State pension and asset allocation question

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am
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State pension and asset allocation question

Post by am » Mon Sep 03, 2012 9:52 am

I have an annuity/pension from Illinois at 62 which will be about $2200 with 0% survivor benefit and $1800 with 100% survivor benefit. Right now the balance is about 33k with a separation refund of double that or 66k. Every month the cash balance increases at about 6.5% per annum (rate set by the state). Wondering if I should consider this in my asset allocation or simply consider it as a cash stream when I retire? Also, is there a chance this money will not be available or does the state constitution protect it?

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ofcmetz
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Re: State pension and asset allocation question

Post by ofcmetz » Mon Sep 03, 2012 10:42 am

am wrote:I have an annuity/pension from Illinois at 62 which will be about $2200 with 0% survivor benefit and $1800 with 100% survivor benefit. Right now the balance is about 33k with a separation refund of double that or 66k. Every month the cash balance increases at about 6.5% per annum (rate set by the state). Wondering if I should consider this in my asset allocation or simply consider it as a cash stream when I retire? Also, is there a chance this money will not be available or does the state constitution protect it?

I would just consider the pension as a cash stream that will meet part of your future income needs. It would be foolish to count on any government pension as a 100% guarantee, especially one from the state of Illinois. I'd plan for worst case and expect the income stream from the pension to be about 50% of what was promised and plan accordingly. Then is they are able to come through as promised you'll be in that much better shape.
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carolinaman
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Re: State pension and asset allocation question

Post by carolinaman » Mon Sep 03, 2012 10:52 am

I do not know specifically about Illinois but most state pensions are protected meaning they must pay pensioners 100%. they cannot get out of their obligation even with bankruptcy.

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iceport
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Re: State pension and asset allocation question

Post by iceport » Mon Sep 03, 2012 10:59 am

am wrote:I have an annuity/pension from Illinois at 62 which will be about $2200 with 0% survivor benefit and $1800 with 100% survivor benefit. Right now the balance is about 33k with a separation refund of double that or 66k. Every month the cash balance increases at about 6.5% per annum (rate set by the state). Wondering if I should consider this in my asset allocation or simply consider it as a cash stream when I retire?
I am counting on a state pension also, and I don't explicitly consider it in my AA. When I was further from retirement, I took it into account in a small way by using a slightly more aggressive AA than I otherwise would have chosen. Now, I just ignore it for AA purposes and figure that it will reduce what I will need to obtain from SS and withdrawals from the portfolio.
am wrote:Also, is there a chance this money will not be available or does the state constitution protect it?
Yes, there is a chance you will never receive what you expect now! Unfortunately, Illinois has the lowest pension funding ratio of any state in the nation. (Don't feel too bad, my state of CT is in a similar predicament.) See here: The Widening Gap Update.

My state was one of the very very few states that chose to implement pension reforms retroactively. The pension I was promised 26 years ago when I started was re-negotiated just last year, and I lost 20% of my expected pension in one fell swoop. :annoyed

Will that happen to you? Who knows. By far the most common (and fairest) way to implement pension reform is going forward with new hires. But the further away you are from retirement, the more concerned I'd be that a retroactive pension reduction could be made.

As johnep notes, once you start collecting, your benefits are pretty well locked in. Before that, your benefits are somewhat vulnerable.

--Pete
"Discipline matters more than allocation.” ─William Bernstein

carolinaman
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Re: State pension and asset allocation question

Post by carolinaman » Mon Sep 03, 2012 11:10 am

petrico wrote:
am wrote:I have an annuity/pension from Illinois at 62 which will be about $2200 with 0% survivor benefit and $1800 with 100% survivor benefit. Right now the balance is about 33k with a separation refund of double that or 66k. Every month the cash balance increases at about 6.5% per annum (rate set by the state). Wondering if I should consider this in my asset allocation or simply consider it as a cash stream when I retire?
I am counting on a state pension also, and I don't explicitly consider it in my AA. When I was further from retirement, I took it into account in a small way by using a slightly more aggressive AA than I otherwise would have chosen. Now, I just ignore it for AA purposes and figure that it will reduce what I will need to obtain from SS and withdrawals from the portfolio.
am wrote:Also, is there a chance this money will not be available or does the state constitution protect it?
Yes, there is a chance you will never receive what you expect now! Unfortunately, Illinois has the lowest pension funding ratio of any state in the nation. (Don't feel too bad, my state of CT is in a similar predicament.) See here: The Widening Gap Update.

My state was one of the very very few states that chose to implement pension reforms retroactively. The pension I was promised 26 years ago when I started was re-negotiated, and I lost 20% of my expected pension in one fell swoop. :annoyed

Will that happen to you? Who knows. By far the most common (and fairest) way to implement pension reform is going forward with new hires. But the further away you are from retirement, the more concerned I'd be that a retroactive pension reduction could be made.

As johnep notes, once you start collecting, your benefits are pretty well locked in.--Pete
Actually in most states once you are vested in the pension system, your benefits are locked in. Any pension changes only affect new or unvested pensioners. How Illinois or other underfunded pension systems get the additional funding they need for their obligations is a good question, but legally they must pay their pension obligations. This is also true for most local govts as well.

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iceport
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Re: State pension and asset allocation question

Post by iceport » Mon Sep 03, 2012 11:25 am

johnep wrote:
petrico wrote:
am wrote:I have an annuity/pension from Illinois at 62 which will be about $2200 with 0% survivor benefit and $1800 with 100% survivor benefit. Right now the balance is about 33k with a separation refund of double that or 66k. Every month the cash balance increases at about 6.5% per annum (rate set by the state). Wondering if I should consider this in my asset allocation or simply consider it as a cash stream when I retire?
I am counting on a state pension also, and I don't explicitly consider it in my AA. When I was further from retirement, I took it into account in a small way by using a slightly more aggressive AA than I otherwise would have chosen. Now, I just ignore it for AA purposes and figure that it will reduce what I will need to obtain from SS and withdrawals from the portfolio.
am wrote:Also, is there a chance this money will not be available or does the state constitution protect it?
Yes, there is a chance you will never receive what you expect now! Unfortunately, Illinois has the lowest pension funding ratio of any state in the nation. (Don't feel too bad, my state of CT is in a similar predicament.) See here: The Widening Gap Update.

