Month: July 2019

Retirement Roundup: How bad is the state and local pension crisis really?

Posted on by planeteria

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

How bad is the state and local pension crisis really?| Brookings

State and local government pension plans hold nearly $4 trillion in assets and provide retirement income to over 10 million Americans. For most of these plans, the value of liabilities for future benefit payments exceed the value of plan assets. Byron Lutz of the Federal Reserve Board, and Louise Sheiner of Brookings focus on the sustainability of pension plans—whether plans will run out of assets and need to borrow money or be bailed out to meet benefit obligations. In a paper presented at the 2019 Municipal Finance Conference at Brookings, they conclude, in short, that, on the whole, state and local pension systems in the U.S. are not facing in an imminent crisis.

CalSavers State-Run Retirement Plan Opens | PlanSponsor

California State Treasurer Fiona Ma and former State Senator Kevin de León announced the launch of CalSavers, a state retirement savings program that will give access to more than 7 million working Californians who currently lack a workplace plan. State law requires that all employers with five or more employees who don’t already offer a retirement plan to either begin offering a qualified plan from the private market or register for CalSavers over the next three years.

You should be saving at least 12% of your pay for retirement. Here’s why. | Money

To reach retirement in solid financial shape, you likely need to up your savings game today. Vanguard recommends a total contribution rate of between 12 and 15 percent of salary. But you may want to save even more, depending on your situation and on how you expect stocks to perform in the future. Researchers’ recommendations vary based on annual income, the age when someone started saving, and the expected rate of return (after inflation) for a retirement portfolio.

Married women are more at risk in retirement than singles | MarketWatch

Compared to single women, a greater percentage of married women are at risk for retirement insecurity, according to a recent study using the National Retirement Risk Index. Forty-six percent of married women were found to be at risk compared with about 39 percent, on average, for all single women. The findings highlight the need for two-earner couples to save more, and the best way to address this issue would to broaden access to retirement savings plans in the workplace. In addition, plan sponsors could help educate their married workers about the potential need to save for two.

Annuities in 401(k)s Won’t Solve the Retirement Crisis. Here’s Why.| Barron’s

Proposed U.S. legislation would make it easier for employers to offer annuities in 401(k) retirement plans that provide retirees fixed payments for as long as they live. The bill, known as the Secure Act, passed in the House of Representatives in May and is now awaiting a vote in the Senate. But since it has bipartisan backing and is the biggest retirement legislation to gain traction in more than a decade, it’s widely expected to be approved. While some annuities are low cost, others come with high commissions and high fees that eat into the benefits.

July 2019 Telephone Town Hall FAQs

Posted on by planeteria

On Tuesday, July 9, Colorado PERA conducted telephone town halls for members and retirees. These town halls gave members and retirees a chance to ask questions and talk to PERA leadership about the investment performance in 2018, PERA’s funded status, and the impact of recent legislation. If you missed the calls, recordings are posted here.

A summary of the most asked questions and responses is below. Questions about individual retirement benefits may be answered by contacting PERA Customer Service at 1-800-759-7372.

What was PERA’s investment return in 2018? My investments did better in 2018.

For the year ending December 31, 2018, PERA’s investment portfolio returned a negative 3.5 percent. While last year’s return was disappointing, PERA is a long-term investor and the investment program is designed to perform over the long term. PERA’s investment program has returned 8.8 percent over 10 years. 

For most investors, 2018 was a difficult year. Global equities, as measured by the MSCI ACWI, declined 9.4 percent in 2018, while the Bloomberg Barclays U.S. Aggregate Bond index was flat for the year. When comparing investment performance, it’s important to keep the time period in mind. Different time frames will lead to differences in investment performance because the market can fluctuate from one period to the next.


What is PERA’s funded status after 2018? Why did the funded status decline?

The funded status for the PERA defined benefit trusts at the end of 2018 was 59.8 percent, compared to 61.3 percent at the end of 2017.The investment return is just one piece of what goes into the plan’s funded status. We also make assumptions about factors such as salaries, head count growth, the number of retirements, among others. Last year, many of our demographic assumptions didn’t play out favorably. For instance, payroll growth was stronger than we expected, and the School Division, PERA’s largest, had more early retirements. These factors also impact the funded status.

