Month: July 2017

What We Heard on the PERAtour

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Which principles and priorities should guide the development of future changes to help reduce PERA’s risk profile? That question was posed to 900+ attendees at a dozen statewide community meetings as part of the first phase of our PERAtour earlier this summer. The input from meeting participants and comments submitted on our dedicated website will be used by the PERA Board of Trustees as it considers making recommendations to the Colorado General Assembly in 2018 to improve PERA’s funded status.

If you were unable to attend one of the PERAtour events in person, a full recording of the conversation can be found on the PERA YouTube channel. Additionally, a presentation that was given to the PERA Board on these principles can also be found on YouTube.

The graphic below highlights the principles and priorities shared at the community meetings, as well as feedback gathered from PERA members, retirees, and concerned citizens who participated either in person or online.

Retirement Roundup: Are You Sabotaging Your Own Retirement?

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A digest of timely information and insight about finance, investing, and retirement.

4 ways you might be sabotaging your own retirement plan | Time-Money
Successfully preparing for retirement is hard enough, given today’s rapidly evolving economy. But several recent retirement surveys suggest that many of us are also making retirement planning more difficult through self-defeating behavior.

Plan on growing old? Then the Medicaid debate affects you | The New York Times
A majority of people who are lucky enough to grow old cannot and do not pay for themselves in old age. One in three people who reach age 65 end up in a nursing home at some point. According to the Kaiser Family Foundation, among the people living in a nursing home today, 62 percent cannot pay the bill on their own. And when that happens, Medicaid pays. The very Medicaid program that stands to have hundreds of billions of dollars less to spend if anything like the health care bills on the table in Washington come to pass.

IRAs fall short of original goal | Squared Away Blog
Individual Retirement Accounts, or IRAs hold nearly 8 trillion dollars, or nearly half of all the value held in the U.S. retirement systems, which includes pension funds and 401(k)s. IRAs were created to offer individuals without retirement plans at work the opportunity to save for retirement through tax-deferred accounts. But IRAs “have drifted very far from their original intent” of helping those who need them most, research for the Center for Retirement Research conclude in a new study.

This is the most helpful thing you can do for your family before you die | Marketwatch
One of the most necessary tasks a person can do in his or her life is getting every personal record in a designated place. Bank and credit card account information, social media emails and passwords, doctor and lawyer contact information, former addresses and employment – might seem daunting, but it can help loved ones efficiently manage their duties, reach out to necessary people and save time in the midst of personal turmoil. And it can even make you more financially fit.

Ill-funded police pensions put cities in a bind | The Wall Street Journal
Police pensions are among the worst funded in the nation. Retirement systems for police and firefighters have just a median 71 cents for every dollar needed to cover future liabilities, according to a Wall Street Journal analysis of cities of 30,000 or more. The combined shortfall in the plans, which are the responsibility of municipal governments, is more than $80 billion, nearly equal to New York City’s annual budget. And yet any attempt to bring police pensions into line with today’s municipal budgets and stock-market performance runs into the reality that many officers won’t stand for it – and they often have the public behind them.

Where did baby boomers go wrong? | Marketwatch
Retirement is right around the corner for many baby boomers – if they haven’t already entered it – yet many are unprepared. Those born between 1946 and 1964 expect they’ll need $658,000 in their defined contribution plans by the time they retire, but the average in those employer-sponsored plans is $263,000, according to a survey of 900 investors by financial services firm Legg Mason. Older boomers, who are 65 to 74, have an average of $300,000.

Americans across the country, and all age groups, are drastically under-saved for retirement. Only a third of Americans who have access to a 401(k) plan contribute to it, and previous research suggests the typical middle-aged American couple only has $5,000 saved for the future. There are a multitude of reasons people may not have enough for retirement. Still, not saving enough was the biggest regret among older Americans, according to a survey of 1,000 participants by personal finance site Bankrate.com.

Asset Class In-Depth: Fixed Income

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Fixed Income is one of five broad asset classes in PERA’s investment portfolio and represents about a quarter of PERA’s $45 billion portfolio. This asset class plays a critical role in the overall asset allocation by serving adding diversification to PERA’s portfolio, acting as a stabilizing anchor during turbulent times in the stock market and a balance against other asset classes like equities. The investment returns from fixed income have been favorable historically and help meet PERA’s investment objectives.

What is Fixed Income?

