Category Archives: Pensions

Softening Investment Expectations Signal Accelerating Budget Pressure from Pensions

Source: Thomas Aaron, Timothy Blake, Moody’s, Sector InDepth, State and Local Government – US, February 16, 2017
(subscription required)

State and local governments have held down annual pension contributions with high assumed discount rates, which in turn reflect high assumed returns on their pension assets. Generally, the higher the assumed discount rate, the lower the annual contribution requirement. Facing investment conditions that increasingly suggest lower future returns, however, the California Public Employees’ Retirement System (CalPERS, Aa2 stable) and many of its national peers are gradually lowering their assumed discount rates. Such moves will generally result in governments making higher pension contributions, incrementally improving their discipline in funding their pension promises earlier in time. But these higher contributions also mean that budgetary pressure from pensions, already on the rise in many cases, is accelerating. Meanwhile, pension investment volatility risk remains high.

Cost Sharing Among State Defined Benefit Pension Plans: Approaches to managing risk and cost uncertainty

Source: Greg Mennis, Pew Charitable Trusts, January 2017

From the overview:
A number of states with defined benefit, or traditional, pension plans have enacted policies that retain the core elements of the plans while sharing the risk of cost increases—as well as potential gains—between public employees and employers. These mechanisms for sharing costs can help reduce volatility and investment uncertainty while preserving the ability to pay promised pension benefits.

For most public sector defined benefit (DB) plans, the cost of providing these benefits fluctuates, depending on investment performance, inflation, salary growth, life spans, and workforce demographics. Cost volatility can strain state or local budgets or lead to underfunded pension plans if policymakers have not provided sufficient contributions.

In response to the budget strains and funding challenges, some states have looked to alternatives to traditional pensions, including defined contribution, cash balance, and hybrid plans. Still, most state and local governments continue to offer DB plans, though many now use cost-sharing mechanisms to reduce budget uncertainty. Employees continue to receive guaranteed lifetime benefits and in some cases see gains, such as higher cost of living adjustments (COLAs), from strong investment returns….

….This map and table highlight strategies used by large state pension plans to share cost increases with members. Looking at the benefits offered to new workers in 102 primary state retirement plans, Pew’s public sector retirement systems project identified 28 plans in 16 states that use formal cost-sharing mechanisms to manage risk….

NCPERS 2016 Public Retirement Systems Study

Source: National Conference on Public Employee Retirement Systems, December 2016

In September, October and November 2016, the National Conference on Public Employee Retirement Systems (NCPERS) undertook a comprehensive study exploring retirement practices of the public sector. In partnership with Cobalt Community Research, NCPERS has collected and analyzed the most current data available on member funds’ fiscal condition and steps they are taking to ensure fiscal and operational integrity. The 2016 NCPERS Public Employee Retirement Systems Study includes responses from 159 state, local and provincial government pension funds with more than 10 million active and retired memberships and assets exceeding $1.5 trillion. The majority –77 percent– were local pension funds, while 23 percent were state pension funds…..
NCPERS 2016 Public Retirement Systems Study Dashboard
Since 2011 NCPERS has conducted the annual Public Retirement Systems Study that surveys nearly 200 local and statewide public pensions. It is the most comprehensive survey of its kind and provides information on investment experiences and assumptions, plan administration and operations, and trends, innovations, and best practices.

With the issuance of the 2016 NCPERS Public Retirement Systems Study, in addition to the static pdf of the survey we have provided a dynamic interactive dashboard powered by Tableau to supplement the study. The dashboard will allow you to manipulate and search the survey results so that the data is refined to your specifications. Among the benefits is that you can compare survey results to plans similar to yours in size, participant composition, and plan type.

Public Pension Investment Risk-Taking May Result in Future Challenges

Source: Donald J. Boyd, Yimeng Yin, Nelson A. Rockefeller Institute of Government, Pension Simulation Project, January 2017

The latest report from the Rockefeller Institute’s Pension Simulation Project examines the difficult choices public pension funds faced as interest rates fell over the last 25 years. Public plans generally increased investment risk in an effort to avoid lowering expected investment returns, creating substantial potential for plans to become severely underfunded or to require sharp increases in government contributions in the future. This is the fourth report of the Pension Simulation Project, supported by the Laura and John Arnold Foundation and The Pew Charitable Trusts.
Policy Brief
News Release

State and Local Pension Reform Since the Financial Crisis

Source: Jean-Pierre Aubry and Caroline V. Crawford, Center for Retirement Research at Boston College, Issue in Brief, SLP#54, January 2017

The brief’s key findings are:
• Since the financial crisis, 74 percent of state plans and 57 percent of large local plans have cut benefits or raised employee contributions to curb rising costs.
• Plans with a larger pension cost burden and lower initial employee contributions were more likely to enact such changes.
• And, among plans that made changes, those in states with the strongest legal protections for current workers were more likely to limit the cuts to new hires.

OECD Pensions Outlook 2016

Source: Organisation for Economic Co-operation and Development (OECD), December 2016

From the abstract:
The OECD Pensions Outlook 2016 assesses policy issues regarding strengthening pension systems and, in particular, funded pension plans. It covers defined benefits and defined contribution pension plans; fiscal incentives to save for retirement; policy measures to improve the financial advice for retirement; annuity products and their guarantees; pension design and financial education; and the pension arrangements for public-sector workers, including a comparison with those for private sector workers.

