Advisers help clients prepare for sharp decline in pension benefits

Busy days are ahead for Illinois and Michigan advisers who work with municipal employees as public-pension overhauls loom in the Prairie State and in Detroit. On Tuesday, U.S. Bankruptcy Judge Steven Rhodes gave Detroit the OK to file for Chapter 9 bankruptcy protection, which will permit the Motor City to reorganize its municipal debts. Although opponents to the bankruptcy have argued that public pensions in Detroit are protected from cuts by the state's constitution, Mr. Rhodes ruled that federal bankruptcy law supersedes state law — making the pensions vulnerable to adjustments. That same day, legislators in Illinois cleared a bill that will cover the state's $100 billion pension debt. That plan purports to save $90 billion to $100 billion by trimming cost-of-living increases for retirees, placing a cap on the salary levels used to determine pension benefits and offering an optional 401(k) plan for current workers. Employees 45 and under will have their retirement age pushed back on a sliding scale. For financial advisers working with these clients, preparing for a sharp cut in pension benefits — and a smaller income stream — is a centerpiece of retirement planning. “'Assume that you only get half of your expected benefits. We set our savings rate according to that plan,” said Timothy W. Wyman, managing director at Center for Financial Planning Inc. He has three clients who are retirees and living off a pension from Detroit. “Apparently, there's a small 'G' in 'guaranteed,'” Mr. Wyman said. “Illinois has the worst funded pensions in the country, and we're in for a bumpy ride,” said Dave Grant, an adviser with Finance for Teachers Inc. “Up until yesterday, I was telling clients that nothing is really set in stone yet and to look at the current situation based on the benefits they have.” Those COLA cuts and pension caps are all but a certainty, as Illinois Gov. Pat Quinn is expected to sign the legislation. Mr. Grant has prepared clients by taking the hypothetical situation to the extreme. “Let's freeze the pension and assume there will be no more contributions from the state,” he said. “Let's say the state gets bankrupt and [in retirement] you get either what you put in or a reduced benefit based on projections.” What makes the prospect of a public pension shakeup so scary for many retirees isn't just the fact that they have been counting on a certain stream of income throughout retirement but also that there aren't any fallbacks in the event that a municipality becomes unable to fund its pension obligations. “When the scare was that GM and Chrysler would go bankrupt, we could show those clients the [Pension Benefit Guaranty Corp.] tables,” said Kevin VanDyke, founder of Bloomfield Hills Financial. The PBGC backstops private pension plans. “In this case, nobody knows what will happen," Mr. VanDyke said. What makes Detroit's pension crisis particularly debilitating is that many municipal employees don't get Social Security, so a cut to a retiree's pension stream can take a significant chunk out of that individual's retirement income, he said. How those changes unfold in Detroit remains to be seen. Nevertheless, clients have been bracing themselves for the cuts for months. They face the prospect of either adjusting their investments to make up for the loss in income, working longer, taking on a part-time job or trimming their expenses. Mr. Wyman said that his three clients who depend on a Detroit pension average, with an average age of 71, are lucky enough to have part-time work during retirement and can still stay afloat without their pensions. But that is very rare, he said. “That 70-year-old who will see a significant cut [in benefits] — you can't plan for that,” Mr. Wyman said. “Even if they were 65. What were their options then? This is so different than someone who is early in their career and who can make other decisions," Mr. Wyman said.