Fixed Income investments are various types of bonds. A bond is very much like a loan issued by a bank. A bond issuer receives money from a bond purchaser and agrees to repay the bond at a specified interest rate on a fixed schedule, hence the name: fixed income. The benefit of this type of investment to a bond purchaser, or investor, is that the rate of return and the timing of repayment are generally known at the time of investment. Unless the borrower defaults and fails to make payments, the income will flow in on a set schedule. This certainty is offset by the fact that the issuer is not obligated to pay back any more than the amount specified in the bond.

Types of bonds

Bonds come in various types. Some, like U.S. Treasury bonds, are backed by the full faith and credit of the U.S. Government. Bonds issued by corporations are backed by a repayment pledge, giving the bond holder a lien on the assets of the corporation. If the corporation defaults on the bonds, the bondholders have claims on the corporation’s assets ahead of its stockholders. Other similar investments include securitized loans that have claims on pools of assets like mortgage loans, auto loans, credit cards, and bank loans. By pooling assets such as mortgages into securitized bundles, the loans spread the risk of defaults across a large number of smaller loans and become economical in size for pension funds and other institutional investors to buy.

Quality of bonds

Bonds also come in various credit qualities and their yield is proportional to their risk. U.S. Treasury bonds are considered the highest quality and are most likely to be repaid on a full and timely basis. These bonds are rated AAA by credit rating agencies. Securitized mortgage-backed securities are also generally rated AAA. AAA bonds have the lowest risk and offer lower yields. The lower the rating in credit quality, the more bonds tend to compensate investors for taking higher credit risk with higher yields. Corporate bonds cover the full rating spectrum. Investment-grade corporate bonds are rated between AAA and BBB. High-yield corporate bonds, or what some refer to as junk bonds, go from BB to C.

Term of bonds

Bonds are also issued for various terms or maturities. Longer term bonds typically have a higher yield because the investment is tied up for a longer period of time. Just like all of the other asset classes, bonds have unique characteristics that affect the value of the investment. The PERA Fixed Income team takes into consideration these characteristics when managing the investment portfolio.

Investment benchmarks

PERA’s fixed income portfolio is benchmarked against the Bloomberg Barclays U.S. Universal Bond Index. This is a broad-based index including a representative sample of the universe of investment-grade, high-yield, and emerging market bonds issued in the United States. The index is weighted by capitalization, meaning that each bond is weighted relative to its size. The benchmark provides a baseline for comparing PERA’s investment performance against the investable fixed-income universe.

Portfolio allocation

The size of PERA’s Fixed Income allocation in the investment portfolio is guided by PERA’s Board of Trustees with advice from their independent investment consultant and PERA staff. This is set forth in the Board’s Statement of Investment Policy. Currently, the Fixed Income allocation target is 23.5 percent of the total portfolio with a range between 18 percent and 28 percent of total assets. According to a recent national survey, this is comparable to most U.S. public pension funds. PERA manages roughly 75 percent of the Fixed Income portfolio internally, providing significant cost savings for PERA members.

Investment environment

In November of 2008, the Federal Reserve, or “The Fed,” under Chairman Ben Bernanke initiated an unconventional monetary policy of quantitative easing to help restart the economy after the great recession. To implement this monetary policy, the Fed engaged in open market purchases of U.S. Treasury and mortgaged backed securities; both are fixed income securities. The Fed grew its balance sheet portfolio from $900 million prior to the recession to $4.5 trillion today through purchases of $3.5 trillion in bonds. This step in aggressive monetary expansion probably saved the U.S. economy from a severe recession, but the longer term consequences are still unknown. The Fed stopped expanding its balance sheet in October 2014, but continues to reinvest maturities and principle payments into U.S. Treasury and mortgage-backed securities in order to keep its portfolio size stable. Currently the Fed Governors are reviewing plans on how to unwind their balance sheet. Among investors there is widespread speculation on how the fixed income market will react once the Fed discontinues reinvestment of maturing securities and perhaps initiates outright sales.

Monetary policy and fixed income markets

The almost decade-long period of artificially low interest rates has been called by some a financial repression. The very low rates available to savers have reduced the income of retirees who expect to live off their investment income. For pension funds this is an almost universal problem with a 2013 OECD report highlighting how low interest rates reduce the expected rate of return on pension assets and may push investment managers to take on larger risks in a search for yield. The Fed’s low rate policy has constrained pension funds and forced institutional investors to seek alternatives that come with additional risks, costs, complexity, and may be less liquid than traditional fixed income.

Link to other investment asset class articles on POTI:

Equities

Opportunity Fund

If PERA had a signal light, its divisions would be orange. What does that mean?