2016 Retirement Confidence Survey of the State and Local Government Workforce

Source: Paul J. Yakoboski, Joshua M. Franzel, Center for State and Local Government Excellence, December 2016

From the summary:
This report examines the employment and retirement planning and saving experiences of state and local government workers, as well as confidence in their retirement income prospects.

Key findings:
The findings include:
• One-third of public sector employees have been with their current employer for less than 10 years, and one-third for 20 years or longer. Approximately two-thirds do not expect to leave their current employer anytime soon.
• Health insurance, retirement benefits, job security and salary are the most important job elements they would consider in deciding whether to switch employers.
• The vast majority are covered by a primary defined benefit pension plan; almost 20 percent of these workers reported changes to these benefits over the past two years.
• Two-thirds expect to receive retiree healthcare benefits from an employer when they retire; among these, one-quarter reported changes to their benefits over the past two years.
• The typical state and local employee would like to retire at age 62, but expects to retire at 65.
• Most public servants do not know how much they need to save for a comfortable retirement, nor have they planned and saved specifically for medical expenses in retirement.
• Forty-four percent are very confident that they will receive all of the retirement plan benefits they have earned and 44% are somewhat confident. The analogous figures for retiree healthcare benefits are 30% and 54%, respectively. Their confidence in future Social Security and Medicare benefits is lower.
• About 20 percent are very confident that they are saving and investing appropriately for retirement, with approximately 55 percent somewhat confident in their savings and investing.

Retirement Security Legislation in the States

Source: Anna Petrini, LegisBrief, Vol. 24 no. 44, November 2016
(subscription required)

Even as they are living longer, many Americans—especially those working in the private sector— are not saving enough to ensure a comfortable retirement. Concerned about costs for public assistance programs if their citizens retire into poverty, states have begun exploring a spectrum of policy solutions to avert a retirement savings crisis.

Removing the Legal Impediments to Offering Lifetime Annuities in Pension Plans

Source: Jonathan Barry Forman, Pension Research Council Working Paper, WP2016-6, August 2016

from the abstract:
Longevity risk–the risk of outliving one’s retirement savings–is probably the greatest risk facing current and future retirees in the United States. At present, for example, a 65-year-old man has a 50 percent chance of living to age 82 and a 20 percent chance of living to age 89, and a 65-year-old woman has a 50 percent chance of living to age 85 and a 20 percent chance of living to age 92. The joint life expectancy of a 65-year-old couple is even more remarkable: there is a 50 percent chance that at least one 65-year-old spouse will live to age 88 and a 30 percent chance that at least one will live to 92. In short, many individuals and couples will need to plan for the possibility of retirements that can last for 30 years or more.

One of the best ways to protect against longevity risk is by securing a stream of lifetime income with a traditional defined benefit pension plan or a lifetime annuity. Over the years, however, there has been a decided shift away from traditional pensions and towards defined contribution plans that typically distribute benefits in the form of lump sum distributions rather than as lifetime annuities, and people rarely buy annuities in the retail annuity market. All in all, Americans will have longer and longer retirements, yet fewer and fewer retirees will have secure, lifetime income streams.

There are a variety of ways that the federal government could promote greater annuitization of retirement savings. In particular, government policies could be designed to increase retirement savings, for example, by requiring employers without pension plans to at least offer automatic payroll-deduction IRAs to their employees. The government could also encourage workers to remain in the workforce longer, for example, by increasing the early and normal retirement ages associated with Social Security and pensions. Government policies could also be designed to get workers to preserve their retirement savings until retirement, for example, by discouraging premature pension withdrawals and loans.

The federal government could also do more to promote annuitization. One approach would be for the government to mandate that retirees use at least a portion of their retirement savings to purchase annuities or similar lifetime income guarantees. Alternatively, the government might only want to encourage annuitization. For example, the government could require plan sponsors to include annuities or other lifetime income mechanisms in their investment options and/or in their distribution options. The government could also provide additional tax benefits for individuals who receive income from lifetime annuities and lifetime pensions, for example, by completely exempting lifetime income payments from income taxation or favoring them with a reduced tax rate. The federal government could even get into the market of selling annuities. In any event, the government could make it easier for plan sponsors to offer annuities and deferred income annuities, for example, by letting plan sponsors rely on insurance regulators and industry standards to oversee and monitor annuity providers. The government could also promote better financial education about annuities and other lifetime income options.

Finally, in addition to promoting annuities, it could make sense to broaden the range of permissible lifetime income products–especially low-cost products that pool risk among participants, as opposed to products that necessitate high premiums to compensate insurance companies for their guarantees and profits. In that regard, for example, TIAA’s College Retirement Equities Fund (CREF) offers a variety of low-cost variable annuities that pool risk among participants. So-called “defined-ambition plans” like those in operation in the Netherlands offer another way to share risk among plan participants.

All in all, modest changes in the laws and regulations governing pensions and annuities could go a long way towards helping to promote secure, lifetime retirement incomes.