State Pension Plan Rates of Return Under Review

More than half of state pension plans use a rate of return assumption of 8 percent, according to a 2011 PBS report.

While the assumed rate of return may sound like an academic exercise, it influences billions of dollars in taxpayer expenses when applied to the future funding requirements of pensions and benefits for retired school teachers, fire fighters, police officers and other public employees.

The Pew Center on the States estimates that there is a $1 trillion shortfall between the $2.3 trillion in employees’ retirement benefits already funded by states and municipalities, and the expected cost of $3.3 trillion associated with these promised benefits.

Pension funding levels vary widely across states according to the Pew Center, with New York and Florida being fully funded while Illinois and Kansas are less than 60% funded.

The rate of return assumed in calculating future pension obligations plays a critical role in determining current taxpayer liabilities, even though the longer term commitments remain fixed.

High Rate of Return Assumptions Lower Out-of-Pocket Costs

Pension plan sponsors, through their actuaries, rely on assumed rates of return to determine the amount their cities, states, and workers must contribute to a pension system to adequately fund future obligations.

As the assumed rate of return increases, current funding requirements decrease. Conversely, a lower assumed rate of return requires a higher current funding level in order to meet future obligations. By one industry estimate, each 1 point reduction in the assumption rate means 10 percent more in current contributions.

Some critics believe that 8 percent is too high and that it is no longer appropriate in today’s financial market with historically low interest rates. Their concern is that investment return assumption rates are artificially inflated to reduce the required contribution amounts required by those paying into the pension system.

Rates of Return also Project Pension Investment Income

Even more critical, pension plans rely on these rates to calculate the plan’s return on investment, which frequently accounts for a significant portion of the plan’s revenues. These return assumptions can affect the size of the plan’s funding gaps-the amounts by which future liabilities to retirees exceed current pension assets. When there are funding gaps due to lower assumption rates and other factors, employers and employees will be required to contribute more to the plan.

Critics of the 8 percent rate also claim that in addition to keeping assumption rates high to avoid necessary obligations, pension fund portfolio managers might be tempted to take on more risk to sustain better-than-market returns.

The U.S. stock market has not had a sustained increase in value over the past decade. Further, relatively low bond rates and excessive debts accumulated by consumers and governments in the past two decades have contributed to slower global growth. This means a potentially greater liability on the part of the pension to meet obligations. As such, pension actuaries (or the states that hire them) may be hesitant to reduce high assumed rates of return despite the fact that the assumed rate may exceed actual return on investment.

Public Pension Financial Reporting under Scrutiny

Nevertheless, legal considerations loom for state pension sponsors who seek to avoid reducing their assumption rates to avoid contribution obligations. The Governmental Accounting Standards Board (GASB) proposed new pension accounting rules on July 8, 2011 which, if adopted, will require annual disclosure of a pension fund’s asset mix and its expected rate of investment return by asset class.

Under the GASB proposal, governments will be required to report a “net pension liability” on their balance sheet. At present, an unfunded pension liability may not be clearly defined, and therefore not reflected, in financial ratios involving debt and other long-term liabilities. Recognition of pension shortfalls in the financial statements, taken together with other liabilities such as outstanding bonds, claims and judgments, and long-term leases, will enable taxpayers and plan participants to better understand long-term obligations.

Other provisions in the GASB proposals relate to the disclosure of discount rate assumptions and the impact on the total liability of a 1 percent change in the discount rate.

The goal is to provide taxpayers, plan participants, and investors with higher quality financial disclosure. If plan sponsors and trustees are inflating their numbers to minimize current obligations and assume more risk, they may be exposed to lawsuits for violating their fiduciary duties.

November 2011

LIC Pension Plans

LIC pension plans are planned to offer individuals with regular income during their old age. Pension also known as retirement plans are particularly for the people who are willing to make their old age financially secure. There are various pension plans that the Life Insurance Corporation of India offers individuals to help them choose the most apt one depending on their current financial situation. These policies are planned not only to give financial security to the individuals but also their families and relatives.

The main objective behind LIC of India to initiate these pension plans is to provide standard earnings to people after their retirement from job. Pension plans are different from life insurance plans and are taken to cover the jeopardy during unfortunate occasions.

There are 5 main LIC plans that are active presently. The details of these plans are listed below:

Pension plus

Pension plus is a unique pension plan where an individual taking this plan can take out one-third of the corpus from the lump sum amount. The rest of the two-third amount will be paid either monthly or half-yearly after maturity as per the holders wish.

This policy is available in two forms; debt fund and mixed fund.

A certain minimum interest rate of 3.5% p.a. shall be accredited to the ceased Policy Fund comprised by the fund worth of all ceased policies. This Fund will be paid a minimum interest rate of 3.5% p.a. from the day of discontinuance of the policy to the day of conclusion of 5 years from the initiation of the policy. In case of death of the policy holder, the interest will accumulate from the day of suspension of the policy to the date of booking of legal responsibility.

The minimum age required for an individual to undertake this plan is to 18 and the maximum age is 75 years. The minimum maturity period is 10 years.