How is last year’s legislation working?

In 2018, the Colorado General Assembly passed Senate Bill 200 which included provisions to help PERA adapt to changes in demographics or the market. The legislation is designed to help ensure the fund’s stability over time and put PERA on a path to full funding by 2047. The bill made changes to the plan that included increases in contributions and modifications to benefits.

On July 1, active members, except those who work in the Local Government Division, saw an increase in contributions, and most members are now contributing 8.75 percent of their pay toward their PERA benefit. PERA retirees are experiencing the second year of the suspension of the annual increase (AI).

The legislation also included a provision, called the automatic adjustment that is triggered when PERA falls ahead of or behind schedule to reach full funding. These changes are not easy on PERA members or retirees. They are, however, designed to make sure PERA stays on the path that ensures retirement security today and tomorrow.

When will retirees get an annual increase?

Legislation in 2018 (SB 200) suspended the annual increase for 2018 and 2019. The legislation also contained “guard rails” (called the automatic adjustment) to keep PERA on the path to full funding by 2047. The negative investment year in 2018 and other demographic shifts affected PERA’s funded status, and the automatic adjustment will go into effect in July 2020. This means that when the annual increase is restored in July 2020, it will be 1.25 percent.

How does the automatic adjustment work, and how long will it take for the AI to go back up and contributions to go down?

Last year’s investment losses coupled with demographic shifts mean that PERA has fallen behind on its funding goal, which has triggered the automatic adjustment. That means that the three rates: member contributions, employer contributions, and the AI paid to retirees, will all change beginning July 1, 2020.In July 2020, the AI paid to retirees will be set at a maximum of 1.25 percent.

SB 200 contained scheduled increases for members (except for members in the Local Government Division) of 0.75 percent in July 2019, 0.75 percent in July 2020, and 0.5 percent in 2021. Due to the automatic adjustment, member contributions will increase by an additional 0.5 percent, on top of the scheduled increases, in July 2020. That means in 2020, most members will contribute a total of 10 percent to PERA from each paycheck.

The amount all employers contribute to PERA will also increase by one half of one percent in July 2020. Total employer contributions will range from 14.2 percent to 23.6 percent, depending on the Division.

While it’s challenging to predict exactly when the AI will go up and member and employer contribution rates will go down, it may take a decade for these changes to go back to current levels.

Are PERA employees participating in cuts like we are?

The 300 PERA employees are also PERA members and they began contributing more on July 1. They will also have to wait three years before becoming eligible for a reduced AI in retirement.

Can investment fees be reduced to fund the annual increase?

PERA takes seriously our responsibility to be good stewards of the resources we manage on behalf of our members. The cost to invest $48 billion is competitive and low – 37 basis points, or 0.37 percent of assets. Administrative costs are also low when PERA is compared to our public pension peers across the country.

About 60 percent of PERA’s assets are invested internally, by PERA employees. By managing these investments in-house, PERA saves about $45 million a year.

Does PERA invest with a focus on environmental sustainability?

While PERA recognizes the important role of all financially material factors, including those that may pertain to sustainability, PERA does not make investment decisions to suit personal beliefs of any person or group.

An investment strategy based on personal value systems may be impossible to implement in a way that reflects all our members’ individual beliefs. As a fiduciary, our highest priority must remain the stability of the fund for all our members.

The PERA Board has adopted a Statement that outlines PERA’s policy on divestment. PERA does not have the authority to determine social, environmental, or economic policy, and exists to invest for one purpose – to ensure the retirement security of Colorado’s current and retired public employees.

Is PERA still a valuable benefit?

Yes, absolutely. The PERA defined benefit plan is well-designed to meet the goal of giving members the best replacement income in retirement. In other words, PERA does a better job of replacing a member’s working income than any other retirement plan on the market – including Social Security and 401(k) style plans. When PERA defined benefit members retire, they continue to get a steady PERA paycheck for the rest of their lives—even if, like some of our members, they live into their hundreds. This is why PERA is a benefit you can’t outlive. With a 401(k), once that account is depleted, the benefit is done.

