earnings `time bomb' looms in u.s, page-7

Hi Billy,

In Australia, most super funds are accumulation, not defined benefit.

Overseas, the reverse is true, where most funds are defined benefit, and fewer funds are accumulation.

Under the accumulation model, the employee (ie: beneficiary) bears the funding responsibility and risk. True, we have compulsory super contributions which are employer funded. But once contributed, all of the "output" (ie: earnings) risk falls to the employee. Any shortfall needs to either be caught up by the employee (ie: through additional funding contributions, alternative investment activities, or reduced payouts and lifestyle choice).

Under the defined benefit model, all of the funding and contribution risk falls to the employer. In the event of an earnings shortfall (determined by actuarial analysis), the employer must top up the fund. Conversely, in the event of a funding surplus, employers can either take a contributions holiday, or apply (following receipt of confirming actuarial advice) for the surplus funds to be re-invested to the employer.

Within the Australian environment, there are fewer and fewer defined benefit funds (excluding the Public Service funds, and the older industry funds spun out from the Public Service, or in place to support the mining industry).

The main risk to Australian companies, therefore, lies with those companies which have extensive overseas interests (such as the Banks, and some of the Mining /extraction companies) and whose overseas pension arrangements are all defined benefit in nature.

As for the overseas defined benefit risk, this tends to be a matter of continuous actuarial forecasting (ie: estimating in today's $ terms, the "whole of life" funding commitment /expectations of the DBFs).

In the event of currently existing funding deficiencies, there may well need to be a top-up, but usually this will not be required until there is an actual, matching pay-out commitment (ie: paying out pension entitlements, etc). But, just as quickly, today's funding deficiency could return to tomorrow's funding surplus. Hence, my observation that determining a DBF risk is "a matter of continuous actuarial forecasting".

That said, the matter, and the concerns raised in regards to determining a proper pension funding scheme, which will survive the stretch of time, is a very important issue which needs to be continually monitored, assessed, and worked against.

Conversely, before we criticise overseas companies too much, we should not forget that during 1999 and again in 2000, Telstra transferred surplus benefits from its defined benefit funds to shore up both its 1999, and its 2000 reported profits.