Everyone faces the concept of retirement at some point.
The closer an individual gets to retirement age, the more concerned he may become about his ability to live comfortably after
retirement. It may also make him wonder whether his retirement benefits will be available when he is ready to collect.
The Future of Pensions
Those who expect to collect a pension when they reach retirement age may have become concerned
about recent reports regarding pension-fund growth. Recent issues regarding pension fund
investments such as:
• Modest economic growth
• Low interest rates
• Rich stock valuations
These factors have caused some economic experts to begin reevaluating previous assumptions they had concerning returns on pension funds.
Keeping the above factors in mind, anyone whose retirement income includes a pension is encouraged to speak to a financial adviser to assess
the effects these projections may have on his financial plans.
One problem is the benefits many state and local governments are committed to paying cost more than
the availability of funds. This shortage of funds could result in decreased pensions for retirees,
increases in taxes or decreases in other programs funded by various governmental agencies; this may
be necessary to cover the deficit in the pension funds.
According to the National Association of State Retirement Administrators, the low interest rates
that have been consistently in effect since 2009 has led to a re-evaluation of many public pension
plans. This has been necessary for these entities to project potential long- term investment
returns. In addition, they have been forced to reduce previous assumptions regarding plan
investments This has been necessary to allow these entities to project potential long-term
Public Pension Funding
Government-funded pension plans reported assets of $4.41 trillion during the period ending
September 30, 2018. How are the assets used to fund the pensions? They are held in trust and
invested so that they will be available to fund the cost of pension benefits. The return on those
investments is essential since the earnings from those investments provide most of the financing
for public pensions. Any shortage in projected long-term earnings from those investments must be
replaced through increases in contributions or reductions in benefits.
Projections are necessary to fund a pension benefit and make assumptions concerning future events.
Public pension plans typically consist of two components: the real return rate and
inflation. When these two components are added together, the result is what is called the nominal
rate of return, the most common rate used in the industry.
The real rate of return is the second component of the return on investment projection. This
component consists of the actual return on the investment after it is adjusted for inflation.
The purpose of knowing the real rate of return is so those in charge of monitoring the pension
funds know the return that the investment generated for the fund. This allows them to better assess
the future of the fund and plans for future investments.
The risk an individual pension may face is contingent upon several factors: inflation, return on
investments and rate of return. While currently corporate pension funds are doing better than
government-funded pension funds, this continued growth could change at any time.
Pension funding always carries an element of risk; the future retirees need to follow the news in
order to make plans for their future income.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to you needs, such advice services must be obtained on your own separate from this educational material.