AFSCME Information Highway

Source: Jonathan Walters, Governing, May 2008

Pensions are getting less generous for a new generation of government workers. Will they tolerate equal work for unequal benefits?

Starting next July, public employees hired in the state of Kansas will be second-class citizens, in a way. They will have to pay more into the employees' retirement fund than workers who came on board before them do. They'll have to clock more years on the job in order to collect their pension. And when they do go on to retire, the new group of workers is set to receive less generous payouts than their brethren hired before July 1, 2009.

It's not for spite that the future hires are getting a lesser deal. The reason is more straightforward than that. The Kansas pension system is $5.4 billion short of full actuarial health. By lumping the next generation of workers into a second "tier," Kansas expects to take considerable pressure off the pension fund's long-term finances. What's more, since the workers getting nicked haven't even accepted the job yet, there was no natural constituency to oppose the plan in the legislature.

The notion of dinging future hires in the name of pension health is nothing new -- New York State began tiering its employees back in the early 1970s. But with retirees living longer, the stock market in flux and state and local budgets getting tighter, a growing number of states are tiering in the name of maintaining their pension funds. Just in the past three years, Arkansas, Colorado, Louisiana, Mississippi, North Dakota, Rhode Island and Texas have acted to create new classes of employees. For anyone about to go into government work in those states, retirement may be a little further out , and a little less sweet, than for those who toiled before them.

As Kansas found, tiering can make for an elegant political fix. That's particularly true because state law in Kansas, as in many states, prohibits taking away benefits promised to existing employees. There's evidence, however, that bifurcating pension benefits simply pushes pension conflict down the road. As the second tier's ranks swell and gain in political power, those employees inevitably agitate to win back what they lost before starting to work.

Posted by Info Center at 5:01 PM in Pensions | Public Sector | Permalink

Source: M. Corinne Larson, Government Finance Review, Volume 24, no. 1, February 2008

From the abstract:
A recent survey on public pension investment practices shows that many of the plans have active, sophisticated investment programs in place, and the trend is toward expanding the types of investments made. Therefore, finance officers involved with pension investing will need to understand increasingly sophisticated money management techniques.

Posted by Info Center at 11:07 AM in Pensions | Public Sector | Permalink

Source: Pamela Perun, C. Eugene Steuerle, Urban Institute, May 23, 2008

From the abstract:
Despite decades of significant tax subsidies for pensions and retirement accounts, most Americans retire with little or no pension saving. This paper suggests that it is possible to create a "Super Simple" saving plan that would provide a basic, low-cost, easily administrable plan with the potential to increase significantly the retirement assets available to moderate- and middle-income individuals. This plan follows the lead of a new system about to be implemented in the United Kingdom, which features automatic contribution for employees who do not opt out, a significant government match, and simplification of existing rules amongst other elements.

Posted by Info Center at 3:32 PM in Pensions | Retirement | Permalink

Source: Alicia H. Munnell, Kelly Haverstick, Jean-Pierre Aubry, and Alex Golub-Sass, Center for Retirement Research at Boston College, Issue in Brief, SLP #7, May 2008

The brief's key findings are:
• Over 40 percent of plans in our sample failed to make their annual required contribution (ARC) in 2006.
• Two thirds of these plans faced legal constraints on their contributions, but many are gradually adjusting their limits.
• For the unconstrained plans, the following factors are associated with a failure to make the ARC:

o The plan uses a less rigorous cost method;
o The plan is large; and
o The plan is in a state with a relatively high debt burden.

Posted by Info Center at 1:18 PM in Pensions | State & Local Finance | Permalink

Source: Alicia H. Munnell, Kelly Haverstick, and Jean-Pierre Aubry, Center for Retirement Research at Boston College, State and Local Pension Plans #6, May 2008

From the summary:
While state and local pensions as a group are about as well funded as plans in the private sector, significant variation exists. More than 60 percent are adequately funded, but almost 40 percent are not. Low levels of funding means that future taxpayers will have to pay the cost of unfunded pension promises, as well as the unfunded costs of retiree health insurance. Alternatively, if taxpayers balk at covering these pension commitments, future beneficiaries risk losing benefits, such as ad hoc cost-of-living increases.

Posted by Info Center at 9:40 AM in Pensions | State & Local Finance | Permalink

Source: Ron Snell, State Legislatures, May 2008

... How well are states prepared to meet the retirement commitments they have made?

In some ways, very well. State and local governments are custodians of an enormous pool of assets safeguarded for future retirees--$3.24 trillion in cash and investments at the end of last October. In the fiscal year that ended on June 30, 2007, state and local governments and their employees contributed $91 billion to retirement funds, and the funds earned more than $265 billion on their investments. Funding levels generally have been improving in recent years, as investments have recovered from their post-2000 lows.

In other ways, states are not so well prepared. Very few states hold all the assets they should have on hand to prepare for future retirement benefits. All states invest in order to meet future obligations, but even allowing for future investment return, some state trust funds hold less than half what they should. And a substantial number are below the 80 percent figure that the public retirement community regards as adequate. The Pew Center on the States recently estimated that state pension systems (not including locally run systems) are about $360 billion short of the assets they should ideally hold for future retirees.

