We have been saying for a long time that anyone in the western world who's 10-15 years away from collecting their first pension payments, shouldn't expect to get much, if anything, when the time comes. This is because, obviously, the economy has deteriorated as much as it has. It's also because, in essence, pensions plans are the ultimate Ponzi schemes.

What doesn't help are the central bank and government policies that are in fashion today that are based on pushing interest rates about as low as they can get.

The reactions to all this are interesting in their range of variation. Last week I picked up an article (more on that later) that made me refer back to a series of bookmarks I had made over the past month or so. Here are a few quotes that, when put together, paint the picture pretty accurately; you add up the details and numbers and you get an idea of what's going on. Not necessarily for the faint of heart. First, Michael Aneiro for Barron's:

Top Pension Fund Sends a Warning

The California Public Employees' Retirement System, the nation's biggest public pension fund at $233 billion, reported a mere 1% return on its investments in its fiscal year ended June 30. Earlier this year, in an attempted acknowledgment of today's realities, Calpers had lowered its discount rate–an actuarial figure determining the amount that must be invested now to meet future payout needs—for the first time in a decade, to 7.5% from 7.75%. That represents combined assumptions of a 2.75% rate of inflation and a 4.75% rate of return.

Needless to say, a 1% annual return didn't come close to hitting any of those figures and doesn't engender confidence in the assumptions of institutional or individual investors alike. Calpers was quick to note that its 20-year investment return is still 7.7% and that the past year was challenging for everyone. But Calpers is a bellwether, and other systems are expected to report similarly disappointing returns, necessitating higher annual contributions in the years ahead to meet funding needs.

Later in the week, S&P Dow Jones Indices said that the underfunding of S&P 500 companies' defined-benefit pensions had reached a record $354.7 billion at the end of 2011, more than $100 billion above 2010's deficit. The organization reported that funding levels at the end of 2011 ran around 75%, on average, and that future contributions will constitute a "material expense" for many companies.

Fitch Ratings later released its own study of 230 U.S. companies with defined-benefit pension plans and found that median funding had dropped to 74.4% in 2011 from 78.5% in 2010, and that corporate pension assets grew just 2.9% in 2011 amid sluggish returns and a 6% decline in contributions.

This is not pretty. What we see is hugely unrealistic annual return assumptions combined with equally huge underfunding. Both ends burning. More from Marc Lifsher at the Los Angeles Times:

Pension funds seriously underfunded, studies find

Corporate and public pension funds across the country are seriously underfunded, threatening the retirement security of workers and straining the financial health of state and local governments, according to a pair of independent studies.

In 2011, company pensions and related benefits were underfunded by an estimated $578 billion, meaning they only had 70.5% of the money needed to meet retirement obligations, according to a report by S&P Dow Jones Indices.

Funds generally don't need to have all the money needed pay future pensions because returns on investments vary over the years and people retire at different ages and with different levels of benefits, experts said. But a funding level in the 70% zone is considered dangerously low.

The looming shortfall, and the move by corporations to 401(k)-type plans in which the level of investment is controlled by employees, could keep many aging baby boomers from retiring, said Howard Silverblatt, a senior S&P Dow Jones Indices analyst and the report's author.

"The American dream of a golden retirement for baby boomers is quickly dissipating," Silverblatt said. "Plans have been reduced and the burden shifted with future retirees needing to save more for their retirement.

"For many baby boomers it may already be too late to safely build up assets, outside of working longer or living more frugally in retirement."

While the cost of retirement is out of reach for many older workers and growing more expensive for younger ones, it's becoming less of a burden for employers, according to the report issued Tuesday.

Employers are paying less into pension funds despite the fact that company cash levels remain near record highs and cash flows are at an all-time high," Silverblatt said.

Meanwhile in the public sector, a separate pension-related report by the national State Budget Crisis Task Force warned that public pension funds in the U.S. are underfunded by $1 trillion to $3 trillion, depending on who's making the estimate.

There's no consensus on the amount by which pensions funds are underfunded. According to Reuters' Jilian Mincer, the funding shortfall may be as high as $4.6 trillion (2011 numbers).

Public pension funds to face calls to set realistic targets

Public pension funds are expected to report poor annual returns in the coming weeks, results that are likely to increase calls for more realistic retirement promises for teachers, police officers and other public workers.

At least three of the nation's largest U.S. public pension funds have already announced returns of between 1% and 1.8%, far below the 8% that large funds have typically targeted.

The fund's targets have been "unrealistic," said Michael Lewitt, a portfolio manager at Cumberland Advisors in Sarasota, Florida. "They've been fooling themselves because there is no realistic case they can make that." [..]

