Funding fact or fiction?

May 09, 2013

In February, we resolved the 2012 preliminary funding shortfall of $9.6 billion by making inflation protection on credit earned after 2013 conditional on the plan's funding status.

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This year, despite our strong investment performance, the plan projected another, albeit smaller, preliminary shortfall of $5.1 billion.

Some have suggested that a shift to defined contribution from a defined benefit plan is the solution for persistent shortfalls. We disagree. We believe an evolved defined benefit plan is the most cost-effective way to provide retirement security.

Let's take a look at some of the assumptions being made in the debate, and set the record straight on whether they are fact or fiction:

Fact: Our pension plan is still on solid financial footing.

As of January 2013, our plan is 97% funded for the long term. With $129.5 billion in assets, the pension plan has enough money to pay pensions for many, many years. There is no near-term problem; contributions to the plan plus investment income more than offset the amount paid out in pensions each year. But, pension plans are obligated to look far into the future (70 years or more) and periodically show they will have enough funds to pay future pensions to all current members. It's those long-term projections that show recurring funding shortfalls.

Fiction: Actuarial assumptions are to blame for the projection of shortfalls.

Our actuarial projections have been remarkably accurate. However, people are living longer than demographers, actuaries and the medical profession predicted. Assumptions must be reasonable and provide a plausible snapshot of the future, but nobody has a crystal ball.

Fact: The plan has always evolved over the years.

No generation of teachers has received exactly the same benefits as the one before or after it. Like everything in life, the pension plan has changed with the times since its creation in 1917. For example, inflation protection was not enshrined until the mid-70s; many of our current retirees did not have an opportunity to retire at an 85 factor or receive a 10-year pension guarantee.