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Pension plan policy and efficiencies
- 1. Pension Plan Policy andEfficiencies Kentucky Legislative Briefing Wednesday, January 30, 2013 Diane Oakley Executive Director
- 2. About NIRS • Nonprofit,nonpartisan research organization founded in 2007. • Credible research and education programs regarding retirement security with focus on pensions – public and private sector. • Reports, primers, commentary, conferences, media interviews, testimony and more. 2
- 3. Opportunities and Challenges Opportunities: • Better understanding of long-term nature of state/local government pension financing. • Appreciation of core elements of public pension design that are most cost-effective way to accomplish human resource, retirement security policies. Challenges: • Distinguishing assertions from facts. • Legislation by anecdote. • Short sighted policies that encourage a “race to the bottom.” Source: NASRA, The State Landscape on Pensions, 2011 3
- 4. Public Pension Stakeholders Purposeof providing retirement plan is to achieve stakeholder objectives. Who are stakeholders in public pension plan? •Employers who seek to attract and retain qualified workers needed to perform essential public services and have orderly workforce turnover. •Taxpayers who seek the provision of public services at a cost that is fair and reasonably stable and predictable; also seek to minimize dependence on public assistance.. •Employees who seek compensation that is competitive and a retirement benefit that promoted retirement security. 4
- 5. Important to KeepFocus on Retirement Policy • Retirement security benefits everyone. • Employer-sponsored retirement benefit is a workforce management tool, old-age poverty insurance, and stabilizing factor in the economy. • As a stable employer, government is well-suited to sponsor pensions. • Core elements of pension promote retirement security: – Mandatory participation – Employee-employer cost-sharing – Pooled assets invested by professionals – Benefit adequacy – Lifetime benefits Source: NASRA, The State Landscape on Pensions, 2011 5
- 6. Pensionomics 2012: Nationally, DBpension plans expenditures in 2009… • Provided a critical source of reliable income for 18.9 million Americans. • Supported 6.5 million jobs that paid $314.8 billion in income. • Created over $1 trillion in economic output. 6
- 7. Impact of PensionPayments to Kentucky Public Retirees Expenditures by state and local government retirees provide steady economic stream to Kentucky and its communities. 2009 expenditures supported: • 29,270 jobs that paid $1.1 billion in wages and salaries. • $3.5 billion in total economic output. • $510.4 million in federal, state, and local tax revenues. • Each dollar paid in pension benefits supported $1.24 in total economic activity in Kentucky. • Each taxpayer dollar “invested” in plans supported $4.64 in total economic activity in the state. Source: NIRS, Pensionomics 2012 7
- 8. Public Pensions TypicallyAre Shared Funding Responsibility Employee and Employer Pension Contributions, 1982 to 2009 Source: U.S. Census Bureau 8
- 9. Professional Investment Managers Achieve Higher Returns • Pensions achieve better investment returns than 401(k) type plans. • These additional returns really add up over time. How $10,000 Invested Grows over 30 Years Source: A Better Bang for the Buck, NIRS, 2008 9 9
- 10. DB Plan CanDeliver Same Benefit at About Half the Cost of DC Plans Source: A Better Bang for the Buck, NIRS, 2008 10
- 11. Public Pensions: StrongFinancials for Most Plans Going into Financial Crisis Source: NASRA, The State Landscape on Pensions, 2011 11
- 12. Lessons From Well-FundedPlans Why We Did This Study • Increased attention to pensions and funding since financial crisis. – Investors and pensions saw decline in funded levels – Misperception that taxpayers are fully responsible for covering investment losses – Attention on public pension benefits 12
- 13. Lessons Learned Study AnnualRequired & Normal Cost Contributions Paying the full ARC each year maintains a well-funded plan with stable contributions. • Texas TRS: Constitution mandates payment. • Illinois MRF: Statute mandates local government payment. • Idaho PRF: Statute mandates state government payment. Paying the normal cost rate (NCR) leads to stability. • Idaho: The employer rate cannot fall below the NCR. • Illinois: Only when the funding ratio is substantially above 100% can the excess amount be used to reduce the NCR. • Texas: Requires that the employer contribution rate cannot fall below a certain level. 13
- 14. Lessons Learned Study 1.Employer pension contributions that pay full ARC, and at least equal the normal cost. 2. Employee contributions to help share the plan cost. 3. Benefit improvements that are actuarially valued before adoption and properly funded upon adoption. 4. COLAs granted responsibly. 5. Anti-spiking measures that ensure actuarial integrity, transparency. 6. Economic actuarial assumptions that can reasonably be expected to be achieved long term. 14
- 15. On the RightTrack Private and Public Sector Pensions Comparison of change from prior year in corporate and public pension contributions, 1989 to 2009 80% * • DB pensions persist among 60% C o rp o ra te largest private sector employers. 40% 20% P u b lic • Federal regulations, funding volatility killed 0% Private Sector DB Plans, -2 0 % NOT Costs 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 U S D e p t o f L a b o r, * E s tim a te U S C e n su s B u re a u , M illim a n Source: National Institute on Retirement Security, On the Right Track 15
- 16. Switch to IndividualAccounts Not a Viable Solution • Closing/freezing DB plans and switching to individual accounts does not address underfunding, entails significant costs. • Majority of states ensure long-term sustainability by modifying DB plans. • Pensions balance compensation, boost retention and productivity, and enable quality services for a lower cost. • Hurt recruitment and retention of skilled workers, or lead to higher compensation, while undermining retirement readiness. Source: National Institute on Retirement Security, On the Right Track 16
