The sponsors of ‘defined benefits’ pension plans controlled, as of December 2004, about US$2.5 trillion in equities belonging, indirectly, to the beneficiaries of these plans.

(See: “Who’s Holding America’s Stock Proxies?“)

In December 2004, U.S. equities, even after the crash of 2000-2001, were still substantially over-valued.

(See: “Equity Values“)

In order for stock prices to reflect values that were customary for a century before the advent of stock buybacks, prices would have to drop between 20% (earnings basis) and 50% (dividend yield basis).

In the case of ‘defined benefits’ pension plans, this would represent a loss of between US$500 billion and US$1.2 trillion in market value of pension portfolios!

To put this in context, such an ‘adjustment’ would be equivalent to from 90% to 210% of before-tax corporate profits in 2004.

In another context, a fall in valuation to historical levels would be equivalent to from one- and to two-thirds of all receipts of state and local governments in 2004.

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Between 1999 and 2002, U.S. private pension funds lost US$1.2 trillion in value.

It turns out that $282.2 billion of the decline in private pension fund value over 1999 to 2002 was due to net withdrawals from these plans, but even so, the drop in market value amounted to $979.7 billion.

It would almost seem that pension fund managers had been speculating with retirement money, attempting to beat each others’ short-term performance statistics, with little interest in safeguarding the assets of plan beneficiaries.

But half of U.S. private pension funds were organized as ‘defined contribution’ plans, such as 401(k)s, in which the fundamental asset allocation decision was made not by fund managers, but by the plan beneficiaries themselves.

During the 1990s, millions of private ‘pension fund’ decisions were made not by pension fund managers but by unsophisticated workers who, believing the “Common Stock Legend“, blindly allocated their long-term assets to equity mutual funds.

In 2004, 44.4 million workers were insured by PBGC under ‘defined benefit’ private pension plans, which comes down to pension assets of about $40,000, on average, per worker — hardly enough to provide much of a ‘defined benefit’ in old age.

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Net new issues of agency securities turned negative in Q3 2005, as a result of the federal government’s crackdown on operations of Fannie Mae in late 2004.

(See: Flow of Funds Table F210, Agency- and GSE-backed Securities.)

This represents a withdrawal of over US$540 billion in the annual supply of these popular debt securities (the average net new issues from 1998 to 2003). This is part of the answer to Chairman Greenspan’s ‘conundrum’ as to why long-term interest rates did not rise as expected, in response to the Federal Reserve’s manipulation of short-term rates and the subsequent economic recovery.

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