Pension Risks are Growing

[nun]

Quote:

Originally Posted by marko My pension was fully funded. Then the company was acquired. Not sure of the exact details but--and this could be wrong--but the new company fired a ton of old timers who had heavy pensions. Everyone decided to take their lump sums...usually in the $500K to $800K range each (I was one of them) and the belief is that the fund was no longer fully funded as a result. Not sure of how or why exactly, but pensions have been discontinued and the remainder is no longer fully funded. I have been told that more recent retirees can no longer take lump sums and must rely on monthly payouts. A lot of hearsay and I could be mistaken in the details, but I'm just happy to have taken the money and run.

There is a lot of dubious dealing in pensions. If those dealings are protected by law then it's just another example of the little guy getting..."insert appropriate verb". Mismanagement and larceny seem to be very common. What happened to the fiducial responsibilities of the trustees? There's been some bad dealings with my pension, but nothing catastrophic and there is a commitment backed up by legislation to get it's funding up to 100% by 2030 and each year the employer (MA) is putting in more than required to make up for previous low funding years and the pension fund trustees are pretty good. It's at 70% funding currently.

[Car-Guy]

Quote:

Originally Posted by nun There is a lot of dubious dealing in pensions. it's just another example of the little guy getting..."insert appropriate verb". Mismanagement and larceny seem to be very common. What happened to the fiducial responsibilities of the trustees?

For some reason, when I read these comments, I thought you were talking about social security.

[Big_Hitter]

Quote:

Originally Posted by marko My pension was fully funded. Then the company was acquired. Not sure of the exact details but--and this could be wrong--but the new company fired a ton of old timers who had heavy pensions. Everyone decided to take their lump sums...usually in the $500K to $800K range each (I was one of them) and the belief is that the fund was no longer fully funded as a result. Not sure of how or why exactly, but pensions have been discontinued and the remainder is no longer fully funded. I have been told that more recent retirees can no longer take lump sums and must rely on monthly payouts. A lot of hearsay and I could be mistaken in the details, but I'm just happy to have taken the money and run.

Pre-2008, the only limit on lump sum distributions were maximum benefit limits and limits on high-25 compensated employees. After PPA became effective in 2008, the plan has to be at or over 80% funded to allow for unlimited lump sum distributions. What I suspect is that your plan had a "run" on it due to all the terminations before the market crash of 2008.

There is nothing wrong with taking a monthly annuity although 10-15 years ago lump sum distributions were very popular.

[Car-Guy]

Quote:

Originally Posted by Big_Hitter Pre-2008, the only limit on lump sum distributions were maximum benefit limits and limits on high-25 compensated employees. After PPA became effective in 2008, the plan has to be at or over 80% funded to allow for unlimited lump sum distributions.

Am often surprised at what I learn reading this forum. Didn't know about this.

Quote:

Originally Posted by Big_Hitter There is nothing wrong with taking a monthly annuity although 10-15 years ago lump sum distributions were very popular.

The fundamentals of this tread (more pensions in trouble, again) is the main reason why I took a lump sum ~4 years ago when I retired.

[NW-Bound]

Quote:

Originally Posted by hnzw_rui The actuarial assumptions on investment returns is the big question mark. If the pension is 100% funded, that means there should be enough assets in the trust to pay all current and future pension obligations using just existing assets and investment returns with no further cash inflow. Alas, the assumed 7-8.5% investment returns are a tad bit optimistic and I doubt many pension funds are 100% funded even at those returns. It's the high estimated returns and unfunded accrued actuarial liabilities that makes the pension fund sensitive to bankruptcies, membership drops, etc.

Quote:

Originally Posted by Big_Hitter incorrect. If the plan has assets equal to the plan's target (unit credit accrued) liability, then that means, if all actuarial assumptions are met, the plan has enough assets to cover accrued (past) pension benefits. There are still future service benefits to fund unless the plan is frozen.

