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Financial trouble for pension plans

July 11, 2012 by · Leave a Comment 

The nation’s largest pension fund, the California Public Employees Retirement System (Calpers) recently announced that its investments earned a measly one percent for the fiscal year ended June 30. Other public pension funds throughout the country are expected to reveal similar results for the year.

The Calpers is the nation’s largest pension fund at $233 billion. It expects to earn 7.5 percent rate of return a year from its investments. The annual earnings estimate includes 2.75 percent rate of inflation and 4.75 percent rate of return on its investments. Since the investment return for the year didn’t even come close to 7.5 percent, participants in the fund, mostly California teachers, municipal government workers and state workers, will be charged a higher annual contribution.

Pension obligations are already bankrupting some cities in California. Underfunding of pension plans are becoming a norm for many pension plans including both public and private sector funds. Many studies show only about 75 percent funding of pension plans and expect the funding levels to go down further. The economic downturn and historically low interest rates are creating very challenging time for pension funds. Many companies are trying to get away from defined-benefit plans and encourage employees to enter into defined-contribution plans.

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