How Safe Is My Pension?

Pension plan safety is one of the most popular and relevant topics among the potential pensioners who read my blog. It’s popular because much like Social Security, chronic underfunding of certain types of pensions receives a lot of bad press in the U.S. As a result, many people think that all pension plans are circling the drain. While that isn’t true, as with most things in life, determining the truth about your pension plan’s safety is a somewhat subjective and complicated journey. However, that doesn’t mean you shouldn’t strive to answer the question, especially if the Golden Albatross has trapped you in its maw.

Instead of a circling the drain, how about a black hole sun?

There’s a reason why I started the Pension Series with the topic of pension safety. I said it then, and restated it more recently in my book; no issue cuts straight to the chase quicker than pension plan safety. That’s especially true when trying to determine if staying for a pension is worth it. If you are facing the gut-wrenching stay or leave decision at your pensionable job, and you decide there’s a high probability the pension won’t be there at retirement, then you may not require any further analysis. In other words, the realization that the pension won’t be there as promised effectively ends the internal debate.

Where Might This Apply?

Unfortunately, there are two types of pension systems in the U.S. where that scenario is more likely than the others. Those two types of pension systems are Public Pension Plans (PPPs) at the state and local government level and corporate Multi-Employer Plans (MEPs). On average, the PPPs are in worse fiscal shape (71% funded for PPPs at the end of 2019 compared to 85% for MEPs), but workers in the MEPs have less legal recourse to seek compensation if their pension plan fails. So, it would be a tough call on which system deserves more scrutiny within the Pension Series if I had to make the call.

Fortunately, I didn’t have to make that decision. I say that because this article originated as an assigned presentation for one of the classes in my Masters in Applied Management course. As I mentioned in my Kiwiarbitrage and Pension Series Part 21 articles, my family and I emigrated to Nelson, New Zealand, in early 2020 on a full fee-paying student visa. Since studying for a master’s degree offered certain visa privileges for my family, and the local university only runs one master’s program, I find myself studying a subject with occasional, but not routine, cross over with the blog.

You got to take your wins where you can find them, and this particular assignment was to find a large data set and analyze it using the techniques taught to us in class. Since we could choose any data set, I naturally wanted one related to pensions. In this case, it was the Public Plans Database (PPD) run by the Center for Retirement Research (CRR) at Boston College.

What This Post Is Not

Just to be clear, my assignment wasn’t to analyze the most underfunded pensions in the PPD. If you are looking for that analysis, I would recommend this recent article by researchers at the CRR: 2020 Update. Instead, I was to analyze how the data was collected, catalogued, stored, and presented to determine if there was inherent bias, or some other type of anomaly, already baked into the data. What I “discovered” will not shock anyone who covers the topics of public pensions carefully. Although, it may raise concern for the everyday worker who doesn’t track the mundane details of how pension funds report their funding status (which is probably the vast majority of pensionable workers and my readers).

This is going to make sense in a second

Put plainly; many pension plans massage the statistics in their annual reports which populate the database. That is especially true for the categories that determine a plan’s official funded status for each year. They do this to make their pension plans appear better funded. This is such a well-known issue that the Government Accounting Standards Board (GASB) has issued multiple updates to the rules that pension plans must use to calculate funding status to end the practice. Those rule updates have not worked as intended. As a result, I make several recommendations at the end of the presentation for the average manager or worker if they want to analyze their pension fund’s health.

Recommendations

The main recommendation I make is to use trend analysis over multiple years when attempting to determine your pension fund’s health. If you want more information on why, you’ll need to download and listen to my presentation. Alternatively, you can buy my book and read about it there!

Yes, I generally knew about the issue before I embarked on my assignment. Conveniently, it provided me an opportunity to dive in and better understand the details. In any case, I refer to this issue generally in my book and make the same  recommendations that I do in the presentation. Call it synergy, or working smarter and not harder. Either way, there was nothing in the rules of the assignment that said I couldn’t expand on previous knowledge.

Which Brings Me To My Final Point

This article may not be “the droids you are looking for.” It’s an attempt to capture the work I did without changing the format. Since, I’m pressed for time these days between the master’s program, book launch, and family obligations, I saw no need to rework my presentation into a written blog post. Instead, I decided to record a voice track, add some music, and post it on the blog. Although, at this point, I’m questioning that decision considering how much time it took to record the voice track and get this posted!

Regardless, if you clicked on this article thinking you were in for another rambling sojourn through pension plan safety, I’m sorry to partially disappoint. I mean you still get the rambling, just in a PowerPoint presentation set to music rather than a written article. If you’re awake at the end of it, let me know what you think of the format (and music!) in the comments.

Charge up your coffee cup and enjoy!

Download the presentation in a zip file here: GMLimited_Analysing_Pension_Funding1

Download the uncompressed version: GMLimited_Analysing_Pension_Funding1