Pension plans are a bubble that is now bursting wide open. Five major factors contribute to the crisis: mounting stock market losses, optimistic plan assumptions, longevity (retirees living longer), overly generous payouts, and a surge of boomer retirements.



There are new stories out every day discussing these issues, yet few are aware of them. Let's take a look at a few recent headlines.



$865 Billion Loss Affects New Hires



State Pensions’ $865 Billion Loss Affects New Hires



State governments from Rhode Island to California have run up estimated pension-fund losses of $865.1 billion, forcing some to cut benefits for new hires. Assets for 109 state funds declined 37 percent to $1.46 trillion over the 14 months ended Dec. 16, according to the Center for Retirement Research at Boston College. The Standard & Poor’s 500 Index of stocks fell 41 percent in the period.



After Philadelphia’s fund lost $650 million in the first nine months of last year, Nutter joined the mayors of Atlanta and Phoenix in writing a letter to Treasury Secretary Henry Paulson seeking financial help for U.S. cities. Their November letter cited investment deficits and rising pension costs.



The $865 billion in losses, which exceed the $700 billion Troubled Asset Relief Program that Congress approved in October, comes as states face budget deficits totaling $42 billion.



To return to 2007 actuarial funding levels by 2010, the 109 funds would need annual returns of 52 percent on assets, the analysis found. Annual returns of 18 percent would achieve the goal by 2013, the center said. The projections are based on a 5.7 percent annual increase in liabilities and a $50 billion increase in assets from contributions above annual payouts.



State and local governments contributed $64.5 billion to pension plans in fiscal 2005-06, according to data from the U.S. Census Bureau. That’s about 57 percent of the $113.2 billion spent on police and fire services.



“I believe that our members will oppose such initiatives in collective bargaining or in state legislatures,” said John Adler, a director with the Capital Stewardship Program in New York for the Service Employees International Union, which represents public workers. The union’s 850,000 members were in retirement plans with more than $1.5 trillion in assets as of Jan. 1, 2008, Adler said.

Unions Are The Problem

Pension Law Sparks Outrage

It might have seemed the height of audacity when J. James Marzilli Jr., charged with attempting to grope a woman, asked the state to nearly double his pension, just 11 days after he resigned from the state Senate in disgrace.



In fact, he was following a well-trod Beacon Hill tradition of cashing in on a law that allows veteran state legislators who retire or fail to win reelection to receive staggering pension increases worth thousands of dollars a year.



A Globe review shows that 14 former legislators are currently drawing significantly increased pensions under the law, including several who left amid their own ethical and criminal troubles.



"It's ridiculous," said L. Scott Harshbarger, the former attorney general of Massachusetts and onetime president of Common Cause, a government watchdog group. "How in the world is it appropriate, necessary, or consistent with any reasonable public policy that if you chose not to run for office or are defeated in running for office that you get an enhanced pension? It just seems to me totally unreasonable, and for elected officials this does not enhance their image."



Legislators, however, have shown little interest in scaling back what one pension official called a "special quirk" in the system.



Vincent J. Piro, a former state representative from Somerville who lost his seat after he was charged with taking a $5,000 bribe, used the law to boost his pension from about $6,750 - not including annual cost-of-living adjustments - to $18,872.



The law, as it was amended in 1950, allows any elected official under age 55 "who has completed twenty or more years of creditable service and who fails of nomination or reelection" to apply for a pension increase.



Using a formula based on the lawmaker's age, years of service, and annuity, the law can boost a pension by as much 400 percent. Pension officials say the requests are almost always granted unless the lawmaker was convicted of a crime. No wonder, some say, that lawmakers created the statute.



"If you're going to stick a little juicy one in there for yourself, why not put one in there if you can't get reelected?" said Nicholas Poser, a Boston pension lawyer.

Rate-Of-Return Assumptions Questioned

The Fort Worth Employees’ Retirement Fund — the pension fund for city employees — has taken an enormous hit from the stock-market collapse.



As of Nov. 30, the fund had fallen to approximately $1.29 billion, a drop of nearly 35 percent from its peak of nearly $1.99 billion in October 2007.



