pension managers can breathe a little easier.

Are Pension Plans Out of the Woods?

No, the pension plans are not out of the woods…yet. One gauge of the pension plan problem is the sorry state of the Pension Benefit Guarantee Corporation (PBGC) the quasi-governmental agency that inures America’s private, defined benefit company pension plans. The PBGC stands behind the defined benefit plans (plans which guarantee a specific level of retirement income for each worker) of some 44.3 million American workers. With the steel and airline industry in a shambles and no end in sight, the government could ultimately be responsible for bailing out the pension plans of these behemoth corporations. By the PBGC’s own estimates, they believe that there is some $85 billion of pension deficits (some estimates are as high as $350 billion) lurking on the books of America’s most precarious companies.

What Are the Result so Far?

Over the last two years, the insurer has plunged into the red and congress has stepped in with funding proposals to backstop the agency.

Although no one thinks that the government will let the Pension Benefit Guarantee Corp go bust, not with 44 million votes on the line, pension under-funding is a worrisome issue. Add to this the massive current account deficit the US is running and the huge fiscal deficit and we have the makings of an ever-growing problem. The common wisdom is that the economy is improving and rising economic fortunes will mean rising stock prices and interest rates. All of this should benefit pension plans.

Is this Assumption Valid?

History is the reason for the assumption. In the 17 years from the end of 1964 to 1981, the Dow Jones Industrial average gained exactly one-tenth of one percent. During the period from 1982 to the peak in March of 2000, the Dow rose from 875 to a peak of 11,723 a gain of 1,239%.

Could a Weak Economy be the Explanation for Such Anemic Performance in the Earlier Time Period?

No, during the 1964 to 1981 time period, the Gross Domestic Product (the broadest measure of economic activity) of the US actually grew 374% versus some 197% for the later period. Clearly there is no one-to-one correlation between economic activity and stock markets.

What is the Likely Reason for Higher Stock Prices?

Possibly due to the fact that a slew of baby boomers over the last twenty years have plowed a ton of money into the stock market would be the cause of higher stock prices.

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