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.

“States like New Jersey and Illinois, which have reduced funding on a continuous basis, now have large liabilities and we have that with city government retirement plans as well,” Kotok said.

On the upside, a state or city-wide shortfall in pension funding benefits can be an opportunity for advisors to position themselves more holistically in their local marketplace.

“There’s no one silver bullet to fill the gap in a funding benefit,” said James Nichols, head of retirement income and advice strategy for Voya Financial. “Advisors can recommend that their clients delay retirement by a year or two, increase savings and take advantage of catch up contributions in their workplace plan.”

Nichols also favors optimizing Social Security benefits as a viable option that is part of a holistic financial plan specifically aimed at covering a pension plan funding gap.

“Taking advantage of a Social Security claiming strategy can create a significant boost to an individual’s overall retirement income stream,” said Nichols.

For married retirees who are 65 and older, Nichols advises a file-and-suspend Social Security strategy where the higher earning spouse files for their benefit but suspends it.

“The higher earner builds a bigger delayed payout in this way and the spouse claims their benefit off that bigger benefit,” Nichols said.

However, after May 1, 2016, the file and suspend strategy will no longer available for those not already grandfathered in.

“There are many other combinations of Social Security optimization strategies that an advisor can create depending on the client’s age and marital status,” Nichols said.