As I have been pointing out for a couple of decades now, aggressive risk taking and unsustainable return assumptions in retirement plans and pension funds are a reliable recipe for disappointment and financial hardship. The trouble is it can take years before the inevitable becomes obvious, and by then it's often too late to make up the missing capital in the time left remaining. At that point, solution sets typically include leaving retirement to go back to work or continuing to work well into one’s 70s and/or downsizing life plans to correspond with the numbers at hand.
There are dozens of decisions leading down the road to financial disappointment, which, if made differently, have a high probability of better outcomes. Minimizing cash flow waste, saving regularly, avoiding debt and protecting capital from unfavorable risk-return bets are all key elements of prudent management. Unfortunately, most people rely on faulty presumptions, and it's not until incomes fall or asset prices move into the give-back phase of each market cycle that reality becomes apparent.
This pattern is made all the more damaging because business and financial "experts" are often highly conflicted in their mandates and duty of care. Presently, both are heavily assessed on how much share prices rise during their tenure, even when that rise is purchased by debt-fueled share buybacks that serve to degrade longer-term strength and stability. In this way, many corporate executives and institutional investors ride atop a giant “Ponzi-like” scheme, where they take out their compensation upfront in the form of shares (which they largely liquidate), dividends and fees, while company employees and fund owners end up holding losses.
Just one poignant case in point is General Electric (NYSE:GE): "At GE, ‘Destruction of capital’: How GE's decade of stock buybacks may come back to haunt the company":
All told, over the decade ended at the close of 2017, GE spent $53.9 billion to repurchase 2.07 billion shares, at average prices of $26. At today’s $8.38, GE could buy the same number of shares for less than one third that amount, or $17.4 billion. Hence, GE has wasted a staggering $36.5 billion overpaying for its overpriced stock. That amount, what investigative accountant Albert Meyer calls “destruction of capital,” is equivalent to half of GE’s current market cap of $71 billion. To make matters worse, repurchasing 2.07 billion shares has lowered the share count by 1.9 billion shares or 8% less than that over the decade. The reason: GE made large options grants to its top managers over those years that eventually vested, requiring the company to issue new shares that diluted its stock.
As executives and so-called "activist" hedge funds/speculators have cashed out billions, "long-term investors" and the employee pension plan have suffered a 65% decline in the value of their holdings since 2017.
In a predictable playbook, GE announced that it was freezing its pension plan for 20,000 of its U.S. employees with salaried benefits as it looks to cut its pension deficit by about $5 billion (to $8 billion) and the company’s net debt by $4 to $6 billion. See GE is to freeze pension plans for about 20,000 US employees in a bid to cut debt.
There's much more of this to come at other companies, pensions and retirement funds.
Part of what’s needed to help correct this epidemic of value destructive leadership and financial management is a clawback mechanism that can reclaim the profits extracted by management and "activist investors" during the lever-up and gut-equity phase.
In addition, share buybacks need to be banned - we can’t afford their perverse incentives to continue. And executive compensation must be tied to long-term improvements in the balance sheet rather than short-term gains in the share price. Last, but not least, only those who acknowledge a fiduciary duty to employees and clients should be permitted to act in leadership and advisory roles. The present mosh-pit of short-sighted incentives and self-enriching conflicts is much too devastating.
Disclosure: No positions.