Category Archives: Pensions

Don’t Dismantle Public Pensions Because They Aren’t 100 Percent Funded

Source: National Conference on Public Employee Retirement Systems, NCPERS Research Series, November 2017

From the press release:
State and local pension plans have consistently been able to meet their benefit and other payment obligations over the past quarter century, according to a data analysis published November 16 by the National Conference on Public Employee Retirement Systems.

Between 1993 and 2016, contributions and investment earnings by 6,000 public pension plans exceeded benefit obligations in all but four years. And during those four years – 2002, 2008, 2009, and 2012 – all plans met their obligations in the aftermath of recessions because they had built up cushions during normal times, according to the analysis conducted by Michael Kahn, director of research for NCPERS.

The findings offer a striking counterpoint to initiatives under way in some states and municipalities to dismantle public pensions because they are considered under-funded, said Hank H. Kim, NCPERS’ executive director and counsel. ….

Critics of public pensions often cite funding ratios of less than 100% as evidence of pressing financial problems, but this is faulty logic, Kim said. Contributions and earnings continue to flow into plans even as benefits are being paid out, he noted. ….

Kahn found that individual states – regardless of whether their pension plans were underfunded or fully funded – had between five and eight years in which income fell short of obligations, and had to draw on their cushion to pay benefits. Far from being a cause for concern, “this is exactly what public pensions are designed to do – to provide a steady income over the long haul,” Kahn noted. “Pension assets typically are invested over a 30-year time horizon, so plans aren’t blown off course by short-term market shifts.”

NCPERS offered four recommendations for public pension plans:
– Stop dismantling plans on grounds that they are not fully funded.
– Improve funding by determining the appropriate levels of required employer contributions.
– Establish a pension stabilization fund that can set aside money from a certain revenue stream to be used in special circumstances such as a recession.
– Implement a mechanism to ensure that full employer contributions are made on a timely basis, perhaps by making employer contributions a nondiscretionary part of the budget.

Employee Contributions to Public Pension Plans

Source: National Association of State Retirement Administrators (NASRA), Issue Brief, September 2017

From the introduction:
Unlike in the private sector, nearly all employees of state and local government are required to share in the cost of their retirement benefit. Employee contributions typically are set as a percentage of salary by statute or by the retirement board. Although investment earnings and employer contributions account for a larger portion of total public pension fund revenues, by providing a consistent and predictable stream of revenue to public pension funds, contributions from employees fill a vital role in financing pension benefits. Reforms made in the wake of the 2008-09 market decline included higher employee contribution rates in many states. This issue brief examines employee contribution plan designs, policies and recent trends.

Pension Math: Public Pension Spending and Service Crowd Out in California, 2003-2030

Source: Joe Nation, Stanford Institute for Economic Policy Research (SIEPR), Working Paper 17-023, October 2017

From the abstract:
California public pension plans are funded on the basis of policies and assumptions that can delay recognition of their true cost. Even with this delay, local and state governments are facing increasingly higher pension costs—costs that are certain to continue their rise over the next one to two decades, even under assumptions that critics regard as optimistic. As budgets are squeezed, what are state and local governments cutting? Core services, including higher education, social services, public assistance, welfare, recreation and libraries, health, public works, and in some cases, public safety.

Quarterly Survey of Public Pensions: Second Quarter 2017

Source: Melinda Caskey, Deron Pope, and Gritiya Tanner U.S. Census Bureau, Report Number: G17-QSPP2, September 2017

From the tip sheet:
This survey provides national summary data on the revenues, expenditures and composition of assets of the largest defined benefit public employee pension systems for state and local governments. The report produces three tables: Tables 1 and 3 include data on cash and security holdings, and Table 2 provides data on earnings on investments, contributions and payments.

Hawaii Adds New Tool to Monitor State Pension Fund – Regular stress testing will help track fund’s fiscal health

Source: Greg Mennis and Tim Dawson, The Pew Charitable Trusts, September 11, 2017

Hawaii is the latest state to require regular analysis of the potential impact of future economic swings on its public pension funds. Known as stress testing, such calculations can help states monitor the fiscal strength and sustainability of these funds.

This spring, the Legislature unanimously approved a bill requiring the analyses, and Governor David Ige (D) signed it into law July 5. California, Virginia, and Washington already require extensive and routine sensitivity analyses on their public pension plans. Typically, these tests provide estimates of the future financial position of these funds under various economic and investment return scenarios. Interest among other states appears to be growing as well. ….

Pension Plan Types and Financial Literacy in Later Life

Source: Yang Li, Jeffrey A Burr, Edward Alan Miller, The Gerontologist, Advance Articles, September 9, 2017
(subscription required)

From the abstract:
Background and Objectives:
The ongoing shift from defined benefit (DB) to defined contribution (DC) pension plans means that middle-aged and older adults are increasingly being called upon to manage their own fiscal security in retirement. Yet, half of older Americans are financially illiterate, lacking the knowledge and skills to manage financial resources. This study investigates whether pension plan types are associated with varying levels of financial literacy among older Americans.

Research Design and Methods:
Cross-sectional analyses of the 2010 Health and Retirement Study (HRS) (n = 1,281) using logistic and linear regression models were employed to investigate the association between different pension plans and multiple indicators of financial literacy. The potential moderating effect of gender was also examined.

