How many times does a stack of bricks need to fall on our collective heads?

The funded status of pension plans has been on a wild ride since 2008, experiencing major declines in 2008, 2010 and 2011. The drops were due to the “double whammy of declining equity markets and lower interest rates,” said Jonathan Barry, Mercer’s U.S. Retirement Risk & Finance DB Risk Leader, during a recent webinar.  How plan sponsors manage that pension risk volatility was the subject of a joint Mercer/CFO Publishing study, “Redefining Pension Risk Management in a Volatile Economy.  Mercer conducts a monthly analysis of the S&P 1500. At the end of November, it found that aggregate S&P 1500 defined benefit pension plans were underfunded by $391 billion, which means they were funded at 75%. This was down from a funding ratio of 88% in April 2011, Barry said. (Source: www.benefitspro.com)

Repeat after me ... the higher expected return of equity investments doesn't come without the corresponding risk.

Repeat after me ... the only way to de-risk bond-like liabilities is to invest in bonds.

Repeat after me ... EROA is a fiction without basis in financial economics.

First of many? One Year Later.

Retired police and firefighters from Central Falls RI have agreed to sharp pension cuts, a step thought to be unprecedented in municipal bankruptcy and one that could prompt similar attempts by other distressed governments.  If approved by the bankruptcy court, the agreement could be groundbreaking, said Matthew J. McGowan, the lawyer representing the retirees.  “This is the first time there’s been an agreement of the police and firefighters of any city or town to take the cut,” he said, referring to those already retired, who are typically spared when union contracts change. “I’ve told these guys they’re like the canary in the coal mine. I know that there are other places watching this.” [...] Central Falls had little choice. For years, its government failed to contribute enough to its police and firefighters’ pension fund, and the fund effectively ran out of money this fall. The city, which had also promised the retirees comprehensive health benefits, could not cover the pension and health payments out of its general revenue.

http://www.nytimes.com/2011/12/20/business/pension-deal-in-rhode-island-could-set-a-trend.html
(Thanks to MPC for the link.)