Companies controlled by PE firms use bankruptcy to shed pension obligations • Hacker News Board

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#101

Post by Retric » Mon, Dec 31, 2018, 7:21 PM UTC

grogenaut wrote: post #92

RestlessMind wrote: post #77

Earlier quoted context omitted.

Why? I can think of multiple reasons. Some essentially boil down to human nature - short-term thinking, preferring politicians who make rosier promises ("assume high rate of return on pension investments and lower the taxes") against honest politicians ("increase taxes since current levels are unfunded"), etc Some are about societal changes no one can honestly predict - avg lifespans increasing (avg life expectancy i…

I imagine it’s a lot like any other cash flow issue. It’s in no ones best interest to halt the company the instant it can’t meet its obligations by $1. You get a loan instead. But when do you halt the company?

Companies don't have a choice to pay their electric bill or not. They are given a choice to pay their workers via under funding pensions.

Shockingly the second causes more problems, because companies will take out a loan to fund the first but quietly under-fund the second for years until a small problem becomes a huge one.

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#102

Post by rchaud » Mon, Dec 31, 2018, 7:35 PM UTC

1001101 wrote: post #10

Oliver Stone's Wall Street was not an instruction manual.

Neither was Liar's Poker, yet Michael Lewis has repeatedly commented that people saw it as something to aspire to. The same occurred with the glorified story of Jordan Belfort. Or Patrick Bateman (that one was of course fictional).

What is it about our society that makes people oblivious to satire/cautionary tales as long as it's given a shiny cosmetic sheen?

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#103

Post by mlthoughts2018 » Mon, Dec 31, 2018, 7:39 PM UTC

rubidium wrote: post #37

mlthoughts2018 wrote: post #31

Earlier quoted context omitted.

I don’t think it’s as simple as this, because alternative instruments for retirement, like 401(k) or “higher wages now” have a lot of severe problems too and typically have no legal recourse for affected people when those instruments experience failures. My grandparents had 401(k) retirement savings and were basically wiped out by the 2008 financial crisis. I think it would be no exaggeration to say that the crisis d…

If people want to set up annuities that is totally welcome. But they shouldn't be tied to the employer. It should be a separate company that exists solely for the purpose of paying the benefits at retirement. Depending on an employer for your retirement is, in the modern market, a proven bad idea. It's terrible what happened to your grandparents (to anyone else nearing retirement, take this as a cautionary tale and g…

I agree, and the same should be true for health insurance, gym memberships, etc.

However, in a practical sense, your point doesn’t matter because all retirement plans accessible to the majority of people are employer-based. Most people only get access to 401(k) plans through an employer, and the only reason it’s worthwhile for them is for the employer match (asset growth won’t be meaningful, particularly compared with inflation).

Often there are also vesting issues as well. I worked for a company once where if your tenure at the company was less than 4 years, the company got all of its contributions back. Many other employers offer no matching whatsoever, and in that case you really have to ask yourself whether it wouldn’t be better to instead pay taxes up front and just invest retail into some low-fee broad-market ETF on your own, rather than to trap money away behind penalties and tax complexity in a 401(k) where you’re not even getting a company match.

So we are still equally reliant on employers as the facilitator of access to a retirement benefit. Functionally it’s truly not different than pensions, only the underlying financial instrument is different.

You do point out that depending on an employer for retirement is a bad idea, but in the absence of greatly expanded social security and nationalized health care, depending on an employer who at least has the chance to use its scale to mitigate risk in the retirement instrument is about the best you can do.

Expecting individuals with little or no access to meaningful financial planning services to manage the risk profile of their own retirement vehicle is ludicrously stupid by comparison. Individuals can be wiped out by unexpected legal bills, insurance technicalities, early death of a provider, etc. Infividuals are not the right level of entity to be juggling these risks.

Instead it points to a moral failure on the part of corporations, forsaking loyal workers in favor of complex strategies to extract labor without being compelled to absorb the risk of retirement financial solvency.

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#104

Post by jandrese » Mon, Dec 31, 2018, 7:47 PM UTC

fatbird wrote: post #38

lefstathiou wrote: post #27

To me the bigger culprit is the unfunded pension as a tool of retirement planning. Unfunded pensions are failing or on the brink of failing almost everywhere they are tried. It's a huge scandal and deeply immoral IMO. I read the other day that NYC alone has over $100bn in unfunded pension liabilities. There is simply no budget to pay that down. Unfunded pensions taking down numerous economies in Europe. There is a co…

Why isn't it a solution to simply require pension funds to be fully funded, perhaps under a separate legal entity that's protected from raiding by PE firms? Why is it that the "unfunded pension" crisis always makes people question the second term in the phrase instead of the first?

Congress did that to the Post Office and it nearly killed them. Worse, it made them less competitive with FedEx, UPS, DHL, etc... which further exacerbated the problem.

You also see this with big legacy companies that slowly get throttled by their pension schemes and are undercut but new companies full of young workers. Automakers for example. We have been underfunding pensions for a long long time because people weren't supposed to be living so long and because cuts to the pension program aren't immediately visible so they're a tempting target for unscrupulous management.

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#105

Post by AdamM12 » Mon, Dec 31, 2018, 7:50 PM UTC

sct202 wrote: post #13

AdamM12 wrote: post #8

On some levels the government insuring pensions like this creates an economic incentive to do exactly what these guys are doing.

Government pensions aren't insured like this and also have widespread issues with leaders coming in an slashing contributions so that they can spend the money elsewhere; eg, Illinois on every level of government. The insurance at least protects the pensioners to some degree.

