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Official Says Pension Rules Encourage Underfunding

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A top strategist at the U.S. Securities and Exchange Commission says current U.S. defined benefit pension rules give employers an incentive to put in too little cash and invest plan assets recklessly.[@@]

SEC Chief Economist Chester Spatt delivered his critique of the U.S. pension system last week in Washington at a seminar organized by a Georgetown University research center.

The current pension system has problems because employees and the Pension Benefit Guaranty Corp., the agency that insures pension benefits, bear much of the load if a plan fails, Spatt said, according to a prepared version of his remarks posted on the SEC Web site.

Because employers are contributing cash to pay for other people’s pension benefits, they start with an incentive to contribute too little, Spatt says.

PBGC funding rules encourage employers too much stock in plans in an effort to increase plan asset totals temporarily and eliminate or reduce the need to put in more cash, Spatt says.

Although over the long run stocks do outperform bonds, “there should be an acknowledgement that these add not only to the expected return, but also to the risk that the plan will be unable to meet its obligations,” Spatt said.

Plans that have high asset totals because rising stock prices produced big gains probably should pay higher PBGC premiums than plans with slower-growing but less risky investment portfolios, Spatt said.

Meanwhile, Spatt said, pension plan financial reports often do a poor job of disclosing what is really going on inside plans.

“As the savings and loan fiasco of another era should teach us, the potential resource costs of awkward default and risk-bearing incentives in this context are potentially very large,” Spatt said. “The current disclosures on firm financial statements are inadequate for the capital markets and employees to assess and internalize the true nature of pension liabilities and the extent of funding of these liabilities.”


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