My state was one of the very very few states that chose to implement pension reforms retroactively. The pension I was promised 26 years ago when I started was re-negotiated, and I lost 20% of my expected pension in one fell swoop. :annoyed

Will that happen to you? Who knows. By far the most common (and fairest) way to implement pension reform is going forward with new hires. But the further away you are from retirement, the more concerned I'd be that a retroactive pension reduction could be made.

As johnep notes, once you start collecting, your benefits are pretty well locked in.--Pete
Actually in most states once you are vested in the pension system, your benefits are locked in. Any pension changes only affect new or unvested pensioners. How Illinois or other underfunded pension systems get the additional funding they need for their obligations is a good question, but legally they must pay their pension obligations. This is also true for most local govts as well.
I wish!

Seriously, you are not taking into account today's political and economic realities. Collective bargaining contracts expire and require renegotiation periodically. When that happens, it is possible to retroactively alter the terms of pension promises made to active workers. Trust me on that. All it requires is that the new agreement is ratified -- and the threat of layoffs is often an effective motivator. There is a different legal bar that helps prevent the raiding of pension benefits once the payments begin. Before that, pension promises are fair game. There is no legal bar to renegotiating the terms of pension agreements. Thankfully, it is very rare.

(In our case, the major pension concession was a political move on the part of our unions to help enact different legislation unrelated to state employees. In most states, the unions represent their members more faithfully.)

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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Re: State pension and asset allocation question

Post by rallenal » Mon Sep 03, 2012 11:41 am

My pension is from another state (CO) that retroactively cut benefits to the already retired. This in spite of the retirement system and the state AG saying such benefits were protected by the contract clause before they said they weren't. So be very careful in counting on anything from a public pension system. Private sector is governed by ERISA so less risk there now.

am
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Re: State pension and asset allocation question

Post by am » Mon Sep 03, 2012 12:13 pm

"So be very careful in counting on anything from a public pension system. Private sector is governed by ERISA so less risk there now."

So then do you think it would be wise to take the separation refund 66k and roll it over into a IRA?

Of course there is also the chance that the current interest rate of 6.5% set by Illinois gets bumped up to higher levels if the economy does well and my annuity gets bumped up. It was 3k+ before the recession hit. There are also health benefits that I could buy at a discount at 62. If OBama's health plan goes into effect this may not be advantageous. And finally, there is a chance I could work for the state system again and get my benefits at 55. I would only need 2 3/4 years more. Kind of a tough one.

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Re: State pension and asset allocation question

Post by 22twain » Mon Sep 03, 2012 12:43 pm

johnep wrote:Actually in most states once you are vested in the pension system, your benefits are locked in. [...] This is also true for most local govts as well.
Maybe. Consider Central Falls, Rhode Island:

http://www.cbsnews.com/8301-18563_162-5 ... e-slashed/

mur44
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Re: State pension and asset allocation question

Post by mur44 » Mon Sep 03, 2012 3:00 pm

New Jersey is one of the first states to cut state/county/local pensions
for retirees as well as current workers. COLA was eliminated for retirees
and current employees. Employee contributions hiked.

State of New Jersey does not offer lump sum payment and
therefore, there is NO guarantee that one will receive pension
payments in the future years.

I am wondering if there is any insurance company that
would guarantee state pension.

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Re: State pension and asset allocation question

Post by Mudpuppy » Mon Sep 03, 2012 3:36 pm

I think the core concept to take away from this conversation, with respects to your financial planning, is to make a conservative projection for the pension (say 20% to 50% of the current benefit) and use that projection to offset your needed retirement income. Then be sure that all of your voluntary contributions to whatever plans your state provides (401k, 403b, 457b), your IRA, and your taxable investing will be sufficient to support the rest of your retirement needs. Any planning beyond that is trying to look into a murky crystal ball, and will bring nothing but headaches.

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ofcmetz
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Re: State pension and asset allocation question

Post by ofcmetz » Mon Sep 03, 2012 4:21 pm

Mudpuppy wrote:I think the core concept to take away from this conversation, with respects to your financial planning, is to make a conservative projection for the pension (say 20% to 50% of the current benefit) and use that projection to offset your needed retirement income. Then be sure that all of your voluntary contributions to whatever plans your state provides (401k, 403b, 457b), your IRA, and your taxable investing will be sufficient to support the rest of your retirement needs. Any planning beyond that is trying to look into a murky crystal ball, and will bring nothing but headaches.

This is exactly what I'm doing. My Louisiana pension is only 57% funded, but I'm offered an excellent 457B and a 403B. It seems wise to risk saving to much if you are covered by one of these states with questionable abilities to meet obligations.
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Re: State pension and asset allocation question

Post by rallenal » Mon Sep 03, 2012 5:18 pm

am wrote:"So be very careful in counting on anything from a public pension system. Private sector is governed by ERISA so less risk there now."

So then do you think it would be wise to take the separation refund 66k and roll it over into a IRA?

Of course there is also the chance that the current interest rate of 6.5% set by Illinois gets bumped up to higher levels if the economy does well and my annuity gets bumped up. It was 3k+ before the recession hit. There are also health benefits that I could buy at a discount at 62. If OBama's health plan goes into effect this may not be advantageous. And finally, there is a chance I could work for the state system again and get my benefits at 55. I would only need 2 3/4 years more. Kind of a tough one.
Not an option I had so I haven't studied that. I think that the prospects of Illinois increasing the investment earnings assumption are pretty remote. While 6.5% is fairly low by state pension system standards the earnings assumptions are under a lot of pressure (Moody's just issued their own standards assessing pension risk in bond the unfunded liabilities in IL are so high that even if they have a windfall on earnings, the money logically goes to reducing those. Of course, we are talking about IL here so logic may not be in play. If you keep it, I would discount it pretty heavily as other posters have suggested. If that turns out to be too conservative then you get a windfall.