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The Colorado PERA Board of Trustees is constantly monitoring the performance of the PERA fund and the long-term health and sustainability of each of PERA’s divisions (State, School, Local Government, Judicial, and DPS).

One of the key aspects of performance that the Board considers is the risk profile for each division trust, essentially the likelihood that something negative could happen that would threaten any division’s sustainability and PERA’s ability to pay benefits over the long term.

To better communicate the fund’s risk profile in a straightforward way, the Colorado General Assembly’s Legislative Audit Committee directed the Office of the State Auditor to contract with an actuarial firm to develop a methodology to simplify the understanding of PERA’s financial  status. The result of this study was the creation of a signal light color framework to report on PERA’s financial status. See prior articles on the results of this study and others specified in 2014 legislation here and here.

Using a signal light color framework, the tool indicates how long it will take each PERA division to reach full funding, where dark green status means that a division would be funded by 2041 (30 years from 2011) and dark red status means that a division would run out of money within 20 years, with additional signal-light like categories in between to indicate a spectrum of risk.

Last year, most of the PERA divisions were in the yellow category, meaning that PERA should enhance its monitoring of the fund. In 2016, as part of their oversight of PERA, the PERA Board conducted a review of the plan’s core assumptions and made changes. Two significant changes included recognizing that PERA retirees are living longer and therefore receiving benefits for a longer period of time, and evaluating the current investment market and the fund’s expected investment return moving forward. This led to the adoption of new mortality tables to better reflect the life expectancies of PERA members and retirees and a more conservative long-term investment assumption of 7.25 percent.

After incorporating the Board’s assumption changes made in 2016 as well as 2016 investment returns for the PERA fund, PERA’s actuarial consultants have determined that each of PERA’s five divisions have reached orange status. This is critical because it indicates that the divisions would each need more than 50 years to return to full funding. Orange status is an indicator that the Board should develop a corrective action plan to reduce the amount of time it will take PERA to be fully funded.

It’s important to note that, while the risk profile of PERA’s divisions is too high, this does not mean that PERA is running out of money. PERA continues to pay benefits to its retirees and will keep doing so. The orange status indicates that the divisions are solvent today and will remain so in the future.

Nonetheless, in order to reduce the amount of time needed to reach full funding and help protect PERA against the possibility of a major economic downturn in the future, the Board is considering steps to reduce the risk profile over time.

As part of this work, PERA conducted a statewide outreach tour in the spring, holding meetings across Colorado. Visit the PERAtour website to watch a video explaining the Board’s recent actions and PERA’s funded status, learn what PERA heard from those who attended meetings, or share your thoughts.

Moving forward, the Board will synthesize what was heard during the outreach tour and review input from stakeholders. There will be future opportunities to provide feedback about those options before the Board makes any recommendations to the Colorado General Assembly in advance of the 2018 legislative session.

FAQ: Colorado PERA and Social Security

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In late April, new legislation was introduced in the U.S. Senate that proposes to change how the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO) are applied to those who, like many PERA members, spend a majority of their work life in employment outside of the Social Security system. The Social Security Fairness Act of 2017, introduced by Sen. Sherrod Brown (D-OH), would repeal both the WEP and the GPO. The bill, S.915, has been assigned to the Senate Finance Committee. An identical bill, H.R.1205, has been introduced in the U.S. House of Representatives, and Colorado Reps. Ed Perlmutter (D-CO-07) and Jared Polis (D-CO-02) are cosponsors of the legislation.

Most PERA members contribute to PERA instead of Social Security. But if a PERA member also qualifies for a Social Security benefit, that benefit will most likely be reduced by either the Windfall Elimination Provision (WEP) or the Government Pension Offset (GPO). For members who have contributed to both PERA and Social Security, the Social Security benefit will be subject to the WEP. Members who are eligible for a Social Security spousal benefit – a benefit for those married to someone who has earned their own Social Security benefit – the Social Security spousal benefit will be reduced by the GPO.

Below is a list of frequently asked questions from PERA members about the WEP, GPO, Social Security, and PERA:

Question:  Will my PERA benefit be reduced because I’m getting a Social Security benefit?

Answer:  No. PERA does not reduce the PERA benefit for members who have also earned a Social Security benefit. However, the Social Security benefit may be subject to either the WEP or GPO.

Question:  Will I get the projected retirement benefit amount that is currently listed on my Social Security earnings statement?

Answer:  Probably not. Chances are very good that the actual Social Security benefit amount will be less than the amount listed on the Social Security earnings statement.

Question:  By how much will my Social Security benefit be reduced because I’ve worked for an employer who contributes to PERA instead of Social Security?

