Proactive Pension Management Webinar v1007d · Behavioral economics, harnessing the power of...

Proactive Pension Management

Tuesday, October 8, 2019

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

Webinar Presenters

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 determinedEmployee: Fixed

Fixed contributions, possibly w/ match to employee share

Value of Benefit Fixed formula Depends on account balance in retirement

Investment Responsibility

Employer Employee

Risk Pension plan and government sponsor

Employee

Pension Structures

Pension Structures

Pension Structures

Pension Structures

FundedRatio

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

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

Assumed return:8.00% 2001

7.25% 2016

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 

Budgeting

Recruitment/retention

Protect benefits

Behavioral economics, harnessing the power of inertia

Consume less legislative time/expertise

Contribute to plan sustainability

Effectively communicate with stakeholders? 

Appropriate risk allocation among stakeholders?

Tie legislators’ hands?  

Can be politically expedient

Some stakeholders continue to seek legislative changes

Other process concerns?

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.

Email : info@slge.org

Twitter: @4GovtExcellence#ProactivePensions