Colorado PERA Pension in the COVID 19 Era
By: Steven Higgins, Financial Advisor, Principal
Colorado Public Employees’ Retirement Association (PERA) provides retirement and other benefits to the employees of more than 500 government agencies and public entities in the state of Colorado. According to the PERA website, the pension system distributes $6.6 billion of retirement distributions to more than 105,000 Colorado residents annually. Over the years pensions have become more scarce. In 1960, well over 50% of American workers participated in a pension plan. According to the Pension Rights Center, only 21% of Americans participate in a pension plan today. There have been concerns about the viability of pensions. When market volatility and economic uncertainty occurs, individuals including our clients, often wonder if the promise of PERA will be there for them. At HD Wealth Strategies, we often work with clients who utilize a pension such as PERA within their retirement income strategy. As part of our process, we routinely review the evolution of PERA so that we can understand the impacts and opportunities that affect our clients.
The Executive Director of PERA, Ron Baker, in the recently released annual report for 2019 acknowledged very strong returns for the PERA portfolio in 2019 while holding a cautious tone regarding 2020 and the economic impacts on PERA relating to the COVID 19 situation. Baker said, “Entering this crisis, PERA was showing signs of strength and making progress toward our path to full funding.” For 2019, the PERA investment portfolio returned 20.3%. The average annual return for the last 10 years has been 9.1% and over the last 30 years the return has averaged 8.6%. PERA maintains a long term return assumption of 7.25% so, by any measure 2019 was a good year. Turning his attention to 2020, Baker remarked, “While we recognize the strong 2019 performance and the effect of the first full year of Senate Bill (SB) 18-200 reforms, the fiscal impact of the current pandemic permeates throughout the public sector of Colorado and includes PERA.” Baker’s comments about the PERA reforms highlight an opportunity to see the recent changes to PERA in very real time.
Timely Legislative Changes
Senate Bill (SB) 18-200 passed in 2019 implemented an automatic adjustment system into PERA, allowing adjustments to be made to the system with the hopes of keeping PERA on track to meet the goal of full funding. In short, in years when PERA is behind schedule, annual increases will be decreased and contribution percentages will be increased and in years when PERA is ahead of schedule annual increases will be increased and contributions decreased. Since 2019 returns were robust, annual increases will be restored and contribution rates will decrease for 2020 starting in July 2020. However Baker, acknowledged that due the likelihood that 2020 will not be positive, it should be expected that increases will be rolled back and contribution rates will be increased in July of 2021. When the PERA advisors created the automatic adjustment program in 2019, they were planning for just this type of situation and the process seems to be working.
Realities of State Budget Shortfalls
According to PERA’s annual report, Colorado state law requires that a distribution of $225 million from state funds be paid annually to PERA. The state Joint Budget Committee (JBC) was tasked with addressing Colorado’s budget shortfall as a result of the economic impacts of COVID 19. In addition to other significant changes, the JBC introduced House Bill (HB) 20-1379 which suspended the $225 million distribution to PERA for 2020. According to PERA’s annual report, even with the challenges presented in 2020, the pension remains on the current trajectory to reach full funding in 22 years. The automatic adjustment system along with strong returns seems to have worked together to help PERA work through a challenging year.
A Pension as Part of a Financial Plan
A pension can provide a foundation of steady cash flow in a retirement income plan. At HD Wealth Strategies, we find that our clients who combine the guaranteed cash flow of a pension with the growth and liquidity of a portfolio of investments tend have stronger probabilities of success than those who don’t have pensions. That being said, there are important considerations when making decisions or elections about your pension.
Inflation Adjustments – Inflation is the silent killer of retirement income. Over time, inflation erodes the purchasing power of each dollar and if your pension doesn’t offer an annual increase, your pension benefit will slowly become less effective at supporting your retirement income plan. Often, the presence or lack thereof of an inflation adjustment plays a large role in the decision to take the lump sum payout as opposed to the income. When making the decision to take the income or lump sum, it is very important to have a qualified financial advisor run a model of the potential outcomes to determine what is right for your situation. Note: the PERA pension does have an annual inflation increase to the benefit.
Purchasing Service Credit – Many pensions allow the participants to purchase additional years of credit allowing them to retire earlier or with a larger income benefit. The formula for determining the cost of each year of service credit are complex and are based on years of service, age, and current salary. Purchasing years can be expensive and it is certainly not right for everybody. However, for participants who are early in their careers and expect a future increase in salary, purchasing service credit can be a powerful investment. At HD Wealth Strategies, we model the cost and benefit of purchasing service credit and work with pension organizations such as PERA alongside our clients to facilitate the purchase of service credit.
While less Americans have pensions, for those who do, the pension can serve as a pillar of a family’s retirement income plan providing a guaranteed stream of income for life. As part of our planning process at HD Wealth Strategies, we routinely review the details and changes that affect our client’s pensions and how they work as part of a retirement income plan. If you have specific questions about your pension plan, don’t hesitate to reach out.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
