Presented By: Dilip Alavane 2009 E02 Dhiraj Surana 2009E12 Manish Bharti 2009E14
American Pension Fund Background <ul><li>Resides on 2 major pillars; </li></ul><ul><li>Public system: Mandatory contributi...
Rise of PBGC <ul><li>Defined Benefit Pension Plan : To protect the benefits for workers whose employers sponsors the pensi...
The Perils of Retirement
Failure of PBGC <ul><li>Falling stock market and lower discount rate  </li></ul><ul><li>Increasing number of retirees </li...
Rectification of Failure <ul><li>The above failures can be rectified by </li></ul><ul><li>1. Used higher interest rate to ...
401(K) <ul><li>Defined Contribution (DC) plan that allowed the employee to make pre-tax contributions to the plan; which w...
Failure of 401(K) <ul><li>70% to 80% funds of 401(K) pension plan was invested in the stock market . </li></ul><ul><li>The...
Companies conquering the pension crisis <ul><li>1. Pouring in  more than legal minimum in late 2003 to wipe out the defici...
<ul><li>3. Companies on tight budgets liquidated there non cash assets to pump up their pension funds. </li></ul><ul><ul><...
Conclusion <ul><li>Investment in stock market should not be the only investment option. importance should be given on “Div...
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American Pension Fund Fiasco

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  • Defined Benefit: defined monthly benefit to retirees Defined Contribution: defined contribution from the employer but not the benefit
  • Studebaker terminated its employee pension plan. First casualty , when company faced economic crisis Increased outflow from pension funds due to increased longevity and decreasing fertility .
  • $7.7 bn surplus in 2001 to a record $3.6 bn deficit in 2002 and $11.2 bn deficit in 2003 $85 bn deficits was with financially unstable firms
  • Demography:pensioners more than the workers &amp; unfavourable workers to retirees $7.7 bn surplus in 2001 to a record $3.6 bn deficit in 2002 and $11.2 bn deficit in 2003 $85 bn deficits was with financially unstable firms. Companies were allowed to count the income of their pension funds as part of their profits , used arbitrarily high rates of return to boost their bottom lines, investing in equities rather than in bonds Fund for the pension was decided upon the discount rate &amp; Companies lacked to fund their pension schemes adequately.
  • American Pension Fund Fiasco

    1. 1. Presented By: Dilip Alavane 2009 E02 Dhiraj Surana 2009E12 Manish Bharti 2009E14
    2. 2. American Pension Fund Background <ul><li>Resides on 2 major pillars; </li></ul><ul><li>Public system: Mandatory contributions from workers are transferred to retirees </li></ul><ul><li>Private system: Voluntary contributions are accumulated </li></ul><ul><ul><li>Defined Benefit : defined monthly benefit to retirees </li></ul></ul><ul><ul><li>Defined Contribution: defined contribution from the employer but not the benefit </li></ul></ul>
    3. 3. Rise of PBGC <ul><li>Defined Benefit Pension Plan : To protect the benefits for workers whose employers sponsors the pension plans. </li></ul><ul><li>The company Piccadly Cafeterias was being dissolved in bankruptcy and its plan covered 6800 employees and retirees </li></ul><ul><li>Studebaker terminated its employee pension plan. </li></ul><ul><li>First casualty , when company faced economic crisis </li></ul><ul><li>Increased outflow from pension funds due to increased longevity and decreasing fertility . </li></ul>
    4. 4. The Perils of Retirement
    5. 5. Failure of PBGC <ul><li>Falling stock market and lower discount rate </li></ul><ul><li>Increasing number of retirees </li></ul><ul><li>Demography </li></ul><ul><ul><li>Airlines and Steel companies have hit the PBGC particularly hard . </li></ul></ul><ul><ul><li>Demography: pensioners more than the workers & unfavorable workers to retirees </li></ul></ul><ul><li>Foreign Competition </li></ul><ul><li>Accounting rules </li></ul><ul><ul><li>Income of pension funds as part of their profits. </li></ul></ul><ul><li>At the end of 2003 PBGC had a deficit of $11.2 bn , the agency paid $2.5 bn and collected only $ 973 mn as premiums. </li></ul><ul><li>Fund for the pension was decided upon the discount rate & Companies lacked to fund their pension schemes adequately. </li></ul>
    6. 6. Rectification of Failure <ul><li>The above failures can be rectified by </li></ul><ul><li>1. Used higher interest rate to discount future liabilities which resulted firms to contribute less to their plan and pay less. Instead the discount rate should be based on Government Bonds. </li></ul><ul><li>2. PBGC – premium should not be based on company’s credit rating. </li></ul><ul><li>3. Premium should be an entirely independent entity than the company’s investments </li></ul>
    7. 7. 401(K) <ul><li>Defined Contribution (DC) plan that allowed the employee to make pre-tax contributions to the plan; which was later invested into one or more funds provided in the plan. </li></ul>
    8. 8. Failure of 401(K) <ul><li>70% to 80% funds of 401(K) pension plan was invested in the stock market . </li></ul><ul><li>The decline in the first quarter of 2001 in stock market evaporated all of the gains </li></ul>
    9. 9. Companies conquering the pension crisis <ul><li>1. Pouring in more than legal minimum in late 2003 to wipe out the deficits. </li></ul><ul><li>Eg: GM, 3G,Honeywell,Continental Airlines, Delphi. </li></ul><ul><ul><li>GM : raised about $18 bn by issuing bonds and sold Hughes Electronics subsidiary to fulfill the pension shortfall which surpassed $25 bn. </li></ul></ul><ul><ul><li>Delphi sold $400 mn of trust-preferred security to raise money . </li></ul></ul><ul><li>2. Offering bonus rather than pay raise to lessen their future pension liabilities which are based on salaries </li></ul>
    10. 10. <ul><li>3. Companies on tight budgets liquidated there non cash assets to pump up their pension funds. </li></ul><ul><ul><li>US Steel putting the timber rights to 170,000 into its funds. </li></ul></ul><ul><ul><li>North-West Airlines put in 13.3 mn shares of stock in a subsidiary airline </li></ul></ul><ul><li>4. Companies were permitted to close their pension plans for new employees </li></ul>
    11. 11. Conclusion <ul><li>Investment in stock market should not be the only investment option. importance should be given on “Diversification of Portfolio” </li></ul><ul><li>Follow the basic accounting principle of “conservatism” while deciding and calculating the discount rate. </li></ul><ul><li>The pension shouldn’t be of only DB category ,but should also focus and concentrate on DC </li></ul>

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