Proactive Pension Management Tuesday, October 8, 2019 Webinar - PowerPoint PPT Presentation

Proactive Pension Management Tuesday, October 8, 2019

Webinar Presenters Gerald Young , Senior Research Associate, Center for State and Local Government Excellence Paula Sanford. Ph.D. , Senior Public Service Associate, Carl Vinson Institute of Government, University of Georgia Anna Petrini , Senior Policy Specialist Employment, Labor and Retirement Program, National Conference of State Legislatures 2

Center for State and Local Government Excellence Promote excellence in local and state governments so they can attract and retain talented public servants.

slge.org/retirement

publicplansdata.org

Defined Benefit vs. Defined Contribution DB (Traditional) DC (401K-style) Contributions Employer: Actuarially Fixed contributions, possibly determined w/ match to employee share Employee: Fixed Value of Benefit Fixed formula Depends on account balance in retirement Investment Employer Employee Responsibility Risk Pension plan and Employee government sponsor

Pension Structures

Pension Structures

Pension Structures

Pension Structures

Funded Ratio https://www.slge.org/resources/update-on-the-funded-status-of-state-and-local-pension-plans-fy2018

Investment Earnings https://www.slge.org/resources/state-and-local-pensions-a-long-term-view

Investment Earnings Assumed return: 8.00% 2001 7.25% 2016 https://www.slge.org/resources/state-and-local-pensions-a-long-term-view

Case Studies: South Dakota • Defined benefit plan: 1.8% benefit multiplier • Employers and employees contribute 6% ea. • Multiple employer plan • Total membership: 88,106 • Actuarial value of assets: $12.2 billion • Actuarial funded ratio: 100%

Innovation: Variable COLA • Annual COLA based on funded status of the plan • Upheld by South Dakota Circuit Court

Key Takeaways • Great relationship with the state legislature • Work with all stakeholders when proposing plan changes • SDRS has a fiduciary responsibility to every stakeholder • All stakeholders are responsible for a financially sustainable system

Case Study: Virginia • Hybrid Plan: 1.0% benefit multiplier for defined benefit plan plus defined contribution components • Employees pay 4% of salaries for DB plan, employers pay remaining needed • Multiple employer plan • Membership in Hybrid Plan: 85,179 • Effective date: 2014 for new employees

Innovation: Auto-Escalation • With variable defined contribution account, employers match employee contribution • AE employee contribution 0.5% every three years • AE ends when employee contribution is 4% • First AE occurred in 2017 – highly successful

Key Takeaways • Behavior economic tools can work • Importance of high-quality communication and education • New plan: – Helping to improve overall funding ratios – Reducing employer contribution costs

Lessons Learned • Open and honest communication with all stakeholders • No one group should bear the burden for addressed reduced funding ratios • Need variability in the funding and benefit formula to address changes in funded status

Additional Perspectives: National Conference of State Legislatures

LEGISLATIVE OPPORTUNITIES AND CHALLENGES  Reduce uncertainty  Effectively communicate with stakeholders?  Budgeting  Appropriate risk allocation among  Recruitment/retention stakeholders?  Protect benefits  Tie legislators’ hands?  Behavioral economics, harnessing  Can be politically expedient the power of inertia  Some stakeholders continue to seek  Consume less legislative legislative changes time/expertise  Other process concerns?  Contribute to plan sustainability  Changes fashioned in crisis mode

BENEFIT RISK: COLAS  COLAS = standard, but very expensive benefits  Recent reforms include contingencies  Delay onset  Apply to only a portion of benefit  Link to investment performance/actuarial soundness  Policies vary dramatically => some retirees going without COLAs for long stretches  Legal challenges

TRENDS IN VARIABLE CONTRIBUTION AND BENEFIT ARRANGEMENTS  Fewer major reforms since period immediately after Great Recession  Pension plan changes increasingly => risk‐sharing arrangements  Uncertain whether legislators will leave recent rash of reforms to play out  Or shifting economic/demographic trends will => uptick  New data tools, including stress testing  No one‐size fits all solution

SOURCES AND CONTACTS  Visit www.ncsl.org/pensions for retirement reports, legislative summaries, webinars and presentation materials prepared by NCSL.  Anna Petrini, anna.petrini@ncsl.org, 303‐856‐1527.

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