Public Companies, Pension Funds, Juice up their Earnings!

Can you believe the earnings reports on your Pension Fund?

Mish's Global Economic Trend Analysis: April 21, 2008
"Juiced Earnings And Fanciful Figures
In his latest annual report Warren Buffett talks about How Public Companies Juice Earnings.

For the 363 companies in the S&P that have pension plans, assumptions in 2006 averaged 8%. Let’s look at the chances of that being achieved.

The average holdings of bonds and cash for all pension funds is about 28%, and on these assets returns can be expected to be no more than 5%. Higher yields, of course, are obtainable but they carry with them a risk of commensurate (or greater) loss.

This means that the remaining 72% of assets – which are mostly in equities...

No Free Lunch
There is no free lunch for pension plans. The problem with pension plans is expected rates of return are simply too high. The risk free yield on 5 year treasuries is under 3%. Even as little as 6 months ago one could have locked in 5%. But that is not enough when assumptions are 8%.Yet we are now told by Paul Morgan, senior consultant and director of capital markets at Evaluation Associates, that the solution is "Liability-driven investing".This is of course complete nonsense, and it should not take a genius to figure it out. By what miracle can LDI return 8% a year if the long term average is 5%?"