Market Woes Cause Pension Tsunami For Many States
Government retirees enrolled in Wisconsin’s state pension fund are in for a shock this May: For the first time ever, their pension checks will be smaller. The Core Fund, which is managed by the State of Wisconsin Investment Board (SWIB), reported its lowest level in five years: a -27% return in 2008, while the riskier Variable Fund is down nearly 45%.
The State of Wisconsin Investment Board manages money on behalf of the Wisconsin Retirement System, which covers about 540,000 retirees and employees of school districts and state and local governments in Wisconsin. Because of Core Fund’s poor performance in 2008, 150,000 public employee retirees are likely see their pension benefits cut by about 2.5% to 3%.
For some 30,000 retirees with holdings in the Variable Fund, however, the future outlook is even worse. Unlike the Core Fund, there is no limit to how much payments in the Variable Fund can decline. When final adjustments are announced May 1, retirees can expect a drastic reduction of 40% or more in the Variable Fund portion of their account, according to the Wisconsin Department of Employee Trust Funds.
Wisconsin is far from alone in its pension-fund woes. California, Kentucky, Rhode Island, New York and Missouri are among a number of states reporting an estimated $865 billion in pension-fund losses. And the news couldn’t come at a worse time, with state budget shortfalls totaling an incredible $40 billion.
According to the Center for Retirement Research, assets for 109 state pension funds declined 37% to $1.46 trillion as of Dec. 16. The situation has become so dire that many states could be forced to cut back on pension benefits for newly hired employees.
The state of Kentucky is already moving in that direction. Lawmakers there have proposed a pension reform plan that puts the state’s first minimum retirement age at 57 for workers hired after Sept. 1. The plan also requires 30 years of service - an increase from 27 - to receive full benefits.
As reported Jan. 13 by Bloomberg, Kentucky’s largest fund for state workers held about 52% of the assets needed to pay current and future benefits to its 117,000 members as of June 30. At the time, the plan had an unfunded liability of $4.8 billion, while the entire system’s liabilities totaled approximately $16 billion.
Despite watching billions of dollars disintegrate, many public pension fund managers say they intend to stay the course and keep their current investment strategies intact. As for plan participants, they may have a different opinion. In Wisconsin, participants are pulling out of the riskier Variable Fund portion of that state’s pension plan. As of January, more than 1,700 participants instructed the state to move their money out of the Variable Fund or quit making contributions to the all-stock fund. The last time that happened was in 2002.
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