In North America and other countries around the world, if you examine the number of children families had over the years, it goes up and down. In the 1900’s people were above 7 per family, but some would die early from children diseases. In the 1930 was the depression and family size fell; in the 1940s was the war which meant many men were away. After the world the size of families increased and since the 1960s family size have slowly falling to around 2. The group after the world war is known as the Baby Boom generation and throughout its life – institutions had to change to meet its demands as they aged. When they were young, schools doubled, then universities and colleges grew and the workplace grew. The flip side is after they left the institutions, the School Boards have problems dealing with the infrastructure. Now the Baby Boom generation has begun to retire and will do so over the next decade. The good news is the generation behind will find jobs easier, the bad news is we will be talking about pensions and retirement funding for decades. There are many books about pension failures, but a good one is The Third Rail by Jim Leech and Jacquie McNish, published by Random House, Toronto, 2013.

The third rail is what our retirement is suppose to look like. The first rail is old age security at age 65, then one counts on their individual savings and the last rail is the pension plan from work. Few people pay attention to it until you are about to receive it but what if the pension plan is underfunded and seemingly what is to happen. If we use the example of the Baby Boom, when they were growing up they had 20 people contributing one collecting which makes the amount of contributions, the investments in the market and the low collectors of funds a viable funds. As we move to where the Baby Boom is collecting with the same 20 people know 10 are collecting, the markets still fluctuate and only a few are contributing. Common sense says something has to give. That is one scenario coming in the future. What are the assumptions in the on going plan? the investment income? the growth rates? Do you agree?

In the book, there are examples from New Brunswick and Rhode Island and they are very similar. The focus was on public sector pensions and the reality is many times the people in government want to give the employees a good pension. If they ask for cost of living, why is that not a good thing? In Rhode Island an example was given of a Fire Chief who from a base salary of $63,000 because of guaranteed cost of living of 6% annually his pension became $197,000 and if lived to 100 years of age the pension would be $700,000 (this individual was benefiting from compound interest). This would have been fine if investments were guaranteed to go up above 6% a year; the number of contributors to payees remain a constant but markets do not have guarantees and this fund was underfunded.

Linking to dividend paying stocks, the issue of underfunded pensions whether in the private or public sector makes a difference towards the ability to be above what the actuaries need to be in the fund. If there is less, then credit ratings will suffer and they will be at competitive disadvantages as the organization will have to pay higher interest rates. Instead of investing in the business, the institutions will have to raise capital to bring the pension plan to above what is needed in the future. While we all love pension plans, particularly those that have them, they need to be fully funded. One metric to look at is the company pension plan fully funded? If it not, look for alternatives. If it is a municipality, look to moving to ones which have and ensure they keep it that way or you will be paying more taxes and getting less.

There are more questions than answers, till the next time – to raising questions.