Low returns will further aggravate funding shortfalls for hundreds of pension plans, adding to pressure on cities, counties and states that are already facing lower tax revenue and rising costs.

The vast majority of states have cut pension benefits or increased contributions from workers, or are trying to.

"Failing to understand the scope of the pension crisis sets taxpayers up for a bigger catastrophe in the future," said Bob Williams, president of free-market think-tank State Budget Solutions, in Washington. "Without government action, states, counties, cities and towns all over America will go bankrupt," he said. [..]

Major public pensions typically assume an average return of about 8%, but the median annual return in 2011 for large pension funds was roughly half that amount, 4.4%, according to data provided to Reuters by Callan Associates.

Median returns were only 3.2% for the last five years and 6% for the last 10. Before the 2007-09 recession, market performance was often above the 8% assumptions. Average returns for the last 20 or 25 years as a whole still reach that level. But with losses in 2008 and 2009 and uneven returns since then, analysts say pension funds should adjust to what seems to be a new reality. [..]

The funding status of public pensions has dramatically slipped over the last decade. Barely more than half were fully funded in 2010. At the end of that year, the gap between public sector assets and retirement obligations had grown to $766 billion, according to a report by the Pew Center on the States.

Ratings agency Moody's Investors Service calculated this month that if it used a 5.5% discount rate, a rate closer to the way private corporations value their pensions, it "would nearly triple fiscal 2010 reported actuarial accrued liability" for the 50 states and rated local governments to $2.2 trillion.

Other estimates put the shortfall even higher. State Budget Solutions estimated it in a recent study at $4.6 trillion as of 2011.

In San Francisco, they don't mince words, writes Heather Knight at SFGate:

More bad news for San Francisco’s city pension fund

A preliminary report of how the city’s pension fund performed in the fiscal year 2011-12, which ended June 30, shows it earned a meager 1.6% — far below the assumed rate of return of 7.5%. For a fund currently worth $15.3 billion, that’s a big difference.

"This is even worse than anyone predicted," said Public Defender Jeff Adachi, who offered a competing, failed pension reform measure that would have raised more money through employee contributions. "If this was a movie, it would be a disaster movie called ‘Pension Armageddon.’"

Canada, which faces similar problems ("massive shortfalls"), despite an ostensibly far better performing economy (how on earth does that add up?), apparently takes a somewhat different approach than the US, where, essentially, the favorite approach is moving the goalposts, which "lets companies use a 25-year average of the discount rate rather than two years".

You don't have to be a genius to see that the - financial - world was a totally different place 25 years ago than it is today. So using 25 year old stats to calculate today's required pension funding rates is a highly risky affair. If you find two years too short a period, you can go for 5 years, perhaps, I can see an argument being made for that. But 25? That looks like a desperate attempt at a cover-up more than a serious effort to find accurate accountancy methods.

Well, Canada resists such desperation. So far, at least, and despite strong opposition, that wants a sweet deal like the US gets. Louise Egan and Susan Taylor for Reuters:

Ottawa shrugs off pleas for pension fund relief amid massive shortfalls

Canada is taking a different tack than Washington on the thorny issue of helping companies fund their widening pension gaps, shrugging off corporate pleas for relief even as the United States lets businesses slash their contributions.

A frightening prospect for workers, retirees and companies, yawning pension deficits have gone from arcane accounting entries to front page news on fears that massive shortfalls could even cause some corporations to fail.

As a growing number of employers look to roll back benefits to the alarm of unions, others are pouring cash into their pensions funds only to see the hole get deeper.

Canada is not unique, and as in the United States, generous public sector pensions are a hot-button issue. But the federal government is taking a more hands-off stance than U.S. President Barack Obama, who signed a bill last month that changes how companies calculate what they must contribute to their pension funds, effectively allowing them to pay less.[..]

Softening the rules implies letting plans stay underfunded for longer, a risk financially prudent Ottawa may be reluctant to accept. After all, the country’s conservative banking culture helped it survive the global financial crisis better than most.

As in other countries, the scope of the Canadian problem is huge. 90% of the roughly 400 defined-benefit pension plans overseen by Canada’s federal regulator are underfunded, meaning they cannot meet their liabilities should their plans be wound up today, as is required by law. [..]

Historically, Canada has preferred relief measures such as lengthening amortization periods. Permanent rule changes in 2010 let companies average their solvency ratios over a three-year period instead of one, so that a sudden bad year doesn’t force them to make big cash infusions.

But some critics say it is dancing around the real problem – the very low "discount rate" used to assess a plan’s solvency, which is the focus of the recent measures in the U.S., Denmark and Sweden. This rate, based on long-term government bonds, helps actuaries judge how much assets will earn over time.

