Quote:
Originally Posted by GGG
I’m confused as to why people believe these funds are not sustainable at current contribution levels.
The unfounded liability was created because teachers/ government funding was 3.5%-5% each and grossly under funding the plan. Combined they now contribute 21-22% to get about 50% of their pretax income.
If anyone of us chose to do this for 30 years we could have the same pension.
Now someone might argue that 11% is too much matching for retirement benefits but we are taking in the 5% max too high range. The idea of gold plated pensions is a lie. It’s responsible savings to fund their and a portion of teachers before 1992s pensions.
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Well this is about more than the teachers pension though. The problem for administration of these pensions is that you have to accurately predict the future benefits required, and have the returns and discount rate (which also has to be accurate), at least match up. Getting the benefit required is crucial, and not simple. As people live longer, it adds to that obligation which is entirely on the sponsoring entity. This is a chunk of the issue when it comes to the funded status of a pension fund.
Pension fund management faces a few specific issues as well. Today, after basically twenty years of declining interest rates, bonds gave a good boost to these portfolios, and that meant things like pensions could get decent returns while sticking to a balanced mandate. How does that look going forward with rising interest rates? Those balanced mandates with 35-40% in fixed income probably return closer to 5% than they would’ve say a decade ago where they could get 8-9%. That’s a problem, and again that risk is entirely with the sponsor.
Longevity risk is the main factor though, and there are only a few things a pension can do to deal with this. They can use a couple options to transfer that risk to insurers (some of these depend on whether the pension is closing or remaining open). Or they can increase the risk of their assets and hope their asset allocation will help bridge the gap. None of those “solutions” are free though. You either straight up add risk, or literally pay someone else to take the risk off your plate.