Full text

Posted by William at 9:44 AM in Pensions | Retirement | Permalink

Source: Alicia H. Munnell, Kelly Haverstick, Steven A. Sass and Jean-Pierre Aubry, Center for State and Local Government Excellence

The brief's key findings are:
* State and local pension plans, overall, are as well funded as private plans, with assets covering nearly 90 percent of liabilities.
* This outcome is striking, even "miraculous," given that public plans:
- tend to pay larger benefits;
- use a more stringent funding yardstick; and
- are not covered by any national legislation that mandate funding standards.
* Assets per worker increased markedly in the1990s after states and localities responded to new standards issued by the Government Accounting Standards Board.

Full report

Posted by William at 10:13 AM in Pensions | Permalink

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.

Posted by William at 10:14 AM in Pensions | Permalink

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.

Posted by Info Center at 7:15 PM in Pensions | Permalink

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.

Posted by Info Center at 3:24 PM in Pensions | Retirement | Permalink

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.

Posted by Info Center at 5:35 PM in Pensions | Public Sector | Retirement | Permalink

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.

Posted by Info Center at 12:27 PM in Pensions | Permalink

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.

Posted by Info Center at 4:17 PM in Pensions | Permalink

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

Posted by Info Center at 1:05 PM in Corporate Governance | Finance | Pensions | Permalink

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.

Posted by Info Center at 5:17 PM in Pensions | Retirement | Permalink

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)

Posted by Info Center at 11:36 AM in Pensions | Permalink

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.

Posted by Info Center at 2:04 PM in Pensions | Permalink

Source: U.S. Government Accountability Office

There are no easy answers to the difficulties of equalizing Social Security's treatment of covered workers and noncovered public employees. About one-fourth of public employees primarily state and local government workers are not covered by Social Security and do not pay Social Security taxes on their government earnings. Nevertheless, these workers may still be eligible for Social Security benefits through their spouses' or their own earnings from other covered employment. To address concerns with how noncovered workers are treated compared with covered workers, Social Security has provisions in place to take noncovered employment into account and reduce Social Security benefits for public employees.

Report
Highlights

Posted by Info Center at 2:40 PM in Pensions | Social Security | Permalink

Source: Ronald K. Snell, National Conference of State Legislatures, October 2007

This report summarizes selected pensions and retirement legislation that state legislatures enacted in 2007, some 2006 legislation not reported last year, and a few items of particular interest that failed to pass or were vetoed. Bills summarized below have been enacted into law unless there is a specific indication to the contrary. Not all legislation had been chaptered at the time this report was compiled. Some legislatures remain in session at the time of publication, October 2007.

From IWS Documented News Service

Posted by Info Center at 12:32 PM in Pensions | Permalink

Source: Katherine Barrett and Richard Greene, Governing, Vol. 21 no. 1, October 2007

No one knows much about how public pension funds are governed or who's governing them. It's about time we did.

Even governments that don't have dramatically underfunded pension plans are facing unprecedented problems in paying for their liabilities, largely as a result of prior years' decisions to put off actuarially required contributions and a more recent phenomenon: the growth in the number of retirees.

Posted by Info Center at 11:22 AM in Pensions | Public Sector | Permalink

Source: James Poterba, Steven Venti, David A. Wise, NBER Working Paper No. 13381, September 2007
(subscription required)

The pension landscape in the U.S. has changed dramatically over the past 25 years. Saving through personal retirement accounts has become the principal form of retirement saving. We document the transition from a defined benefit system to a personal account system and show the effect it has had on wealth at retirement. We summarize results from other research we have done to project the growth of retirement assets over the next three decades. Our projections suggest that the advent of personal account saving will increase wealth at retirement for future retirees across the lifetime earnings spectrum.

Posted by Info Center at 1:08 PM in Pensions | Permalink

Source: Bruce R. Nordstrom, Mercer, Issue 13, June 2007

From the summary:
Pension plan sponsors in the US have had time to consider the effects of the recent pension reform legislation on their DB plans. This article examines whether they like what they are seeing, and whether a trend is emerging for dealing with the consequences of these new laws.

Posted by Info Center at 10:29 AM in Pensions | Retirement | Permalink

Source: Roderick B. Crane, Michael Heller, Paul Yakoboski, TIAA-CREF Institute, May 2007

From the summary:
This paper examines many of the sometimes-controversial issues raised in discussions regarding the design and funding of retirement plans for public employees. However, it does so in a different way. By focusing on development of appropriate benefits and funding policies and the use of risk management principles, we hope to provide public sector policy makers a better way to develop sound and sustainable retirement benefit policies for state and local governments and their employees based on our organization's nearly 90 years of experience providing retirement security to individuals working in the non-profit sector.