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Re: State pension and asset allocation question

Post by Muchtolearn » Mon Sep 03, 2012 5:19 pm

johnep wrote:I do not know specifically about Illinois but most state pensions are protected meaning they must pay pensioners 100%. they cannot get out of their obligation even with bankruptcy.
Johnep, states cannot declare bankruptcy at least under current law. What is starting to happen is that when the various funds are running short (so far in local places like San Diego, San Jose, Central Falls Rhodes Island) there are sometimes negoitations with the unions. States thus far have followed your principal and as California did last week, reduced benefits for future employees. That is good except the savings are minimal. So when there simply isn't enough money in the funds, then there will be a de facto pitting of new vs older employees as the union is going to have to give somewhere. Illinois is one of the 1 or 2 least funded plans. What was done there this year won't help much and included large tax increases which can't be repreated in the near future. I would no count on any specific amount from Illinois. Certainly the population of the state will not allow zero money to be spent on anything other than retiree pensions and health care. Easy fixes even for retirees already retired is to stop the unsustainable automatic 6.5% returns posted by OP. NY has a 7% situation. All of this must end of course.

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Re: State pension and asset allocation question

Post by Muchtolearn » Mon Sep 03, 2012 5:23 pm

rallenal wrote:My pension is from another state (CO) that retroactively cut benefits to the already retired. This in spite of the retirement system and the state AG saying such benefits were protected by the contract clause before they said they weren't. So be very careful in counting on anything from a public pension system. Private sector is governed by ERISA so less risk there now.
Rallenal, I didn't know this and I thought I was up on all of this. Can you provide a sketch of what actually happened to already retired people collecting pensions? Was it imposed or negotiated?

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Re: State pension and asset allocation question

Post by am » Mon Sep 03, 2012 7:34 pm

So is the smart thing to take the separation refund and run? The 6.5% guaranteed is very attractive however, but if I will not be able to get this money later I would rather invest it in the markets myself.

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iceport
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Re: State pension and asset allocation question

Post by iceport » Mon Sep 03, 2012 8:46 pm

am,

We've managed to convince you there is no iron-clad guarantee the IL pension will remain as currently advertized, but we might have done too good a job of it. It's unlikely to be an all-or-nothing proposition. In reality, retroactive changes to promised pensions are relatively rare. And when they are made, the cuts are not usually very drastic. My own case of a 20% cut really only applies to an early retirement option that I was planning to use. Had I planned on staying to full retirement age, the only affect would be a cut in the minimum COLA from 2.5% to 2.0%. Others with longer to go until retirement will have to make relatively modest contributions to the plan to prevent their current retirement ages from increasing by three years. Reforms I've heard about elsewhere seem to leave those already in the retirement system alone, or offer some way to mitigate the damage.

The bottom line, as I see it, is that even if it is trimmed around the edges your pension could provide a very valuable income stream. Though we don't really know how far you are from collecting, it's hard to envision $66k growing to that kind of value, even if your pension were to be cut in half. And chances are very good you will not lose anything close to that, if anything at all.

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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Re: State pension and asset allocation question

Post by peppers » Mon Sep 03, 2012 9:11 pm

As petrico says, consider it an income stream. My wfe's pension will come from IL and she should get "something." When the time comes, will that amount remain the same throughout retirement? We are not planning on it. These are interesting times indeed.
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Re: State pension and asset allocation question

Post by Mudpuppy » Mon Sep 03, 2012 9:34 pm

am wrote:So is the smart thing to take the separation refund and run? The 6.5% guaranteed is very attractive however, but if I will not be able to get this money later I would rather invest it in the markets myself.
There's no way anyone can say that's the smart thing or not right now. You've given us no indication of your age, how much more will be accumulated in the lump sum before retirement, or how many years out this decision is. The answer will depend on these factors.

Let's just assume you have to make a decision by the end of the month. Comparing the pension with no survivors benefits to the current lump sum has a 30 month break even period. Comparing the pension with 100% survivor benefits to the current lump sum has a 37 month break even period. It is highly unlikely the pension would be eliminated in the next 2-3 years, so the pension would make more sense if you had to decide right now.

But the answer may be highly different in the future, based on what turns your pension takes. You'll have to run a similar comparison in the future to determine which option is best then. Since you were asking with respects to asset allocation and I cannot predict the future, the answer has already been given: assume a reduced benefit and consider it as an income stream.

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Re: State pension and asset allocation question

Post by Bongleur » Mon Sep 03, 2012 10:17 pm

>It is highly unlikely the pension would be eliminated in the next 2-3 years

IMO just the opposite - we are currently in a very precarious financial condition. Either it gets fixed or it breaks catastrophically in the near future. Place your bets...

One fix could be to change state law so the lump-sum value only increases by some small fraction of the actual pension fund gains for a year, if they have any (since they need to retain most gains to play catch-up for future obligations). In that case, take the lump now and you could probably make the same gains. Is the lump sum taxable or do you get to put it into a tax-deferred account?
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Re: State pension and asset allocation question

Post by donall » Tue Sep 04, 2012 12:19 am

What retirement system are you in? Not all Illinois pension systems are underfunded. IMRF is not underfunded and is healthy, perhaps because the system never had state contributions promised. Are you using the reciprocal service to figure the pensions?

