IMHO: “Over″ Blown?

Looks like the pension crisis is finally over.
Well, the funding part of the crisis, anyway. No fewer than three separate studies were published this past week* that essentially said that the pension plans of larger employers are either fully or nearly fully funded again.
For several years now, we’ve been struggling with the impact of the so-called “perfect storm’ on pension plans. The catchy nomenclature was borrowed from the 2000 film by the same name (which, in turn, was pulled from the 1997 book on which it was based)—a reference to the 1991 Halloween Nor’easter that resulted from the unusual combination of several forces of nature to create an exceptionally powerful storm across a very large area. A storm—nearly a hurricane—that caught many off-guard.
The so-called perfect storm for pension plans also resulted from an unusual confluence of factors—a slumping investment market, the “vacation’ from funding that many plans took during a period when soaring investment returns made such actions unnecessary, and, significantly, an unprecedented decline in the interest rate of the 30-year Treasury bond after the Clinton Administration decided to quit issuing new ones.
Back in the Black
In the intervening years, plan sponsors have benefited from investment returns that exceeded projections—as they frequently do over the long term. Also adding to the value of the assets in these programs, plan sponsors have returned to the process of making regular—and in some cases, extraordinary—contributions to the programs. Finally—and this has had a significant impact on the calculation of the liabilities owed by these plans—the return to something like a “normal’ interest rate environment coupled with the use of a blended rate, rather than an artificially distorted 30-year Treasury. It hasn’t been easy, it hasn’t been painless, and it surely hasn’t been “perfect’—but many, perhaps most, large pension plans seem to be back in the “black.’
Not that the funding shortfalls for most were ever as bad as they were portrayed. While there were clearly some villains—and some unsustainable promises dumped on the Pension Benefit Guaranty Corporation—being 85% funded on a pension obligation isn’t all that different from having 85% of your mortgage paid off with 20 years to go (it’s actually better than that).
You’d never have gotten a sense of that from the headlines, or the angst of the legislators. It may be worth remembering that the last time these funds were flush with cash (we’re a long way from that), pensioners were up in arms that the pension surplus should be given to them in the form of higher benefits, analysts were critical of the “gloss’ that pension returns lent to financial reporting, and, frankly, plan sponsors were disinclined to make regular contributions in excess of the required amounts.
It’s worth noting that since this last storm “broke,’ many plan sponsors have chosen to freeze or terminate their traditional pension plans. The reasons are varied, of course. The confluence of factors cited above may have made the program untenable financially; workplace demographics may have cried out for a different retirement plan design; or they may simply have looked ahead to the future and made a different choice.
Still, it’s hard not to wonder how many were set on that path for no reason more substantive than the relentless pillorying of the funding “crisis’ in the media. It was certainly more than a tempest in a teapot—but IMHO, the concerns expressed were always overblown.

*Editor’s note: the studies include reports from Towers Perrin (see DB Funding Landscape Starts to Shine in 2006), UBS (see UBS New Tracker Finds 2006 Pension Improvement), and Watson Wyatt (see A Return to Better Funding for Pensions in 2006)

Workplace Pressures Creating New Generation of Entrepreneurship

Advisers who currently target small businesses – or who work with individual participants at businesses of any size – could see a major shift over the next decade, according to a new study.
The looming retirements of Baby Boomers could launch a new generation of entrepreneurship, according to new research. Many baby boomers nearing retirement age will launch new businesses in far greater numbers than their counterparts from earlier generations, according to the first installment of the Intuit Future of Small Business Report.
Their motivation: diminished job security, disappearing pensions and health benefits, and the need to match savings with longer life expectancies – issues central to the focus of advisers focused on employer-sponsored retirement plans.
Clients, Not Employers
Moreover, the line between small and large businesses will blur as more entrepreneurs form free-agent contracts with large companies as a natural response to the demise of lifetime employment. According to the report, by 2017, free agents will thrive with less job security – “they will have clients, not employers,’ asserts the study. These “spin-offs’ will exert far more control over their time and working conditions.
This new surge in entrepreneurship will be fostered in the workplace of tomorrow. The study notes that, for some, entrepreneurship will complement a corporate career, but not replace it, as employers see the entrepreneurial spirit as key to innovation and will train promising candidates accordingly. The report says that, as a result, professionals will spend their careers “alternating between two related worlds, sometimes running their own businesses in the free market and at other times running a virtual business within a larger organization.’ Completing a new virtuous circle, experience in the former will help bolster the latter.
“Contract workers, accidental and social entrepreneurs will fuel a proliferation of personal businesses,” claims the report, while economic, social and technological change – and an increased interest in flexible work schedules – will produce a more independent workforce seeking a better work-life balance.
Following in Their Footsteps
Not only will these former participants strike out on their own, many of their children will follow suit, becoming the most entrepreneurial generation in American history, according to the report authors. Those in Generation Y are “remarkably well-suited to the emerging entrepreneurial environment,’ according to the report. Indeed, entrepreneurs will no longer come predominantly from the middle of the age spectrum, but instead from the “edges,’ with those nearing retirement and their children who are just entering the job market laying the foundation for “the most entrepreneurial generation ever.’
Additionally, women will increasingly turn to entrepreneurship. The glass ceiling that has limited women’s growth in traditional corporate career paths will send a rich talent pool to the small business sector, according to the study’s authors. “Mompreneurs’ – mothers who start part-time, home-based businesses, often with the help of the Internet, will be part of this trend. In fact, these “personal businesses,’ as the one-person sector is sometimes called, will be launched by people who may not even consider themselves small business owners. Moreover, a “new breed’ of immigrant entrepreneurs will turn to the Internet to launch business, using their language skills, strong educations, multi-country contacts and professional experience to form international partnerships.
Entrepreneurial training will begin much earlier in life, with universities, secondary and vocational schools – and even some elementary schools – offering entrepreneurship as a mainstream subject. At the college level, the emphasis will widen, focusing not just on high-growth businesses backed by venture capital, but on small business ownership of all kinds.
The report is available online HERE

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