Trillion-dollar time bomb
Robert D. Arnott's March 18 "Other Views" commentary, "DB and DC plans face trillion-dollar time bomb," talks about the long-term adverse consequences arising from a much lower actual future rate of return on benefit plan assets than is currently being assumed by defined benefit plan sponsors and defined contribution plan participants. This is a most timely subject.
Those who need to make assumptions on future yields will, in addition, find it essential to have available a restatement of what real prior rates of return have been, since these serve as the basis for assuming what future rates will be. Mr. Arnott reports plan sponsors on average use nearly a 9% rate. The Social Security actuaries use a real 6.5% rate for projecting benefits under privatization proposals.
The restatement of prior yields for the S&P 500 would require, for each company, adjusting stated earnings each year for extraneous amounts. These include, among others, artificial pension income (General Electric Co.'s pension income, for example, amounted to over 9% of its year 2000 pre-tax income); added income arising because employee share options are not included in costs; the boosting of future income streams by bunching them in one year; and the deferring of current expenses by amortizing them over future years.
To illustrate, after all the adjustments are made to arrive at real earnings, the S&P average earnings for any period might fall from $5 per share to $4 and the yield from 10% to 8%, and then drop to 5% after adjusting for inflation. Future assumed rates would then be derived from the adjusted rates. This would make a considerable difference in thinking about what to expect in the future.
David Langer Co.
Milliman USA, officially
Some old habits die hard and, if proof is required, just try changing a long-established name! In your July 8, page 2 story "Indiana making major changes with equities," you referred to the actuarial consulting firm of "Milliman & Robertson Inc."
For your information, and that of your readers, consultants and actuaries Milliman & Robertson are now known as Milliman USA. The change became effective in June 2001.
New York, NY
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