- 17. Taxpayer Challenges WhenIndividual Account is Primary Benefit • Loss of economic benefits emanating from pension payments. • Public pension funds account for nearly one- half of the nation’s venture capital pool. • General loss of retirement security: 12+ percent of the nations workforce is employed by state or local government and 85% have a pension plan. Source: NASRA, The State Landscape on Pensions, 2011 17
- 18. Employer Challenges Whenan Individual Account is Primary Benefit • Loss of a human resource management tool: Pension is particularly helpful for retaining qualified workers to perform essential public services. Retention is key for certain groups: teachers, law enforcement personnel, members of other career oriented groups. • Pension promotes human resource management objective of orderly turnover, i.e., retirement, or ability to retire, at an appropriate age. Orderly turnover facilitates workforce management objectives. Source: NASRA, The State Landscape on Pensions, 2011 18
- 19. Distinguishing Features ofthe Public Sector Workforce • More public employees work in professions with physical risk: law enforcement, firefighting, corrections, hazardous materials. • Many public sector positions are career-oriented, such as education, finance, and public safety. • Public sector worker median tenure is 7.0 years, compared to 3.5 for the private sector. • Public employee almost twice as likely to have college degree compared to private sector. 19
- 20. Public Sector EmployeesAre Paid Less Than Private Sector Counterparts • State and local workers are paid less than comparable private sector workers. In 2008: – State workers were paid 11% less than their private sector. – Local workers were paid 12% less than their private sector. • The major driver is that government workers have jobs that demand more education. Percent of workers who finished college: – Private sector: 22.6% – State sector: 48.1% – Local sector: 47.9% Source: National Institute on Retirement Security, Out of Balance: Comparing Public and Private Sector Compensation Over 20 Years 20
- 21. Over Time, PayDifferential Has Moved Against Public Workers Source: National Institute on Retirement Security, Out of Balance: Comparing Public and Private Sector Compensation Over 20 Years 21
- 22. Importance of RetirementPlans to Attract Workers Under Age 40 Source: Towers Watson, Attraction and Retention; What Employees Value Most 22
- 23. Importance of RetirementPlans to Retain Workers Under Age 40 Source: Towers Watson, Attraction and Retention; What Employees Value Most 23
- 24. Most Important Factorsin Attracting Employees Younger Than 40 to Company Source: Towers Watson, Attraction and Retention; What Employees Value Most 24
- 25. Decisions, Decisions: RetirementPlan Choices for Public Employees and Employers KEY FINDING: When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan. 25
- 26. Decisions, Decisions: RetirementPlan Choices for Public Employees and Employers 26
- 27. Employee Challenges WhenIndividual Account is Primary Benefit • Inadequate savings and earnings reduces retirement readiness. • Lower investment returns – DC plans underperform professionally managed retirement pools by around one percent annually and liquidity needs may force conservative portfolio cash balance plan. • Timing – an employee who terminated or retires during a down market will leave plan and drain plan assets • Longevity risk – anti-selection as only retirees who are at risk of outliving assets stay in the plan after retirement. • Portability can generate Leakage – assets leaving the retirement account before the account holder reaches retirement age. 27
- 28. Pensions and RetirementSecurity, 2011 Public Opinion Research • Americans highly anxious about retirement. • Americans have low retirement expectations. • U.S. retirement system stressed, needs reform. • Pensions relieve anxiety, are reliable. 28
- 29. Americans Wants Pensions 81% of Americans Say They Need Pensions For Independence, Self-Reliance Source: Pensions and Retirement Security 2011: A Roadmap for Policy Makers, NIRS 29
- 30. www.nirsonline.org Diane Oakley 202.457.8190 [email protected] 30
Editor's Notes
- #16 The charts on this page compare corporate and public pension funding levels and costs. The chart on your left is a comparison of funding levels. Notice the volatility in corporate pension funding levels, shown in red, moving from more than 120 percent funded in 2000 to just above 80 percent in 2002, back up over 100 percent by 2007, then plunging again below 80 percent in 2008. Based on economic theory alone, the ability of these corporations to pay their obligations has vacillated wildly, from well over funded to well underfunded. Moving from 124 to 83 is a change of one-third. This volatility, in my view, grossly exaggerates the actual, underlying condition of these plans. I don ’t believe the actual ability of these corporations to pay their obligations changed by one-third in two years. Then the funding level rose again to 107 by 2007, a rise of nearly 30 percent from 2002. During this same period, public pension funding levels have generally drifted lower, based mostly on asset losses experienced from 2000 to 2002, then again in 2008 and early 2009. In my view, by basing their funding condition on long-term expected returns, the actual condition of public pension funds is much more accurately reflected in these charts than is the corporate funding level. Turning to the chart on your right-hand side, note the year-over-year change in corporate contributions to their pension plans. Up 40 percent one year, down 20 percent the next, up 70 percent the next. This is the result of linking pension contributions to current interest rates, which makes funding levels and costs more a reflection of current bond market dynamics than of the fundamentals of the plan. Public pension contributions, which are based on a long-term expected investment return and which permit more phasing in of asset gains and losses, have been relative paragons of stability, usually rising at a fairly predictable and reasonable rate.
- #21 Addresses Myth: Overpaid state and local workers.
- #22 Addresses Myth: Overpaid state and local workers.