Corporate Pension Plans Face Precarious Times

Here in November 2019, the U.S. economy is performing relatively well. Yet, there's already trouble afoot with corporate pension plans.

Read this excerpt from an Oct. 23 Marketwatch article:

In the face of declining profits, General Electric recently announced three pension actions to help reduce the company's debts.

1. Freeze its pension plan for about 20,000 salaried employees and for about 700 employees in a supplementary plan.

2. Offer lump-sums to about 100,000 former employees who have not started benefits.

3. Pre-fund $4-5 billion of estimated required funding for 2021 and 2022.

Freezing GE's plan means that 20,000 salaried employees will not be able to accrue any new benefits under the plan beginning in 2021. (The plan had already been closed to new entrants in 2012.) When these employees retire, they claim the benefits they have already accrued, but those benefits will be based on their current earnings rather than the higher earnings they were likely to have had in the future. In this way, the employee pension benefits will be lower than expected, and the company saves some money. The freeze also applies to about 700 workers who became executives before 2011 and had a supplementary pension.

The outlook for corporate pension plans will be far more precarious during a deflationary depression.

Here's an excerpt from Robert Prechter's 2018 update of Conquer the Crash:

The bull market in stocks has gone on so long that pension funds, formerly boasting conservative portfolios, have embraced stocks as a safe investment. Over half of the value of public pension funds is committed to stock shares. This is a setup for disaster.

Equally dangerous, banks and mortgage companies lend money to consumers via credit cards, auto loans and mortgages and then package and re-sell those loans as investments to pension funds as well as portfolio managers, insurance companies and even trust departments at other banks. The issuing banks keep most of the interest paid by the consumers in exchange for guaranteeing an interest payment on the package. These investments are called "securitized loans," and banks and mortgage companies have issued $10 trillion worth of them. This high sum implies that if you have a managed trust, invest in a debt fund or have insurance or a pension, you are almost surely dependent upon some of these deals.

When banks sell the packages, they get back as much money as they lent out in the first place, so guess what. They can go right out and roll the same percentage of their deposits out again and again as new consumer loans. Investors in the packages are the ultimate creditors.

If the issuing banks get in trouble some day and can't pay, the owners of the debt packages will then have dibs on the interest payments from the consumers. If those payments dry up, they have that great collateral to fall back on: vacant homes, used cars and household junk. If a depression is on, what will that collateral be worth?

Prepare for what Elliott Wave International's analysts see ahead.

Read the free report: "What You Need to Know Now About Protecting Yourself from Deflation."