Companies complain the rate has never been lower and artificially inflates a plan’s deficit. The lower the discount rate, the bigger the deficit. Air Canada’s chief financial officer, Michael Rousseau, told analysts on a recent conference call that a 1.5% or 2% rise in the rate would eliminate more than $3-billion from the airline’s deficit.

That wishful thinking effectively became reality last month, not for Canadian companies but for their U.S. competitors. The new law there lets companies use a 25-year average of the discount rate rather than two years.

In Europe, Denmark and Sweden have tinkered with how the discount rate is used and the United Kingdom is thinking of following in their footsteps. [..]

Bob Farmer, who represents 250,000 pensioners as president of the Canadian Federation of Pensioners, says softer rules for companies mean bigger risks for workers. Tough luck about the low yields, he says. "That happens to be the world we’re living in." [..]

"The biggest social issue in the next 10 years is going to be pensions," said Rick Robertson, associate professor at the Richard Ivey School of Business, part of the University of Western Ontario. "What do I tell the 64-year-old person who may not have a chance to rebound if the company doesn’t succeed. Who’s my duty to? There’s no easy answer."

Whereas in Japan, with the world's fastest ageing population, the world's biggest pension fund has taken a dramatic route: selling off assets. It hopes to make up for this by moving into riskier assets. That's of course a big gamble no matter how you look at it. Monami Yui and Yumi Ikeda at Bloomberg:

World’s Biggest Pension Fund Sells JGBs To Cover Payouts

"Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash," said Takahiro Mitani, president of the Government Pension Investment Fund, which oversees 113.6 trillion yen ($1.45 trillion). "To boost returns, we may have to consider investing in new assets beyond conventional ones," he said in an interview in Tokyo yesterday.

Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and become eligible for pensions. That’s putting GPIF under pressure to sell JGBs to cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year, Mitani said in an interview in April. As part of its effort to diversify assets and generate higher returns, GPIF recently started investing in emerging market stocks.

Now, remember that the level of funding for US public pension plans has fallen as low as 70% or thereabouts. And that brings me to the article from last week which made me return to the pension topic.

In the Netherlands, pension funds are by law required to maintain a 105% funding level. And there is little enthusiasm for changing this. Right after the autumn 2008 crisis peak, some leeway was provided by the government, but only for a short period. Now, there are other steps being taken:

Civil service pension fund ABP may cut pay outs by up to 15%

One of the biggest pension funds in the world, the Dutch civil service fund ABP, may have to cut pensions next year and again in two years time in order to keep its finances in order, the Volkskrant reports on Wednesday.

The paper bases its claim on confidential documents from the pension fund, which covers some three million workers and pensioners.

The current method of calculating pension funds’ coverage ratio - the amount of assets needed to meet pension obligations - could mean ‘reductions mount up to between 10% and 15%’, the document states.

The fund has already agreed to cut pensions by 0.5% next year. However, talks are under way between ministers and the central bank on changing the way interest rates used to determine the coverage ratio is calculated.

The document also states that if nothing is done to change the calculations, premiums for 17 big funds could rise by 28.5%.

Hundreds of thousands of pensioners are likely to get smaller pay-outs next year because pension funds have been hit by lower interest rates and the economic downturn.

There is no need to explain how tough it will be for many people to see 15% cut off their fixed income. And that will be just the beginning. Some pensions plans may temporarily do better if and when they're allowed to invest in risk(ier) assets, but just as many will do worse for that exact same reason. Changing coverage ratio calculations is not a magic wand; it's just another layer of creative accounting, and we've already got plenty of that.

For younger generations, which over a broad range have lower income jobs, if they have any, seeing pension plan premiums rise 28%, and then some more and so on, will become unacceptable, fast. They will soon figure out that the chances they will ever get any pension decades from now are close to zero. So they’ll ask themselves why they should pay any premiums, from the pretty dismal wages they make in the first place.

Over the next few years, this is a battle that will play out in our societies, and it will have no winners. We need to be very careful not to let it tear those societies apart. In a world where just about everyone has to settle for much less than they have or thought they would have, that will not be easy. Realistic accounting standards would be a good first step, but they will also be very painful. It will be very tempting to hide reality for as long as we can, in the same way we already do with issues ranging from Greece to real estate prices to bank losses to derivatives to our own personal debts.

The best, or even only, advice for those of us who belong to younger generations is: don't count on getting a pension when you reach retirement age. It’ll probably have been moved to age 85 or over by the time you get there anyway.

This is not something that can or will be fixed overnight. It was doomed from the moment baby boomers started producing the number of children they have. It simply hasn't been enough to keep the pension Ponzi going. And those baby boomers, with far too few children to provide for their pensions, have only just started to retire now, as the plans are already in such disarray. I'm sure you can see where this will lead.