Tuesday, November 23, 2004

A pretty good article on pensions, and why they're facing such a mess:

"Heads Up for Pension Headache"

Things like this hit home because certain of my family members are affected by Oklahoma's teachers' pension / retirement system . . . and the management (mismanagement) of it.

Last week I visited a site for the Oklahoma Teachers' Retirement System and downloaded their "2004 Actuarial Report." I've heard that the management of Oklahoma's teacher pension system was horrible, and wanted to see for myself. I didn't have to go far to read the following bit from the auditing folks:

"Last year, the period required to complete amortize [the system's unfunded] liabilities, based on the contribution schedule in effect at that time, was 28.7 years. This year, the funding period is infinite."

Meaning they cannot meet the system's liabilities unless contributions (either from teachers themselves, or from state and federal levels) and/or investment returns go up. "Based on the current statutes for determining the state, federal, and employer contribution rates," they go on to write, "the UAAL (unfunded liabilities) is expected to increase indefinitely without future experience gains or additional funding."

So contributions from teachers are going to have to rise -- that's a given. But I was curious just what kinds of investment gains the actuaries are assuming for plan funds into the future. Turns out they're assuming (projecting) investment rates-of-return of 8 percent (after inflation of 3 percent). Okay . . . 8 percent seems fairly conservative, right?

Not when you look at the system's investment mix.

About 70% of the fund's investment assets are currently in equities. The rest are in cash (7.2%) and fixed-income. Given that cash and fixed-income stuff will limit the returns, a little time-n-money math tells me that the actuaries are actually assuming returns on the equity portion of fund of about 14 percent per year. For the next (infinity) years.

Why are pensions in trouble, again?

Sheesh. If you want to read some really ugly stuff, download the pension report above.

— Posted by Michael @ 2:26 PM

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