Comparing CalPERS and CalSTRS with AT&T retirement

by Wayne Lusvardi | January 27, 2015 4:44 pm

Following yesterday’s CalWatchdog.com story, “State pensions improve, but members living longer[1],” it would be useful to compare California’s two large state retirement funds with a roughly equivalent private one, AT&T.

Most private companies have switched to “defined contribution[2]” pension plans, in which the employer pays a defined sum in to a fund, such as a 401(k), controlled by the employee/retiree. But some companies still use “defined payment” plans, in which the employee, upon retirement, is paid a certain sum regardless of how the underlying investments have performed, with the parent company picking up any difference.

Most California governments also have “defined payment” plans. Which is why it is instructive to see how AT&T, one of the decreasing number of companies with a “defined payment” plan, compares to the similar plans for public employees, specifically the California Public Employees’ Retirement System and the California State Teachers’ Retirement System.

Although it is one of the four top providers of the modern technology of cell phones, AT&T is an old company and still has pension obligations that more recent companies do not.

Pretax loss

In a Jan. 16 filing with the Securities and Exchange Commission[3], AT&T wrote:

“For the quarter ended December 31, 2014, we expect to record a noncash, pre-tax loss of approximately $7.9 billion related to actuarial gains and losses on pension and postemployment benefit plans. At December 31, 2014, we decreased our assumed discount rates used to measure our pension obligation to 4.3 percent and to 4.2 percent for our post-retirement obligation. These reductions resulted in an actuarial loss of approximately $7.9 billion.”

That is, the company itself is picking up the tab for the pension losses. Although the company is doing well, with its shares up 32 percent[4] the past five years, that $7.9 billion will come as a hit to dividends.

The report added:

“Also contributing to the amount were losses due to updated mortality assumptions offset by asset gains in excess of our assumed rate of return as well as demographic changes and other assumptions. Actuarial gains and losses are managed on a total company basis and are, accordingly, reflected only in consolidated results.” 

In other words, Ma Bell’s retirees are living longer than previously projected and so are collecting retirement pay longer. As noted yesterday, CalPERS has made similar calculations, with the lifespan of men increasing by 2.1 years and of women by 1.6 years.

Rate of return

Let’s now look at AT&T’s actions. The California Constitution, by most readings, guarantees public pension payments, with taxpayers on the hook. But private pensions like AT&T’s remain solvent only so long as the company does. If it goes broke, so do the pensions, with some payments picked up by the federal Pension Benefit Guaranty Corp[5] (that is, U.S. taxpayers).

AT&T just lowered the expected investment rate of return on its pension plan from 4.3 percent to 4.2 percent[6]. The public pensions also have lowered their expected rates of return — but not by much. Last March, CalPERS cut its rate to 7.5 percent from 7.75 percent. That followed a move with the same numbers two years earlier by CalSTRS[7].

Both CalSTRS and CalPERS claim their higher rate of return is reasonable because of their historical track record. But if they are wrong, then California taxpayers will be the ones taking up the slack.

By contrast, if AT&T is wrong and its retirement fund underperforms, retirees would see sharp cuts in their pensions, and the fund managers could have problems with shareholder lawsuits. So it makes sense for a private fund to be less exuberant in its expectations.

Source URL: https://calwatchdog.com/2015/01/27/comparing-calpers-and-calstrs-with-att-retirement/

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