Shuttered businesses, stunning job losses and lost state income and sales taxes have all inflicted further harm to the solvency of many public pension plans.

Recent stock market declines triggered by the coronavirus pandemic caused state pension funds to suffer losses of $500 billion, bringing the overall state pension debt to $1.7 trillion and the aggregate funding gap to an all-time high through March, according to analysis from the Pew Charitable Trusts. Even “after the market rebound in April, the aggregate pension shortfall hovered around $250 billion,” says Greg Mennis, director of the Pew Charitable Trusts’ public sector retirement systems project.

So where does that leave public employees counting on pension benefits in states with the most embattled pension plans, for instance those in New Jersey, Connecticut, Illinois and Kentucky?

Even in the good old days, pre-pandemic, Ryan Stith, the founder of Pivot Point Wealth in Brandenburg, Ky., worried about Kentucky’s public pension shortfalls. The state already had one of the worst-funded state pension systems in the nation—at only 34% funded, according to a report from Standard & Poor’s—and critics suspect its funding levels will fall even lower after the economic shutdown prompted by the pandemic.

It’s personal for Stith. While he works with a varied group of clients, many are teachers, and so is his wife, who teaches kindergarten in their rural county where the biggest employer is the public school system. “I truly am worried about the pension system here. We’ve been at a crossroads where it’s been unfunded for the better part of a decade,” he says.

With its low implied interest rate, the difference between a Kentucky public pension lump sum payout or a monthly pension benefit is vast, he says, and it’s a “no brainer” for public employees to take their pension as a monthly benefit rather than a lump sum. “We’ll see what that looks like over the next decade, because I fully expect that pensions will be cut,” Stith says.

The choice facing one of his teacher clients who can retire in the next two years illustrates the dilemma. “Her stated lump sum benefit when she retires is $150,000 to $160,000, but her pension is somewhere in the ballpark of $4,000 a month,” Stith says.

“I think in Kentucky everyone knows and understands changes will be made to the public plan,” he adds. “Covid will make it worse. My role as advisor is to help them understand how these changes can impact their income and lifestyle in retirement.”

Stith says he discusses the variety of ways that Kentucky can or already has cut retirement benefits for its public employees in recent years, including slashing benefits outright, changing calculation methods, taking away cost-of-living adjustments and reducing other retirement benefits like health-care coverage. Kentucky doesn’t participate in Social Security, “so there’s no fallback for teachers. As a result, the ‘guarantee’ of teachers’ pensions takes on even greater importance,” Stith says.

Does his reality check prompt clients to save more? “You get two different answers depending on where they are in the accumulation stage,” Stith says. “Teachers in their 20s, 30s and 40s are far enough away from retirement where there is a real added incentive to save in a Roth IRA or a 457 plan. Some of the clients I talk to who are five to 10 years from retirement may save more while others say they’ll live with the reductions.”

Some public pension plan managers, including Kentucky’s, are seeking out riskier alternative investments to make up for shortfalls in the post-pandemic world. The Kentucky Retirement Systems, which is $42 billion underwater, approved a motion in April to allocate $200 million to private equity firm Blue Torch Capital, a direct lending firm that buys debt from middle-market companies in the process of restructuring and in need of cash. “Now is the time you need to take risk,” said Rich Robben, the chief investment officer at the retirement system, during an April 16 virtual meeting with his committee, according to a published report.

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