Pension and Asset Allocation

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
narnceredir
Posts: 18
Joined: Tue Oct 08, 2013 8:45 am

Pension and Asset Allocation

Post by narnceredir » Mon Feb 11, 2019 3:16 pm

Hi everyone,

A hybrid pension system -- the Wisconsin Retirement System (WRS) administered by the State of Wisconsin Investment Board (SWIB) -- comprises approximately 44 percent of my retirement savings. I have no control over the investments selected by SWIB. As such, I am interested to know what Bogleheads think about pensions and asset allocations. Should I take the asset allocation of the pension investments into account when looking at my entire portfolio, or simply ignore it? For example, as you can see in the below chart, SWIB allocates 30 percent of its investments to fixed income/TIPS, while my IPS allocates 20 percent to bonds. Should I thus acknowledge SWIB's asset allocation and reduce my non-WRS bond allocation, or simply ignore the pension altogether? I'd appreciate any advice that can be offered.

Image

Cheers,
-Narn Ceredir

Thesaints
Posts: 1866
Joined: Tue Jun 20, 2017 12:25 am

Re: Pension and Asset Allocation

Post by Thesaints » Mon Feb 11, 2019 3:18 pm

Would you keep the same asset allocation if you had 2 million and no pension, or one million and a 40k/yr pension ?

alex_686
Posts: 4304
Joined: Mon Feb 09, 2015 2:39 pm

Re: Pension and Asset Allocation

Post by alex_686 » Mon Feb 11, 2019 3:24 pm

First, how is the pension being paid out? I assume it is a defined benefit plan.

Second, how well funded is the plan? I am assuming over 60%

Third, what happens if the plan comes up short? I assume that the state/county/city is obliged to make up the deficit and fully fund it. i.e., not like the bankrupt Detroit MI plan.

The standard answer is to treat pensions as a bond like asset for your own planning. You kind of need to breach all 3 of the above conditions before you should start worrying about how you plan is funded.

Just at a glance it looks stock heavy, bond light, so it will either far surpass funding or fail big time, which is how most public pensions are set up. So maybe skew slightly towards bonds if you are truly worried that your plan will fail.

Topic Author
narnceredir
Posts: 18
Joined: Tue Oct 08, 2013 8:45 am

Re: Pension and Asset Allocation

Post by narnceredir » Mon Feb 11, 2019 3:48 pm

alex_686 wrote:
Mon Feb 11, 2019 3:24 pm
First, how is the pension being paid out? I assume it is a defined benefit plan.

Second, how well funded is the plan? I am assuming over 60%

Third, what happens if the plan comes up short? I assume that the state/county/city is obliged to make up the deficit and fully fund it. i.e., not like the bankrupt Detroit MI plan.

The standard answer is to treat pensions as a bond like asset for your own planning. You kind of need to breach all 3 of the above conditions before you should start worrying about how you plan is funded.

Just at a glance it looks stock heavy, bond light, so it will either far surpass funding or fail big time, which is how most public pensions are set up. So maybe skew slightly towards bonds if you are truly worried that your plan will fail.
First, the pension is a hybrid. It's paid out based on the higher monthly payment of a total money purchase balance or a complicated formula of highest three years of salary and years in service. Under almost all calculations I've done the former is how I'll be receiving my monthly pension benefit.

Second, the WRS is something like 99.1 percent funded, one of the most if not the most sound in the U.S. I'm honestly not concerned about it failing or falling short.

And third, accumulated pension benefits are a property right in the state of Wisconsin.

So, if I were to consider the pension a bond, my "bond" allocation would be 44 percent of my retirement savings, more than double what I decided on in my IPS. So my 457(b) and Roth IRA holdings should as a result be as aggressive as possible?

-Narn Ceredir

Topic Author
narnceredir
Posts: 18
Joined: Tue Oct 08, 2013 8:45 am

Re: Pension and Asset Allocation

Post by narnceredir » Mon Feb 11, 2019 3:50 pm

Thesaints wrote:
Mon Feb 11, 2019 3:18 pm
Would you keep the same asset allocation if you had 2 million and no pension, or one million and a 40k/yr pension ?
Great question. I think my answer is yes.

alex_686
Posts: 4304
Joined: Mon Feb 09, 2015 2:39 pm

Re: Pension and Asset Allocation

Post by alex_686 » Mon Feb 11, 2019 4:02 pm

narnceredir wrote:
Mon Feb 11, 2019 3:50 pm
Thesaints wrote:
Mon Feb 11, 2019 3:18 pm
Would you keep the same asset allocation if you had 2 million and no pension, or one million and a 40k/yr pension ?
Great question. I think my answer is yes.
The correct answer, for a homo economicus - or rational man, is no. A pension is a low risk / low return and is mathematically similar to a bond asset. Why would you with 2 million and no pension chose a higher risk / higher return portfolio? The rational answer is that you should have the same risk tolerance / risk budget under either situation and you should adjust accordingly.

Which, admittedly, is easier said than done.
narnceredir wrote:
Mon Feb 11, 2019 3:48 pm
First, the pension is a hybrid. It's paid out based on the higher monthly payment of a total money purchase balance or a complicated formula of highest three years of salary and years in service. Under almost all calculations I've done the former is how I'll be receiving my monthly pension benefit.

So, if I were to consider the pension a bond, my "bond" allocation would be 44 percent of my retirement savings, more than double what I decided on in my IPS. So my 457(b) and Roth IRA holdings should as a result be as aggressive as possible?
So, yes. Treat your pension like a bond and be aggressive with your other assets.

Post Reply