Pensions are funds that employees contribute to during their working years and then draw from during retirement. Pensions, which are a defined benefit plan, differ from popular retirement plans like 401(k)s, which are defined contribution plans, in that they guarantee a given amount of monthly income in retirement and the investment risk is placed on the plan provider, not the investor/employee.
Without going down a rabbit hole about why pensions are now rare and why defined contribution plans have seemingly taken over, there are some drawbacks to pensions. They are not portable if you change employers, and in an age where people tend to change employers more frequently, it makes sustaining and forecasting the health a pension far more difficult. Over time, you have more and more retired workers with fewer and fewer younger workers contributing to the fund. Private businesses, for example, have pretty much completely done away with pensions while many governments still use them in some form or another.
To an employee a pension is extremely attractive, but to the employer pensions can be a real financial headache.
On Tuesday, June 27th I attended a seminar about the City of Knoxville Employees’ Pension System at the new Public Works Service Center on Morris Avenue with some of the other candidates for City Council. The seminar was informative and gave a brief history of the pension system for the City of Knoxville.
The City first provided pension benefits to the police and fire employees in 1929. This plan was expanded to cover general government employees and the Board of Education in 1935. Over the years, the plan has evolved to become a hybrid system (both defined benefits and defined contributions) with varying levels of employee contribution. The latest plan revision was in 2013 and over the years some employees have opted to keep their old plans while many existing and new employees have signed up for the newer plans, resulting in a spectrum of plans within the pension.
As of July 1st, 2016 the pension fund has an estimated benefit liability of $736,613,073 for the next 20 years. The City currently has assets of $522,870,455 to fund the pension, leaving around $213,742,618 in unfunded liabilities. And to be clear, some unfunded liabilities aren’t necessarily a bad thing. The pension is 71% funded and the City has time to raise more capital to keep the pension healthy. For comparison, many cities that are the size of Knoxville and larger only have around 20% – 30% of their pensions funded.
Pensions and investments everywhere took a big hit in the 2008 crash. In fact, total funding of the nation’s 100 largest corporate pension plans fell $303B in 2008, going from a $86B surplus at the end of 2007 to a $217B deficit at the end of 2008.
The latest City pension plan from 2013, Plan H, is a hybrid plan that puts a portion of the first $40,000 of an employee’s salary into a defined benefit plan with anything over $40,000 going towards a defined contribution plan. To date, this plan has an estimated benefit liability of $2,571,977 with assets of $2,306,729. This leaves Plan H 90% funded with around $265,248 in unfunded liabilities. Not bad.
Word of the Day: Sustainability
People can debate the details of pension plans until they are blue in the face, but the bottom line is that if the plans are not sustainable then they are worthless and everyone invested loses. No one gets a retirement check if the bank account reads $0. Finding a balance of benefit versus cost must be met and we must ask questions like:
- Are we exploring creative options to ensure funding and growth?
- Are all of the benefits necessary to attract and retain a talented workforce?
These are not easy questions to answer. Quite a bit of thought and research will be needed to properly answer those questions in order to strike a balance for a healthy and sustainable pension fund.
So, for the record: Plan H appears to be working well, but I also want to look into ways to ensuring the plan remains sustainable through creative investments and creative planning. Current pension plans need to be honored and the City must do the best it can to honor those promises.
If we hit a doomsday scenario and the pension fund is becoming insolvent, I would propose that general government employees be switched to defined contributions while keeping police and fire on defined benefits. Police and fire, of all government employees, put their health and lives on the line and deserve to rest comfortably knowing they will be taken care of during retirement.