Month: June 2018

Retirement Roundup: Putting PERA on a path to prosperity

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

Becker: Putting PERA on a path to prosperity | Denver Post
Democrats and Republicans in the Colorado General Assembly are elected to solve problems and to make our state a better place to live, thrive and yes — retire. Our state is no stranger to drought and the Public Employees’ Retirement Association pension system was drying up the future of our retirees and public servants. This session legislators were faced with the colossal challenge of fixing this broken retirement system on behalf of our constituents.

‘Dying at your desk is not a retirement plan’ | Washington Post

Some people get a pit in the stomach when they think about saying goodbye to that paycheck. Or at the prospect of deconstructing a nest egg they spent decades building. They might worry about feeling irrelevant or bored without the stimulation of work. For most people, retirement won’t be carefree. They will replace whatever worries they have now with a new set of concerns: health (and their mortality), money, humankind’s future. Of course, timing is everything: Retire too early, and you risk outliving your money. Stay at the desk too long, and you might miss out on life.

Firms offer framework for planning for retirement health costs | PlanSponsor

Vanguard has issued a new framework, jointly developed with Mercer, that helps pre-retirees and retirees better understand the financial planning implications of annual health care costs and long-term care expenses. The research paper, “Planning for healthcare costs in retirement,” outlines key health care cost factors and personal considerations, as well as frames health care expenses as an annual cost rather than a lifetime lump sum.

Networking should not end when you retire | US News & World Report

You might think of networking as a necessary career-boosting tool, but it’s just as important in retirement. Many retirees quickly realize how closely their identities were attached to their jobs. They are unprepared for a post-career life that may not include their colleagues and “work family.”

Kentucky state workers retired in droves—not so much with teachers | Courier-Journal

During a period of uncertainty about potential changes to pension benefits, retirements in Kentucky surged among state and local government employees over the past 12 months. But in comparison, the number of Kentucky teachers retiring did not increase. Kentucky Retirement Systems reports that 8,445 state and local government employees will retire in the fiscal year that will end June 30 — an increase of 17.5 percent in the number of retirements over the previous fiscal year.

State’s $12.5B pension shortfall contributes to reduced bond rating | Santa Fe New Mexican
A lagging economy and New Mexico’s “extremely large pension liabilities” helped lead a national credit rating agency to downgrade the state’s bond rating by a notch. Bond ratings, which reflect confidence in a state’s ability to pay its debts, can affect borrowing costs for road building and other projects. In dropping New Mexico’s general obligation bond rating to Aa2, its third-highest rating, Moody’s Investors Service cited New Mexico’s obligations to the Public Employees Retirement System and the Educational Employees Retirement System, which face total shortfalls of about $12.5 billion.

Legislation passed in 2018 put PERA on the path to full funding within 30 years

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On Friday, June 22, the Colorado PERA Board of Trustees announced that PERA’s funded ratio had increased to 61 percent from 58 percent as a result of changes included in Senate Bill 18-200 and 2017 investment returns. The announcement came as part of the release of PERA’s 2017 Comprehensive Annual Financial Report (CAFR).

In addition, the time-frame for reaching full funding improved significantly for each of PERA’s five divisions, dropping to 30 years or less based upon actuarial projections, while unfunded liabilities were reduced by $3.4 billion. PERA’s diversified investment portfolio returned 18.1 percent in 2017, outperforming its policy benchmark by more than 2 percent.

“With the modifications contained in SB 200, PERA will continue to provide 587,000 members and retirees with a secure benefit,” said PERA Board of Trustees Chairman Timothy M. O’Brien. “We know that the changes in SB 200 impact all segments of the PERA membership, but it is through this shared responsibility that PERA’s risk profile was significantly reduced and PERA was strengthened,” O’Brien concluded.

PERA’s annualized, net of fees, time-weighted rate of return for the last three years is 8.8 percent, the five-year return is 9.5 percent, and the 10-year return is 6.0 percent.

“While I want to recognize the strength of this year’s investment performance, it is important to remember that PERA is a long-term investor,” said Ron Baker, PERA Interim Executive Director. “Necessary changes were made to the plan to better weather the inevitable ebbs and flows of the market. The provisions of SB 200, particularly the automatic adjustment mechanism, are designed to do that,” Baker added.