I will admit to not knowing a whole lot about how pension fund actuarial calculations are made, not having a pension myself. I just observe that whenever a pension problem is discussed in public, the two factors that are often cited are 1) the increase in the ratio of retirees to contributing workers, and 2) actual investment returns being lower than projected.

And the way this has been solved is always 1) reducing benefits to future retirees, and 2) demanding a higher contribution from current workers. So, that led me to think that the original benefit formula was too generous for the amount that was put aside by employees and employers, whatever the cause of it.

[nun]

Quote:

Originally Posted by NW-Bound I will admit to not knowing a whole lot about how pension fund actuarial calculations are made, not having a pension myself. I just observe that whenever a pension problem is discussed in public, the two factors that are often cited are 1) the increase in the ratio of retirees to contributing workers, and 2) actual investment returns being lower than projected. And the way this has been solved is always 1) reducing benefits to future retirees, and 2) demanding a higher contribution from current workers. So, that led me to think that the original benefit formula was too generous, whatever the cause of it.

In MA the solution has so far protected the pensions of retirees and current employees. The changes have been implemented for new employees and involve increasing minimum retirement age from 55 to 60, using a the average of the highest 5 years of salary rather than 3 years in the pension calculation and extra state budget appropriations for pension contributions.

[NW-Bound]

Whatever the fix, the sooner the problem is recognized and remedied the better. It would prevent 1) the perceived unfairness towards the young workers who will not receive the same benefit, or 2) in the present case of the OP's article nearly total collapse of the fund and draconian cut-back in benefits to the existing retirees.

In the article, it was said that some existing retirees argue that the current benefit should be continued until the fund runs out. I wonder if those retirees are among the older ones, who only think of themselves and not the workers coming after them.

[pb4uski]

Quote:

Originally Posted by NW-Bound ....I wonder if those retirees are among the older ones, who only think of themselves and not the workers coming after them.

Sounded like that to me too. Screw those young whippersnappers!

[hnzw_rui]

Quote:

Originally Posted by NW-Bound I will admit to not knowing a whole lot about how pension fund actuarial calculations are made, not having a pension myself. I just observe that whenever a pension problem is discussed in public, the two factors that are often cited are 1) the increase in the ratio of retirees to contributing workers, and 2) actual investment returns being lower than projected. And the way this has been solved is always 1) reducing benefits to future retirees, and 2) demanding a higher contribution from current workers. So, that led me to think that the original benefit formula was too generous for the amount that was put aside by employees and employers, whatever the cause of it.

Yes, the original benefit formulas were fairly generous (likely because investment returns were very good during the 80s and 90s with 10- and 15-year rolling averages of around 12% for our fund). Most pension systems (including ours) have already undergone changes to make them more sustainable. As nun has mentioned, some of those changes include increase in employee contributions, increase in retirement age, decrease in the benefit factor, etc.

Mind, a large part of the problem with pensions is that employers didn't always contribute their share of the funding regularly. If they had been forced to contribute annually ala-SS, the problems with under funding likely wouldn't be as bad.

[NW-Bound]

Were the investment returns so good that in the case of some pensions, they allowed generous benefits to be based on the salary of just a few most recent years, which were then spiked with overtime, accrued untaken sick and vacation, etc...?

I would have thought that a fair benefit formula would depend on the contribution, both from the employee and employer, over the entire working career. You know, like 401k? Or at least over a reasonable number of years, like SS?

I suspect that the largesse came from the expectation that new employees will continue to contribute. So, when that dwindles, either from poor employment, bad economy, or union membership drop, they have a huge shortfall.

[Big_Hitter]

Quote:

Originally Posted by NW-Bound Were the investment returns so good that in the case of some pensions, they allowed generous benefits to be based on the salary of just a few most recent years, which were then spiked with overtime, accrued untaken sick and vacation, etc...? I would have thought that a fair benefit formula would depend on the contribution, both from the employee and employer, over the entire working career. You know, like 401k? Or at least over a reasonable number of years, like SS? .