Also, it’s important to remember that PERA members have benefits even when the unexpected happens. For example, PERA members get survivor and disability benefits. And they have access to a low-cost, world-class 401(k) and/or 457 plan. What’s more is that PERA benefits are portable. You can move from one PERA employer to another and your retirement plan will stay the same, meaning you have flexibility in where you work throughout your career while continuing to grow your retirement benefit.

What is PERA doing to eliminate the WEP?

PERA staff is meeting with members of the Colorado Congressional delegation to educate and heighten awareness of how this federal law impacts PERA members who may work for a PERA employer and also work for an employer that participates in Social Security. There have been efforts recently to change the calculation or eliminate the Windfall Elimination Provision. Currently, U.S. Congressional Representatives Crow, Tipton, and Perlmutter have signed on as co-sponsors of H.R. 141. You can find more information on the status of WEP and federal legislation here. We encourage members to contact their congressional representative to let them know how the WEP impacts them.

Is PERA going to increase the PERACare subsidy for retirees under 65 who aren’t yet eligible for Medicare?

We know the cost of pre-Medicare health care coverage has increased significantly. We’ve been able to offer lower cost plans to our retirees who have Medicare, but the pre-Medicare coverage market remains a challenge for us, and this is true for most Americans. We have been encouraged by efforts at the state level to explore ways to reduce health care costs for Coloradans. But, increasing the subsidy for pre-Medicare PERACare enrollees would negatively impact the financial status of the health care trusts and also require legislation, and we don’t anticipate the Board seeking or supporting legislation that would negatively impact the financial health of the trusts.

PERA’s Automatic Adjustment Provision a Case Study for Pension Risk Sharing

Posted on by planeteria

A recent paper from the National Association of State Retirement Administrators, In-Depth: Risk Sharing in Public Retirement Plans, looks at how different public retirement plans have incorporated a variety of risk-sharing features into their plan designs. Colorado PERA is included as a case study for its use of automatic changes to contribution rates and benefit levels.

Why risk sharing

As the paper notes, a primary objective of any retirement plan is to provide income during retirement by moving a portion of compensation from the working to the retirement years. And while a variety of factors impact the effectiveness of a retirement plan, a few things are especially important: adequate contributions and investment returns, as well as predictions of inflation and the life expectancy of plan members. There are risks – meaning there is a chance of a financial loss compared to what is expected – with each of these factors.

Long-time readers of PERA on the Issues will be familiar with the following formula:

C+I=B+E

Which stands for: Contributions + Investment earnings = Benefits + Expenses.

The revenue a retirement plan receives must, over time, equal the cost of the benefits and expenses the plan pays. If the assumptions underlying any of those factors change over time – if contributions decrease or investments earn less than expected, or if benefits or expenses grow faster than inflation – another factor of the equation must shift or the plan gets out of balance.

Who bears the impact of those changes – who takes on the risk and when those changes should occur – must be addressed. As the paper notes, “Nearly every state in recent years enacted reforms to [their] pension plans…. As a result, although most public employers in the U.S. have retained [Defined Benefit] plans, in many plans, more risk has shifted from employers to employees.”

In different states, cost-of-living adjustments have been reduced, employees have been required to work longer or to a higher age, employee contributions have been increased, and employers have paid higher costs.

The paper focuses on risk sharing plans that do two things compared to traditional defined benefit or defined contribution plans. First, they distribute risk among both employees and employers. And second, they articulate who bears what risk and how, before the loss or gain actually occurs.

Plans in which either the employees or the employers bear all the risk may experience bad outcomes. “Plans in which risks are strategically and optimally assigned…may be found to be more sustainable,” the paper notes.

The paper points to the automatic adjustment feature of Senate Bill 200, approved in 2018, as an example of risk sharing based on the relationship between contribution rates, which are set by the Legislature, and the rate determined by the actuarial experience of the plan’s level of funding (the actuarially-determined contribution, or ADC). Put simply, when the actual rate of contributions to PERA is less than 98 percent of the ADC, the statute requires that employer and employee contribution rates go up by up to 0.5 percent in any one year, not to exceed an additional 2 percent total increase. Conversely, if the rate of contributions were to reach 120 percent or more of the ADC, the contribution rates would decrease. A direct payment to PERA from the state as well as changes to retirees’ cost-of-living adjustments are also triggered.

