Pension assumptions hitting the wall
By James Saft
That 8 percent annual return on investment you and your pension fund manager were banking on is now looking almost as optimistic as Madoff’s magic 12 percent, as deleveraging and deflation bite.
With extremely low or negative interest rates and everyone from consumers to banks trying to shed debt and assets at the same time, what seemed like reasonable projections for a mixed portfolio of stocks, bonds and other assets are now substantially too high.
The implications are a potentially huge hit to corporate earnings and the economy. Companies will be forced to pony up more to keep their pension funds adequately funded while even consumers not encumbered by lots of debt will be likely to raise their savings rate to compensate for lower returns, thus acting as a drag on consumption.
And, while higher savings rates are ultimately what the economy needs, most U.S. company pension plans that promise a payoff based on workers’ final salaries assume an overall return on assets of about 8 percent a year. Individuals and their investment counselors are often even more optimistic, penciling in 9 or 10 percent a year and often maximizing exposure to riskier assets to try and get there.
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