Results:
Respondents with DC plans, with or without additional DB plans, were more likely to correctly answer various financial literacy questions, in comparison with respondents with DB plans only. Men with both DC and DB plans scored significantly higher on the financial literacy index than women with both types of plans, relative to respondents with DB plans only.

Discussion and Implications:
Middle-aged and older adults, who are incentivized by participation in DC plans to manage financial resources and decide where to invest pension funds, tend to self-educate to improve financial knowledge and skills, thereby resulting in greater financial literacy. This finding suggests that traditional financial education programs may not be the only means of achieving financial literacy. Further consideration should be given to providing older adults with continued, long-term exposure to financial decision-making opportunities.

114 Multiemployer Pension Plans Projected to Fail Within 20 Years

Source: Stephen Miller, SHRM, August 29, 2017

Failing union pensions may seek relief through reduced payouts.

As many as 114 multiemployer pension plans covering nearly 1.3 million workers are severely underfunded and headed toward failure within the next 20 years.

The forecast, from a new analysis by actuarial consulting firm Cheiron Inc., draws on the latest annual financial reports filed by multiemployer pension plans with regulators. The troubled plans have total assets of $43.5 billion and liabilities of $79.9 billion, leaving unfunded liabilities—future benefit payouts promised to retirees and beneficiaries for which reserve funds have not been set aside—of $36.4 billion.
Related:
Unfunded Liabilities of the 114 Failing Multiemployer Pension Plans
Source: Cheiron, August 2017
See also: Press release

Investment Return Volatility and the Pennsylvania Public School Employees’ Retirement System

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

The Rockefeller Institute of Government released a report that examines the potential implications of investment return volatility for the Pennsylvania Public School Employees’ Retirement System (PSERS) using the Institute’s state-of-the-art Pension Simulation Model. It also examines the implications of a recent reform that created a hybrid pension plan for new employees. PSERS was selected for study as part of the Rockefeller Institute of Government’s ongoing analysis of risks related to public pension systems.

PSERS is a defined benefit retirement plan for public school employees of the Commonwealth of Pennsylvania. The state and individual school districts are participating employers. As of June 30, 2016, PSERS had over 257,000 active members and approximately 225,000 retirees and other beneficiaries who receive over $476 million in pension and health care benefits each month. PSERS has an uncommon approach to funding under which some employees share partially in the plan’s investment risk, in certain circumstances.

PSERS is deeply underfunded and faces greater challenges than other pension funds we have examined recently. At the end of the 2016 fiscal year, it had a market-value funded ratio of 50 percent and an unfunded liability of approximately $50 billion.

PSERS currently uses a 7.25 percent earnings assumption. Recently it has fallen short of this assumption: its one-year, three-year, five-year, and ten-year annualized rates of return were 1.29 percent, 6.24 percent, 6.01 percent, and 4.94 percent, respectively, for periods ending on June 30, 2016.

In an effort to improve the overall fiscal health of the fund and reduce risks to employers, Pennsylvania lawmakers recently changed the retirement benefit structure available to new state employees. New members of PSERS hired on or after July 1, 2019, will be offered three options for retirement benefits: two hybrid benefit options that include a defined contribution component in addition to a defined benefit component, and a pure defined contribution option. The defined benefit options will provide lower benefits than the current defined benefit plan for existing workers.

The reform is intended to shift part of the funding risk, which is almost entirely borne by the state and school districts under the current defined benefit structure, to new employees…..

Decisions, Decisions: An Update on Retirement Plan Choices for Public Employees and Employers

Source: Jennifer Brown, Matt Larrabee, National Institute on Retirement Security (NIRS) and Milliman, August 2017

From the summary:
Public employees with retirement plan choice overwhelmingly choose defined benefit pension plans over defined contribution 401(k)-type individual accounts.

Decisions, Decisions: An Update on Retirement Plan Choices for Public Employees and Employers, finds that public sector employees with retirement plan choice overwhelming choose defined benefit (DB) pension plans over 401(k)-type defined contribution (DC) individual accounts.

Among the eight states studied that offer employees such a choice, the DB pension take-up rates in 2015 were 80 percent or higher in six states. Two of the plans studied had pension take-up rates higher than 95 percent, while Florida and Michigan had take-up rates of 76 percent and 75 percent, respectively. Importantly, the research finds that even when the retirement plan default option favors a DC plan, most employees still select a DB pension plan.

For example, in Washington the default retirement plan is a combination DB/DC plan. Employees must affirmatively act to elect to participate in the DB pension plan instead, and they do. The majority of newly-hired employees – six out of every ten new hires – actively choose a pension plan.

Related:
Read the press release here.
Watch a webinar replay here.
Download a PowerPoint here.

Pennsylvania’s hybrid plan seen as falling short

Source: James Comtois, Pensions & Investments, July 24, 2017

After many fits and false starts to pension reform, Pennsylvania’s governor has a signed a measure that establishes a hybrid defined benefit/defined contribution plan for new state employees. Although some industry observers believe the new law is a step in the right direction, several others said the switch to a hybrid DB/DC plan does little — if anything — to solve the state’s core underfunding problem…..

…. Both Ms. Childers and Ms. Oakley cited West Virginia and Alaska as two states that decided to switch to a DC plan from a DB plan for state employees — and it didn’t go well for either. In 1991, West Virginia closed its teacher retirement system to new employees to address its underfunding issue, according to a 2016 NIRS survey shared by Ms. Oakley. After 10 years, the replacement DC plan was costing the state twice as much, so it went back to a pension. ….