If you are a weekly subscriber to this blog, you may remember a post I wrote last year explaining funded statuses. I wrote about how funded status represents the measurement of LAGERS’ assets versus liabilities, and how the closer to 100% pre-funded, the better off the financial position of the plan. That’s all well and good, we certainly hear enough in the media about pension funding, and it’s great to know that LAGERS is in such great shape; but as LAGERS’ funding has continued to rise for five straight years since the 2008-2009 market downturn, maybe there’s an even more important take away about the LAGERS system.
If we look back prior to the market downturns of the last decade, LAGERS was historically 100% pre-funded. (Let’s be honest, the 90’s were pretty good to most investors.) And while it is great to be at 100%, I think what happened in ’08-09 speaks to a very important underlying philosophy of defined benefit plans: we are stronger as a whole.
As an individual investor in ’08, I watched my 401(k) balance dwindle. I can’t even imagine how I would have felt had I been on the verge of retirement age with nothing but my 401(k), but I’m guessing some degree of panic would have ensued. The downturn was hard on everyone, LAGERS included. The once 100% pre-funded levels we had so long enjoyed dropped, quickly, from 100% to 81%. But did LAGERS panic? There was no need. Because employers had diligently been making their required contributions each month, and benefits were funded, LAGERS was well positioned to weather the storm. Employees kept on retiring, benefits continued to be paid on time as usual, and LAGERS great plan design took care of the rest. Even at the lowest point, LAGERS’ funding never dropped below 80%, which is generally considered the benchmark for a healthy plan. Fast forward almost 6 years, and LAGERS is diligently working back to 100%, from 86.5% in 2013 to 91.7% in 2014, now up to 94.4% today.
The markets can be a wild ride (last week, case in point), but that doesn’t mean retirement security should be. Great plan design built on the philosophy of diligent funding and pooled risk helps today’s public servants know that they can continue to work hard without fear of the future. As LAGERS funding continues to rise, members and retirees can feel confident about their retirement security, and can take comfort that even with market turbulence in the future, their hard-earned benefit will always be there.