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Re: State pension and asset allocation question

Post by carolinaman » Tue Sep 04, 2012 8:11 am

Muchtolearn wrote:
johnep wrote:I do not know specifically about Illinois but most state pensions are protected meaning they must pay pensioners 100%. they cannot get out of their obligation even with bankruptcy.
Johnep, states cannot declare bankruptcy at least under current law. What is starting to happen is that when the various funds are running short (so far in local places like San Diego, San Jose, Central Falls Rhodes Island) there are sometimes negoitations with the unions. States thus far have followed your principal and as California did last week, reduced benefits for future employees. That is good except the savings are minimal. So when there simply isn't enough money in the funds, then there will be a de facto pitting of new vs older employees as the union is going to have to give somewhere. Illinois is one of the 1 or 2 least funded plans. What was done there this year won't help much and included large tax increases which can't be repreated in the near future. I would no count on any specific amount from Illinois. Certainly the population of the state will not allow zero money to be spent on anything other than retiree pensions and health care. Easy fixes even for retirees already retired is to stop the unsustainable automatic 6.5% returns posted by OP. NY has a 7% situation. All of this must end of course.
Muchtolearn,
I have a local govt pension in NC but that has the same legal position as state pensions. I hear what you are saying and those seriously underfunded pension systems may have no other choice than to cut benefits to pensioners. However, the courts have consistently ruled that govt pension obligations are a legal obligation and cannot be reduced. I believe the mention about Colorado pension reduction has to do with COLA and is being contested in the courts. Some pension systems have COLA and some do not. Those with a COLA often have higher increases than current inflation which exacerbates the problem. Our county attoney's position has always been that once someone gets into the pension system that is a promise the govt has made to that individual and it is a legal contract that cannot be broken.

Our pension system is fully funded so we do not have the issues some others have. I do not know how this gets resolved for California or Illinois pensions or others in similar situation. It will be messy.
Last edited by carolinaman on Tue Sep 04, 2012 11:02 am, edited 1 time in total.

ShowMeTheER
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Re: State pension and asset allocation question

Post by ShowMeTheER » Tue Sep 04, 2012 8:40 am

Muchtolearn wrote:
rallenal wrote:My pension is from another state (CO) that retroactively cut benefits to the already retired. This in spite of the retirement system and the state AG saying such benefits were protected by the contract clause before they said they weren't. So be very careful in counting on anything from a public pension system. Private sector is governed by ERISA so less risk there now.
Rallenal, I didn't know this and I thought I was up on all of this. Can you provide a sketch of what actually happened to already retired people collecting pensions? Was it imposed or negotiated?
I'd be curious to hear about this as well. Nearly every time, the current accrued benefit is untouched while the future accrual is altered. Then the media/journalists get in the way and say pensions were 'slashed', when in reality it was only slashed versus the prior future projection.

These would be interesting cases to read about where a true retroactive cut was made. I hadn't heard of them either.

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Re: State pension and asset allocation question

Post by rallenal » Tue Sep 04, 2012 12:59 pm

ShowMeTheER wrote:
Muchtolearn wrote:
rallenal wrote:My pension is from another state (CO) that retroactively cut benefits to the already retired. This in spite of the retirement system and the state AG saying such benefits were protected by the contract clause before they said they weren't. So be very careful in counting on anything from a public pension system. Private sector is governed by ERISA so less risk there now.
Rallenal, I didn't know this and I thought I was up on all of this. Can you provide a sketch of what actually happened to already retired people collecting pensions? Was it imposed or negotiated?
I'd be curious to hear about this as well. Nearly every time, the current accrued benefit is untouched while the future accrual is altered. Then the media/journalists get in the way and say pensions were 'slashed', when in reality it was only slashed versus the prior future projection.

These would be interesting cases to read about where a true retroactive cut was made. I hadn't heard of them either.
It was, as stated by other posts a cut in the COLA. CO and political subdivision in PERA do not bargain for pensions so the mechanism was a change in the statute. It should go without saying on this forum that there is no financial difference between between the base benefit and the COLA. It is all part of the expected value when you retire. The cut in the COLA led to about a 15% reduction for the average benefit recipient with an average life expectancy. While there have been no reductions in actual payments of which I am aware, these changes open the door to future cuts in actual levels. In any event, there have been cuts in real value. COPERA and most state retirement systems have a cap on the upside unlike Social Security which will inflate whatever the CPI says. There was a CO Supreme Ct decision, an CO AG opinion and repeated statements by the pension system itself that the whole package was covered under the contract clause of the constitution. If you want to get deep into this you can go here: {http://saveperacola.com/resources/} where you can get all of the court filings and other documents associated with the case. The plaintiff's case was dismissed at the district court level-a decision currently under appeal.

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Re: State pension and asset allocation question

Post by ShowMeTheER » Tue Sep 04, 2012 1:30 pm

So just an adjustment to future COLA provisions/assumptions, but not a retroactive reduction in benefit earned.

I have still yet to see a change that reduces accrued public pension benefit (and private plans cannot, of course). It'll be a very serious scenario economically if real benefit reductions occur. They'll take care of them with new hire and future accrual provisions until/unless they have absolutely no other cards to play. Political ramifications would be heck.

I don't expect to see this for many many years, if ever. The changes are unfortunate for those that counted on continuing accruals/increases in a plan that they are currently in, but it'll be an entirely different situation if a system actually starts taking away from already earned benefits.

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Re: State pension and asset allocation question

Post by iceport » Tue Sep 04, 2012 3:33 pm

ShowMeTheER wrote:So just an adjustment to future COLA provisions/assumptions, but not a retroactive reduction in benefit earned.

I have still yet to see a change that reduces accrued public pension benefit (and private plans cannot, of course). It'll be a very serious scenario economically if real benefit reductions occur. They'll take care of them with new hire and future accrual provisions until/unless they have absolutely no other cards to play. Political ramifications would be heck.

I don't expect to see this for many many years, if ever. The changes are unfortunate for those that counted on continuing accruals/increases in a plan that they are currently in, but it'll be an entirely different situation if a system actually starts taking away from already earned benefits.
ShowMeTheER,

I'm not following the distinction you're making. rallenal was correct in stating that the promised COLA was rightfully part of the overall pension benefit that had been earned/promised.

Also, when you refer to an "accrued benefit," do you mean before or after retirement?

My pension benefit was actually slashed retroactively. Though this happened a few years before retirement, I had indeed accrued a certain level of benefit over the course of 25 years, which has now been slashed.

