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More bad pension news

By Barbara Whelehan · Bankrate.com
Friday, April 6, 2012
Posted: 6 pm ET

If you're lucky enough to work for state or local government, you might think you don't have to worry so much about retirement planning since you've likely been promised a pension. But in recent years, troubles have been brewing among public pension plans all around the country.

In the last week alone, Plansponsor.com reported problems with three state plans:

  • New Hampshire: The House of Representatives approved a proposal to put an end to pension plans for public workers and instead offer a 401(k)-type plan. Facing a funding shortfall of $4.1 billion-plus for retirement and medical benefits, last year the legislature raised the retirement age at which future workers would qualify for benefits and increased employee contributions to their pension.
  • Virginia: Teachers and firefighters pressed the governor to veto legislation that overhauls the state's retirement program. The changes involve the creation of a hybrid plan containing both a traditional pension component and that of a 401(k)-type plan for new hires beginning in 2014. The bills also reduce benefits for nonvested workers.
  • Louisiana: An analysis of proposed changes to the state pension system finds that raising the full retirement age for current employees to 67 and increasing costs on current workers raises constitutional challenges.

The problems are widespread. Over the past year, proposed changes involved state pension plans in Illinois, Florida, Michigan, Wyoming, New Mexico, New Jersey, Massachusetts, South Carolina and, of course, California, to name a few. The upshot: States don't have the revenues to pay the promised benefits, so they are looking for ways to cut benefits for workers.

It's either that or raise taxes, an unacceptable solution among taxpayers who don't have a pension plan.

Pensions a boon if you have one

Yesterday, PlansponsorEurope.com reported that a 35-year-old worker in Great Britain without a defined benefit (or pension) plan would have to contribute about 10 times more than a colleague with a pension plan to build an equivalent retirement nest egg.

"This equates to a contribution each year of 55 percent of gross salary for a DC member compared to the average 5.1 percent annual contribution rate saved by a DB pension fund member," according to the report.

The individual, who must bear all investment risks, can't compete with a larger pension scheme to provide for his or her own retirement.

In addition, pension plans benefit "hugely from economies of scale in everything from pension administration to asset management fees," said David Collinson of Pension Corporation, which manages pensions for dozens of companies in the U.K.

Jennie Phipps' blog post yesterday addresses the complexity of attaining retirement security for individuals.

Question: Are you retired, without a pension? Are you managing your money well? What are you doing right, and what challenges have you overcome? I'd like to compile some retirement success stories for a future Bankrate article. If you're willing to share your strategies, please send your story to me in an email at boomerbucks@bankrate.com. I'd love to hear from you.

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2 Comments
Jack Tachspeyr
April 26, 2012 at 12:49 pm

"This equates to a contribution each year of 55 percent of gross salary for a DC member compared to the average 5.1 percent annual contribution rate saved by a DB pension fund member," according to the report.

The individual, who must bear all investment risks, can't compete with a larger pension scheme to provide for his or her own retirement.

In addition, pension plans benefit "hugely from economies of scale in everything from pension administration to asset management fees," said David Collinson of Pension Corporation, which manages pensions for dozens of companies in the U.K.

I hope the author isn't suggesting that a "larger pension scheme" that benefits from "economies of scale" can actually outperform an individual's DC plan by a factor of 10x. Clarification would have been helpful. Obviously individual plans are more volatile than large DB plans. But the advantages of a DB plan are primarily the fact that they typically soak the taxpayer when their investment returns fall short, and DC individual savers don't have that luxury.

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April 08, 2012 at 1:34 am

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