The Pension reform Landscape

Webinar: State and Local

Government Pension Reform

Lessons from negotiated reforms

and recent developments

June 21, 2012

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,


Excellence

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

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

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

Historical and projected

aggregate public pension funding levels

90 92 94 96 98 00 02 04 06 08 10 1270%

80%

90%

100%

Fiscal Year

Actual

Projected

Standard & Poor’s, Public Fund Survey

Distribution of public pension actuarial

funding levels and relative size

Bubbles are

roughly proportionate

to size of plan liabilities

http://www.publicfundsurvey.org/../publicfundsurvey/index.htm

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

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

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

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

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

2011 Report

5 Case Studies of Negotiated

Public Pension Reforms:

• Iowa Public Employees

Retirement System

• Oregon Public Employees

Retirement System

• Vermont State Teachers

Retirement System

• Houston Municipal Employees

Retirement System

• Gwinnett County, GA

Report Research Team:

Christine Becker, Alex Brown, Joshua

Franzel Ph.D., Elizabeth Kellar, and

Danielle Miller Wagner of the Center for

State and Local Government Excellence

and

Paula Sanford, PhD, of the University of

Georgia

2012

Reform Updates

2012 update fact sheets developed by

Center Staff led by Danielle Miller Wagner

Pension Reform

•Currently 35

States and 30

Local

•New examples

continue to be

added

For more information see: slge.org -> research -> retirement

Iowa Public Employees Retirement

System

• 2009 Reforms

• Raised

contribution rates

• Increased the

vesting period

• Modified the

benefit formula

SLGE report: Strengthening State and Local Government Finances: Lessons for Negotiating Public Pension Plan Reforms

Oregon Public Employees Retirement

System

• Changed the method

used to credit

individual accounts

•Created a hybrid

defined benefit /

defined contribution

plan for new

employees


Vermont State Teachers Retirement

System

• Increased contribution rates

• Increased requirements for full retirement eligibility


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

formula


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 county


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

Raised Retirement Age AL, DE, FL, HI, MA, MD, NY, OK

ME

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 RI

National Conference of State Legislatures (Labor & Employment / Pensions)

Recent Reforms to Public Pension

Systems

• Rhode Island: Created a

hybrid plan for all employees

effective July 1, 2012;

• Virginia: Created a hybrid

plan for all employees hired

on or after January 1, 2014;

• Kansas: Created a cash

balance plan for all

employees hired on or after

January 1, 2014;

• Louisiana: Created a cash

balance plan for state

employees and teachers

hired on or after January 1,

2013

Lessons Learned

1. Use quality data

2. Put reform in the HR context

3. Consider implementation when changing policy

4. Share information with all stakeholders

5. Plan carefully and evaluate all options

6. Recognize the importance of a strong governing

body

7. Fully fund the ARC

8. Financial education is key

Questions?

Links to more information


Excellence: www.slge.org

National Association of State Retirement

Administrators: www.nasra.org

The Pension reform Landscape

Economy & Finance

Transcript of The Pension reform Landscape