--Pete
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Juniormint
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Re: State pension and asset allocation question

Post by Juniormint » Tue Sep 04, 2012 6:04 pm

petrico wrote: I am counting on a state pension also, and I don't explicitly consider it in my AA. When I was further from retirement, I took it into account in a small way by using a slightly more aggressive AA than I otherwise would have chosen. Now, I just ignore it for AA purposes and figure that it will reduce what I will need to obtain from SS and withdrawals from the portfolio.
This is my current strategy. I consider my state pension to be part of my AA mainly because my pension is currently the largest portion of my retirement portfolio. This should change by the end of next year when my 403(b), 457(b), and Roth IRA become the bigger portion causing me to adjust my AA accordingly. Even though many say that it should be considered a cash stream, it seems wrong for someone that is still 30+ years away from retiring and not planning to stay with this employer for their entire career since we have the option of rolling the funds to an IRA once we leave. If we are planning to leave and can roll over the funds, shouldn't we count on the funds coming with you as opposed to not counting on the money being there 30 years down the road?

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Re: State pension and asset allocation question

Post by Juniormint » Tue Sep 04, 2012 6:13 pm

Anyways, I would like to ask this question at the BH 11 Conference to the panel. If anyone wants to add more to this question, feel free:

Dear Mr. Bogle,

There are many bogleheads here that work for the federal and/or the state government and therefore have state pensions or similar defined benefit contributions plans. Most of these plans seem to be underfunded and are constantly changing due to enacted laws that can not only have prospective effects but a retroactive effects as well. For those bogleheads that are 20 to 30 plus years away from retirement, do you think it is wise to count these plans provided by the state as part of our asset allocation or retirement planning process or should we ignore it and consider it to be an “extra” cash-stream in case we do receive benefits from it? How do you think we should view and account for these types of plans in our retirement planning process?

robertalpert
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Re: State pension and asset allocation question

Post by robertalpert » Tue Sep 04, 2012 6:54 pm

am wrote:So is the smart thing to take the separation refund and run? The 6.5% guaranteed is very attractive however, but if I will not be able to get this money later I would rather invest it in the markets myself.


I think this is the worst of all choices. Take the $1800 / month and assure lifetime income for both you and spouse. This probably includes health coverage for both you and spouse. (At least is does in Ohio civil service.) Taking separation refund (with no monthly benefit) would probably exclude you for healthcare coverage withing the pension system.

maitrina
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Re: State pension and asset allocation question

Post by maitrina » Tue Sep 04, 2012 7:28 pm

Illinois is one of a handful of states with a "pension protection clause" in its constitution. It reads "Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contract, the benefits of which shall not be diminished or impaired." Three years ago, in the dark of night, the state legislature and governor made major changes to the pensions for future hires. The consensus was that changes to pension benefits for current members would require a constitutional amendment.

As bad as Illinois' pension funding is, it's really, really hard to change the State's constitution, especially in a state with strong and influential public service unions.

p.s. - as a newbie, I really appreciate the knowledge and wisdom shared here.Thank you.
Last edited by maitrina on Tue Sep 04, 2012 9:37 pm, edited 1 time in total.
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Bongleur
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Re: State pension and asset allocation question

Post by Bongleur » Tue Sep 04, 2012 8:51 pm

>"voluntary additional contributions" account that pays, on December 31st of each year, 7.5% interest on the balance

That is extremely generous of the taxapayers. Well, the one's who don't leave the state to protect their wealth... 7.5% investment return is pure hokum.
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Re: State pension and asset allocation question

Post by rallenal » Wed Sep 05, 2012 11:57 am

ShowMeTheER wrote:So just an adjustment to future COLA provisions/assumptions, but not a retroactive reduction in benefit earned.

I have still yet to see a change that reduces accrued public pension benefit (and private plans cannot, of course). It'll be a very serious scenario economically if real benefit reductions occur. They'll take care of them with new hire and future accrual provisions until/unless they have absolutely no other cards to play. Political ramifications would be heck.

I don't expect to see this for many many years, if ever. The changes are unfortunate for those that counted on continuing accruals/increases in a plan that they are currently in, but it'll be an entirely different situation if a system actually starts taking away from already earned benefits.
What Petrico said. And if you want to see a case of where actual benefits were cut, here it is.
http://mobile.reuters.com/article/idUSB ... 4?irpc=932
In the CO case, the pension system argued that there was no contract with the retirees. This argument was accepted by the district court and if upheld, obviously opens the door to more cuts. I reiterate my caution in counting on promised value in public pensions. Do the same due diligence as you would on any other investment. Unfortunately, in many cases there is no choice other than changing employment.

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Re: State pension and asset allocation question

Post by rallenal » Wed Sep 05, 2012 12:02 pm

Juniormint wrote:Anyways, I would like to ask this question at the BH 11 Conference to the panel. If anyone wants to add more to this question, feel free:

Dear Mr. Bogle,

There are many bogleheads here that work for the federal and/or the state government and therefore have state pensions or similar defined benefit contributions plans. Most of these plans seem to be underfunded and are constantly changing due to enacted laws that can not only have prospective effects but a retroactive effects as well. For those bogleheads that are 20 to 30 plus years away from retirement, do you think it is wise to count these plans provided by the state as part of our asset allocation or retirement planning process or should we ignore it and consider it to be an “extra” cash-stream in case we do receive benefits from it? How do you think we should view and account for these types of plans in our retirement planning process?
Add local government/school districts to your question. I suspect there are more teachers than other government employees here and in most states school districts are local government though in many cases they participate in a state pension system. I would also split the question between those plans that also have participation in Social Security and those that don't.

Muchtolearn
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Re: State pension and asset allocation question

Post by Muchtolearn » Wed Sep 05, 2012 12:12 pm

maitrina wrote:Illinois is one of a handful of states with a "pension protection clause" in its constitution. It reads "Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contract, the benefits of which shall not be diminished or impaired." Three years ago, in the dark of night, the state legislature and governor made major changes to the pensions for future hires. The consensus was that changes to pension benefits for current members would require a constitutional amendment.

