A 50 state chart detailing the retirement plan options of faculty and staff at state universities.
The U.S. ranks 17th globally in retirement security, down three spots from last year, the Natixis Global Asset Management 2017 Global Retirement Index shows. The index, launched in 2013, assesses how well retired citizens live in various nations across four broad categories — health, finances, material well-being and quality of life. The 2017 index was released Wednesday. Forty-three countries with developed retirement systems were assessed in 2017, the same number as last year. Natixis, in a report accompanying this year’s release, attributed part of the decline in the U.S. ranking to “lagging life expectancy and a growing gap in economic opportunity.”….
2017 Global Retirement Index
Source: Natixis Global Asset Management, July 2017
Public pension plans in the United States have $3.8 trillion of invested assets, more than two-thirds of which are in equities and similar assets. Unlike private pension funds, public pension funds have increased their equity allocations dramatically over the last two decades, making their investment returns and unexpected investment gains and losses far more volatile than before. This means that plan funded status and contributions requested of governments also are more volatile than before, increasing the risks to taxpayers, stakeholders in government services and investments, and workers and retirees.
One important way to examine the impact of investment-return volatility upon plan funded status and contributions is with a stochastic simulation model that draws investment returns from a probability distribution. We have constructed a pension simulation does that, and we use it to examine the interplay between investment return volatility and funding policy, and to examine the potential consequences of different investment return environments….
From the abstract:
Pensions play a critical role in the ability of local governments to attract and retain the workforce needed to meet citizen demands. The costs associated with this employee benefit, however, can be substantial. A recent National League of Cities (NLC) survey revealed that over the past year the cost of pensions increased in more than 70 percent of cities. One in three cities identified these expenses as the factor most negatively affecting their budgets.
From the introduction:
Pension benefits for employees of state and local governments are paid from trusts to which public employees and their employers contribute during employees’ working years. Timely contributions are vital to the proper funding and sustainability of these plans: failing to pay required contributions results in higher future costs, due largely to the foregone investment earnings that the contributions would have generated.
Nationally, contributions made by state and local governments to pension trust funds in recent years account for just less than five percent of all spending. Pension spending levels, however, vary widely among states and are actuarially sufficient for some pension plans and insufficient for others. Unlike employees, who must always contribute the amount prescribed in statute or by plan rules, some public employers—states, cities, etc.—have discretion to set the contributions they make to public pension plans. This disparity in contribution governance arrangements is one factor leading to a wide range of experience among public employers concerning required contributions. Overall, the experience for FY 15 reflects an improved effort among state and local governments to make actuarially determined pension contributions, and a decline in the rate of growth of pension costs.
This brief describes how contributions are determined; the recent public employer contribution experience; and trends in employer contributions over time.
From the summary:
The brief uses data from PublicPlansData.org to explore which state and local pension plans have the largest allocations in investments outside of public equities, bonds, and cash and the broader impact of aggregate allocation shifts on returns and volatility.
The brief’s key findings include:
– Public pension plans have boosted their holdings in alternative assets, defined as private equity, hedge funds, real estate, and commodities.
– This shift reflects a search for higher returns, a hedge for other investment risks, and diversification.
– The question is how the shift has affected returns and volatility over two periods: 2005-2015 and 2010-2015.
– In terms of returns, a 10-percent increase in the average allocation to alternatives was associated with a reduction of 30-45 basis points, primarily due to hedge funds.
– In terms of volatility, alternatives did not have a statistically significant effect. Hedge funds reduced volatility, but real estate and commodities increased it.
– This analysis is only a first look at this area; further research is clearly warranted.
In March 2016, the Society of Actuaries (SOA) introduced contribution indices, metrics that compare pension plan contributions to benchmarks that represent the contribution level needed to pay down unfunded liabilities or to satisfy a specific requirement. This study explores various contribution indices for employer contributions among 160 state and large city public sector pension plans in the United States over 2006-2014 using the assets and liabilities reported under Government Accounting Standards Board (GASB) guidelines. The analysis isolates employer contributions because state law typically defines employee contribution rates, whereas employer contributions are typically more flexible.
Key observations include:
– For 130 plans with consistently viable data for this study over 2006–2014, total unfunded liabilities as reported under GASB guidelines increased about 150% from about $400 billion in 2006 to approximately $1 trillion in 2014, while liabilities increased 47%, from about $2.5 trillion to roughly $3.7 trillion.
– In every year studied, most of the 160 plans with enough data to complete analysis for the year received insufficient employer contributions to maintain their unfunded liabilities— they experienced negative amortization. In 2014, 72% of plans experienced negative amortization, up from 65% in 2006.
– Many plans with negative amortization contributed at least as much as their target contribution. However, at the peak in 2010, 76% of target contributions entailed negative amortization. By 2014, the percentage fell to 67%, roughly the same level as 2006.
– For 2014, 3% of plans showed a funding surplus and 20% of plans received enough employer contributions to fund their shortfall within 30 years without it growing through negative amortization in the meantime.
– Employer contributions for the same 130 plans increased 76%, from about $48 billion in 2006 to roughly $85 billion in 2014. Employee contributions increased 30% during this period, from $28 billion to $37 billion, while payroll and prices both increased 17%…..
Source: Thomas Aaron, Timothy Blake, Moody’s, U.S. Public Finance, Sector In-Depth, June 20, 2017
A new report gauges pension-related risks in three scenarios for investment returns through fiscal 2020, after adjusted net pension liabilities for US public pension funds surpassed $4 trillion nationwide in 2016.
Source: U.S. Census Bureau, June 2017
This report 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. This 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.
From the summary:
Recruiting and retaining qualified personnel was the top priority for 91 percent of respondents to the 2017 workforce trends survey released today by the Center for State and Local Government Excellence (SLGE). Respondents also rated staff and leadership development (77 and 76 percent) and succession planning (74 percent) as important workforce issues.
– Key findings from the annual survey, conducted by SLGE, the International Public Management Association for Human Resources, and National Association of State Personnel Executives were:
– 74 percent reported hiring staff
– 47 percent hired contract or temporary employees
– 38 percent shifted more health care costs to employees
– 24 percent established wellness programs.
– Every year since 2010, a majority of respondents to the annual survey has reported making changes to health insurance benefits. On the other hand, the pace of changes to retirement plans has slowed in recent years. In 2012, 24 percent reported increasing current employee contributions to retirement plans compared with 9 percent increasing current employee contributions in 2016. Positions hardest to fill in 2016 were:
– Police officers (21 percent)
– Information technology (17 percent)
– Engineers (14 percent) and
– Health care (13 percent)
– Skills in greatest demand were in interpersonal relations (65 percent), written communications (53 percent), and technology (51 percent).