Category Archives: Pensions

(Un) Ready for Retirement

Source: Anna Petrini, State Legislatures Magazine, June 2017

States face a costly future if their citizens fail to save enough for retirement.

Most Americans are not saving enough for retirement. The problem is especially severe among small-business employees, low-income workers and communities of color. On the brink of a national retirement security crisis, state lawmakers are stepping into the breach with a spectrum of innovative solutions.

Retirement planning experts have traditionally used the analogy of a three-legged stool to describe the common sources of retirement income: Social Security, employer-provided pensions and individual savings. But the stool has grown wobbly for many workers, particularly in the private sector. For one, fewer employers offer traditional pensions, which puts the onus on workers to save more themselves. Another issue is changing demographics—people are simply living longer and need to save more money as a result. A third concern: Just how secure is Social Security?

As state officials stare down the prospect of mounting costs if their citizens retire into poverty, they’re looking carefully at how to boost retirement savings. Should they create and facilitate new retirement savings programs for private sector workers or encourage participation in existing plans?….

Pensions v 401(k)s: An Illinois Case Study

Source: Kezmen Clifton, OnLabor blog, May 26, 2017

Illinois’ pension liability is estimated to stand at more than $130 billion. The reason behind Illinois’ ever-growing pension liability is one of debate. Some attribute the deficit to legislators voting on pension bills they didn’t fully understand. Others argue that politicians chose to kick the pension ball down the road to avoid raising taxes or cutting spending on their watch. Still others, like Illinois Governor Bruce Rauner, argue the structure of the pension system itself is to blame: employees change jobs as a way to qualify for more than one pension and many seek raises in their final years as that guarantees them higher payouts during retirement.

While there is much debate about the cause of the deficit, its existence is certain. Despite being in the top 1/3 of the nation’s wealthiest states, Illinois has one of the most poorly funded retirement systems in the country. Illinois has only funded 39 cents for every dollar it has promised to pay out in pensions. The pensions of similarly populated states like New York and Pennsylvania are far better funded, with New York at 89 percent and Pennsylvania at 62 percent, respectively. It is clear that Illinois needs to rethink its current pension scheme. Some groups like Illinois Policy, a conservative think tank, advocate for Illinois to adopt 401(k)s for new government workers, but the idea has not received much traction among state employees. While the traditional debate has been between keeping traditional defined benefit plans like pensions or moving to a defined- contribution plan like a 401(k), there is a lesser explored option as well: the hybrid 401(k)-pension plan. The hybrid plan combines the guaranteed income of a pension while lowering employer contributions with a 401(k)…..

2016 Annual Survey of Public Pensions

Source: U.S. Census Bureau, May 25, 2017

From the press release:
Employer pension contributions made by state and local governments increased by 6.5 percent or $8.5 billion while earnings on investments dropped by $105.7 billion to $49.9 billion, according to the U.S. Census Bureau’s newly released report.

“The 2016 Annual Survey of Public Pensions found that total contributions were $191.6 billion in 2016, increasing 6.6 percent from $179.7 billion in 2015. Government contributions accounted for the bulk of them, $140.6 billion in 2016, increasing 6.5 percent from $132.0 billion in 2015, with employee contributions at $51.0 billion in 2016, climbing 7.1 percent from $47.7 billion in 2015,” according to Phillip Vidal, chief, Pension Statistics Branch.

The other component of total revenue — earnings on investments — declined 67.9 percent to $49.9 billion in 2016, from $155.5 billion in 2015. Earnings on investments include both realized and unrealized gains, and therefore reflect market fluctuations.

In 2016, the total number of beneficiaries of state and local government pensions increased
3.3 percent to 10.3 million people, (from 10.0 million in 2015 and 9.9 million people in 2014). The benefits they received rose 5.4 percent to $282.9 billion in 2016, from $268.5 billion in 2015.
Meanwhile, total assets decreased 1.6 percent to $3.7 trillion in 2016, from $3.8 trillion in 2015.
The Annual Survey of Public Pensions provides a comprehensive look at the financial activity of the nation’s state and locally-administered defined benefit pension systems, including cash and investment holdings, receipts, payments, pension obligations and membership information. Statistics are available at the national level and for individual states. State and Locally Administered Defined Benefits data will also be released on May 25, 2017.

Making your dollars count - Top 9 states: public-sector retirees' benefits for total contributions

State Public Pension Funds Increase Use of Complex Investments

Source: Pew Charitable Trusts, April 2017

From the overview:
State and locally run retirement systems currently manage over $3.6 trillion in public pension fund investments, most of which are held by states. Broadly, half of these assets are invested in stocks; a quarter in bonds and cash; and another quarter in what are known as alternative investments, such as private equity, hedge funds, real estate, and commodities.

Although governments and employees contribute to pension funds, investment earnings on plan assets are expected to pay for about 60 percent of promised benefits. In a bid to boost investment returns and diversify investment portfolios, public pension plans in recent decades have shifted funds away from low-risk, fixedincome investments such as government and high-grade corporate bonds. During the 1980s and 1990s, plans significantly increased their reliance on stocks, also known as equities. And over the past decade, funds have increasingly turned to alternative investments to achieve investment return targets.

