Brexit, pensions, and PERA

If anyone still harbored doubts that events occurring thousands of miles from our shores can have a profound impact on our lives and pocketbooks, then a recent Wall Street Journal article (subscription required) might erase them.

As the Journal reports, the earth-shaking Brexit vote in late June rattled financial markets world-wide, reducing interest rates that were already close to zero. This, in turn, has already hit both private and public sector pensions hard:

“For officials who manage retirements of public and private-sector workers, Brexit exacerbated problems that have been roiling pensions around the world for years. The low-rate environment has pulled down returns, inflated funding gaps, encouraged larger investment risks and prompted plan officials to scale back future investment assumptions.”

This is, of course, worrisome news for people who rely on pensions for a significant portion of their retirement income. At some point, something will have to give — either retirement benefits or eligibility age will change, taxpayers will have to pony up more, or plans will need profound restructuring for new enrollees.

As far as Colorado PERA is concerned, recent global developments should be causing some restless if not sleepless nights for stewards of state employee retirement funds.

You might recall that just last month, two days before the United Kingdom’s vote to leave the European Union, PERA released its 2015 annual report, showing a 1.5 percent return on its investments for 2015. Since PERA counts on an average annual return of 7.5 percent to get its plans to full funding by 40 or 50 years from now, every significant economic ripple today puts heavier pressure on tomorrow’s returns. PERA will have to enjoy some very good years indeed if this year proves to be as bad, or worse, than 2015.

PERA has caught some serious flak in recent weeks for putting an absurdly positive spin on its 2015 numbers. A Colorado Springs Gazette editorial chastised PERA and its enablers for their rosy outlook:

“Don’t give baby kissing politicians a pass on this unpleasant topic. Give them the uncomfortable task of devising solutions to a financial crisis today’s retirees and politicians are causing for people so young they cannot vote. It is time for state politicians and their constituents to act like adults and protect the state’s youth.”

While no one has a crystal ball, the growing political and economic dysfunction and instability in major economic powers, including the U.S., offers little comfort that financial markets will provide significantly better returns anytime soon.

The Journal article quoted experts from each coast to that effect:

“Brexit should be a wake-up call for pension plans because it means interest rates are going to stay low or go lower and it makes it even less likely [the plans] are going to achieve the 7.5% rate of return that most of them are assuming,” said former San Jose, Calif., Mayor Chuck Reed.

New York City reduced its return target to 7% in 2013, but that assumption is likely still unrealistic, said Lawrence Golub, a financier and member of the New York State Financial Control Board, which monitors the city’s finances. The assets returned 3.5% in fiscal 2015.

“The 7% is too high for planning purposes,” he said. “It’s not conservative.”

Colorado state employees and teachers deserve straight talk and prudent stewardship of their retirement funds. This becomes even more urgent as the world becomes a more uncertain and unpredictable place.

 

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