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Part - VII

One reason for pension defaults could be violent fluctuations in interest rates. This could be set right by making scientific assessment of the possibilities for the future. In practice however, this is becoming more and more intractable in the context of frequent economic gyrations experienced by countries.
Interest rates are also frequently subject to political whims. A wrong assumption on interest rate or an unexpected rise in interest rate than assumed might prompt an employer to contribute less than normal in order to show economy in operation. Such under-funding because of increase in interest rate is not uncommon. This amounts to inflating profits of the enterprise.

The second malady is employing the funds in speculative investments. When in 1996, Ronald Reagan, in the course of his presidential propaganda, advocated that funds in social security should be ploughed into the stock market, which was highly ridiculed by many. People who understood the mechanism of managing long term funds, particularly social security, felt abhorred. It was common experience that stocks were simply too risky. Reaganomics in operation made a fund that is supposed to be a social security after retirement to be used in the casino world of stocks and derivatives. This happened in Reagan's America and is continuing to happen on a large scale in different countries. By 1979 pension funds kept as much as 90 per cent of their investments away from stocks. Whatever faith Americans had on stocks had eroded stock markets revived with funds being poured into stocks as if there was no tomorrow. So much so, when the stock market is on the upswing there is euphoria of artificially over-valued assets prompting the employer to reduce funding. And, when the stocks are on a downward trajectory, the fund shows inadequate funding prompting the employer to increase contribution from subscribers or reducing the benefits. Both have happened. This can happen by assumptions too at the time of framing the scheme or thereafter.

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* Contributed by -
Swetha Narayanaswamy,
First Year M.B.A.,
ICFAI Business School, Mumbai.