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Volume 3 Number 30 November
25, 2005 |
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Prudence and pensions Decisions that affect other people require limiting risk As I noted in my last column, when deciding for others, we are bound by different rules than when deciding for ourselves. In decisions that we make as surrogates, we cannot ethically take the same risks that we could assume for ourselves under similar conditions. The same applies when we make decisions, the outcome of which materially affects other people and on which other people rely for their health, safety, or well-being. Ethics – and in many cases the law – requires that we exercise what could be termed "prudence." In short we must maximize the good, while at the same time, minimizing the risk. Logic and experience tell us that we cannot reduce the risk to zero. They also tell us that an overly cautious approach can minimize the good to the point where no one benefits from the risk reduction. So, prudence is that virtue that enables us to balance the two and achieve moderate good with moderate -- or less than moderate -- risk. I've been thinking about prudence – or "provident behavior" or "stewardship" – these last few months as we've seen one corporation after another declare that they could no longer provide the pensions they had promised retirees and on which those retirees had made life-affecting financial decisions. The arguments of the corporations seem compelling, as they turn their figurative pockets inside out, and declare that there is nothing left that would allow them to live up to their commitments. In some cases, the claims ring hollow, seeing as how these same corporations have managed to bestow munificent bonuses on directors, reward with golden and platinum parachutes the executives who brought them down so low, and pay exorbitant salaries to current executive, allegedly to keep them on board to guide the sinking ship safely into bankruptcy court. In other cases, the claims are solid. The cupboard is indeed bare. Meanwhile, retirees – and those nearing retirement – find they must fend for themselves, even as the social safety net is in danger of being shredded by the "We've got ours . . tough luck for you" crowd. The whole mess raises the question of whether it could have been prevented, and whether it can be prevented in the future. Certainly, you can't get money where there is none. If the corporation can't afford the pension commitment, it stands to reason it can't pay it. Are the retirees just the victims of bad luck and the vagaries of the economy – or is there something else afoot? I think there's a good argument to be made that prudent managers would have foreseen the vagaries of the economy. Economic cycles are not a mystery and should be evident to even the most casual observer. All companies have their ups and down. Again, no matter of great mystery. So, it would seem that prudent managers, having made a commitment – one on which other people relied for their basic well-being – would have taken steps to fund the pensions and, as far as possible, would have protected the funds from economic downturns. Had they done that, instead of treating pension payments as expense items or engaging in risky investments, the problem might have been avoided. Just this last week, the New York Times, reported that some pension fund managers, looking to beef up their portfolios, have taken to investing their money in the shadowy world of hedge funds. While this could mean stupendous returns, it could also mean higher risks. The problem is that hedge funds, usually reserved for the elite investors, are unregulated and, as such, their risks are unknown. This leaves open the question of whether the fund managers are being prudent or whether they are chasing maximal returns with maximal risks, leaving open the possibility that even more retirees will some day soon find themselves facing an uncertain future, while the fund managers shrug their shoulders and issue a heartfelt "Oops." There is no way to turn back the clock, of course. No one can wish money into the pension fund once it's gone. But we perhaps can prevent repeat performances if we stop pretending that it's just bad economic luck and bring home the fact that those charged with managing these companies have failed in their ethical obligation to act prudently when handling money that belongs to other people. |
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© Copyright 2005 Carlton Vogt |