Jeevan Nidhi

Jeevan Nidhi is a profits deferred annuity plan. Under this pension plan, the policy holder needs to pay premiums over the entire term plan. In this scheme, the earlier an individual this plan, the more corpus will he receive on retirement. The USP of the pension plan start at the age of forty years. The holder will also receive a certain addition of 5 per cent of the sum assured over the first five policy years.

On maturity, he can alter one-third of the whole corpus including the sum guaranteed, the guaranteed additions, the bonuses affirmed and a terminal bonus, if any and can buy a pension with the left over amount.

If the policyholder expires at some stage in the term of the scheme, the beneficiary will be given the amount guaranteed and the accrued guaranteed additions and bonuses. The beneficiary also has the alternative of buying a pension with this amount.

There are 5 annuity options in action presently:

•Annuity for the whole life;

•Annuity for a set time phase of 5, 10, 15 or 20 years and for life after that;

•Annuity for whole life with return of purchase cost to the beneficiary;

•Annuity for whole life rising at 3 per cent per annum and

•Annuity for life with stipulation of 50 per cent of annuity to the spouse of the policy holder, after his death.

Jeevan Akshay VI

LIC’s Jeevan Akshay- VI is a pension plan for people who are currently in their retirement age and have no pension. This is planned for immediate purchase by people.

LIC will pay the policy holders a consistent payment at standard time periods starting right away after the holder pays a lump sum premium towards the cost of the policy. The annuitant can accept the payment as per his wish either monthly, quarterly, half-yearly or yearly.

One has to submit standard age proof at the time of entry. He will have to choose the preference at the beginning of the plan.

Investors can choose from any of the 5 options:

•Annuity payable for life

•Annuity payable for life with guaranteed period of 5, 10, 15 or 20 years

•Life annuity with a return of purchase price

•Life annuity increasing at a fixed rate

•Joint life and last survivor annuity

Minimum age to avail this policy is 40 years and maximum age is 79 years. Minimum buy price is more than 50,000 and a sum that earns a sure minimum annuity for every choice

New Jeevan Dhara 1

New Jeevan Dhara 1 is a pension plan specially planned for professionals who want to take on a pension plan and secure their financial condition after retirement. This scheme allows the individual to make arrangement for regular income after retirement. The person can select on how he wants to pay the premiums either yearly, half-yearly, quarterly, monthly or through Salary deduction. The premium will be paid in one lump sum.

Policyholder can put in a term declaration rider by giving an extra payment. By the asset of this rider, in case of death of the policyholder at some stage in the deferment stage, amount assured chosen under term assurance, rider will be paid. Bonus is also payable under the policy.

For this policy, the minimum age at entry is 18 years while the maximum age at entry is 65 years.

New Jeevan Suraksha 1

New Jeevan Suraksha-I is an inimitable pension plan planned to offer pension from a selected retirement date. The scheme can be taken over by any person who desire to get pension after retirement. Under this plan, an individual has to pay single payment or regular payment over the suspension period to secure a pension initiating at an upcoming date. Policyholder has the choice to pay a single premium or regular premium either annually, half yearly, quarter or monthly.

Policyholder can put in a term declaration rider by giving an extra payment. By the asset of this rider, in case of death of the policyholder at some stage in the deferment stage, amount assured chosen under term assurance, rider will be paid. Bonus is also payable under the policy.

The minimum age at entry for this policy is 18 years, whereas the maximum age at entry is 65 years.

Finance Can Be Baffling – Get Some Clarity With an Independent Financial Advisor

Few people really understand the particulars of the finance industry, so a financial advisor is essential to get the best out of your investments. It may seem like you wouldn’t need to have an independent financial advisor, but personal finance touches us all, no matter what our position.

Pensions are a prime example of how useful a financial advisor can be. Millions of people have pensions of some sort. Some contribute to employer-led schemes, and some will be claiming a public-sector pension in retirement, but a large number of us have a private pension, and understanding one of those can be a difficult job. Thankfully, an independent financial adviser can help guide you through your options to help you to stop worrying about retirement planning, and enjoy your life!

A financial advisor can let you enjoy retirement in comfort

It seems like pensions are constantly in the news for one reason or another. Either some pension scheme has announced that they can’t afford to pay out what they thought they would, or the population is growing older and costing more. It’s really essential, therefore, to ensure that you plan accordingly, to ensure that you pay in enough now to make sure that you are comfortable later. The problem, of course, is that pensions can be an absolute minefield. Unless you have an expert independent advisor on hand to guide you through, the results could be catastrophic.

Luckily, the pensions industry has developed significantly over the last few years, and there are now a number of new options that you could take advantage of. Naturally, it would be a terrible idea to make these decisions on your own, though, so a good advisor will discuss your expectations and requirements, then offer only products that will suit your needs. Equally, many people are now deciding to emigrate to another country. If that’s you, special tax arrangements exist for any contributions you’ve already made in this country. Again, this is a highly specialised area that only a financial advisor can help with.

An independent financial advisor is just that – independent

So many people don’t make enough provision for old-age, and it’s a growing problem. An independent financial agent doesn’t work for just one pension provider, so they can use their skills and knowledge of the whole market to provide you with a retirement plan that’s perfect for you. You can’t be expected to understand your pension options on your own, so get help from an independent adviser, and they’ll help to ensure that your future can be as happy as your present.