As bad as Illinois' pension funding is, it's really, really hard to change the State's constitution, especially in a state with strong and influential public service unions.

p.s. - as a newbie, I really appreciate the knowledge and wisdom shared here.Thank you.
Maitrina, I wish it were the case but you are being naive. Yes, the pensions are an enforceable contract. So are bonds, so are agreements to pay vendors and so are contracts with employees. Those of us who are older have seen many enforceable contracts not be enforced because they couldn't be. Lets look at a hypothetical:
The pension and health care costs of state employees will consume 110% of state revenues. What do you do? Pay out all revenues to the pensioners, borrow an additional amount from the Mafia (nobody else would lend you money) and have zero funding for anything else? Not a single employee of the state. Not a single cop on the road. Of course not. So contracts are made unfortunately to be broken. From what I read, there is essentially no chance that Illinois can meet its current pension obligations. Just like what has happened to Greece. The problem gets kicked ahead but each time the kick is a little bit shorter in distance.

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Re: State pension and asset allocation question

Post by ShowMeTheER » Wed Sep 05, 2012 12:39 pm

petrico wrote:
ShowMeTheER wrote:So just an adjustment to future COLA provisions/assumptions, but not a retroactive reduction in benefit earned.

I have still yet to see a change that reduces accrued public pension benefit (and private plans cannot, of course). It'll be a very serious scenario economically if real benefit reductions occur. They'll take care of them with new hire and future accrual provisions until/unless they have absolutely no other cards to play. Political ramifications would be heck.

I don't expect to see this for many many years, if ever. The changes are unfortunate for those that counted on continuing accruals/increases in a plan that they are currently in, but it'll be an entirely different situation if a system actually starts taking away from already earned benefits.
ShowMeTheER,

I'm not following the distinction you're making. rallenal was correct in stating that the promised COLA was rightfully part of the overall pension benefit that had been earned/promised.

Also, when you refer to an "accrued benefit," do you mean before or after retirement?

My pension benefit was actually slashed retroactively. Though this happened a few years before retirement, I had indeed accrued a certain level of benefit over the course of 25 years, which has now been slashed.

--Pete
Pete,

Thanks - this is interesting add'l info. By accrued, I mean as of a current date. Doesn't matter if it's before or after retirement. So, most commonly, you get a statement saying As Of 1/1/2012 you have accrued a benefit of, say, $500/month. Then they probably list a projected retirement benefit on 1/1/2018, for example, of $1,000/month. Most often what you've earned (accrued) - $500 here - as of today does not get reduced. Only the future projection/promise is altered.

I also see in the Central Falls, RI link a citing of someone who had a pension slashed from $27K to $18K... and had been retired for 25 years. That is a strong sign that nothing is lost in translation in his case. A true earned benefit cut.

Care to share the mechanics and timing of your case in terms of how it played out?

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iceport
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Re: State pension and asset allocation question

Post by iceport » Wed Sep 05, 2012 12:51 pm

rallenal wrote:
ShowMeTheER wrote:So just an adjustment to future COLA provisions/assumptions, but not a retroactive reduction in benefit earned.

I have still yet to see a change that reduces accrued public pension benefit (and private plans cannot, of course). It'll be a very serious scenario economically if real benefit reductions occur. They'll take care of them with new hire and future accrual provisions until/unless they have absolutely no other cards to play. Political ramifications would be heck.

I don't expect to see this for many many years, if ever. The changes are unfortunate for those that counted on continuing accruals/increases in a plan that they are currently in, but it'll be an entirely different situation if a system actually starts taking away from already earned benefits.
What Petrico said. And if you want to see a case of where actual benefits were cut, here it is.
http://mobile.reuters.com/article/idUSB ... 4?irpc=932
In the CO case, the pension system argued that there was no contract with the retirees. This argument was accepted by the district court and if upheld, obviously opens the door to more cuts. I reiterate my caution in counting on promised value in public pensions. Do the same due diligence as you would on any other investment. Unfortunately, in many cases there is no choice other than changing employment.
Ouch! Up to 55% cut from existing retirees' pensions? I thought my 20% cut before retirement was bad, but 55% slashed during retirement seems criminal.

Here's my real-world example for ShowMeTheER

REVISED 2011 AGREEMENT

COLA - The minimum COLA shall be two percent (2.0%) (It was 2.5%)

Early Retirement Reduction Factors - For individuals retiring on or after October 2, 2011, the early retirement reduction factor shall be changed to six percent (6%) for each year before the individual would be eligible to take unreduced Normal Retirement. (It was 3%)

Current employees who retire after July 1,2022 - Normal Retirement eligibility increases from Age 60 and 25 Years of Benefit Service or Age 62 and 10 Years of Benefit Service to Age 63 and 25 Years of Benefit Service or Age 65 and 10 Years of Benefit Service.

Health care premiums for Early Retirees - The parties have agreed to a grid, Attachment C, where health care costs (for health care eligible individuals) are imposed on individuals who elect early retirement until they reach their normal retirement date, or age 65, whichever is earlier.

These all applied retroactively to existing employees in a retirement system "tier" that was 27 years old.

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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iceport
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Re: State pension and asset allocation question

Post by iceport » Wed Sep 05, 2012 1:24 pm

ShowMeTheER wrote:
petrico wrote:
ShowMeTheER wrote:So just an adjustment to future COLA provisions/assumptions, but not a retroactive reduction in benefit earned.

I have still yet to see a change that reduces accrued public pension benefit (and private plans cannot, of course). It'll be a very serious scenario economically if real benefit reductions occur. They'll take care of them with new hire and future accrual provisions until/unless they have absolutely no other cards to play. Political ramifications would be heck.

