Pensions & Politics. President & CEO

Transcription

1 Pensions & Politics Matthew J. Brouillette President & CEO

2 Managing Pension Liabilities The Public Pension Crisis August 18, 2006; Page A14 the fundamental problem is that public pensions are inherently political institutions. the current public pension system simply isn't sustainable in the long run. 2

3 Sources of Pension Problems 1. Poor Benchmarking 2. Non-Existent Metrics & Unmanaged Risks 3. Politics 3

4 #1 Poor Benchmarking Pennsylvania public pay and benefits are typically benchmarked only against other public plans rather than the entire marketplace. This fosters financial relativity. Affordability and market trends in Pennsylvania s private sector should be the benchmark for the public sector. 4

5 #1 Poor Benchmarking Market trends suggest an annual net employer cost of 5% to 7% of payroll is needed to achieve sustainable long-term affordability. Thirty-One Pennsylvania Companies Participating in the 2009 Hewitt Annual Salaried Benefit Survey Air Products Allegheny Energy Armstrong Wood Products Armstrong World Black Box Network Services Carpenter Technology CertainTeed CIGNA Comcast Delaware Investments Duquesne Light Federated Investors Giant Eagle GlaxoSmithKline Heinz Hershey Company IKON Office Solutions IMS Health Knoll Lincoln Financial Group NOVA Chemicals Penn National PNC Financial Services Rohm and Haas Toll Brothers Unisys United States Steel UPMC US Filter Voith Siemens Hydro Power Westinghouse Electric 5

6 #1 Poor Benchmarking Survey Results Only 11 of 31 companies (35%) sponsor Defined- Benefit (DB) plans for new hires Among the 765 companies nationally, the result is 37% All 31 companies had Defined-Contribution (DC) plans with an average employer match of $.70 matching an average of 6.1% of payroll (2010 Survey = $.72/5.4%) Nationally, the results are $.79 and 5.6% Why the transition? The inability of companies to achieve pension costs that are current, predictable and affordable Unaffordable retiree medical liabilities 6

7 #1 Poor Benchmarking Trends in Retirement Plans (Fortune 100 Companies) 5.77% Average DC Employer Cost 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Traditional DB Plans Hybrid DB Plans DC Plans Source: Towers Watson Survey Traditional DB Plans Hybrid DB Plans DC Plans 7

8 #2 Non-Existent Metrics & Unmanaged Risks No absolute metrics defining the affordability or reasonableness of costs given the perpetual life of the government entity. Creates unreasonable risks to taxpayers. Actuarial assumptions do not create certainty. Little consistency in funding assumptions and funding methods making comparisons most difficult. 8

9 #3 Politics Pensions as political capital Pension Fund Surplus? Benefit Improvements for Participants Pension Fund Deficits? Underfunding by Taxpayers Maintaining or Improving Benefits = High Political Rate of Return Fully and Properly Funding Plans = Low Political Rate of Return 9

10 #3 Politics Pensions are not well understood Abundance of half-truths. Benefit commitments can be over 50 years. Funding is easily manipulated. Easy to (re)defer costs to the next generation Local and city pension shortfalls are becoming political problems for the state. Philadelphia, Pittsburgh, Allentown, etc. 10

11 How Big is Our Pension Crisis? PSERS SERS TOTAL FY $617M $226M $843M FY $4.2B $1.9B $6.1B FY $5.5B $2.3B $7.8B NOTES: PSERS costs are allocated ~54% at the state level and ~46% at the local level (school property taxes). PSERS projects a funded ratio of 89% in FY

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13 How Big is Our Pension Crisis? 13

14 How Did We Get Here? Contributing Factors to Current Pension Crisis According to the Public School Employees Retirement System (PSERS) Act 9 of 2001 Benefit improvements for school employees, legislators, judges, state workers. 19% of the problem Asset Experience Market meltdown. 43% of the problem Act 38 of 2003 Cost of Living Adjustments for retirees. 2% of the problem 14

15 How Did We Get Here? Contributing Factors (continued) Demographic and Salary Experience Changes in the workforce. 2% of the problem Assumption and Cost Method Changes Reduction of asset performance expectations. 13% of the problem Negative Arbitrage due to Pension Code Funding Requirements Underfunding of pension plan costs. 21% of the problem 15

16 What Should We Do? Principles for Reform 1. Funding must be current. Benefits should be funded as they are earned and paid-up in the aggregate at retirement Achieving a 100% funded ratio 2. Costs must be predictable. 3. Costs must be affordable. 5-7% of payroll (net of employee contributions) 16

17 Five Step Pension Reform Plan 1. Establish a unified Defined Contribution plan for new state and local workers, public school teachers, legislators, and judges. Curtails open-ended liabilities Eliminates long-term commitments on behalf of taxpayers Removes politics from pensions SB 566 (2009) 2. Prohibit pension obligation bonds or other postemployment benefit (OPEB) bonds 17

18 Five Step Pension Reform Plan 3. Mandate minimum funding reforms for any newly created liabilities resulting in both pension and OPEB plans For actives maximum funding period is the average remaining working career of recipients. For retirees 1-year funding period (no remaining working career). Permit asset averaging of up to 3 years subject to a 90% to 110% corridor test against the market value of assets. No benefit improvements permitted if the result of such improvements causes the funded ratio to fall below 90%. 18

19 Five Step Pension Reform Plan 4. Consider modifying unearned pension benefits (if legal and feasible) Reduced formula Redefinition of eligible earnings Increasing the normal retirement age Curtailing early retirement subsidies Eliminating COLAs and Deferred Retirement Option Programs (DROPs) 5. Consider funding reforms only after prior steps are achieved. Omitting steps 1, 2, 3, 4 is NOT pension reform. 19

20 How Do We Pay for It? Only Three Ways 1. Increase taxes. 2. Redirect current spending. 3. Defer the liabilities. 20

21 Rendell & McCord Proposals Gov. Rendell/Rep. Evans Defer liabilities to the future House Bill 2497 = $27B in NEW liabilities (paid through 2040) Treasurer McCord Borrow more money Use low interest rates and hope you can earn higher returns = Risky bet Likely require voter referendum 21

22 Increasing & Compounding Liabilities Trend: Defer liabilities rather than reforming plan design and funding policies PSERS state & local impact SERS state impact State Retiree Medical state impact Local & City Pension local impact Local & City Retiree Healthcare local impact School Retiree Healthcare local impact Our problems are increasing and compounding the longer we fail to deal with them. 22

23 Questions for Elected Officials 1. How does deferring pension liabilities today make future liabilities more affordable? 2. Why are unaffordable levels of private sector benefit costs considered affordable in the public sector? 3. How does contributing less into already underfunded pensions plans constitute reform? 4. What is to prevent benefit improvements in the future? 5. How does HB/SB remove the politics from pensions? 23

24 Questions? More PublicPensionReform.com