The paper notes that it is unusual for such contribution and benefit increases or decreases to be contingent on the ratio between actual contribution levels and the ADC, and that they are projected to eliminate PERA’s unfunded liability by 2047.

Read more about PERA’s Automatic Adjustment Provision here.

Retirement Roundup: Avoiding the new retirement spending spree

Posted on by planeteria

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

Avoiding the new retirement spending spree | Kiplinger
Congratulations, you’re retired! After 30 years of hard work and savings, you have over $1 million in your 401(k). Wow, that’s a lot of money, you would think. Feeling flush with cash, however, can lead to a problem. Overspending during the first few years of retirement is one of the biggest mistakes a recent retiree can make. Here’s what happens: After spending decades hard at work, many newly minted retirees jump into all the fun vacations and other bucket list items they had been dreaming of with both feet – like taking six cruises during the first year of retirement, paying off a child’s college debt or putting a down payment on a child’s new house. While this is may be admirable, it’s not the best financial plan.

Many terminated participants keeping retirement plan balances invested | PlanSponsor
A recent Alight Solutions study examining defined contribution (DC) plans has found that more participants are keeping retirement plan balances invested when leaving the plan due to either termination or retirement. The “2019 Universe Benchmarks” report, conducted with 121 plans and covering more than three million eligible participants, was split in categories between participation rates, plan balances, account distributions, and more by age, gender, tenure, and industry. Thirty-two percent of participants who left their job during the first nine months of 2018 kept their balances in the plan as of year-end. Seventy-seven percent of dollars that left plans were moved to individual retirement accounts (IRAs).

The art of doingnothing in retirement | US News
The experts are never shy about telling retirees to go out and volunteer for a worthy cause, take a part-time job, attend a class, babysit grandchildren, or otherwise check off some item on a bucket list. Retirees are often advised to stay busy and do something meaningful. For the most part this is good advice. No one wants to feel bored and useless in retirement. But sometimes it’s nice to just relax and do absolutely nothing. It’s possible to adjust to a relaxing pace of life in retirement by navigating feelings of guilt, adjusting to your new pace, lowering your stress levels, and beginning to live the life you dreamed about.

How well does your job prepare you for retirement? | Forbes
Most would agree that the type of job you hold determines how you feel about working. Some jobs just offer more and better benefits. The tasks associated with prestigious and professional occupations make them more ego-gratifying and intellectually stimulating, not to mention better paying. These jobs contribute greatly to one’s emotional well-being because they’re personally fulfilling. As a result of all this good stuff, professionals rely more heavily on their jobs for defining themselves. So it stands to reason that those holding such jobs would be less enthusiastic about leaving them, and would have a harder time adjusting to retirement. But that’s not the case – they actually adjust better.

Three spending habits that could ruin your retirement | Fox Business
After years of hard work, many Americans look to kick back and enjoy their golden years. However, there are dozens of habits that can impact the different ways people save for retirement – some good, others bad. Financial expert Chris Hogan told Fox Business that “retirement is not an age; it’s a financial number.” So when it comes to saving, be “intentional,” but also be “careful.” In addition, he broke down three habits that could ruin your retirement savings.

What super-savers who plan to retire early are doing differently | CNBC
If you want to retire early, just setting and forgetting when it comes to your savings strategy won’t cut it. Just ask a new crop of investors dubbed “super savers.” These Americans, ages 45 and up, are putting away at least 20 percent of their income. That’s $1 out of every $5. And their efforts are paying off, according to an online survey from TD Ameritrade. The results show that 57 percent of super savers plan to retire earlier than their parents did, versus 46 percent of non-savers. “Most are choosing this path because they’re looking at the freedom and flexibility it offers,” said Dara Luber, senior manager of retirement product at TD Ameritrade. “They are looking for financial security and peace of mind, and they’re thinking that their retirement will be like a second childhood.” If you want the same freedom in your golden years (or earlier), there are a few ways to get started.

Legislative Subcommittee Meets to Review PERA

Posted on by planeteria

New legislative oversight body added under SB 200 provides additional avenue for PERA transparency

The Pension Review Subcommittee, established by Senate Bill 18-200, met for the first time on Friday, July 12. The Subcommittee was formed to expand the Police Officers’ and Firefighters’ Pension Review Commission and create a subcommittee within the commission to oversee PERA.

