pension plan policy and efficiencies
DESCRIPTION
TRANSCRIPT
Pension PlanPolicy and Efficiencies
Kentucky Legislative Briefing Wednesday, January 30, 2013
Diane OakleyExecutive Director
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
Opportunities and Challenges
Source: NASRA, The State Landscape on Pensions, 2011
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.”
3
Public Pension Stakeholders
Purpose of 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
Important to Keep Focus 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, 20115
6
• 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.
Pensionomics 2012: Nationally, DB pension plans expenditures in 2009…
Impact of Pension Payments to Kentucky Public Retirees
Source: NIRS, Pensionomics 2012
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.
7
Employee and Employer Pension Contributions, 1982 to 2009
Public Pensions Typically Are Shared Funding Responsibility
Source: U.S. Census Bureau8
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
9Source: A Better Bang for the Buck, NIRS, 2008
9
DB Plan Can Deliver Same Benefit at About Half the Cost of DC Plans
Source: A Better Bang for the Buck, NIRS, 200810
Public Pensions: Strong Financials for Most Plans Going into Financial Crisis
Source: NASRA, The State Landscape on Pensions, 201111
Lessons From Well-Funded PlansWhy 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
Lessons Learned StudyAnnual Required & 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
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
• DB pensions persist among largest private sector employers.
• Federal regulations, funding volatility killed Private Sector DB Plans, NOT Costs
Comparison of change from prior year in corporate and public pension
contributions, 1989 to 2009
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
0%
40%
80%
-20%
20%
60% Corporate
Public
U S D ep t o f L ab o r, U S C en su s B u reau ,M illim an
*
*Estimate
On the Right Track Private and Public Sector Pensions
Source: National Institute on Retirement Security, On the Right Track15
• 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.
Switch to Individual Accounts Not a Viable Solution
Source: National Institute on Retirement Security, On the Right Track16
Taxpayer Challenges When Individual Account is Primary Benefit
Source: NASRA, The State Landscape on Pensions, 2011
• 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.
17
Employer Challenges When an Individual Account is Primary Benefit
Source: NASRA, The State Landscape on Pensions, 2011
• 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.
18
Distinguishing Features of the 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
Public Sector Employees Are 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
Over Time, Pay Differential Has Moved Against Public Workers
21Source: National Institute on Retirement Security, Out of Balance: Comparing Public and Private Sector Compensation Over 20 Years
Importance of Retirement Plans to Attract Workers Under Age 40
Source: Towers Watson, Attraction and Retention; What Employees Value Most 22
Importance of Retirement Plans to Retain Workers Under Age 40
Source: Towers Watson, Attraction and Retention; What Employees Value Most23
Most Important Factors in Attracting Employees Younger Than 40 to Company
Source: Towers Watson, Attraction and Retention; What Employees Value Most24
Decisions, Decisions: Retirement Plan 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
Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers
26
Employee Challenges When Individual 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
Pensions and Retirement Security, 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
Americans Wants Pensions
29Source: Pensions and Retirement Security 2011: A Roadmap for Policy Makers, NIRS
81% of Americans Say They Need Pensions For Independence, Self-Reliance
29
