Saving for retirement

As you may have guessed, swooning equity markets have been tough on pension funds. The years of plenty have given way to lean times. Many funds, which were enjoying fat surpluses, have seen them slim down considerably. Those with deficits have gone further into the red. Corporations that managed the risk of their pension funds as part of total enterprise risk have generally fared better than those who opted for treating the pension plan as an entity to be managed separately. Some firms are belatedly learning that pension risks can come back and bite you at the most inopportune time. For investors, corporate pension liabilities are just another item to worry about, when analysing already stressed balance sheets. If firms have to meet hefty pension liabilities, the money may have to come out of shareholders’ pockets. So it makes sense to scrutinise company financial statements for any signs of pension trouble. Many of the bigger and older companies have defined-benefit plans, which makes them responsible for investment risk. The smaller and newer ones run defined-contribution plans, which pass such risks directly to the plan participants. All in all, it is easier and cheaper for a firm to administer the latter. Mind you, in the good years, booking the surpluses of defined-benefit plans helped to boost bottom-line results.

There is good reason to believe that the performance of many defined-contribution plans, which are on an individual basis, is worse than defined-benefit plans. By and large, the professional money managers who run the defined-benefit plans follow guidelines about cash flow, duration matching and diversification. So they don’t generally bungle the investments badly. Not so for individuals, who are probably poorly diversified, in terms of asset classes and sectors. Given the equity culture of the past couple of years, it is likely that many have been too aggressive in over-weighting equities. Furthermore, amid all the talk about investing for the long run, and new-economy optimism favouring aggressive growth stocks, many contributors may have plunked their retirement money into technology stocks at exorbitant prices.

During happier days, when returns were deliciously high, U.S. households thought they could eat plenty of cake today and also have lots of patisserie available when they retired. This made sense when investment returns were so good that you could lower your saving rate now and still expect to enjoy a superior lifestyle in retirement. Sadly, returns are more modest, currently, and sooner or later households will have to top up their savings. There is a lot of reluctance to cut back on consumption (helped by the largesse of uncle Greenspan in providing cheap financing), and retirement planning is often pretty sloppy, but at some point a bit of realism may creep into optimistic expectations.

Technology realities

The "new economy" chatter of recent years has quietened but hasn’t died down entirely. As for the main contentions, it reminds us of the saying: "What is new is not true, and what is true is not new". This column was downright sceptical about the flighty claims, right from the start, and particularly so when they became further inflated -- would you know it -- right at the apex of the tech bubble. One idea was that firms would readily leverage technology into greater earnings. This is easy to say but very tough to do. If we are talking about capital-goods producing firms in hardware and software (Yes, software is considered a capital good), then their ability to consistently produce high earnings depends on their talent to innovate constantly -- both in terms of end product and the production process. If they falter, their product can quickly become commoditised, eagerly marketed by an army of copycat producers. In addition, there are lots of innovative competitors in the field who are fully capable of catching up and surpassing the leader. Andy Grove of Intel was realistic when, many years ago, he said that he was paranoid. A former senior executive of Nortel once said that this is a nano-second world, of the quick and the dead -- an accurate statement, judging by the number of corpses that are littering the information highway. Very few corporations, such as Microsoft, manage to carve out a dominant, near-monopoly position. And, in such a case, it eventually attracts the unwelcome attention of regulators.

As for the firms that implement new technology, they have to keep up with best practices in order to remain competitive. If they don’t, competitors with better products, processes and a lower cost base will soon out-distance them. Relying on established brand names and past entrenched positions is no guarantee of continued high earnings. Some of the new technology actually lowers barriers to entry and exposes monopoly positions to greater competitive pressures. So high tech is not necessarily a royal road to higher profits and many of its benefits are enjoyed by consumers, via better products, services and lower prices - rather than shareholders.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.