Category Archives: Pensions

Pension Reform in the United States: Lessons from the Italian Experience

Source: Raymond L. Hogler and Herbert Hunt III, Labor Law Journal, Spring 2008

This article examines the Italian pension reforms and draws insights from the Italian experience that could be useful in developing a program in the U.S. We argue that both process and substance are important in dealing with pension issues. An adequate process ensures that political interest groups are sufficiently engaged to support the idea of reform, that a sufficient time frame exists for citizens to adapt to the changes, and that the overall direction of change remains consistent with reform, even if minor adjustments are made in the implementation. The substantive concepts from the Italian model involve a compulsory private savings program, an integrated approach to health care, and a political commitment forceful and visionary enough to rise above ideological squabbling.

Why Have Some States Introduced Defined Contribution Plans?

Source: Alicia H. Munnell, Alex Golub-Sass, Kelly Haverstick, Mauricio Soto, and Gregory Wiles, Center for Retirement Research at Boston College, SLP#3, January 2008

Although defined benefit plans dominate the state and local sector, in the last decade twelve states have introduced some form of defined contribution plan. The degree of compulsion varies among these states from mandatory participation in a defined contribution plan for new employees, to mandatory participation in both a defined benefit and defined contribution plan, to having the defined contribution plan only as an option…

…The most important explanation turns out to be political rather than economic. States where the same political party controlled the legislature and governorship and that party was republican were the most likely to introduce a defined contribution plan. The results also suggest that plans with a high percentage of union members and those with sizable employee contributions are less likely to add a defined contribution plan component. Interestingly, states without Social Security coverage, which provides a basic level of defined benefit protection, are not deterred from shifting to a mandatory defined contribution plan.

What Do We Know About the Universe of State and Local Plans

Source: Alicia H. Munnell, Kelly Haverstick, Mauricio Soto, and Jean-Pierre Aubry, Center for Retirement Research at Boston College, SLP#4, March 2008

From the summary:
Several surveys report data on public pension plans, but they tend to focus on the 120 major state systems and some include a sampling of locally administered plans. The Census of Governments is the only source that reports on the entire universe of state administered plans, in addition to more than 2,000 locally administered plans. This brief describes that population, reports on the investment performance of different types of public plans, and compares the investment performance of public and private plans.

State and Local Government Retiree Benefits: Current Funded Status of Pension and Health Benefits, January 29, 2008

Source: Government Accountability Office, GAO-08-223, January 2008

Pension and other retiree benefits for state and local government employees represent liabilities for state and local governments and ultimately a burden for state and local taxpayers. Since 1986, accounting standards have required state and local governments to report their unfunded pension liabilities. Recently, however, standards changed and now call for governments also to report retiree health liabilities.

Upgrading The Investment Policy Framework Of Public Pension Funds

Source: Dimitri Vittas, Gregorio Impavido, Ronan O’Connor, World Bank Policy Research Working Papers, WPS4499, January 2008

From the summary:
Public pension funds have the potential to benefit from low operating costs because they enjoy economies of scale and avoid large marketing costs. But this important advantage has in most countries been dissipated by poor investment performance. The latter has been attributed to a weak governance structure, lack of independence from government interference, and a low level of transparency and public accountability. Recent years have witnessed the creation of new public pension funds in several countries, and the modernization of existing ones in others, with special emphasis placed on upgrading their investment policy framework and strengthening their governance structure. This paper focuses on the experience of four new public pension funds that have been created in Norway, Canada, Ireland and New Zealand. The paper discusses the safeguards that have been introduced to ensure their independence and their insulation from political pressures. It also reviews their performance and their evolving investment strategies. All four funds started with the romantic idea of operating as ‘managers of managers’ and focusing on external passive management but their strategies have progressively evolved to embrace internal active management and significant investments in alternative asset classes. The paper draws lessons for other countries that wish to modernize their public pension funds.