I don't expect to see this for many many years, if ever. The changes are unfortunate for those that counted on continuing accruals/increases in a plan that they are currently in, but it'll be an entirely different situation if a system actually starts taking away from already earned benefits.
ShowMeTheER,

I'm not following the distinction you're making. rallenal was correct in stating that the promised COLA was rightfully part of the overall pension benefit that had been earned/promised.

Also, when you refer to an "accrued benefit," do you mean before or after retirement?

My pension benefit was actually slashed retroactively. Though this happened a few years before retirement, I had indeed accrued a certain level of benefit over the course of 25 years, which has now been slashed.

--Pete
Pete,

Thanks - this is interesting add'l info. By accrued, I mean as of a current date. Doesn't matter if it's before or after retirement. So, most commonly, you get a statement saying As Of 1/1/2012 you have accrued a benefit of, say, $500/month. Then they probably list a projected retirement benefit on 1/1/2018, for example, of $1,000/month. Most often what you've earned (accrued) - $500 here - as of today does not get reduced. Only the future projection/promise is altered.

I also see in the Central Falls, RI link a citing of someone who had a pension slashed from $27K to $18K... and had been retired for 25 years. That is a strong sign that nothing is lost in translation in his case. A true earned benefit cut.

Care to share the mechanics and timing of your case in terms of how it played out?
Hi ShowMeTheER,

In our system, we used to be sent annual statements (they were ceased as a cost savings measure), but the monthly benefits we were provided were all projected to retirement. We never received an "accrued" amount. The (projected) straight life annuity was exactly the same as what we could calculate on our own using the (rather complicated) pension formula. The spousal and period certain options were helpful comparisons that otherwise couldn't be determined by us.

So essentially what happened was the formulas were changed for early retirement options, and that change applies to all years of prior service. The COLA was reduced, and the retirement age was raised by 3 years. Oh -- and early retirees now have an additional health care premium that remains in effect until normal retirement age is reached. This all affected different people in very different ways, depending on our individual circumstances. Those planning on early retirement, like me, were hit the hardest by far.

This all happened when nearly all individual bargaining unit wage agreements (15 in all?) were set to expire within ~1 year. Our collective bargaining entity that represents every individual bargaining unit in the state agreed to open benefits negotiations with the governor (that the unions were instrumental in helping elect), and they proceeded in absolute secrecy to structure the agreement with the state. There were lots of politics involved. (The overall collective bargaining entity and the huge national unions that have taken over many of our smaller state unions had other, separate political objectives.)

--Pete
"Discipline matters more than allocation.” ─William Bernstein

ShowMeTheER
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Re: State pension and asset allocation question

Post by ShowMeTheER » Wed Sep 05, 2012 2:30 pm

Thanks for taking the time to post, Pete. Looking forward to reading through it all soon.

Muchtolearn
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Re: State pension and asset allocation question

Post by Muchtolearn » Wed Sep 05, 2012 3:59 pm

Petrico, it looks like early retirees have a health contribution but not retirees. Now one thing that is never guaranteed are retiree pensions aside form the contracts. So that has been an easy one for states and localities to go after. There is no chance that a public employee will go through life with zero contributions. That will be cut. Just plan accordingly and should there be a positive surprise, great. I have retiree medical from a large, successful company. Now I pay 1/3 but I had been there almost 20 years. I anticipate I will keep paying more and then it will be eliminated sometime in the next few years. It is possible that they will let it go until people hit 65 and then say goodbye to it.

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Re: State pension and asset allocation question

Post by carolinaman » Thu Sep 06, 2012 7:39 am

Thanks for the information on RI and others. I read somewhere that the retiree pension obligations of that RI town were 50% of the town's annual budget. No wonder they had to do something. The following is a recent article on the pension challenges in California.

http://www.cbsnews.com/8301-505245_162- ... g-workers/


The laws vary in the states which might explain why some pensions are safer than others. However, it seems that necessity is forcing the hand of California even though their pensions were considered safe based upon prior court decisions. I that California's local govt pensions were much richer than ours in NC which adds to their challenge.

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Re: State pension and asset allocation question

Post by Juniormint » Wed Sep 19, 2012 10:05 pm

rallenal wrote:
Juniormint wrote:Anyways, I would like to ask this question at the BH 11 Conference to the panel. If anyone wants to add more to this question, feel free:

Dear Mr. Bogle,

There are many bogleheads here that work for the federal and/or the state government and therefore have state pensions or similar defined benefit contributions plans. Most of these plans seem to be underfunded and are constantly changing due to enacted laws that can not only have prospective effects but a retroactive effects as well. For those bogleheads that are 20 to 30 plus years away from retirement, do you think it is wise to count these plans provided by the state as part of our asset allocation or retirement planning process or should we ignore it and consider it to be an “extra” cash-stream in case we do receive benefits from it? How do you think we should view and account for these types of plans in our retirement planning process?
Add local government/school districts to your question. I suspect there are more teachers than other government employees here and in most states school districts are local government though in many cases they participate in a state pension system. I would also split the question between those plans that also have participation in Social Security and those that don't.
Done. Thanks so much for the input. :)

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Re: State pension and asset allocation question

Post by Bongleur » Thu Sep 20, 2012 12:29 am

Wonder what % of workers who have pension plans are public sector, and what fraction of the total pension dollars owed are owed to them?
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iceport
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Re: State pension and asset allocation question

Post by iceport » Thu Sep 20, 2012 8:47 pm

Bongleur wrote:Wonder what % of workers who have pension plans are public sector, and what fraction of the total pension dollars owed are owed to them?
Because it would help the OP assess the security of his/her public sector pension, or to make a political point?

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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Re: State pension and asset allocation question

Post by lawman3966 » Thu Sep 20, 2012 10:38 pm

rallenal wrote:Private sector is governed by ERISA so less risk there now.
This could benefit from some clarification. If you're referring to tax-deferred 401K savings accounts, the money has already been paid out to the participants and can't be taken back.

Private sector defined benefit pensions can be reduced by bankruptcy (or by renegotiation), and sometimes placed in the hands of the PBGC, which commonly reduced the pension payout amount. Thus, people with such pensions would be wise to have contingency plans.