SB 18-200 directed the commission to study, review, and propose legislation related to the funding of police offers’ and firefighters’ pensions in the state and benefit designs of such pension plans and must also study and may develop proposed legislation relating to PERA. The commission is comprised of 10 members: five Senators and five Representatives.

As covered previously in PERAon the Issues, four different legislative committees have oversight responsibility of PERA. These reporting committees include the Legislative Audit Committee, Joint Finance Committee, Joint Budget Committee, and Pension Review Commission.

The Pension Review Subcommittee was tasked specifically with making recommendations to the Commission regarding PERA. The July 12 meeting began with an overview of the Subcommittee’s responsibilities and charge from legislative staff. PERA staff then presented to the subcommittee members on a number of topics, with particular focus on the 2018 financials. Questions from the Subcommittee covered a range of topics including the rate of return assumption, asset allocation, and the progress of the Board’s current Asset Liability Study. Board Chairman Timothy M. O’Brien and Treasurer Dave Young joined the panel as well to respond to questions from Subcommittee members.

This newly-formed oversight subcommittee is comprised of four legislators and 10 appointed members of the public. Requirements for serving as an appointed member include experience or knowledge of investment management, corporate or public finance, compensation and benefit systems, economics, accounting, pension administration, or actuarial analysis.

In addition, each subcommittee member is required to attend certain meetings each year, as follows:

  • At least one PERA Board meeting;
  • The Legislative Audit Committee meeting review of PERA’s annualactuarial valuation; and
  • The State Measurement for Accountable, Responsive, and Transparent (SMART) Government Act hearing of the Joint Finance Committee when it reviews PERA.

The Pension Review Subcommittee’s next scheduled meeting is Monday, August 12 and the Pension Review Commission will meet for the first time during the 2019 interim session on Monday, September 9.

PERA staff will continue to work with legislative staff and members of all reporting committees to provide education regarding the importance of ensuring retirement security for PERA’s membership.

PERA releases stewardship report

Posted on by planeteria

On July 22, Colorado PERA released its 2019 Investment Stewardship Report, highlighting PERA’s commitment to long-term financial sustainability through investment cost stewardship.

PERA’s approach to investment stewardship is straightforward: Seek out quality investments that are expected to provide the best risk-adjusted returns to PERA’s portfolio over the long term. As fiduciaries to PERA’s active, inactive, and retired members, PERA has a responsibility to achieve financial performance in order to provide retirement benefits to its members. Stewardship encompasses all risk and opportunity factors that are important to consider when making investment decisions.

The report, now issued for a second year, outlines PERA’s efforts to keep costs low, advocate for strong and fair markets, and incorporate relevant factors into its investment decisions.

PERA uses a four-part stewardship approach to achieve financial sustainability over the long term:

  • Protect the assets under management through cost savings and cost consciousness;
  • Integrate relevant factors into investment decisions, including environmental, social and governance (ESG) considerations that may be financially material;
  • Advocate for robust markets using PERA’s voice, vote, and authority as a long-term institutional investor; and
  • Evaluate the exposures in PERA portfolios, including exposures to ESG factors, to identify value drivers.

PERA diligently manages investment costs on behalf of its members, recognizing that the costs of investing should not outweigh the benefits of investing. The report considers three avenues for investment cost stewardship:

Prudent investments at fair costs translate into the retirement security that PERA is charged with attaining for its members.

As a long-term investor, PERA’s investments must be positioned to deliver value for members both today and in the future. Factors that impact the long-term performance of investments, which may include, but are not limited to, environmental, social and governance issues, are critical to PERA’s investment strategy. Issues ranging from consumer trends to climate change to corporate culture may all have the potential to impact the financial profitability of an industry or business. PERA investment professionals are experts in their field and fully consider all financially material factors when evaluating investment risks and opportunities. PERA invests in companies with competitive advantages which can offer financial rewards that outweigh risks over the long run.

PERA is committed to improving disclosure, and the 2019 Investment Stewardship Report is one to deliver on that commitment. View the Investment Stewardship Report infographic. Financial performance, information about management fees, voting guidelines and voting records are all available at copera.org.