Issues Facing State And Local Government Pensions

Source: Rick Mattoon, Economic Perspectives, Vol. 31 3rd Quarter, 2007

At the turn of the century, many U.S. public pension funds faced a “perfect storm,” brought about by the confluence of unfavorable demographics, low interest rates that increased the present value of liabilities, declining investment returns from the stock market, and swelling ranks of pension benefit claimants. As state and local governments try to address these challenges and plan for the future, some analysts have begun to question whether traditional notions of defined benefit pension plans (where the retiree is guaranteed a monthly income for life) can be sustained. Many private sector firms have abandoned these traditional pensions in favor of defined contribution plans, whereby individuals are responsible for ensuring that their retirement plans are adequate to meet their retirement needs.

Private Equity and Public Good

Source: Stephen F. Diamond, Dissent, Winter, 2008

The collapse of the credit markets over the last year has hit more than just the homebuilding and mortgage sectors of the economy. As interest rates increased, private equity, or “PE,” an important new form of financial capital, was also rocked on its heels. … Trade unions have an ambivalent attitude toward the rise of private equity. On the one hand, many American labor unions have representatives on the boards of the same pension funds that are largely responsible for the steady flow of capital into PE funds, and, of course, that means some union members have benefited handsomely from the funds’ above-average returns. On the other hand, over the last decade, organized labor has developed a relatively sophisticated program of investor activism through the Office of Investment at the AFL-CIO, the Capital Strategies Group of Change to Win, and similar groups at key affiliates. This effort relies on labor’s pension-fund investments in public companies to raise concerns about corporate social responsibility, excessive CEO pay, workers’ rights, and internal corporate governance. But labor does not seem to have made up its mind whether or not PE funds raise or lower corporate standards of behavior.
See also:
The Modern Corporation and Private Property
Adolph Berle and Gardiner Means

Private Equity’s Broken Pension Promises: Private Equity Companies’ Links
To Insolvent Pension Funds

GMB, a Central Executive Council Special Report, 2007

A Workers’ Guide to Private Equity
International Union of Food, Agricultural, Hotel, Restaurant, Catering, Tobacco and Allied Workers Associations

Employer-Sponsored Pensions: A Primer

Source: Brendan Cushing-Daniels and Richard W. Johnson, Urban Institute, January 29, 2008

The shifting pension landscape raises questions about the financial security of future retirees. About one-half of private-sector workers are not covered by employer-sponsored pension plans on their current job. Many private-sector employers have replaced traditional pensions with 401(k)-type plans, which protect benefits for workers who change jobs frequently but expose participants to investment risks. This primer describes pensions, workers with coverage, and related policy issues.

Pew Study Finds States Face $2.73 Trillion Bill for Retiree Benefits

Source: Pew Center for the States

States have promised at least $2.73 trillion in pension, health care and other retirement benefits for public employees over the next three decades, according to a report released today by The Pew Charitable Trusts’ Center on the States. Promises with a Price, the first 50-state analysis of its kind, finds that states have saved enough to cover about 85 percent of their long-term pension costs, but only 3 percent of the funds needed for promised retiree health care and other non-pension benefits. All told, states already have set aside about $2 trillion to meet their long-term obligations. But they still need to come up with about $731 billion–a conservative figure that does not include all costs for teachers and local government employees.

Full Report (PDF; 1.1 MB)

Individual state fact sheets (PDFs)

What Makes for Effective Labor Representation on Pension Boards?

Source: Labor Studies Journal, December 2007
By Johanna Weststar and Anil Verma

This article examines the efficacy of labor representation on pension boards. Using existing literature and interviews with labor trustees, this article develops a model where a more formal approach to recruitment and selection, skill acquisition, and accountability is hypothesized to aid labor trustees in achieving effective integration and representation on pension boards. Data indicate that labor trustees are placed in a challenging environment with insufficient support from their union, other trustees, or the board. These findings have important implications for the selection, training, and integration of labor trustees and the success of a labor agenda on pension issues.