In my own case, my defined benefit pension of $0.00 (paid monthly) is guaranteed not to decline. :)

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Re: State pension and asset allocation question

Post by Bongleur » Fri Sep 21, 2012 1:48 am

petrico wrote:
Bongleur wrote:Wonder what % of workers who have pension plans are public sector, and what fraction of the total pension dollars owed are owed to them?
Because it would help the OP assess the security of his/her public sector pension, or to make a political point?

--Pete
Well, politically you could say that a significant fraction of GM is public sector nowadays...

I just wonder what the whole pension burden is, and what fraction the taxpayer is on the hook for. Followup questions might be whether public sector plans pay higher ERs than private... Do public plans have larger fantasies when estimating future rates of return?

There is certainly political cronyism in choosing plan administrators & which funds can be purchased (you gotta use the brokerage/fund who is based in your big city...).
Seeking Iso-Elasticity. | Tax Loss Harvesting is an Asset Class. | A well-planned presentation creates a sense of urgency. If the prospect fails to act now, he will risk a loss of some sort.

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Re: State pension and asset allocation question

Post by ShowMeTheER » Fri Sep 21, 2012 7:25 am

petrico wrote:
rallenal wrote:
ShowMeTheER wrote:So just an adjustment to future COLA provisions/assumptions, but not a retroactive reduction in benefit earned.

I have still yet to see a change that reduces accrued public pension benefit (and private plans cannot, of course). It'll be a very serious scenario economically if real benefit reductions occur. They'll take care of them with new hire and future accrual provisions until/unless they have absolutely no other cards to play. Political ramifications would be heck.

I don't expect to see this for many many years, if ever. The changes are unfortunate for those that counted on continuing accruals/increases in a plan that they are currently in, but it'll be an entirely different situation if a system actually starts taking away from already earned benefits.
What Petrico said. And if you want to see a case of where actual benefits were cut, here it is.
http://mobile.reuters.com/article/idUSB ... 4?irpc=932
In the CO case, the pension system argued that there was no contract with the retirees. This argument was accepted by the district court and if upheld, obviously opens the door to more cuts. I reiterate my caution in counting on promised value in public pensions. Do the same due diligence as you would on any other investment. Unfortunately, in many cases there is no choice other than changing employment.
Ouch! Up to 55% cut from existing retirees' pensions? I thought my 20% cut before retirement was bad, but 55% slashed during retirement seems criminal.

Here's my real-world example for ShowMeTheER

REVISED 2011 AGREEMENT

COLA - The minimum COLA shall be two percent (2.0%) (It was 2.5%)

Early Retirement Reduction Factors - For individuals retiring on or after October 2, 2011, the early retirement reduction factor shall be changed to six percent (6%) for each year before the individual would be eligible to take unreduced Normal Retirement. (It was 3%)

Current employees who retire after July 1,2022 - Normal Retirement eligibility increases from Age 60 and 25 Years of Benefit Service or Age 62 and 10 Years of Benefit Service to Age 63 and 25 Years of Benefit Service or Age 65 and 10 Years of Benefit Service.

Health care premiums for Early Retirees - The parties have agreed to a grid, Attachment C, where health care costs (for health care eligible individuals) are imposed on individuals who elect early retirement until they reach their normal retirement date, or age 65, whichever is earlier.

These all applied retroactively to existing employees in a retirement system "tier" that was 27 years old.

--Pete
Pete, how does the COLA work in your plan? Is it only in place after retirement? i.e., defined formula resulted in a benefit of, say, $1,000/month. Previously would rise 2.5%/year and now will only rise 2.0%/year? Not necessarily retroactive if that's the case, but maybe there was an active component to COLA.

Although the "Agreement" link/doc wasn't very well done in my opinion, it appears that the early retirement factor cut might be immediate and effective over the full benefit. If so, this is the most aggressive big plan move I've seen in the sense that for someone at age 58 looking to retire early in 2 months, the implementation of the revision would have immediately changed their benefit to collect. That would have a retroactive component to it, since the benefit 'as of today' just changed for that person looking to retire early, but still no cut to the normal retirement accrued benefit. Usually the former ERF of 3% would be grandfathered through the revision date and then the 6% would go into effective from there forward.

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Re: State pension and asset allocation question

Post by iceport » Fri Sep 21, 2012 7:36 pm

ShowMeTheER,

Thanks for taking the time to review! I don't know your source of information, but your perspective is appreciated.

COLA. Yes, you have the COLA reduction correct, minimum was reduced from 2.5% to 2.0%, only applied after retirement. However, I don't really agree that this wasn't retroactive. With a promise of a computed benefit (by formula) and minimum COLA, one could compute the immediate defined benefit, plus a minimum benefit after, say, 10 years. That minimum benefit at 10 years has now been reduced from what was originally promised. How different is that from tweaking the benefit formula downward? Would you not characterize a reduced benefit formula, effective immediately over the full benefit, to be retroactive?

Early Retirement. Yes, you have that correct also. In order to relocate (primarily), I have long been planning on retiring at 55. The day the new agreement took effect, I lost roughly 17% directly due to the revised formula, and another few pecent in health care costs (for the first 5 years). It's roughly a 20% cut. And yes, it is retroactive over all years of service (though as you say, the wording in the agreement leaves much to be desired).

Normal Retirement. The 3 year increase in the normal retirement age was delayed until 2022. However, for someone not old enough for normal retirement by that date, is that not a retroactive cut to an accrued benefit? How do you put a price on 3 years of your life? In fact, it's not as simple as that, because there is an option to "buy back" the original retirement age with actuarially(?) determined contributions starting next year.

No question about it, those of us planning on early retirement got hit the hardest.

Again, thanks for your input.

(Apologies to the OP for hijacking. This does serve as an example of what can happen to promised pension benefits.)

--Pete
"Discipline matters more than allocation.” ─William Bernstein

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