A bit of background to 20 years ago, many pension plans had experienced enormous investment return windfalls from the period just after black Monday. Many plan sponsors used this windfall to fund special retirement programs and/or to improve benefit levels.

DB plans are designed to replace a certain percentage of final pay at retirement. Therefore most defined benefit formulae use a final 3 or a final 5 year average approach because it makes it easier to design a plan to replace x% of compensation for career employees. Most pension designs when combined with SS usually target 70 to 80% of final pay.

Career average plans, like you describe, are more popular now but they are in the form of cash balance designs.

Employee contributions are almost unheard of in the private sector but almost universal in the public sector.

[Greencheese]

Personally I think the issue comes down to mobility. People used to stay in the same place for generations, nowadays people work in one place and retire in another. Thus 1 generation utilizes benefits, moves, and then expects another to stay in place and pay for them. However, if people aren't willing to move in and replace those leaving... well then the math fails.

[Music Lover]

Public pensions are a typical Ponzi scheme...those who get in early receive the most benefit, while those who come along later are forced to pay for a pension that may not be there when they retire.

[dixonge]

Quote:

Originally Posted by Music Lover Public pensions are a typical Ponzi scheme...those who get in early receive the most benefit, while those who come along later are forced to pay for a pension that may not be there when they retire.

First, the only pension in the original article was the Teamsters, a union-based pension. Their union membership has drastically shrunk.

Second, public pensions can be perfectly fair and level. Much of this depends on the structure and adjustments made.

Our pension is with TCDRS - evidently they do things a bit different...

[ERD50]

Quote:

Originally Posted by dixonge First, the only pension in the original article was the Teamsters, a union-based pension. Their union membership has drastically shrunk. ...

This is one of the problems with future promises like this. The promise needs to be fully funded, and those funds collected as they are earned, and conservative growth estimates used ( like zero real - and adjusted by increasing contributions if needed). If the promise depends on furture contributions, and your base shrinks - that's a problem.

-ERD50

[Teacher Terry]

I really feel bad for these people. HOpefully, if they do cut it won't be as bad as they stated. I know Detroit proposed a much higher cut then what was originally proposed. Some of the comments were terrible. Many of those people probably have physical ailments related to their jobs. My Dad was a tool grinder in the auto industry when they didn't wear any protection so by 54 after over 30 years he could not walk a block and was on oxygen. Thankfully his pension paid until the end.

[marko]

Quote:

Originally Posted by nun In MA the solution has so far protected the pensions of retirees and current employees. The changes have been implemented for new employees and involve increasing minimum retirement age from 55 to 60, using a the average of the highest 5 years of salary rather than 3 years in the pension calculation and extra state budget appropriations for pension contributions.

Then there's this about MA pension abuse:
Massachusetts pension abuse - Boston.com

Seems that the rank and file are held to different set of rules than the errrr.....'connected'.

[FreeBear]

Quote:

Originally Posted by NW-Bound I guess that's one of the perils from a "pay-as-you-go" program. I'd rather have my own pile of money to manage, though it will not escape the vagaries of the market return either. However, I will be more informed of impending doom and hopefully able to adapt before it becomes too late.

+1

Rolled over a little mini-Megacorp pension just before ER, so now funded entirely on our savings. If my ER $$ car starts to go off the road, at least I'm in the drivers seat, not the back seat!

On the other hand, I have no one to blame if we're dining on cat food in our twilight years!

[nun]

Quote:

Originally Posted by marko Then there's this about MA pension abuse: Massachusetts pension abuse - Boston.com Seems that the rank and file are held to different set of rules than the errrr.....'connected'.

There have been a small number of cases of abuse, but part of the pension reforms was to stop "double dipping" and artificially inflating salary just before retirement. This is covered in the last article in your link. The MA pension is well run.

[Frankie1926]

I think there are still many loopholes in ma pension system, had a friend that served in an unpaid selectman position for 25 years which counted toward the pension when he took a full time city job. So he only needed to work a few years full time and take a pension like he worked 30. On and on it goes...


Sent from my iPad using Early Retirement Forum