The Pension reform Landscape


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The Pension reform Landscape

  1. 1. Webinar: State and LocalGovernment Pension ReformLessons from negotiated reforms and recent developments June 21, 2012
  2. 2. Today’s Presenters• Keith Brainard, Research Director, National Association of State Retirement Administrators• Joshua Franzel, Vice President, Research, Center for State and Local Government Excellence• Alex Brown, Research & Policy Analyst, Center for State and Local Government Excellence
  3. 3. Bird’s-eye view of public pensions in the U.S.Defined benefit plans for employees of state and local government in the U.S.• $3.0 trillion in assets• 15 million active (working) participants (12 percent of the nation’s workforce)• 8.0 million retirees and their survivors receive $200 billion annually in benefits• 85%+ of state and local government workers participate in an employer-sponsored pension plan
  4. 4. Overarching Issues• Pension benefits for employees of state and local government are in the midst of unprecedented change• Public employee compensation, including retirement benefits, is the recipient of an unprecedented level of attention from the media, academics, and policymakers• An unprecedented number of lawsuits challenging changes to pension benefits are outstanding• State and local government employment is lower today by some 650,000 jobs, or 3.5%, from its August 2008 peak
  5. 5. Overarching Issues• Pension accounting standards are on the verge of drastically changing the way public pension liabilities and costs are calculated• Interest rates are at their lowest levels in decades and are projected to remain low through at least 2014• Longevity is improving
  6. 6. Historical and projected aggregate public pension funding levels 100% 90% Actual Projected 80% 70% 90 92 94 96 98 00 02 04 06 08 10 12 Fiscal YearStandard & Poor’s, Public Fund Survey
  7. 7. Distribution of public pension actuarial funding levels and relative size Bubbles are roughly proportionate to size of plan liabilities
  8. 8. Changes to public pension plans in the U.S.• Higher required retirement ages• Longer vesting periods• Higher employee contributions• Fewer/lower cost-of-living adjustments• Greater use of hybrid retirement plans• Increased emphasis on employee-employer cost-sharing• No shift to defined contribution plans as the primary retirement benefit
  9. 9. Retirement eligibility has become more stringent• More normal (unreduced) retirement age requirements of 60, 65, and even 67• Elimination of retirement eligibility at any age based on designated years of service• Increased movement from five years as the predominant vesting period
  10. 10. Retirement benefits are being reduced• COLAs – applied to only a portion of the benefit – More COLAs delayed until attainment of designated retirement age – More COLAs tied to actuarial condition of plan or fund’s investment performance• Movement of final average salary period from three years to five and longer
  11. 11. Higher employee contributions• Many states have approved higher employee pension contributions for existing plan participants• In some states, this is held or perceived to be illegal• Some higher rates are phased in over several years
  12. 12. Growing use of hybrid plans• Two main types of hybrid plan: – DB-DC plans feature a traditional, more modest pension, combined with a defined contribution plan – Cash balance plans feature pooled assets with notional accounts that pay a guaranteed minimum interest rate, with possibility of sharing “excess” investment earnings
  13. 13. 2011 Report 5 Case Studies of Negotiated Public Pension Reforms: • Iowa Public Employees Retirement System • Oregon Public Employees Retirement SystemReport Research Team: • Vermont State TeachersChristine Becker, Alex Brown, JoshuaFranzel Ph.D., Elizabeth Kellar, and Retirement SystemDanielle Miller Wagner of the Center forState and Local Government Excellence • Houston Municipal EmployeesandPaula Sanford, PhD, of the University of Retirement SystemGeorgia • Gwinnett County, GA
  14. 14. 2012 Reform Updates2012 update fact sheets developed byCenter Staff led by Danielle Miller Wagner
  15. 15. Pension Reform •Currently 35 States and 30 Local •New examples continue to be addedFor more information see: -> research -> retirement
  16. 16. Iowa Public Employees Retirement System • 2009 Reforms • Raised contribution rates • Increased the vesting period • Modified the benefit formulaSLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms
  17. 17. Oregon Public Employees Retirement System • Changed the method used to credit individual accounts •Created a hybrid defined benefit / defined contribution plan for new employeesSLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms
  18. 18. Vermont State Teachers Retirement System• Increased contribution rates• Increased requirements for full retirement eligibilitySLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms
  19. 19. Houston Municipal Employees Retirement System Passed a series of pension reforms from 2004-2007 which: • Increased employee contributions • Disallowed conversion between tiers • Modified the benefit formulaSLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms
  20. 20. Gwinnett County, GA • Need for more direct management of the county pension fund • Realization that defined benefit costs were growing at a time of slow growth in the countySLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms
  21. 21. Recent Reforms to Public Pension Systems Major Pension Reforms 2011-2012 New Employees Current Employees Current Retirees Increased Contribution Rates AL, HI, MD, NH, NY AL, MD, ND, NH, NJ, VT, WI AL, DE, FL, HI, MA, MD, Raised Retirement Age ME NY, OK Reduced, Froze, or Eliminated COLAs HI, MD, MS FL, MD, VA ME, NJ, RI Modified the Benefit Formula MA, MD, MS, NJ, NY, VA NH, RI Restructured to a Hybrid Plan VA RINational Conference of State Legislatures (Labor & Employment / Pensions)
  22. 22. Recent Reforms to Public Pension Systems• Rhode Island: Created a • Kansas: Created a cashhybrid plan for all employees balance plan for alleffective July 1, 2012; employees hired on or after January 1, 2014;• Virginia: Created a hybridplan for all employees hired • Louisiana: Created a cashon or after January 1, 2014; balance plan for state employees and teachers hired on or after January 1, 2013
  23. 23. Lessons Learned1. Use quality data2. Put reform in the HR context3. Consider implementation when changing policy4. Share information with all stakeholders5. Plan carefully and evaluate all options6. Recognize the importance of a strong governing body7. Fully fund the ARC8. Financial education is key
  24. 24. Questions? Links to more informationCenter for State and Local Government Excellence: www.slge.orgNational Association of State Retirement Administrators: