how is the health of your pension?

[Tif7]

I agree with this. I am not counting much on any pension. Most of withdrawals be from my savings.

Same here. My megacorp has reduced benefits a number of times already. I think it's only a matter of time before they shut it down completely. It's not COLA'd. I'm at least 20 years away from collecting anything. Whatever I have earned by the time they shut down will be worth very little by the time I can collect anything.

T

 

[Tif7]

....and maybe being confused as to what definitions of liability and fully funded.

Could be.

My question is how much money does the pension plan need to today in order to be 100% funded?

It depends on what the liability is today right? Total payments for the next 20 years will be 1.8B, but because of the time value of money the liability will be less then 1.8B (Just as 20 years of mortgage payments will total more then a balance of 100k today.) Let’s say it’s 1.3B. I realize I'm making that number up, but we need some kind of number to work with.

To be 100% funded today, you would need to have 1.3B in assets. If you only had 1B in assets then you would be 77% funded, and if you had 1.5B in assets you would be 115% funded.

I'm curious to know what you think the numbers should be.

T

 

[arebelspy]

Could be.

It depends on what the liability is today right? Total payments for the next 20 years will be 1.8B, but because of the time value of money the liability will be less then 1.8B (Just as 20 years of mortgage payments will total more then a balance of 100k today.) Let’s say it’s 1.3B. I realize I'm making that number up, but we need some kind of number to work with.

To be 100% funded today, you would need to have 1.3B in assets. If you only had 1B in assets then you would be 77% funded, and if you had 1.5B in assets you would be 115% funded.

I'm curious to know what you think the numbers should be.

T

...won't that depend on the rate of return then, as we've been saying all along?

 

[Mulligan]

I don't know. The way I see it, the company has to pony up the cash to pay what it owes. If the assets do well they have to find less money. If the assets take a beating they have to make up the shortfall somehow. As Alan said a few posts above, the megacorps he worked at are required to keep the fund solvent. So, between now and 10 or 20 years from now cash injections are going to be needed along the way if funding levels drop. I know very little about UAL’s pension problems. But from what Gearhead Jim posted the plan was 110%, assets took a huge hit, and UAL was forced to make contributions. They could not raise the cash, the plan went to the PBGC. So a companies ability to raise cash when needed matters a lot.

T

Tif, for me anyways, your comments actually reinforce the importance of watching assumed rate of return. 1) I have a public pension so it does not have PBGC protection 2) Even though I have 15 years SS, the WEP would not allow a " bump up" if I had say a 50% haircut from my pension. 3) Contribution rate from emplyee and employer have already jumped 40% from 10.5% to 14.5% EACH (does anybody know of a system that has each side pay that much yearly?) so I think that option of additional cash infusion is realistically closed.

 

[clifp]

...won't that depend on the rate of return then, as we've been saying all along?

+1

Many people would say that safest investment would be to be 100% invested in US treasury bonds. If the pension plan purchased $50.8 million worth of US zero coupon that mature in 2031 with a yield of 2.90%, they would have $90 million to make the last payment. To make the payment in ten years they would need $73.18 million of 10 year Tbonds with a yield of 2.09% To fund next years payments of $90 million that would need $89.910,000 thanks the the .1% yield on 1 year T-bills. Without going to through the math of adding up all of the 20 years. I'd say an average interest rate of 2% is reasonable and would require $12.1 Billion. Now if we go back to Dec 2001 when 1 year Tbills were paying 2% 10 year Tbills were 4.6% and 20 years were 5.5% . The total assets required for the same plan to be 100% funded was around $7.3 billion a big difference.

Now imagine the guy who worked for a Greek corporation and the pension plan told him say 5 years ago, we aren't taking any chances with your retirement it is entirely invested in Greek Govt bonds and 100% fully funded. They probably would not being feeling very secure about their retirement today.

This is why if I had a pension I'd want to be invested in a wide variety of assets stocks and bonds, commodities, with some international exposure so that if China did surpass the US as the #1 economy I'd benefit. Once you start investing in things without a fixed rate of returns and/or a high degree of safety like US Treasury bonds, you have to make assumptions about how much these assets are likely to make in the coming years.

Employers (especially state and local government) when they report funding levels for their pension make assumptions about future returns. The numbers they use have a huge impact on funding levels for pension plans. Government pension plans are allowed to make higher assumptions about the rate of returns than private pension plans, which is why reports on funding levels should be viewed with suspicion.

 

[tightasadrum]

What a timely discussion this is for me. Last Friday I executed one pension, and tomorrow I plan to execute the other one. Both maxed out in October 2011. I decided on monthly payments instead of a Lump Sum Distribution. I pulled my hair out with this decision, but the PBGC protection definitely factored into my decision. With world markets, and even sovereign debt, so shaky right now, I wasn't confident I could improve on the monthly pension. I know if PBGC can't fund shortages in the future, the additional layer of safety goes away. But if that happens, I'll have a lot more to worry about than my pension. So, annuity-type, non-COLA'd pension it will be, at least after tomorrow. Other savings and rental property will have to pick up the slack, or maybe DW will agree to going back to work full-time...probably not. OK, I'll grow a bigger garden.

 

[Tif7]

Mulligan - those are steep contributions. Hopefully it shores up the system and your benefits don't get cut in the future.

Clifp - thanks for taking the time to post your comments and calculations. It helps to get some insight into how you think about these things.

T

 

[martyb]

There were a lot of frustrations and drawbacks to a career as a federal employee. But ... my Civil Service Retirement System (CSRS) pension is very generous, COLA'd, includes the gov't paying 72% of my health insurance premiums and DW would receive 55% of what I get if I predecease her.

grumpy, I realize it's a nozy question, but would you mind saying what grade you retired at and how many years? I'm a GS-11 and now that I'm a year away from my 55th birthday, I'm getting a little nervous. I'm also CSRS.

 

[martyb]

Yes, my pension amount was reduced due to my opting to provide for a survivor annuity for my wife. But as I understand it, she would receive 55% of what I currently receive, not 55% of what I would have received had I not elected the survivor annuity. I am not really certain about this or concerned about it. Our total assets are such that, were I to die before her, she would have no money worries in any case.

Yes, I believe that's the way it works.

 

[Amethyst]

Marty, it shouldn't make any difference what grade you retire at - if you retire under CSRS at the qualifying age with the qualifying number of years, the Govt will pay 72% of your health insurance premiums (at least until Congress messes with this or you become eligible for Medicare, which is a whole other kettle of worms). Meanwhile, a GS-2 and a GS-15 have the same options for selecting survivor annuity benefits - full survivor annuity, partial annuity, etc. etc.

Also check with your HR department at work - if you're a year away from retiring, they probably have a checklist of things to do.

Amethyst

grumpy, I realize it's a nozy question, but would you mind saying what grade you retired at and how many years? I'm a GS-11 and now that I'm a year away from my 55th birthday, I'm getting a little nervous. I'm also CSRS.

 

[arebelspy]

Tif7 - someone linked to this article in another thread: http://www.chicagobusiness.com/article/20111217/ISSUE01/312179972?template=printart

This quote from that article may help you understand why future returns assumptions is indeed relevant to the percent funded:
"The system, which has just 46.5% of the assets it needs to cover promised payments to retirees, is counting on an 8.5% annual return, which many portfolio managers and investors, including Berkshire Hathaway Inc.'s Warren Buffett, say is unrealistically high. If TRS banked on a 7.75% return — the rate that two other Illinois public pensions lowered their forecasts to this year — its assets would equal only 43% of obligations."

Or perhaps you can think of it this way...

The percent funded is not an amount of current assets over current obligations. If it was, future returns wouldn't matter. This seems to be how you're looking at it.

The percent funded is future assets over future liabilities. Future liabilities is more relevant than current, because you may have pensions that are rising, more retiring soon, etc.

And you'll need to pay those liabilities in the future, so you'll need to know how many assets you'll have, which will change based on your return. So to figure out the amount funded, you need to project your returns.

Hope that makes sense!

 

[Finance Dave]

Our pension is a DC and is held in a trust. It has a cash balance which is readily available to me, and the plan is portable. I'm fully vested, so I know how much I'll get. It earns interest at prime+1% while working, or prime minus .5% if you retire, leave it there, but don't collect right away.

The contributions made are 6% of your pay, including all bonus plans. I didn't make a lot of money early in my career, but I do pretty well now...so I'm trying to pad it a bit these last few years.

 

[martyb]

QUOTE from Amethyst:

Marty, it shouldn't make any difference what grade you retire at - if you retire under CSRS at the qualifying age with the qualifying number of years, the Govt will pay 72% of your health insurance premiums (at least until Congress messes with this or you become eligible for Medicare, which is a whole other kettle of worms). Meanwhile, a GS-2 and a GS-15 have the same options for selecting survivor annuity benefits - full survivor annuity, partial annuity, etc. etc.

Also check with your HR department at work - if you're a year away from retiring, they probably have a checklist of things to do.

Amethyst




Yeah, I know about the health ins. and survivor's and all that, what I'm kind of curious about is how folks are doing after retiring on a CSRS pension, whether they felt that was enough income or if they felt like they needed to work part-time afterwards etc. I guess what I'm getting at is I'm wondering if most of the CSRS retirees here retired at higher grades or lower grades, and whether they are feeling like their pensions are adequate. Basically, the approximately 70% of my hi-three that I'll be getting will work out, after taxes, health & life insurance, and survivor's benefit reduction to be approximately what I currently take home as gross pay. However, my current gross pay is after maxing my TSP at $22,000. I guess I'll worry about it until after it's all said & done. Since there are so many CSRS'rs on here, it would be interesting to know final GS or WG grades & how many years. I'm just trying to see kind of where I fall in that group. I'm a GS-11 and will have 36 yrs when I go, if I go on time. However, I'm not "stepped out", which might be the source of my uneasiness/chicken-ness.

 

[Chuckanut]

Thanks for responding. It sure sucks when you don’t get what you earned! I understand why you feel the way you do. What you are doing though is judging how the current system works against an expectation of something it is not designed to do. If you want a system that guarantees your full pension benefit if your company goes bankrupt then that’s all well and good. But that is not what we have now. The system protects part of your benefit. The rest is at risk. If the company is doing fine, you get what you earned. If the company goes into bankruptcy then you receive the protected piece. If the protected piece is a fraction of what you earned then yes, that sucks. But that is not necessarily a failure of the system. Like anything else, it is far from perfect, but expecting it to provide more then it is designed to do is setting yourself up for disappointment.

T

We both agree on the above. I would like to see reforms to help insure that the working person gets what has been earned. Why we don't get those reforms is another discussion that would fill gigabytes of storage.

 

[Tif7]

Hope that makes sense!

Thanks for posting. I'm on a mobile with a crappy browser that's not doing so well with that link so I will have to read the article later.

After clifp posted calculations and comments it helped me understand what people were taking about. And what you just posted reaffirms that. I was totally thinking about something different.

For the benefit of everyone reading, and to be completely clear, yes, the return on assets does matter for what everyone is looking at here. I should have taken the time to understand what people were talking about, and especially what Mulligan was asking, before I posted something that was incorrect. Thanks to everyone who kept posting to get it sorted out. Sorry if I caused any confusion along the way.

T

 

[arebelspy]

Cool, no worries. Glad we got the confusion sorted out.

 

[ziggy29]

"The system, which has just 46.5% of the assets it needs to cover promised payments to retirees, is counting on an 8.5% annual return, which many portfolio managers and investors, including Berkshire Hathaway Inc.'s Warren Buffett, say is unrealistically high. If TRS banked on a 7.75% return -- the rate that two other Illinois public pensions lowered their forecasts to this year -- its assets would equal only 43% of obligations."

Or perhaps you can think of it this way...

The percent funded is not an amount of current assets over current obligations. If it was, future returns wouldn't matter. This seems to be how you're looking at it.

Hey, as long as we can kick the can far enough down the road to blow up on someone else's watch...