Greater investment in equities and alternatives can provide higher financial returns but also bring heightened volatility and risk of shortfalls. Most funds exceeded their investment return targets during the bull market of the 1990s but then suffered losses during the volatile financial markets of the 2000s—leading to higher pension costs for state and local budgets. The volatility inherent in public funds’ investment strategies can be seen in more recent results as well, with large funds posting fiscal year gains of over 12 percent in 2013 and 17 percent in 2014, but only 2 percent in 2012, 4 percent in 2015, and 1 percent in 2016.

The shift toward more complex investment vehicles has also brought higher investment fees. State funds reported paying more than $10 billion in fees and investment-related costs in 2014, which amounted to their largest expense. Those fees, as a percentage of assets, have increased by about 30 percent over the past decade, a boost closely correlated with the rising use of alternative assets, which has more than doubled since 2006. Additionally, state funds are paying billions of dollars in unreported performance fees associated with these alternative investments…..

The State Pension Funding Gap: 2015 Market volatility deepens the divide between assets, liabilities

Source: Pew Charitable Trusts, Issue Brief, April 2017

From the overview:
The gap between the total assets reported by state pension systems across the United States and the benefits promised to workers, now reported as the net pension liability, reached $1.1 trillion in fiscal year 2015, the most recent year for which complete data are available. That represents an increase of $157 billion, or 17 percent, from 2014.

A state pension plan’s annual funded ratio gives an end-of-fiscal-year snapshot of the assets as a proportion of its accrued liabilities. In aggregate, the funded ratio of these plans dropped to 72 percent in 2015, down from 75 percent in 2014. Investment returns that fell short of expectations proved to be the largest contributor to the worsening fiscal position, with median overall returns of 3.6 percent.1 On average, state pension plans had assumed a long-run investment return of twice that—7.6 percent—for fiscal 2015.

Though final data for 2016 are not yet available, low returns will also be reflected there. Based on returns averaging 1.0 percent for that year, the net pension liability is expected to increase by close to $200 billion and reach about $1.3 trillion. Market volatility will also have a significant impact on cost predictability in the near and long terms.
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Investment Return Volatility and the Michigan State Employees’ Retirement System

Source: Yimeng Yin and Donald J. Boyd, Nelson A. Rockefeller Institute of Government, Pension Simulation Project Policy Brief, March 2017

A new report from the Rockefeller Institute’s Public Pension Simulation Project examines investment return volatility and its impact on the Michigan State Employees’ Retirement System (MISERS). The analysis found that a very conservative contribution policy can protect a plan closed to new members from becoming severely underfunded. However, for large closed plans like MISERS, the sponsoring governments may face a risk of substantial contribution increases if the plan invests in risky assets and if large shortfalls must be recouped in short periods of time. This is the seventh report of the Pension Simulation Project at the Rockefeller Institute, which examines the potential consequences of investment-return risk for public pension plans, governments, and stakeholders in government. The project is supported by the Laura and John Arnold Foundation and The Pew Charitable Trusts.

Funding Public Pensions: Is full pension funding a misguided goal?

Source: Tom Sgouros, University of California – Berkeley, Haas Institute for a Fair and Inclusive Society, 2017

Public pension systems across the United States are, and have been, in crisis. But, to a larger extent than is widely acknowledged, the crisis is the result of the accounting rules governing both these plans and the governments that sponsor them. These rules are designed to insure against risks that public pensions systems do not face, while simultaneously failing to insure against the risks they do face. The rules also encourage “reforms” that frequently do not improve the financial situation of a given pension system. This is not just deplorable, but a recipe for making a bad situation worse—precisely what we’ve seen over the past few decades. A hybrid accounting system could provide a more accurate picture of a system’s financial health while reducing the waste of overfunding. It could relieve unnecessary financial pressures on thousands of governments across the nation while still preserving the integrity of their pension systems.

State and Local Government Spending on Public Employee Retirement Systems

Source: National Association of State Retirement Administrators, NASRA Issue Brief, Updated April 2017

State and local government pension benefits are paid not from general operating revenues, but from trust funds to which public retirees and their employers contributed while they were working. On a nationwide basis, pension contributions made by state and local governments account for roughly 4.5 percent of direct general spending. Current pension spending levels, however, vary widely and are sufficient for some entities and insufficient for others.

In the wake of the 2008-09 market decline, nearly every state and many cities have taken steps to improve the financial condition of their retirement plans and to reduce costs. States and cities changed their pension plans by adjusting employee and employer contribution levels, restructuring benefits, or both. Generally, adjustments to pension plans have been found to be proportionate to the plan’s funding condition and the degree of change needed.

The Drivers of Public Sector Pension Reform Across the U.S. States

Source: Michael Thom, The American Review of Public Administration, Volume 47, Issue 4, May 2017
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From the abstract:
This study analyzes the diffusion of public sector pension reforms across the American states between 1999 and 2012, a policy area notable for its fiscal implications as much as its recent political polarization. Previous enactment in other, non-contiguous states was the largest and most consistent driver of reform. Otherwise, empirical findings suggest that reform antecedents varied by reform type. Existing funding levels reduced the likelihood that states would cut benefits, change pension governance, or reduce cost of living allowances, but had no effect otherwise. Evidence for partisan legislative influence is weak, although Republican control had partial, positive effects on the enactment of pension governance reforms and increases to the retirement age. Across the board, other relevant factors such as constitutional pension protections, collective bargaining rights, and union membership density had no effect. That external contagion pressures have a more robust influence than endogenous conditions raises questions about the future efficacy of pension reform.