The coming years for pension-plan beneficiaries, as Karlan Tucker reviews the current data, do not paint a very encouraging picture.
“People need to realize that numerous factors can affect the pension’s ability to pay future income, so they should plan accordingly,” said Tucker, CEO/Founder of Denver-based Tucker Financial Solutions. “That means taking a proactive approach to creating their own secured monthly income for their retirement.” In other words, creating their own private pension often using proceeds from their 401(k)s.
Tucker is referring specifically to a recent study by Agnes Grunfeld of MSCI ESG Research, an independent investment research institute, which finds many companies adopting de-risking programs to reduce their pension-plan obligations. Some of these programs include prohibiting new entrants into the plans and paying out lump sums. As Tucker points out, this does not really aid the beneficiary.
“When you take the income from a pension, you lose control of your lump sum, it’s no longer yours,” he said. “If you instead take the lump sum and invest it in the correct annuity, you now get the desired monthly income for life, but you also still own the lump sum/principal inside the annuity – a much more secure financial option.”
Speaking of annuities, another technique companies are now using is to transfer assets into these insured instruments and let the pension-plan responsibilities be handled by insurance companies. If you think about it, this makes good sense, as insurance companies are the risk managers of the world. In this case, managing longevity risk so that the income never runs out, no matter how long we live. As someone who has worked with over 5,000 families to help them secure retirement plans, Tucker has taken particular note of this tactic.
“I find it telling,” said Tucker, “that corporations seeking to guard their risk in pension-plan obligations are now turning to the safety of annuities, the same investment vehicle my clients have used for over 35 years to provide secured monthly income throughout their retirements.” Advisors who are not well educated on them, or who may have an agenda that isn’t always in the best interest of their clients, often malign these investments. Yet corporations, world governments, the NFL and millions of individuals use them with great satisfaction and peace of mind.
Grunfeld’s study shows that premiums to the Pension Benefit Guaranty Corporation will increase from $34 per $1,000 of unfunded vested benefits to $38 next year and $42 by 2019.
These premiums are needed to pay into a pool that is designed to partially cover failed pensions. Often payments are a fraction of the amount owed, and at times as low as 10 percent. The premiums are increasing due to the increased risk of additional pensions failing due to underfunding.
To buffer this larger expense, some companies like Delta, Verizon and FedEx have increased their pension contributions, but they have done so in part with monies realized from taking on new debt.
One of the major reasons pensions are underfunded is that most need about a 7.5 percent annual return from their investments, and they’re just not getting it. If they can’t get it in a bull market, it will only get worse when we find ourselves in the coming bear market.
Of course, when Tucker reviews the reasons to purchase annuities, he sees it from the perspective of the people he works with, not corporations shedding their risk.
“But the same problems we see with pensions – increased longevity, changes to tax rates, market volatility, and the coming bear market – all affect the average person trying to secure their retirement,” said Tucker. “Add to that the second-longest bull market we have ever experienced as a country, and it’s easy to see the how people can be fooled into thinking money will magically be there for them when they need it in their later years. If only it worked that way.”
Finally, increased longevity adds another kind of stress to pension plans. The mortality tables issued by the IRS determine the contribution requirements for corporations paying into pensions. With average life expectancy expected to rise 1.8 years for men and 2 years for women, corporations are rightly anxious about the increased length of time they will now have to pay out.
Tucker has also recently studied solvency issues regarding PERA, due to the high number of Coloradans affected by its coverage, and the underfunding issues in the plan are now approaching the catastrophic. PERA in Colorado, by its own admission, owns an unfunded liability of $32.2 billion, and, according to the Governmental Accounting Standards Board, that amount is actually closer to $51 billion.
The average annual rate of return on its investments that PERA has earned over the last decade, 5.2 percent, places the plan well on the way toward insolvency. It would need to earn nearly 10 percent annually for decades in order to achieve full funding, a proposition that’s beyond fantastical if you consider the market delivered a 5.3 percent average annual return for the century beginning in 1900, and only 4.2 percent since 2000.
“A major problem is that pensions, in general, need a 7.5 percent return on investment,” said Tucker, “and safe, high-rated corporate bonds are only yielding 4 percent. To get the additional 3.5 percent, many pension fund managers are having to dramatically increase the risk in the portfolio to even get close. And this increased risk may backfire in a coming bear market with increased corporate bond defaults, which in turn may increase pension defaults.”
Due to all of the previously stated reasons, it’s easy to see why pensions are in such trouble. A look at the benefit-to-revenue ratios of underfunded pension plans for some Colorado companies further illustrates this:
• PERA: 54% underfunded
• Delta: 32.8% underfunded
• Century Link: 31% underfunded
• Raytheon: 30.2% underfunded
• Lockheed Martin: 26.6% underfunded
• Northrop Grumman: 25.4% underfunded
(source: MSCI ACWI Index Companies by Underfunding Ratio, 2016)
When Karlan Tucker reviews and analyzes the full set of MSCI statistics regarding pensions, he sees the same warning signal he continually relays to his clients, namely: You are the only person who can truly secure your retirement income. “I ask my clients, who will sign your paychecks in retirement? Uncle Sam will be one, but Social Security isn’t enough, so who else? If it’s your pension, you may do well to have a plan B.”
By working with his clients to formulate specific retirement plans, Tucker helps Coloradans confront the risks ahead of them today. If you are currently vested in a pension plan, or just want to know more about how to secure monthly income paychecks during your retirement years, Tucker offers the following advice:
- If you are in a pension plan, find out if it is underfunded and by how much. Federal law requires your human resources department to tell you.
- Learn how to optimize your Social Security benefits. For example, the “Start, Stop, Start” strategy, in conjunction with creating your own private pension, may allow you to retire years earlier than without this strategy, perhaps as early as 62. Tucker recommends you give your healthiest years to your retirement bucket list, not your employer, unless you love your job. After all, we only live once.
- Sit down with a retirement income planner who’s a fiduciary. Tucker highly recommends you create a plan for monthly secured income to pay your monthly expenses, in effect creating your own private pension, and then place downside protection in your portfolio so you wont give back your nine years of gains when the market trips and falls. And remember that you can’t get a second opinion from the person who gave you the first.
Pensions and Social Security may have been a great one-two punch in an earlier version of America, but unfortunately, it’s not the America we’re living in today. Rightly or wrongly, now the retirement burden has shifted squarely to our shoulders.
Remember there’s safety in the counsel of many. Tucker’s advice? Seek counsel.
About Tucker Financial Solutions:
Tucker Financial Solutions, a retirement planning financial advisory and investment firm, specializing in fixed index annuities, life insurance, asset management, and college funding. Tucker Financial Solutions, founded in 1991, is located in Littleton, Colorado. Tucker Financial Solutions is part of the Tucker companies, which include Tucker Advisors, Tucker Asset Management and Tucker College Solutions.
Karlan Tucker is the CEO and Founder of Tucker Financial Solutions located in Littleton, Colorado. He is co-author in Brian Tracy’s new book, “Success in the New Economy.” The book is scheduled to release in spring 2018. He is also a radio talk host and author. He’s been interviewed nationwide on television and radio stations. Since 1991, he and his advisory team have helped Coloradans successfully retire. He regularly reviews topics on investing, retirement, college planning and taxes.