The Corner


Pensions: For Whom the Bell Tholes

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I posted something yesterday on some of the challenges — to use too mild a word — that are looming for retirees, about-to-be retirees, and pension funds from an ultra-low-interest-rate environment that, thanks in no small part to central-bank involvement, has persisted for years and is likely to continue for quite a few years more.

Writing for Bloomberg Opinion, John Authers takes note of a recent case that highlights the difficulties surrounding the pension sector:

In Thole v. U.S. Bank, two retired members of U.S. Bank NA’s pension plan had sued for the right to bring a class action against the pension plan on the basis that it had been poorly investing the plan’s assets. They requested the repayment of approximately $750 million to the plan in losses suffered due to what they regarded as mismanagement. They had never, however, suffered any interruption to their own pension payments, which had continued in line with the contractually agreed amounts.

The [Supreme] court ruled that they could not bring an action against the pension plan because: “They have received all of their vested pension benefits so far, and they are legally entitled to receive the same monthly payments for the rest of their lives. Winning or losing this suit would not change the plaintiffs’ monthly pension benefits.”

The fact that defined-benefit plans have a legal duty to keep paying pension benefits does not, however, guarantee that they will find the money from somewhere to pay it.

Indeed not, and Authers has more than a little sympathy for what the dissenting justices had to say:

The Court holds that the Constitution prevents millions of pensioners from enforcing their rights to prudent and loyal management of their retirement trusts. Indeed, the Court determines that pensioners may not bring a federal lawsuit to stop or cure retirement-plan mismanagement until their pensions are on the verge of default. This conclusion conflicts with common sense and longstanding precedent.

To understand why the majority disagreed, this article in the National Law Review gives an excellent summary.

But whatever the law may say, the underlying problem that ultra-low interest rates represent to defined-benefit plans is not going away.


The Federal Reserve appears determined to put a cap on corporate bond yields. Defined-benefits plans are dependent on two factors: returns on assets (largely stocks), and bond yields, which determine how expensive it is to buy an income – or in other words to meet their liabilities. The latest figures from the actuaries at Mercer, up until the end of May, show that S&P 1500 plans were in deep deficits, of about $500 billion, although the counter-acting effects of higher share prices and lower discount rates have largely stopped the deficit from deepening any further.

The problem is that the Fed’s master plan for getting through the next few years, and financing the huge sums of money that were thrown at the Covid-19 pandemic, is financial repression. This is the phrase for effectively forcing investors to lend to the government at artificially low rates . . . . There are arguments that this may be less painful than the alternatives, but it will be excruciating for pension plan managers, as it makes the cost of their liabilities artificially high.

As Authers notes, the nightmare scenario for the future is that large corporate pension plans will find that they are unable to meet their commitments. The presence of the Pension Benefit Guaranty Corporation may offer some comfort to pensioners, but that will be of cold comfort to companies brought to their knees by pension obligations suddenly made much more onerous by the effects of low interest rates (for another good discussion of how this can work, go here). And it will be terrible news for their current employees too.

Just another reminder that (artificially) ‘cheap’ interest rates are a lot more expensive than they seem . . .


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