Tag: financial security

Pension Checks of Some Milwaukee County Retirees in Jeopardy After Acting on Government Advice

cut up one hundred dollar bill

A few hundred Milwaukee County retirees are facing reduced pension checks in the future – all because they took County advice that for years resulted in benefit over-payments.

The retirees were receiving bigger payments because they were following County advice regarding “buy ins” and “buy backs.” But the overpayments they were receiving didn’t county ordinances or IRS rules.

In total, the County’s advice led to $25 million worth of overpayments.

So now the County wants retirees to give the money back. Milwaukee County Executive Chris Abele is leading the charge.

From Express Milwaukee:

Last April, Milwaukee County Executive Chris Abele sent a letter to more than 200 Milwaukee County retirees warning them that their pension payments weren’t valid and that he would take back any money they’ve been overpaid.

Nine months later, Abele is walking back from those comments.

But his new strategy, outlined in a Jan. 9 memo to county supervisors, would still take money away from 221 retirees whose only mistake was accepting the county’s own advice when setting up their pension plans.

“The county executive’s plan does not try to recoup any money from retirees,” emailed Abele’s spokesman, Brendan Conway. “It only adjusts future payments to the amount that complies with the law.”

And by “adjusting” them, Abele means “lowering” them.

Under this plan, the city would be getting its money back – by reducing future benefit checks for the retirees in question.

The union response:

“As we’ve come to learn about Abele, he’s making the situation worse,” said Boyd McCamish, head of AFSCME District Council 48, the county’s largest union. “Why does he insist on terrorizing retirees who have done nothing wrong?”

[…]

“It’s about the principle,” McCamish said. “If you are a retiree, a pensioner, you should feel no security at all even though you’ve been paying into these things all your life. One of the main things Abele’s trying to do, along with his buddies the Koch brothers, is to create and perpetuate what is known as the precarious workforce. So even retired people should feel levels of instability. Because when people are desperate and scared they will do anything and they will accept anything.”

Abele’s failed to win over the Pension Review Board in December with the plan.

City officials question whether it is legal to reduce future benefit checks based on overpayments stemming from advice the government itself provided.

“It does not seem clear to me that he can do that legally,” County Supervisor Theo Lipscomb told Express Milwaukee. “Another question is whether you morally should do that. These people relied on advice that the county provided.”

 

Photo by TaxCredits.net

Examining an Insider’s View of Canada’s Pension Debate

Canada

Last month, the Toronto Star interviewed Tom Reid of Sun Life to get an insider’s view of Canada’s pension debate. The interview can be read here.

This week, Leo Kolivakis of the Pension Pulse blog penned his own critical examination of the debate. The post can be read below.

____________________________________

By Leo Kolivakis, Pension Pulse

Indeed, the Canadian Life and Health Insurance Association is hopping mad and expressed its disappointment on its website.

The problem is that the CLHIA is spreading misinformation and outright lies on the so-called benefits of defined-contribution (DC) plans. They are nowhere near as safe and secure as defined-benefit (DB) plans and they’re a lot more costly, regardless of what Reid claims. They also don’t perform as well over long investment horizons because they don’t invest in private investments.

Go back to carefully read my comment on the brutal truth on DC plans, it’s a real eye-opener. We have become so ill-informed on this debate that we accept the lies and misinformation being spread out there.

As I’ve long argued on this blog, there is a case for boosting DB plans in Canada and elsewhere. The benefits of DB plans are well-known and under-appreciated.

Importantly, boosting DB plans, especially now that Canada’s crisis is just beginning (if you wait for “better economic conditions” you will never enhance the CPP!), makes for good retirement and economic policy. Why? Because if you do it properly, adopting world class governance standards, you will enhance economic activity, increase the revenue from sales taxes and reduce the overall debt of the country.

Of course, the insurance and banking industry don’t agree and will keep pushing the Conservatives to peddle PRPPs as the solution but they’re wrong and they know it. They’re petrified of Canada’s top ten and for good reason, when you look at the evidence, our large DB plans are doing an outstanding job providing their members with safe and secure retirement benefits. No DC plan can compete with our large DB plans.

