| Many pensions have ambitious assumptions of 7 or 8% annual returns. S&P went from 1565 Oct 07 2007 to 735.09 Feb 27 2009. We're now up to 2818 but if we had delivered 8% since october 07 we'd be at 3649 by this Oct 5. So we're 28% short! If you use S&P peak in 2000 it's 1552 and to deliver 8% since then we'd need to be at 6209!!! Catching back up to steady state growth, especially after a 50% loss, is unfathomably hard! What makes it worse is that the present value of obligations skyrocketed as interest rates went to 0. In 07 the Fed Funds rate was 4.5% and it's currently 2%. This rate was 0.25% until the end of 2015. For a payout of $50k per year for 10 years, ten years in the future, the present value is $481,031 at 0.25%, $368,442 at 2%, and $254,761 at 4.5%. So the current obligation is 44% higher than it was in 07 and the amount of money is 28% lower than expected. And this is AFTER the S&P has had an incredible run from 735 to 2818! |