State Pensions again

[ChiliPepr]

I'm still not getting it. Five years ago, the actuaries said the plan's $2.1 billion in assets were enough to cover all liabilities for 30 years. Now, with $1.88 billion, we've got not quite 2/3 of the necessary amount? I don't recall all the details, but I don't think there have been any significant changes in the assumptions underlying the actuaries' evaluation, or in the employee demographics. I'm not even certain there have been more retirements than were expected, due to the budget shortfalls of the last few years--I just assumed that anyone who got laid off and was eligible to retire probably did so, either immediately or maybe after a few months if they couldn't find another job.

It's just not making sense to me that in five years, liabilities have increased so much that an 11 or 12% decline in assets means the system is 1/3 less able to meet its obligations. But I'm not an actuary. What do I know? Maybe it is just one of those counter-intuitive things that doesn't sound right to me, even when it is.

Actually, I think it does make sense... 5 years ago, they said $2.1B was enough for 30 years. 5 years ago, they may have used an assumption that the portfolio would gain 6.075% return every year... so at the end of 5 years the value of the portfolio would be $2.82B. $1.88B is 2/3rds of $2.82B.

All pensions assume that they will make some return, when they are wrong it can cause havok.

 

[eytonxav]

Required reading for all state/gov't employees: "Who Moved My Cheese"

 

[MichaelB]

That was almost a rhetorical question. What good would it do me to know what's in the sausage? I can't change the ingredients, and at this late date, I can't go back and order bacon instead. I can't think of any action I can take at this point that will improve my position in the event the pension system goes bankrupt, except, possibly, taking one of the lump sum options instead of the straight benefit. I've been considering doing just that for some time. If I do, I'll have a lower total income, but fewer of my eggs in the pension fund's basket. The thing is, I'm not sure taking the lump sum wouldn't actually make failure of the pension system even more likely than if I take the straight benefit.

If the fund goes broke any time in the next 5 years, I will have to find some way to make extra income and/or reduce expenses. If it goes broke after that, I'll be 62, and can just take SS early instead of waiting until FRA. I should be OK, although with less wiggle room than I would have had otherwise. And that's even if I don't resort to real emergency parachutes like a reverse mortgage.

Is this the fund? Developing a sustainable retirement system
There is a big change in mortality assumptions between the 2008 and 2012 plans. The benefit levels also appear to have increased substantially above CPI (2x) during that period. Those two things would easily explain the fall in coverage.

 

[kyounge1956]

Is this the fund? Developing a sustainable retirement system
There is a big change in mortality assumptions between the 2008 and 2012 plans. The benefit levels also appear to have increased substantially above CPI (2x) during that period. Those two things would easily explain the fall in coverage.

Yes, that is the one I am talking about. I believe that link is the information about the proposed change to the pension plan for new hires, but I haven't kept up with that and don't know if any final decision has been made yet.

From all the questions and concern you have expressed it did not seem rhetorical to me. Knowing more detail leads to understanding what specifically needs to be done to strengthen the fund. If you see those measures being undertaken, your confidence in the pension stream increases. If you don't see the type of action being taken, and you have the option of a lump sum payment, you take it. In a situation such as this, bad news may be a better option than uncertainty.

I guess I am venting. Even with what I knew already, I had my doubts about the future soundness of the fund. I didn't see what learning more of the details would do other than increase FU&D, hence my question. To add to my disinclination to examine matters more closely, I am in no position to influence the management of the fund, and don't see much in the way of constructive suggestions that I could make if I were. It is just ugly, no matter which way you look at it, and I doubt that its appearance will improve on closer inspection.

What specific measures could be taken? Well, increase contribution levels (has been done); adjust imputed interest rate on contributions (has been done); review asset allocation to reduce the fund's vulnerability to market crashes (review is ongoing, but as long as bond interest rates stay so low, moving to a lower stock allocation to reduce volatility could reduce total return to a level which will make the fund unable to meet obligations; also, it would require a reduction in the assumed return on assets, which would drop the funding percentage even lower than it already is). Legally speaking, the City is required to make up any shortfall in benefits, but would the money be available in the event of a future pension fund failure? If the City doesn't have the money, they can't pay the benefits. In the current situation, the same economic conditions that caused our pension fund difficulties also caused a significant downturn in City revenue. I'm sure you can all imagine the outcry if the City were already cutting services due to a budget shortfall, and then cut them even further to pay pension benefits resulting from a retirement fund failure.

What can I do but cross my fingers and hope for the best, while having a Plan B in case hope fails? I am tempted to take the lump sum, but worry that I may be helping to precipitate the fund's downfall if I do. I assume the various benefit options are supposed to be actuarially equivalent, but are they really? If more retirees take partial or full return of contributions rather than the straight benefit, I don't see how that can do the fund any good.

 

[GandK]

Good luck, kyounge1956.

I believe if it were me, I would take the lump sum.