Are Canada’s top ten perfect? Of course not. If they were, this blog would never exist. But take it from this insider, given a choice between anything Prudential, Sun Life, Manulife or Canada’s big banks have to offer and having your retirement money managed by our large DB plans, you should always opt for the latter. Period.

Does this mean that banks and insurance companies should get out of the retirement business altogether and just leave it up to our large DB plans? No, I believe there is a market for what they’re doing and they can certainly compete with the internal portfolio managers at our large DB plans but they’re going to have to lower their fees and change their angle.

In fact, if banks and insurance companies in Canada were smart (they’re hopelessly myopic!) and realized the bigger picture, they would be forcing the federal government to enhance the CPP for all Canadians and boost our DB plans.

I leave you with a comment Bruce Rogers wrote to the Toronto Star in regards to the interview above:

Thanks for devoting space to Ontario’s plans for a pension to supplement the Canada Pension Plan. Too bad your effort gave the platform to an interviewee who has a financial interest in the inadequate, defined contribution approach to the problem.

Our society clearly needs to take action to ensure that retirees and seniors generally enjoy financial security and a modicum of dignity. To argue against a more generous defined benefit approach is to ignore a serious problem.

Of course, the Harper government has made its decision and Bay Street will agree with that course. Let’s hope the business pages of the Star will balance the debate in future, perhaps by exposing the growing threat to defined benefit pensions where they exist.

This is an informed reader who understands what’s at stake. When it comes to retirement policy, we need to go Dutch on pensions and not take lessons from Down Under or worse, the United States of pension poverty.

Lastly, I wish the media in Canada would start interviewing real pension experts like Jim Leech, Leo de Bever, John Crocker and others who truly understand what is at stake and why we need to boost defined-benefit plans for all Canadians.

 

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Do Pension Plans Give Retirees a False Sense of Retirement Security?

broken piggy bank over pile of one dollar bills

At one time, pensions were seen as the safest, most secure stream of retirement income. But the security of pension benefits is no longer rock-solid. That raises the question: do pensions give retirees a false sense of retirement security?

Economist Allison Schrager explores the idea:

Until recently, a pension benefit seemed as good as money in the bank. Companies or governments set aside money for employees’ retirements; the sponsors were on the hook for funding the promised benefits appropriately. In recent years, it has become clear that most pension plans are falling short, but accrued benefits normally aren’t cut unless the plan, or employer, is on the verge of bankruptcy—high-profile examples include airline and steel companies. Public pension benefits appear even safer, because they are guaranteed by state constitutions.

By comparison, 401(k) and other defined contribution plans seem much less reliable. They require employees to decide, individually, to set aside money for retirement and to invest it appropriately over the course of 30 or so years. Research suggests that people are remarkably bad at both: About 20 percent of eligible employees don’t participate in their 401(k) plan. Those who do save too little, and many choose investments that underperform the market, charge high investment fees, or both.

It turns out that pension plan sponsors, and the politicians who oversee them, are just as fallible as workaday employees. We all prefer to spend more today and deal with the future when it comes. Pension plans have done this for years by promising generous benefits without a clear plan to pay for them. When pressed, they may simply raise their performance expectations or choose more risky investments in search of higher returns. Neither is a legitimate solution. In theory, regulators should keep pension plan sponsors in check. In practice, the rules regulators must enforce tend to indulge, or even encourage, risky behavior.

Because pension plans seem so dependable, workers do in fact depend on them and save less outside their plans. According to the 2013 Survey of Consumer Finances, people between ages 55 and 65 with pensions have, on average, $60,000 in financial assets. Households with other kinds of retirement savings accounts have $160,000. It’s true that defined benefit pensions are worth more than the difference, but not if the benefit is cut.

As the new legislation makes clear, pension plans can kick the can down the road for only so long. Defined contribution plans have their problems, but a tremendous effort has been made to educate workers about the importance of participating. (Even if the education campaign has been the product of asset managers who make money when more people participate, it’s still valuable.) Almost half of 401(k) plans now automatically enroll employees, which has increased participation and encouraged investment in low-cost index funds. And now it looks like a generous 401(k) plan with sensible, low-cost investment options may turn out to be less risky than a poorly managed pension plan, not least of all because workers know exactly what the risks are.

Read the entire column here.

