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Pension funds are once again facing a challenge they haven’t encountered in many years, heavy inflation. The first year of the Biden administration has seen inflation soar, and retirees are having trouble keeping up. Now pension funds are wondering how and if they can raise payouts. Heather Gillers reports in The Wall Street Journal:

Rising inflation is driving up expenses for many large U.S. pension funds that have promised retirees cost-of-living raises.

About half of states link pension benefits for some or all of their retired workers to changes in the consumer-price index, according to the National Association of State Retirement Administrators. With inflation reaching 7% in December, some retirement funds are now looking at increasing pension checks by 3% or more for the first time in a decade. At others, board members or state officials are approving one-time cost-of-living raises.

“It’s a hot topic,” said Keith Brainard, the association’s research director. “A cost-of-living adjustment can be an expensive plan provision.”

Pension funds are confronting a challenge shared by institutions and household savers alike: Just as expectations for public market investment returns are dimming, everyday costs are going up. This year, many retirement systems will book a loss on cost-of-living adjustments, rather than the annual windfall they have been seeing for years when those inflation-linked increases came in below expectations.

The $28 billion Los Angeles Fire and Police Pension System, for example, got an unexpected gain of $264 million last year when cost-of-living adjustments for pensioners came in well below the actuaries’ assumption of 2.75%.

This year, with the fund’s cost-of-living adjustment likely to approach 7% for many beneficiaries, the system is likely to pay out tens of millions dollars more than anticipated. Pensions range from 50% to 90% of final salary.

Pension funds “have been used to coming in ahead; now all of a sudden they’re going to be behind,” said Joe Newton, pension market leader with Gabriel, Roeder, Smith & Co., an actuarial and benefits consulting firm. Russia’s attack on Ukraine is further stoking inflation concerns.

In the roughly 30,000-person town of Windsor, Conn., an $84 million local pension fund is paying out about $410,000 a month in pension benefits to its roughly 250 retirees this year, said Finance Director James Bourke. About $63,000of that is due to cost-of-living increases made over the years, with $5,000 coming from this year’s cost-of-living increase of 1.3%.

Next year, the cost-of-living increase will rise to 5.9%, tacking on about $25,000 a month. The pension fund has taken several measures over the past decade that help keep costs down, Mr. Bourke said, including closing the plan to new hires and increasing worker contributions.

Inflation also can add to pension costs down the road if it drives up workers’ final salaries, which are used to calculate their pensions.

Read more here.