What's Your Motivation?

In January ATT--the original Ma Bell--lowered their expected return on pension fund assets to 4.3% from a previous 5%.  They also increased life expectancy for retirees to accommodate current longevity trends.  RESULT--over $8 Billion dollar charge to their financial statements for the increased cost in funding the pension plan.  (BTW--Auntie is 105 and has been on an ATT pension since she was 55.)  

Below is a clip from the most recent valuation of the Oklahoma Teachers Retirement System Pension Plan (OTRS):



PROGRESS TOWARD REALIZATION OF FINANCING OBJECTIVES The unfunded actuarial accrued liability (UAAL) as of June 30, 2013 was $8.112 billion, and it decreased to $7.207 billion this year. As a result, the System’s funded ratio—actuarial value of assets divided by the actuarial accrued liability—increased from 57.2% to 63.2% as of June 30, 2014. This increase was primarily due to a gain on assets with a return on the actuarial value of assets of 15.6% compared to the assumed 8.0%. This funded ratio increases to 72.7% measured on the market value of assets as of June 30, 2014. The period required to completely amortize the UAAL based upon the contribution schedule is called “the funding period.” Based upon the current statutory contribution schedule, the funding period decreased significantly from 17 years as of June 30, 2012 to 11 years in the current Board of Trustees October 22, 2014 Page 3 valuation. The decrease is due to the asset gains described above. Based upon the current contribution and benefit provisions, assuming no actuarial gains or losses in the future, and assuming the market value of assets returns 8%, the UAAL is expected to trend steadily down to zero over the next 11 years.

This really says three things:  1)  The plan is only 63.2% funded (or 36.8% under funded); 2) they are assuming an 8% return on assets; 3) There is no mention of any change to life expectancy.  

Motivation???
   ATT was motivated to report the change at a time when other bad news was being reported and therefore minimize the PR damage.  They were/are also motivated greatly to report the best financial numbers they can in an otherwise viciously  competitive market. (they made the change anyway)

   OTRS on the other hand has chronically under funded the pension AND even as recently as this week a proposal was made in the state legislature to use pension funds to cover a state budget deficit.  (it was voted down thankfully)  
The political forces on the plan encourage overly optimistic assumptions along with a lack of capacity to just FUND the shortfall as was done by ATT. Those forces choose to spend the money now on some other project while allowing the pension to be underfunded rather than do what ATT did which in my mind would be the right thing to do WRT our promises to teachers.

Why should I care?
   With interest rates at or near zero, stock markets at or near record highs, and life expectancy continuing to climb these examples of how large pools of what many people consider "safe" money can inform what we as individuals might expect from our own investments and retirement outcomes.  For Oklahoma citizens IF the plan does not work as well as predicted then WE will need to make up the shortfall from taxes and fees or default on our promises to teachers across the state.  
   This same situation is true with the Social Security System and Medicare on the Federal level but they have a printing press and nobody else does.  There is no island upon which any US resident can fully hide from the practical realities of our demographic trends and current economic circumstances.  If there is an easy way out it is likely one unknown to anyone alive at this time--AND we have to keep looking!