Current Developments in Public Pensions

2014 Annual Meeting

Keith BrainardNational Association of State Retirement

Administrators

August 12, 2014

Comparison of Retirement Benefits in the U.S.

Private Sector

• Between employers that do not sponsor a retirement benefit and employees that elect to not participate when one is sponsored, 65% of full-time private sector workers participate in an employer-sponsored retirement plan

• 50% when part-time workers are counted

• Fewer than one in five have a traditional pension (DB) plan

• Social Security coverage is universal

Public Sector

• Nearly all full-time workers have access to an employer-sponsored retirement benefit

• 85%+ participate in a traditional pension (DB plan)

• Three-fourths participate in Social Security

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Distinguishing elementsof public pension plans

• Mandatory participation

• Employee-employer cost sharing

• Benefit adequacy

• Assets that are pooled and professionally invested

• A benefit that cannot be outlived, i.e., mandatory annuitization

3

Public pensions in the U.S.

Defined benefit plans for employees of state and local government in the U.S.:

– ~$3.7 trillion in assets

– ~15 million active (working) participants

• 12+ percent of the nation’s workforce

– 8.0+ million retirees and their survivors receive ~$225 billion annually in benefits

– Of ~4,000 public retirement systems, the largest 75 account for 80+ percent of assets and members

– Aggregate funding level = ~73%

US Census Bureau,Public Fund Survey4

Overarching Public Pension Issues

• Since 2009, we have witnessed an unprecedented:

– number of reductions in public pension benefit levels

– number of legal challenges in response to pension changes

– reduction in state and local government employment

• New pension accounting standards are changing the way pensions are calculated

• Bond rating agencies are calculating their own pension numbers

• Investment return assumptions are under scrutiny and challenge, and are being reduced

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Historical aggregate public pension funding levels1990 to 2013

90 92 94 96 98 00 02 04 06 08 10 12

79.0

82.0

85.0 86.0

89.0

96.0

100.9

96.9

91.4

88.486.7

85.486.385.1

79.877.0

75.873.673.4

Fiscal YearStandard & Poor's andPublic Fund SurveyJuly 2014

*

* estimated

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Median annual change

in public pension

liabilities and

assets02 03 04 05 06 07 08 09 10 11 12 13

0%

2%

4%

6%

8%

Assets

Liabilities

Fiscal YearPublic Fund SurveyJuly 2014

Actuarial value of assets and

liabilities, and

funding levels,

FY 01 to FY 16

$0

$1

$2

$3

$4

Actuarial Value of Liabilities

Actuarial Value of Assets

01 02 03 04 05 06 07 08 09 10 11 12

100.9

96.9

91.488.4

86.785.486.385.1

79.877.075.8

73.372.775.8

78.580.6

Fiscal Year

Trillion

Aggregate Funding Ratio (%)

Public Fund SurveyJuly 2014

13 14 15 16

projected

Distribution of public pension actuarial funding levels and relative size

Bubbles are roughly proportionateto size of plan liabilities

40%

60%

80%

100%Median = 72.7%

Public Fund Survey &Public Plans Database July 2014

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Distribution of ARC received by 86 plans, FY 13

Public Fund Survey, US Census Bureau

20%

60%

100%

Median = 99%

Average = 87%

Slow salary growth

BLS, compiled by NASRA

Declining employment among states and local

government

BLS, compiled by NASRA

Median annual change in public pension payrolls, FY 09 to FY 13

Public Fund Survey,Public Plans Database

08 09 10 11 12 13

0%

2%

4%

Fiscal Year

13

Median annual

change in retirees, active

members, and ratio of actives to retirees

Legislative pension enactments in recent years

• Nearly every state has modified public pension benefits, raised employee contributions, or both, since 2009

• Lower benefits:

– higher retirement age

– more required years of service

– longer vesting period

– reduced or eliminated COLAs

• Increased use of hybrid retirement plans

No broad shift to defined contribution plans as the primary retirement benefit for broad employee groups on a statewide basis, ex Oklahoma

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Growing use of statewide hybrid plans

• Two main types of hybrid plans: “Combination” DB-DC, and cash balance

• Combo DB-DC plans feature a traditional, more modest pension, combined with a defined contribution plan– Mandatory: GA, IN, MI, OR, RI

– VA as of 1/1/14– TN as of 7/1/14

• Optional in OH, WA

16

Statewide cash balance plans

• Cash balance plans feature pooled assets with notional accounts that pay a guaranteed minimum interest rate, with possibility of sharing “excess” investment earnings– Texas, for county and many municipal

employees – Nebraska, for state and county workers – Kentucky, for state and local workers

(not teachers) effective 1/1/14– Kansas for all new hires effective 1/1/15

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Distribution of investment return assumptions, FY 01 to present

Jul 2013

July 2014

Median public pension investment returns for periods ended 12/31/13

Callan Associates 19

Overarching Issues

•Pace of reforms is slowing•Reform battles remain in some states (IL)•Some legal challenges remain outstanding•Pension costs are stabilizing for many plans•Costs will rise for some plans, especially

those that have not received their ARC• Investment return assumptions will remain

under scrutiny and pressure•New GASB measures will reveal new ways of

looking at pension costs and conditions

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