In trying to chart your own course to invest for your retirement, it’s useful to look at what major companies are doing with their pension-fund money to try to achieve the same goal for tens of thousands of employees. Although each company’s pension fund has its own unique set of circumstances to consider in making its investment decisions, pension funds nevertheless share the same need to invest both for current income and long-term growth that retirement savers and retirees have to satisfy in their personal finances.
Lately, as the stock market has pushed toward new highs, many individual investors who’ve been on the sidelines have finally seen the health of the market as a sign to get back into stocks. Yet among pension funds, the recent trend seems to be the opposite, as many major companies are cutting back on their stock allocations in favor of more conservative and predictable investments.
Playing it safer
Ford Motor Company (NYSE:F) is the latest company to make changes to its pension-fund allocation. Ford Motor Company (NYSE:F) officials told analysts last week that the automaker would slowly move more of its assets toward bonds and other fixed-income securities.
But you shouldn’t conclude that Ford Motor Company (NYSE:F) is basing its move on a bearish bet on stocks. Rather, the motivation for shifting more money to bonds has more to do with the complex calculations that determine whether a pension fund is adequately funded. Several companies, including Lockheed Martin Corporation (NYSE:LMT) and United Parcel Service, Inc. (NYSE:UPS), have followed suit in boosting their pension-fund bond portfolios.
Specifically, the problem that Ford Motor Company (NYSE:F) and other pension funds have faced in recent years is that falling interest rates have increased the present value of their future obligations to workers and retirees, widening the deficits between what they owe and the assets they have on hand. Ford said that falling rates increased its pension deficit by $8.9 billion in 2012, dwarfing the $1.8 billion it earned in investment returns and the $3.8 billion it contributed to the fund. In the future, a move of just a single percentage point in the benchmark it tracks for pension-funding purposes would produce a change of between $2.3 billion and $2.8 billion in its funding status.
Why you’re different from a pension fund
By moving more money into bonds, pension funds are able to match up assets with liabilities more effectively. Because bonds have fixed maturity dates, you can tailor bond purchases to provide exactly the cash flows you’ll want in the future. In addition, because bond prices move with interest rate changes, bonds held in a pension-fund portfolio tend to offset the impact that rate changes have on funding requirements.
But the big difference you face in your investing is that pension funds can always go back to their parent companies and demand more money to meet shortfalls. Indeed, given the huge shortfall that Ford Motor Company (NYSE:F) faces, it plans to contribute another $5 billion to its pension plan this year. General Electric Company (NYSE:GE) and The Boeing Company (NYSE:BA) also have massive pension shortfalls and will likely have to follow suit with additional contributions of their own in the coming years.