Thread: deflation and private sector pensions

http://online.barrons.com/article/SB...mod=BOL_hpp_dc

According to a new report from Fitch Ratings, ultra-low interest rates will exacerbate the underfunding of many U.S. corporations' pension plans.
Companies also will have no choice but set aside more of their earnings. And just as that means belt-tightening for consumers, it means corporations have less to distribute to their shareholders.

According to Kenneth S. Hackel, president of CT Capital, a financial advisory firm, 1% cut in a retirement plan's assumed rate of return is roughly equal to a 15% decline in stock prices.
Fitch reckons a 1% cut in the assumed discount rate for companies' DB plan can result in a 10%-20% increase in the present value of future liabilities. How to bridge that gap?
prudent management will likely require contributions well in excess of the minimum required given low yields and low equity returns," Fitch analysts write.
So, what's the answer? You know those hefty cash holdings on corporate balance sheets on which the bulls keep harping? Fitch thinks pension funding requirements will have dibs on corporate cash flows, and then the stock of cash on companies' balance sheets.
That's the thing about deflation; it's like a neutron bomb for corporate, public-sector and consumer balance sheets. Asset values and returns get decimated while liabilities remain standing. Except that falling interest rates make those future liabilities more onerous, requiring more belt-tightening, which only exacerbates the deflation.