 

Photo by http://401kcalculator.org via Flickr CC License

What Tom Wolf’s Win Means For Pennsylvania Pensions

Tom Wolf

Tom Wolf and Tom Corbett had two very different visions for Pennsylvania’s pension system.  If newly-elected Governor Wolf attempts to reform the state’s retirement system, it will look very different than what Pennsylvania residents have experienced over the last few years under Corbett.

If Corbett had won, he would have pushed the legislature adopt a “hybrid” pension plan that incorporates qualities of a defined-benefit plan and a 401(k) plan.

Described by Institutional Investor:

In the 2013 legislative session, Corbett sought to pass pension reform as part of a package of three initiatives (the other two involved privatizing state liquor stores and a state transportation funding plan). Corbett’s pension plan would have enrolled future employees in a defined contribution plan and lowered future defined benefit payouts for current employees. Corbett’s office estimated that these changes would save the state $12 billion in employer contribution costs and $40 billion in plan costs over the next 30 years.

[…]

Corbett’s pension proposal did not pass the legislature. This June Representative Mike Tobash, a Republican, proposed a hybrid pension plan in which new employees would be enrolled in a combined defined benefit, defined contribution fund. This would start the state on the road to a DC system but lessen up-front costs by not shuttering the DB plan.

[…]

Almost immediately, Corbett came out and said he was in “full support” of Tobash’s plan. If reelected, Corbett says, he will call a special session of the General Assembly to tackle the pension problem. Opponents of the plan have taken to calling the plan the Corbett-Tobash pension plan.

But Tom Wolf doesn’t support the hybrid plan. What will the pension system under Wolf look like? He hasn’t offered much in the way of specifics, but he staunchly supports the state’s defined-benefit system. From Institutional Investor:

According to his campaign, Wolf “absolutely opposes changes to current employees’ pension plans, and he believes that a defined benefit retirement plan is the most effective tool for ensuring that our public workers have a financially secure retirement.” Wolf believes that to attract workers and create good private sector jobs, Pennsylvania must offer an attractive and competitive compensation package, which includes a defined benefit pension.

If elected, Wolf has said he will work with the legislature to find a solution to the pension-funding problem. But exactly what that solution might look like, with a governor so “absolutely opposed” to benefit cuts, remains to be seen. The General Assembly is likely to remain Republican, meaning the most probable scenario is a legislature favorable to benefit reform and a governor who is not. Unable to find a solution under four years of a pro-reform governor, a different approach maybe can work.

Pennsylvania’s pension systems are 63.9 percent funded, collectively. Pension liabilities have been the subject of several credit rating downgrades for the state.

Cutting Investment Fees – A Key To Secure Retirement?

flying one hundred dollar billsCharles D. Ellis wrote a thoughtful article in the Financial Analysts Journal recently about the hard choices that people– and institutions – must face sooner than later regarding retirement and pension systems.

One of the main facets of the article’s thesis:

We need to make hard choices on how much to save, how long to work, how to invest, and how much to draw from our savings for spending in retirement.

The article is full of great discussion on these points. After someone stops working, a big part of their financial security stems from controlling costs – not just living expenses, but investment expenses, as well.

From the article:

Most investors somehow believe that fees for investment management are low. Fees are not low. Here’s why: By convention, fees are shown as a percentage of the assets, say, just 1%. But that’s seriously misleading. The investor already has the assets, so the manager’s fee should be stated as a percentage of the benefit (i.e., returns).

If returns are 7%, then the same fee in dollars is 15% of returns. And because index funds deliver the full market return with no more than the market level of risk for a fee of 0.1%, the real cost of active management is the incremental cost as a percentage of the incremental benefit of active management. That’s why the true cost of active management is not 1% or even 15%. Because the average active manager falls short of his chosen benchmark, the average fee is more than 100% of the true net benefit.

Increasingly, investors are learning that one way to reduce costs—and increase returns—is to save on costs by using low-cost index investments, particularly with their 401(k) or other retirement plans.

How your retirement funds are invested is important because many of those dollars are invested for a very long time—20, 40, even 60 years.

The article, titled “Hard Choices: Where We Are”, is available for free from the Financial Analysts Journal.

 

Photo by 401kcalculator.org