Reread the article and what I said. The government insures some private pensions, not public pensions. This insurance provides some economic incentive for PE firms and other managers to behave in the manner derided in the article. All I was stating.

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#106

Post by mlthoughts2018 » Mon, Dec 31, 2018, 7:52 PM UTC

tedmiston wrote: post #98

vageli wrote: post #66

Earlier quoted context omitted.

> It's terrible what happened to your grandparents (to anyone else nearing retirement, take this as a cautionary tale and get your money in something safe). But hearkening back to the "glory" days of employer-paid pensions is not a viable solution. What is "something safe"? I was under the impression that 401ks are not really known as risky investments.

401ks are investment vehicles or "buckets" that contain investments, rather than investments themselves, so a 401k's risk level depends entirely on the underlying assets (investments) that it holds. There is nothing inherently more safe about a 401k from an investment perspective compared to any other type of bucket. Within their 401k, most people hold a higher percentage of stocks (more to gain) earlier in their wor…

I think a deeply underappreciated point in all this is to stop and consider that the description you’ve given above, which is a really nice summary, would be so utterly bonkers advanced-sounding and deeply complicated to average workers that they would absolutely have no comprehension whatsoever what any of this means, how to act on it, etc.

Even working in quant finance and managing these portfolios for huge pension or retirement plans, you get astounded that the “technical experts” on the board of directors barely understand the concept of simple interest, and continuous compounding or any formulas would be untenably way, way too complicated.

So when you see people on Hacker News acting aghast that elderly people might have inadvertently been loaded up on high-beta equities right around the 2008 crash, you just know those commenters have no concept of the reality that most Americans live through.

In my grandparents case they even went to some local Edward Jones financial planner or something who just turned out to be deeply incompetent and acted like he was some hot shot day trader, putting them in equity-heavy niche portfolios with higher fees, when they should have been decorrelating themselves from market volatility generally.

He did nothing illegal, and my grandparents believed earnestly that someone competent was making prudent decisions about their money.

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#107

Post by closeparen » Mon, Dec 31, 2018, 7:53 PM UTC

deogeo wrote: post #99

closeparen wrote: post #88

Earlier quoted context omitted.

With a 401k, you own the underlying assets, and a brokerage is just holding them for you. With a pension, you own a promise from the employer to pay you a fixed amount. How it does that is (theoretically) none of your concern. Some consider pensions to be more pro-worker because you're entitled to the same payout regardless of market performance. But it seems to be turning out that the 401k is more worker-friendly, a…

> With a pension, you own a promise from the employer to pay you a fixed amount. How it does that is (theoretically) none of your concern. I'm mostly in the dark about the US pension system, so forgive me if the question is a silly one: How is this 'promise' not a legally binding debt, to be repaid as much as possible by the selling of assets during bankruptcy?

They are. But in these cases, substantial repayment is not possible:

a) The entity never had enough assets to begin with (public pensions).

b) The assets have lost their value (business failure).

c) The assets were directed elsewhere by management (private equity takeover).

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#108

Post by bedhead » Mon, Dec 31, 2018, 7:55 PM UTC

Pensions get abused because they can be. (I'll limit this to public pensions)

When a municipality issues a bond, that bond has an indenture which is a contract. It has a very specific set of rules about what the municipality can and cannot do (covenants) and a very specific schedule for when and how the money must be paid back. Try skipping an interest payment and all the sudden you instantly find that there are serious consequences, like you find yourself in court, or threatened with involuntary bankruptcy, and your credit rating goes down, etc.

When a person obtains a mortgage, they too sign a contract specifying things they must do (eg get insurance) and a schedule for repaying principal and interest. Try skipping a month or two of payments and the bank starts calling, it affects your credit, and maybe you lose your house one day if you keep not paying.

But pensions have nothing like this...it's almost the reverse set of incentives. There's virtually no enforcement of prudent management. The Chicago teacher's pension fund skipped making contributions for a decade in what they euphemistically called "pension holidays". Instead, the money got diverted mostly to higher salaries. The people who ran the city were actually rewarded for this malfeasance. And that's in addition to routinely underestimating critically important assumptions such as healthcare costs, lifespan, investment returns, and interest rates, which are hard enough as it is. The problems take multiple election cycles to manifest, and it creates a massive moral hazard. You couldn't design a more toxic form of IOU if you tried...I've long argued that public pensions should be illegal.

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#109

Post by jandrese » Mon, Dec 31, 2018, 7:56 PM UTC

bsbechtel wrote: post #19

olliej wrote: post #4

Still amazing to me that owners and equity firms get money before pension funds. The literal theft - a pension is part of your income, and being able to sell off a company without paying off pension debts literally means retroactively stealing wages from workers. Remember that banks, etc all have insurance on their debt, apparently that doesn’t matter - companies are simply stealing from money that is not theirs, and…

The government does the same thing with SS. If you pass away before collecting benefits, those benefits aren't passed on to those who inherit your estate.

Social Security isn't an investment. It's more like an insurance scheme against old age. Everybody pays into the pot and that is divvied up among everybody who qualifies (retirees).

Re: Companies controlled by PE firms use bankruptcy to shed pension obligations

#110

Post by jandrese » Mon, Dec 31, 2018, 7:58 PM UTC

nickthemagicman wrote: post #2

Its a shame that pensioneers are so low on the bankruptcy list. The banks of America's and Lehman bros get their money before the people who are working the business to survive do. Without basic income you need a job to survive but at the same time you're being exploited while you work that job.

The bankruptcy list is mostly pointless because there's so little to divvy up these days. By the time the bankruptcy happens all of the Wall Street types have already taken the money and run.