Showing posts with label equity. Show all posts
Showing posts with label equity. Show all posts

Mar 10, 2009

How Defined Benefit Plans work(ed)

Pension plans suffer, from a rare disease....

According to IPE more than 90% of UK Defined Benefit (DB) schemes are underfunded. The aggregate funding position of almost 7,800 schemes reported a deficit of £218.7bn at the end of February 2009.

The situation in the Netherlands is hardly better.Figures from the Dutch regulator,DNB, show around half of the country’s 650+ pension schemes are under-funded. The Dutch government has extended the recovery period for pension funds from three to five years. The main question is: "Is that long enough?"

How Defined Benefit Plans work(ed)

Pension funds, especially DB schemes, have to face that their worst dreams, a complete doom scenario, is becoming true :
  • First the subprime market collapsed
  • Then, as trust broke down, the stock market went down as well
  • On top of that Interest rates dropped dramatically

Titanic lessons
Just like the 'unsinkable' Titanic was protected by compartments, we had protected our pension schemes with diversification. And just like the Titanic, we actuaries, asset managers, and quants made a fundamental mistake. We underestimated the correlation between the different compartments (bonds, subprimes, stocks). One hit in the vital front compartment was enough to draw our pension dreams to the bottom of the ocean.

Optimistic view
But let's not stay pessimistic.

Do you know how long it took the market to recover after 1929? .....


Global Investment Returns Yearbook 2009
And there are more reasons to stay positive about the equity results on the long term, as is shown in the very interesting downloadable Credit Suisse Global Investment Returns Yearbook 2009, that analysis returns from 1900 until the end of 2008.

As this yearbook shows us in more detail, it is only a matter of statistical faith, that equity performance on the long term will recover.

So the only thing we can do is, just like a sick patient: stay cool, rest (don't move), don't panic and wait until trust and the markets recover.

God bless you....