Answer:  It’s hard to say because every work situation is unique. In terms of earning a Social Security benefit, the reduction could be determined by a number of factors including the number of years worked under Social Security, called substantial earnings. For PERA members who also have 30 years of substantial earnings under Social Security, the reduction may be lower. However, PERA members with fewer than 20 years of substantial earnings under Social Security are subject to the maximum reduction under the WEP. There is a maximum dollar amount that can be subtracted from the Social Security benefit amount. This maximum dollar amount changes each year and is established when a beneficiary reaches age 62. For people turning 62 this year, that amount is $442.50. For people turning 62 in the future, that amount will most likely increase. Use the WEP calculator to determine how this provision in federal law might impact you.

The GPO works differently. Typically, Social Security benefits are reduced by two-thirds of the PERA (or other government pension) benefit, but there are some exceptions. A GPO calculator at Social Security’s website can help estimate a Social Security Spousal Benefit.

Question:  If the PERA member dies and their spouse becomes the benefit recipient, would they be subject to a reduction in Social Security?

Answer:  No. If the PERA member selected Option 2 or 3 at retirement and passes away, the cobeneficiary, whether a spouse or someone else, begins to receive a PERA benefit. The cobeneficiary’s Social Security benefit is not reduced because they are receiving this type of benefit from PERA.

Question:  How do I know if I’ve even earned a Social Security benefit?

Answer:  In order to receive a Social Security benefit, a worker will need to have earned 40 credits (formerly called quarters) under Social Security. Forty credits equals 10 years of work. Those who have fewer than 40 credits are not eligible to receive a Social Security benefit. Create an online Social Security account to learn more about the federal program.

Question:  Why are the minimum ages for qualifying for a PERA retirement and receipt of Social Security different?

Answer:  For PERA members who recently began working for a PERA-affiliated employer, the minimum age to be eligible for service retirement benefits is 60 (58 for those who work for a School Division employer). The minimum age to begin receiving unreduced Social Security benefits for those born in 1960 or later is now 67. Minimum retirement ages in both programs have increased over time, reflecting the longer life expectancies of workers in the United States.

Read the Center for Retirement Research Issue Brief: Social Security’s Financial Outlook: The 2017 Update in Perspective

Retirement Roundup: Would a 401(k) Be a Better Deal For Teachers?

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A digest of timely information and insight about finance, investing, and retirement.

If someone tells you your kid’s teacher would be better off with a 401(k) than a pension, don’t believe it | Los Angeles Times

Teachers across the country are facing aggressive political attacks on their pensions. Most classrooms in California are occupied by long-term teachers who count on traditional pensions as their main source of financial security retirement. And California is fairly typical in terms of average teacher experience. Research shows that by the time most active teachers leave service – in their early 50s or later – they will be far better off with their pensions than they would have been with a 401(k).

You’re more likely to retire wealthy if you do this one thing | Time-Money

Wouldn’t it be great if there was one simple thing you could do to help you better prepare for retirement and make you feel more confident about your prospects for financial security at the same time? Well, there is: Put your retirement plan in writing.

Social Security faring no better in 2017 | PlanSponsor

Social Security funds are projected to become depleted by 2034, the same projection as last year, according to an announcement from the Social Security Board of Trustees. The combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance Trust Funds are projected to have 77 percent of benefits payable at that time. The Disability Industry Trust Fund is projected to become depleted in 2028, extended by five years from last year’s estimate of 2023, with 93 percent of benefits payable.

The U.S. is losing ground when it comes to retirement security | CNBC

Among the leading nations for retirement security, the United States didn’t even crack the top 15, according to the 2017 Global Retirement Index by Natixis Global Asset Management. Europe continued to dominate the top spots.

3 things I should have said about retirement planning | The New York Times

Looking back on a career giving advice about saving for retirement, more empathy and more real-world perspective could go a long way. The advice itself – to start young, save aggressively and diversify – might not change, except for one thing: no matter how much money you think you are going to need, save another 15 percent, just in case.

Mid-sized employer meets big 401(k) goal | Squared Away Blog

Peggy Zembower, the human resources director at an auto dealership, was dismayed when she saw that long-time employees had never increased their retirement saving above the measly 1 percent of pay they’d started at. So she implemented recommendations like automatic enrollment in the plan and auto-escalation of the amount saved over time. Her work has paid off and Thomas Automotive, a mid-sized company with 280 full- and part-time workers, has increased participation in its 401(k) retirement savings plan from 53 percent to 87 percent of employees.