City taxpayers should be concerned about potential long-term implications. The pension fund has already required a sizable increase in support from taxpayers to shore it up. The more dollars that are pumped into it, the greater are the chances that the City Council will have to compensate by raising the property tax rate or reduce services. Higher pension costs also make it more difficult for the city to cut the tax rate.



The fund no longer is achieving its long-term assumption of a rate of return averaging 8.5 percent annually. The Star-Telegram Editorial Board has long urged that the fund lower the assumed rate to a safer, more-conservative assumption.



Assuming the higher rate, yet failing to achieve it, skews actuarial assumptions. That understates the fund’s projected long-term funding shortfall and thus paints an unrealistically optimistic picture of its status. That, in turn, makes it difficult for the City Council and the pension fund board to assess accurately its status and make important financial decisions regarding it.

Ridiculous Actuarial Assumptions

Concerns About Car Makers' Pensions

The government agency that protects pensions for Americans is raising fresh concerns about the repercussions if one or more of the U.S. auto makers were to collapse, saying 1.3 million workers and retirees could see their pensions slashed if that were to happen.



The head of the U.S. Pension Benefit Guaranty Corp. acknowledged in an interview that General Motors Corp., Ford Motor Co., and Chrysler LLC have well funded pensions according to the standard accounting rules applied by the Securities and Exchange Commission.



But by the PBGC's measures, the pension funds of Detroit's Big Three would be underfunded by as much as $41 billion if one or more of the auto makers went under and killed their pension plans, PBGC Director Charles E. F. Millard said.



"An awful lot of people seem to think these plans are well funded or overfunded," Mr. Millard said in an interview. "Each of these plans is significantly underfunded [and] in three years I don't want people coming back and saying, 'How come the PBGC never told us that?'"

State of Wisconsin pension checks to shrink

State retirees will see a big bite taken from their pension checks this year, with their payments falling at least 2.5% and many plummeting by double-digit percentages. The reason: The state's biggest public investment fund lost more than $26 billion in 2008, according to preliminary figures released Thursday.



The cuts, which take effect in May, will be the first time in the 26-year history of the Wisconsin Retirement System that pension checks drawn on the giant Core Fund will decline, officials have said. The Core Fund lost 26.2% of its value in the market last year, ending 2008 with $57.8 billion. It started the year with $80.7 billion.



In addition to the market losses, the funds paid out about $3 billion to retirees during the year.



Hardest hit by the pension funds losses will be the approximately 113,000 retirees and employees who earmarked half their retirement money to the aggressive, all-stock Variable Fund, an account that lost 39% of its value in the market last year and had $4 billion on Dec. 31, according to preliminary figures put out by the State of Wisconsin Investment Board. The fund began the year with $7.1 billion.



Approximately 25% of the government retirees covered by the system had money in the Variable Fund, said Matt Stohr, spokesman for the state Department of Employee Trust Funds. The portion of their pension checks covered by the Variable Fund will plummet by up to 45%, he said. Exact figures for pension payments will be calculated next month.



Calling the 2008 market one of the "most challenging years ever," Keith Bozarth, SWIB executive director, said his money managers "probably survived it as well as most pension funds and institutional investors."



Despite the huge losses, Bozarth said, SWIB will continue its investment strategies to ensure it is well invested in the market if a turnaround takes place.



"You can't predict when it's going to turn or how quickly it's going to turn," Bozarth said. Market turnarounds often happen with amazing speed, he said. "You don't want to take your eggs or your ball and go home and then you miss the upturn," he said. "We're trying to avoid that."

Calpers, Others Rethink Bets on 'Alternative' Investments





After suffering through 2008, some big pension funds are having second thoughts about their exposure to private-equity firms, hedge funds and other nontraditional investments.



Across the U.S., pension-fund managers and investment officers have been scrutinizing their asset allocations, especially toward alternative investments. In addition to wilted returns, pension funds are leery because some hedge funds have made it hard to cash out, including by postponing redemption requests from investors.



Other pension funds that barreled into private equity have been crunched by capital calls, or demands to deliver cash that are often conditions of investment with private-equity firms. While those obligations aren't a surprise, many pension funds expected to offset the payments with returns from other private-equity investments. Such gains have been rare.



"What we saw as an asset before, we now see as a liability," says Christopher Ailman, chief investment officer of the California State Teachers' Retirement System, the country's second-largest public pension fund by assets.



