The public pension systems in the United States provide retirement security for teachers, firefighters, police officers and other public servants. For decades, pension funds have been administered by fund managers, working with investment professionals and actuaries, in order to meet the funding obligations of the fund for pensioners when they seek disbursements. Millions of Americans have pensions. Many financial advisor clients have pensions, and either have or will depend on them for significant retirement income.
Most pension members consider themselves to be fairly knowledgeable about investing and their pension program details, but in reality, their knowledge level falls short. Most cannot identify if their pension is fully funded, the recent returns of the fund, or the current investment direction of the fund.
This incorrect perception is the driving force behind Spectrem’s detailed report Tensions with Pensions: An Analysis of Public Pension Fund Members’ Knowledge and Sentiment about How Their Money is Being Invested.
“There is a wide disparity between the perceived knowledge and understanding of pensioners and the truth about the funding level of the pension itself,’’ said Spectrem president George H. Walper Jr. “The incorrect knowledge extends to how the fund in invested, and the rate of return the fund is earning compared to what is required to properly fund the pension.”
Advisors working with investors who have pensions would be wise to do a little investigating to determine how well their client’s pension is funded and if the underfunding can affect the pensioner when the day comes for him or her to collect the funds due them.
The study looks specifically at the California Public Employee’s Retirement System (CalPERS) and the New York City Retirement Systems (NYC Funds). Pensioners from those funds were surveyed and compared to a nationwide panel of pensioners from other pensions.
For example, 80 percent of NYC Funds pensioners believe the NYC Fund is fully funded. That’s a very high percentage that believes their fund is 100 percent able to match its current liabilities.
In truth, the NYC Fund is only 62 percent funded, according to their annual reports.
This is where advisors come in. There are millions of pensioners who are unaware either that their pension is underfunded or the degree to which it is underfunded. While it is not an advisor’s job to sound an alarm, it is their job to make certain their investor is properly prepared to handle the financial matters related to retirement, and if a pensioner should be worried about the funding of his or her pension, an advisor can provide information and ideas to cover the investor in case the pension fails to provide the expected funds.
Top Takeaways for Advisors
Cleary, advisors need to know the value of a client’s pension in order to advise a client on investment decisions prior to or after disbursement from that pension. But advisors can also provide the method by which an investor can determine whether the client’s pension is undervalued, the extent to which it is undervalued, and whether that status will affect the client’s pension payments going forward.
©2018 Spectrem Group