Question

What’s happening to Florida in regards to pensions is a growing concern to every state. How are companies also affected by pensions? What are the pros and cons of offering pensions? Do you believe pensions are good for business? Is it good for cities, states, countries, to offer pensions to their employees? Why or why not?

Answer 1

Why Pension Scheme is so much issue at Florida ?

Before start answering above question , let me explain about two types of Pension plan existence . Defined contribution plan and defined benefit plan . Defined . As per 401(K) , defined contribution plan represents , employee set aside a certain amount or certain % of salary each month for retirement. Where as defined contribution plan guarantee a certain amount for employees at retirement based on length of service .

Why pension fund is creating issue n Florida state ? – problem started with Defined benefit plan. Under this plan , it owes a certain number of retiree certain monthly benefits for life . While doing this plan and mathematic calculation regarding quantum of money the plan should have right to pay when benefits will be due as well as the plan must have future return , inflation adjustment and in certain case future health care cost . Problem which is piled up that many sponsors have not set aside money they need to pay off the benefit they promised for current and future retire person . major challenge relates to funding to manage huge promised liability towards pension fund . This underfunded pensions could be one of the issue relates to the credit crisis which will hit in near future .

Funding gap is increasing on daily basis , which is much ore dangerous for near future . Looks like debt they have accumulated not possible to get return of 7% average. Looks like the unfunded liability became $ 6 trillion

State and local government has to manage fund to support huge pension fund liability they can chose only two path to do that :

Raises Tax amount + reduced Service matter

Increase tax amount us another challenge because to save tax , they will move to other country with low tax burden . Looks like with present federal debt , some part of this unfunded pension debt is going to get liquidate and this will definitely heart eith taxpayer or retire pensioners

The Berkeley city council taking criticism for prioritizing pension payment ahead of public work projects . We alos noticed that inverse ( tussle ) relationship between Infrastructure Investment and pension fund contribution .We noticed that each addition of   $ 1 billion in plan contribution takes away about $ 2.5 billion from State and Local government Investment

As per recent analyst report said 6.59% assumed to be reasonable return estimate of likely portfolio return over the next 15 years

At present statement pension system consist of : retired teachers , country workers , state workers , university personnel etc . Worker in the pension system contribute 3% of their salaries to the fund .

Overall on summary note , we noticed that cost will be in the range of $ 380 Million to adjust the $ 160 billion + pension fund . In case economy decline in long term then pension return may not be robust .

Other analysts warn that the State top level credit rating could be in jeopardy if the credit rating agencies believe that Florida overall pension projection were bult on unrealistic financial expectation .

Is Pension scheme really good fr companies ?? As I explained above at present we have two types of pension scheme – 1) defined contribution plan and other one Defined benefit plan

Good part of pension scheme will be – Employee retention = proper defined benefit plan definitely help company to retained employee . Another important point to note that good pension scheme that can be funded on a profit sharing basis . This scheme will definitely help employee once they understood their retirement is tied into results that can motivate then to increase productivity. Another project also help relates to Owners to contribute much more to their own retirement funds as compared to other plan ,

But important to note that cost also involved in case of pension scheme All pensions plan have long term benefits but not easy to set up . Company has to appoint “ actuary : to calculate employees funding level annually . In case of business needs more liquidity fund in that scenario , pension plan may nt be right fit. .