When Arizona State Retirement System (ASRS) executives realized their $34 billion pension was running the risk of a funding benefit shortfall, they implemented 10 sustainability initiatives.
“We saw this as a potential problem 13 years ago because the contribution level was significantly dropping in our projections since the cost of operating pensions is going up,” said Paul Madsen, executive director and CEO of ASRS.
"The pressure on pensions is due to increased longevity of older workers, which is creating more liabilities for pension plans," said Edward Keon, managing director and portfolio manager with Quantitative Management Associates), a Prudential business that offers equity and multi-asset class investment solutions.
For advisors with clients who have pensions, there’s reason to be concerned.
“Pensions are less of a sure thing today than they were 20 to 30 years ago depending on who issues the pension and its funding status,” Keon said.
The trouble is unfunded liabilities build over time unless the pension increases funding.
“If it’s a corporate client, in order to increase funding they have to reduce their profits and earnings by at least that amount,” said David Kotok, co-founder and chairman of Cumberland Advisors in Sarasota, Fla. “If it’s a governmental pension, they have to reduce some other public service, freeze taxes or defer the funding.”
In addition to aging workers living longer and drawing on the pension’s pool of money, liabilities also include returns tied to market-based interest rates that are currently low.
“Our clients have seen their benefit ratios coming down by 5% to 6% and financial advisors need to address this decline by ensuring that their clients have other sources of retirement income," Keon said.
In the case of ASRS, pensioners had the foresight to stem rising costs.
“There have been no negotiations present or contemplated that I’ve heard of to reduce the ASRS pension benefit but many pension plans around the country are currently trying to address funding issues,” said Tom Connelly, a financial advisor with Versant in Phoenix who chairs the ASRS investment committee.