Amortization Period for Each Division

DivisionPeriod of Time to Reach Full Funding
State27 years
School30 years
Local Government15 years
Judicial15 years
Denver Public Schools (DPS)17 years

For an overview of the CAFR, see the PERA Financial Snapshot.

Retirement Roundup: Why retirement isn’t the best time to change your financial approach

Posted on by planeteria

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

Retirement planning: What happens after saving? | Forbes
For most of us, retirement is something we dream about for many decades. And hopefully, we accompany those dreaming years with the discipline to save as much as we can for when the time finally arrives. But no matter how large our investment portfolio may be when it’s time to retire, there’s one additional step we should possibly consider: holding on to the budgeting approach that may have worked so well during our working years.

This growing problem threatens to delay your retirement | CNBC
Americans today are more likely to reach retirement in debt than ever before. That’s the takeaway from a new study that appeared last month in the American Economic Association Papers and Proceedings. The researchers compared debt levels among different generations when they were between the ages of 56 and 61 to learn how the financial standing of people bracing to exit the workforce has changed over time, and how much the Great Recession is to blame.

Not prepared for retirement? Here’s a solution: Don’t retire | Bloomberg
Lots of people around the world aren’t prepared for retirement, as Suzanne Woolley of Bloomberg News ably explained recently. There’s one obvious solution to that problem: Postpone your retirement. A recent academic study called The Power of Working Longer, cited in The New York Times, finds that working just three to six months longer can raise your retirement income as much as increasing your savings by 1 percent every year for the last 30 years of your career.

Your retirement may be saved by a side hustle | Washington Post
For those heading into retirement or already retired, a side hustle in the gig economy may just be what you need to boost your savings. In the “gig economy,” people work as freelancers, contractors or temps. Often the paychecks are steady and retirement benefits don’t come with the gig. Yet, it’s this way of working that can help boost an anemic retirement account or increase the income of a retiree. By 2020, more than 40 percent of the workforce will consist of people working in the gig economy, according to a report from Intuit.

Reality check: Here’s what the average retiree spends every month | MarketWatch
The gray-haired couple sipping champagne on a beach at sunset. Grandpa teaching the grandkids how to fish at the family lake house. Are these scenes of carefree times in retirement based on financial reality? According to the latest Bureau of Labor Statistics data, which is based on 2016 figures, “older households” — defined as those run by someone 65 and older — spend an average of $45,756 a year, or roughly $3,800 a month. That’s about $1,000 less than the monthly average spent by all U.S. households combined.

Looking to retire abroad? How to choose a location | TD Ameritrade
Do you dream of living in that cute little mountain town you visited on a trip to Tuscany, or perhaps spending your retirement on the beaches of the Caribbean or Bali? While some Americans may think about retiring to a place like Florida — one of the top places to retire in the U.S. — some of the best places to retire aren’t in the U.S. at all. In fact, some of the most affordable places to retire are abroad.

Senate Bill 200’s automatic adjustment keeps PERA full funding on track

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As regular readers of PERA on the Issues know, Senate Bill 18-200 (SB 200) was passed by the General Assembly and signed by Governor Hickenlooper earlier this year. Changes resulting from this legislation will put PERA on a path to full funding in approximately 30 years and give PERA’s members and retirees, as well as Colorado taxpayers, a stronger, more stable retirement fund.

Included in SB 200 is an innovative mechanism that automatically adjusts both contributions to and distributions from the PERA trust funds in order to keep the plan on track to that goal of full funding.

The provision requires automatic changes to four components of PERA funding: member contributions, employer contributions, the State’s direct distribution and the annual increase (AI) paid to retirees. Prior to SB 200, the only way that contribution rates or annual increase percentages could change was by passing legislation.

If PERA’s period to reach full funding falls behind the funding goal, contributions and the direct distribution would increase while the AI would decrease. If the funding period moves ahead of the goal, contributions and the direct distribution would decrease, and the AI would increase. There are limitations on increases or decreases in a single year.

Through implementation of the automatic adjustment, PERA’s funding will continue to make progress toward full funding within 30 years of SB 200.

A fact sheet on the automatic adjustment can be found here, and a video explaining the provision can be viewed here.