Posted by Info Center at 12:58 PM in Pensions | Public Sector | Permalink

Source: Watson Wyatt, July 23, 2007

From the press release:
The rate of pension plan freezes among FORTUNE 1000 firms has slowed, and the majority of companies with defined benefit plans are committed to keeping them. These are the findings of two new studies by Watson Wyatt Worldwide, a leading global consulting firm. An analysis of pension plan sponsorship among FORTUNE 1000 companies shows that the share of plan sponsors freezing their plans dropped from 7 percent in 2006 to 4 percent in 2007. New freezes reached their highest levels in 2006, when 42 additional firms on the FORTUNE 1000 list had frozen plans.

Posted by Info Center at 12:38 PM in Pensions | Permalink

Source: John C. Scott, A Paper Submitted to the Conference on Empirical Legal Studies - November 9-10, 2007, posted to the web: July, 5 2007

abstract
scroll down for download options

American workers are experiencing a long-term decline in the quality and quantity of retirement income security despite the enactment of dozens of tax laws supporting private pensions, hundreds of tax rules, and billions in lost tax revenue for over 40 years. Why is pension security eroding, and why is retirement income policy ineffective? I argue that the system of tax laws and institutions governing private pensions both directs political change as well as responses to such change in a way that is shifting risk onto workers. This paper grounds its review in the structure of pension law as found in the tax code. I first review general trends regarding retirement and retirement plans as well as the general pattern of tax legislation affecting pensions. In particular, I note the rise of the 401(k) plan, which has become the major type of private pension program in the United States. The combination of a diffuse set of tax laws governing pensions and the fragmented nature of key stakeholders creates an game-like environment in which each group and subgroup compete for changes in tax legislation at the expense of others. The paper concludes with an attempt to bridge fiscal sociology with the sociology of risk in the context of retirement policy.

Posted by Info Center at 4:25 PM in Pensions | Taxation | Permalink

Source: David Laidler and William B. P. Robson, C.D. Howe Institute Commentary, No. 250, June 2007

The problems of employer-sponsored defined-benefit (DB) pension plans in Canada raise two issues: the need for short-run measures to limit the damage; and the need for new pension models to prevent their recurring.

The DB sector’s immediate preoccupations are the result of changes in the economic environment — in particular, a decline in long-term interest rates — that caused their balance sheets to deteriorate, and of changes in accounting standards to more market-based methods that revealed the underfunded state of these plans in stark form.

The immediate policy challenge is to ensure the recovery and/or restructuring of sick plans, and the continued health of sound ones. Extra time and financial scope to work off deficits are good, but current limits on contributions to plans should rise or disappear, while legislation to establish clear title to surpluses for sponsors who must cover deficits is badly needed.

Accounting standards should remain strict, however, to ensure that emerging problems are seen and addressed. It would be a mistake to privilege government-employee plans by relieving them of the same solvency requirements that apply to private-sector plans. Another wrong turn would be resorting to government-sponsored insurance to backstop plans, since this approach creates moral hazards and future liabilities for taxpayers.

In the longer run, policy should sustain and encourage a thriving occupational pension sector that helps individuals save for old age and helps finance the investment that underpins economic growth. But DB plans were in decline long before the recent crisis, and evidence is mounting that the classic single-employer DB plan has fatal agency problems — evident particularly in the tendency for these plans to mismatch assets and liabilities in ways that exposed them to risks far larger than sponsors or participants understood.

Posted by Info Center at 5:08 PM in Pensions | Permalink

Source: Report to Congressional Requesters, United States Government Accountability Office, GAO-07-703, June 28, 2007

To protect workers' retirement security, the requesters asked GAO to assess: 1) What is known about conflicts of interest affecting private sector defined benefit (DB) plans? 2) What procedures does the Pension Benefit Guaranty Corporation (PBGC) have to identify and recover losses attributable to conflicts? 3) What procedures does Employee Benefits Security Administration (EBSA) have to detect conflicts among service providers and fiduciaries for PBGC-trusteed plans? 4) To what extent do EBSA, PBGC, and the Securities and Exchange Commission (SEC) coordinate their activities to investigate conflicts? GAO interviewed experts, including agency officials, attorneys, financial industry representatives, and academics, and GAO reviewed PBGC documentation and EBSA enforcement materials. GAO analyzed Labor, SEC, PBGC, and private sector data, including data on pensions, pension consultants, and rates of return data, and conducted statistical and econometric analyses.

Posted by Info Center at 5:16 PM in Pensions | Permalink

Source: Steven Brull, Institutional Investor, April 2007

A little learning is a dangerous thing. But not when it comes to running the nation’s second-biggest pension fund. For years the California State Teachers’ Retirement System was the epitome of a creaky, mismanaged bureaucracy, toiling in the shadow of its cross-town sibling, the California Public Employees’ Retirement System. Its membership—public school and community college teachers—felt neglected. Its investment staff was underpaid. Its returns in most years were at best mediocre. That has all changed. CalSTRS has awakened from its slumber, emerging as a powerful force on the local and national stage.

Posted by Info Center at 10:20 AM in Pensions | Retirement | Permalink