Few bets turned out well for pension-fund managers in 2008. But alternative investments were doubly painful, partly because ill-timed capital calls from private-equity firms forced some pension funds to sell stocks into the falling market.



Such sales are one reason why the California Public Employees' Retirement System is speeding up its asset-allocation review to early 2009. Previously, the nation's largest public pension fund wasn't scheduled to review its asset weightings until 2010.



"We want to make sure that our assumptions made at the end of 2007 are still valid," says Pat Macht, a Calpers spokeswoman

Canadian Pension Plans Want To Ignore The Problem

A series of reports released last week show many of Canada's corporate pension plans are struggling to stay afloat amid plunging stock markets that eroded a good chunk of the plans' wealth in 2008.



Defined-benefit plans, under which employees are guaranteed a reliable and steady income after retirement, are in trouble as companies are under pressure to make up huge shortfalls through higher contributions.



Meanwhile, defined contribution plans, where retirement benefits are not guaranteed by employers and are based on investment returns, face even bigger problems.



For some companies with defined benefit plans, the pension shortfall creates a vicious cycle: the financial crisis is forcing them to make millions of dollars in extra payments at a time when the economy is in recession and they don't have the money to do so.



Bryan Hocking, CEO of the Association of Canadian Pension Management, said the sudden financial reversal at many pension plans is causing Canadians to wonder just how secure their retirement will be.



"I think probably a few years ago most of the public wouldn't have even paid any attention to any of this," Hocking said. "Now that it affects them directly, or has the potential of affecting them directly, I think they're paying a lot of attention to it".



Several federally regulated Canadian companies have been lobbying Ottawa to change the regulations to give them a longer period to top up shortfalls in their defined-benefit plans".



They argue that such a move would not be a bailout or require any government money, but would allow affected companies to spread out payments to their pension plans over a longer period.



In his economic statement last fall, federal Finance Minister Jim Flaherty said the government would extend the repayment period to 10 years from the current five, but many in the industry say that's not enough.



Last week, two reports confirmed plunging stock markets eroded billions of dollars from Canadian pension plans in 2008".



Watson Wyatt Worldwide said the ratio of a typical pension plan's assets compared with its solvency liabilities plunged 27 per cent in 2008, from 96 per cent last January to just 69 per cent at year's end.



Meanwhile, Mercer reported its Pension Health Index fell 23 per cent from the beginning of 2008 to 59 per cent - the biggest drop since the index was created 10 years ago.

Evanston, Illinois Increases Property Taxes To Fund Pensions

Facing a $140 million pension fund deficit and a growing recession, the major players of Evanston government came together Saturday for their first discussion on the proposed budget for next year.



"The economy, wherever it is - global, national, state or local - it all looks the same," said Martin Lyons, the city's finance director, who took over in August.



Lyons led most of the meeting at the Evanston Civic Center, 2100 Ridge Ave., and gave a presentation on the major points of the plan for the 2009-2010 fiscal year.



The proposal includes raising the property tax in Evanston by almost 5 percent, which would generate $207,000 in additional revenue. It also relies on taking $5 million from the city's General Fund and several other cost-saving methods.



This year's budget is tight, as city officials try to make up for the $140 million deficit in the pension fund for police and firemen. The fund was underpaid for nearly 20 years, leaving the city in a tough position with 24 more years to make up the deficit.



Another reason for the increase in taxes on existing property is the sharp downturn in tax revenue from property transfers, Lyons said. Tax collections from real estate transfers are down 38.6 percent compared to last year, he said. The data was through November.



"It's two things," Lyons said. "We have fewer transactions and we have transactions at lower dollar amounts."



The finance director repeatedly stressed that taxes needed to be increased in order to make up for lost revenue. He said that although spending cuts were an option, there was only so much cutting that could be done.



"Evanston is a full service community," he said. "The whole range of services and then some are provided to Evanston residents."



For starters, I propose firing Martin Lyons, the city's finance director (or voting him out of office, whichever is appropriate). The second thing to do is freeze the pension plan, changing the rules for new hires. The third thing to do is cut services. The fourth thing to be done is threaten the unions with Vallejo tactics unless pension cutbacks are agreed upon. And the fifth thing to do before any taxes are raised is to actually file for bankruptcy.

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