Protecting shareholder rights: Comment letter to SEC advocates for investors, retirement plan members

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On June 1, 2018, Colorado PERA sent a letter to Hon. Jay Clayton, Chair of the Securities and Exchange Commission (SEC), to express concern about a possible shift in policy away from opposing forced arbitration provisions in public companies’ governance documents.

Forced arbitration provisions would prevent shareholders from suing public companies by requiring investors to settle disputes through arbitration rather than litigation. Some public companies consider arbitration as a way to avoid costly legal disputes and bad publicity as well as discourage lawsuits that they consider frivolous. However, forced arbitration would cost shareholders, including public retirement plans and their members, in the loss of critical transparency and important protections against corporate fraud.

The issue of forced arbitration has been a matter of serious deliberation at the SEC over the past year and, if changed, would mark a considerable turn for the enforcement agency. In a letter to Congresswoman Carolyn Maloney (D-NY) sent earlier this year, Clayton wrote that he has not “formed a definitive view on whether or not mandatory arbitration for shareholder disputes is appropriate in the context of an [initial public offering] for a U.S. company.”

Allowing forced arbitration would be a serious change in longstanding SEC policy that has historically refused to accelerate the effective date of a company’s registration statement if it contained a mandatory arbitration provision. In doing so, the SEC has demonstrated a preference for maintaining the right to sue, which has long been considered a crucial shareholder protection against fraud and other securities violations.

As PERA General Counsel Adam Franklin notes, “Colorado PERA has long recognized the importance of securities litigation, and specifically securities class actions, due to the role it plays in creating a culture of accountability and deterring corporate fraud.”

Forced arbitration “is private and confidential, preventing investors and the public from having access,” Franklin continues. “In order to protect our investments and to deter future fraud it is imperative that investors retain our ability to bring suit in court against corporations under the federal securities laws.”

PERA has long been active in advocating for strong corporate governance policies and has recognized the importance of securities litigation and securities class action in creating a culture of accountability and deterring corporate fraud. Earlier this year, PERA Interim Executive Director Ron Baker joined the board of the Council of Institutional Investors (CII). CII supports strong governance standards at public companies and strong shareholder rights and includes membership of more than 125 public, union and corporate employee benefit plans, endowments and foundations.

PERA staff will continue to monitor the SEC’s position on forced arbitration provisions and we’ll update readers of PERA on the Issues if there are further developments about this issue.

Governor Hickenlooper signs Senate Bill 200

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On Monday afternoon, Governor Hickenlooper signed into law Senate Bill 18-200, Modifications To PERA Public Employees’ Retirement Association To Eliminate Unfunded Liability (SB 200). The ceremony took place in the Capitol Building foyer outside the Governor’s office and was attended by the bill’s co-sponsors, General Assembly leadership and staff, PERA representatives, and media.

The Colorado legislature passed the bipartisan legislation just before midnight on May 9, in the waning hours of the 2018 session. The bill was co-sponsored by four lawmakers: state senators Jack Tate (R-District 27) and Kevin Priola (R-District 25) and state representatives KC Becker (D-District 13) and Dan Pabon (D-District 4). It is designed to restore Colorado PERA’s retirement plan for public employees to full funding within 30 years.

In praising the legislature for passing the complex bill, Governor Hickenlooper acknowledged that it contains components that each group of stakeholders might like or dislike, and by doing so, “[SB 200] is an example of a genuine Colorado compromise.”

Echoing the governor, state Senator Tate added, “I’m very happy with this outcome, primarily because we had an outcome. [This bill] was always about one thing, which was maintaining retirement security for Colorado’s public servants.”

SB 200 adopted many of the recommendations that the PERA Board proposed in late-2017. The Board finalized its proposals after a yearlong fact-finding process by PERA staff that solicited extensive input—from financial experts and various stakeholder groups, including PERA members, retirees, and employers—which PERA then passed on to lawmakers.  “These behind-the-scenes conversations were where the action really happened, and we credit the PERA Board for setting the tone early on,” said state Senator Priola.

The Board’s proposal and SB 200 both advocate for sharing responsibility in such a way that will pay down PERA’s unfunded liability within the actuarially sound 30-year timeframe, which will also help sustain, and possibly improve, Colorado’s credit rating.

“When the 2018 session started, more than a few people told me this bill had about a five percent chance of passing,” said House Majority Leader Becker. “But the shared responsibility aspects of SB 200 are a win for retirees and their families, as well as for the entire state.”

For more information about SB 200, view this rundown of how the new law will affect PERA employees, employers, and retirees.

Senate Bill 200: What you need to know

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Now that Governor Hickenlooper has formally signed Senate Bill 200 (SB 200), the work begins on implementing it. (Read more about the passage of SB 200 here.) This complex piece of legislation naturally raises numerous questions for Colorado PERA members, retirees and employers. PERA on the Issues will continue to provide details on all aspects of the bill, and we encourage you to contact us if you’re unclear about any of the new provisions.

Why did the Board advocate for any changes to the PERA plan?

During the General Assembly’s deliberations about the bill questions arose about why this was necessary given that the legislature had passed another PERA-related bill in 2010. The primary reasons are that PERA members are living longer, which increases the cost to provide their retirement benefits; and that more conservative projections of future investment returns have emerged, which requires PERA to adjust its prior assumptions about our investment portfolio. The result of these two factors is that PERA’s risk profile had become too high.

Did SB 200 include all of the PERA Board recommendations?

The PERA Board and staff recognized these trends in 2016 and subsequently spent all of 2017 formulating recommendations for the structural changes that became the basis of SB 200. The final bill contains many of the PERA Board’s proposals, all of which are designed to reduce PERA’s risk profile moving forward and decrease the amount of time it will take to reach full funding for each of its divisions to within 30 years. A comparison of the Board’s recommendations with the final version of SB 200 can be found here.

What assurances are there that these changes will continue to keep PERA sustainable?

Of course, economic and demographic trends will continue to evolve. But SB 200 accounts for that by including an innovative automatic adjustment provision that—should PERA stray from its 30-year funding timeline—modifies employer and employee contributions, the direct distribution and the annual increase as needed. (Read more about the automatic adjustment provision of SB 200 here.)

What else does the bill include besides changes to the PERA benefit structure?

SB 200 mandates that the state pay a $225 million direct distribution every year until the unfunded liability is paid off. It also establishes an oversight committee comprised of four legislators and 10 appointed, non-governmental experts from relevant fields. Neither of these provisions were included as part of the PERA Board’s recommendations.

Because of SB 200, PERA members, retirees and employers, as well as Colorado taxpayers, will benefit from a stronger, more stable retirement fund. PERA’s funded status will improve over time, the state’s credit rating will remain strong and PERA retirees will continue to receive retirement benefits, contributing to Colorado’s economy and the state’s well-being. For more comprehensive details about how SB 200 will affect you, see our fact sheet.

PERA corrects the record about proposed federal legislation

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Earlier in June, PERA Interim Executive Director Ron Baker sent a letter to Colorado’s Congressional delegation asking that they withhold support from potential legislation that could undermine public pension recovery efforts and recent pension reforms in Colorado and around the country.

Over the past eight years, Rep. Devin Nunes (R-CA) has introduced legislation known as the Public Employee Pension Transparency Act (“PEPTA”). Rep. Nunes recently asked each member of Congress through a “Dear Colleague” letter to co-sponsor similar PEPTA legislation this session.

In his letter, Baker outlines a number of reasons why PEPTA is concerning for public pension plans in general and for Colorado PERA specifically.

  • The legislation would require public employee plans, including PERA, to report their pension liabilities and assets using an assumption that their investments will only earn the U.S. Treasury bonds interest rate. PERA’s $49 billion trust fund is a diversified portfolio of stocks, bonds, real estate, private equity and other assets. Historically, these investments have earned a rate in excess of the legislation’s artificial benchmark. Any states and local governments associated with public plans that did not comply with this requirement would be stripped of their ability to issue federally tax-exempt bonds.
  • PEPTA is based on an assumption that many state and local retirement plans are headed toward insolvency and don’t share meaningful information about their financial condition. Each year, PERA produces a Comprehensive Annual Financial Report, a voluminous data source available online. Further, PERA reports to three (soon to be four) legislative oversight committees during the interim session and the regular legislative session.

The letter also notes that PEPTA would not lower taxpayer costs, increase transparency, expand accountability, or improve understanding of state and local government retirement plans.

PERA staff will continue to monitor the progress of PEPTA and other federal legislation that could impact public pension plans or PERA members. PERA’s letter to Colorado’s Congressional Delegation is available here.