Civil Service Pension Reform in the United States

Transcription

1 Civil Service Pension Reform in the United States James Petrick Chief Financial Officer Federal Retirement Thrift Investment Board

2 Reasons for reform Cost of system too high. Record fiscal deficits in the early 1980 s Costs not fully allocated to individual agency budgets Old system limited mobility

3 Reasons for reform (continued) Public pensions were seen as more generous than private sector Emergence of 401(k) system as an alternative model Needed to include federal workers in Social Security to enhance solvency

4 Old Civil Service Pension System (CSRS) Traditional salary based Defined Benefit Maximum replacement rate of 80% Reference Wage Highest Three Years Earnings Exempt from Public Social Security System Employee Contribution - 7% of wage (no tax deduction)

5 Retirement Calculation under old system Accrual rate: 1 ½ % first 5 years, 1 ¾% years 5 to 10, 2% years above 10 (56 1/4% for 30 years) Eligibility for full retirement at age 55 with 30 years service, age 60 with 20 years, 62 with 5 years. Early retirement under specified conditions at age 50 with 20 years but with actuarial reduction for each year below 55 Full price indexing of benefits after retirement

6 The New Pension Scheme (FERS) All workers hired on or after Jan 1, 1984 (old workers given option to switch) Three part retirement benefit: Defined benefit at 1% annual accrual rate (1.1% after age 62) Mandatory enrollment in Social Security Enrollment in new downsized Defined Contribution Thrift Savings Plan

7 Worker Contributions under FERS 0.8% of pay to DB portion 6.2% of applicable wage base to Social Security Designed to replicate 7% contribution to CSRS but results in different distribution of benefits due to nature of benefit structure Remaining benefits must be provided by voluntary contributions to TSP

8 New DB Portionn - Differences Much lower accrual rate (about half) Raised early retirement age to 57 No price indexing of benefits for early retirees until age 62 No service credit for unused sick leave

9 Thrift Savings Plan Tax-favored defined contribution individual accounts Like US private sector 401k plans Provides voluntary savings vehicle with low costs Participant-directed Participants decide how much to contribute and how to invest Intended to enable workers to match old system replacement ratios (56% of final three salary at 30 years and age 55)

10 Facts about the TSP Largest defined contribution plan in the US Over $200 billion in assets Over 4 million participants, located around the world Average of $1.5 billion contributed each month Managed by Federal Retirement Thrift Investment Board, with 80 employees 400 contractors

11 Annual Year-End Balances G, F, C, S, I, and L Funds ($ millions) $99,312 $100,553 $97,686 $94,649 $77,268 $58,166 $44,889 $35,183 $128,925 $152,009 $173,281 $202,839 $206,604 $231,602 G Fund F Fund C Fund S Fund I Fund L Funds

12 Annual Contributions G, F, C, S, and I Funds ($ millions) $21,773 $20,790 $19,532 I Fund $17,766 $16,178 $14,171 $12,206 S Fund C Fund $2,449 $3,074$3,897 $1,539 $1,973 $4,513 $5,117$5,664 $9,963 $9,093 $8,353 $7,615 $6,417 $7,031 F Fund G Fund G Fund F Fund C Fund S Fund I Fund

13 Political Independence of the TSP Statutory design provided basis for TSP independence from political influence Independent Board of Directors that governs separate administrative body staffed by civil servants Full asset segregation Amounts belong to participants held in trust in individual accounts Participants have legal ownership under U.S. law and Constitution

14 Independence (continued) Fiduciary responsibilities Enforceable in the courts Must act prudently and solely in the interest of the participants Executive Director and five Board members are accountable for all actions Independence of Board Board members appointed by the President (two upon recommendation of Congress) to fixed, staggered terms Cannot be easily removed (Do not serve at the pleasure of the President or Congress) Board members appoint the Executive Director

15 Independence (continued) Budgetary independence Independent budget authority (not subject to White House control) All expenses paid from TSP funds (forfeitures and earnings) No Congressional appropriations (except for small start-up appropriation)

16 Independence (continued) Investment in index funds required by statute. Avoids political pressure to invest money in special projects or companies Voting of proxies (shares) prohibited by statute. Keeps plan out of political battles over specific companies or industries Procurement actions are public and open to all

17 Regulatory Oversight Government agency that oversees private pensions (Department of Labor) has oversight responsibility for TSP Performs annual series of audits and issues findings and recommendations Reports to the Board Congressional oversight Hearings GAO audits

18 TSP Contributions 1% of salary contributed automatically by government Government matches first 5% of employee contributions 100% match on first 3% 50% match on next 2% Automatic (1%) contributions vested after 3 years; all other contributions vested immediately Employees can roll-in money from other plans

19 Thrift Savings Plan Participation Rates 100% 80% 83.4% 69.6% 60% 40% 27.7% 20% 0% Dec 2008 FERS CSRS U.S. Annual data as of September of the respective year.

20 TSP Investment Structure Law requires use of index funds for equity options Index funds are designed to follow entire markets or broad slices of markets Investment management is completely passive Board decided to use indexing for fixed income also

21 Current TSP Investment Options G Fund Specially issued government securities F Fund U.S. corporate and government bond index fund. Tracks the Barclays Capital U.S. Aggregate Bond Index C Fund Large capitalization U.S. stocks. Tracks the S&P 500 Index S Fund Small to medium capitalization U.S. stocks. Tracks the Dow Jones U.S. Completion Total Stock Market Index I Fund International stocks. Tracks the EAFE Index

22 The TSP L Funds Added 2005 Lifecycle or target date asset allocation funds Use combinations of underlying TSP funds. Allocation and glide path chosen by expert consultant Participant chooses fund based on when they need the money Farther out time horizon dates more aggressive (i.e. risky) investments As horizon date approaches, automatically change to more conservative investments glide path Provides investment allocations designed to give optimal returns for the amount of risk taken

23 The L Funds Five funds selected - 10 considered but rejected as too complex Income Fund For those already withdrawing their accounts 2010 Fund 2020 Fund 2030 Fund 2040 Fund

24 Selecting TSP investment managers Board selects appropriate indexes Board chooses selection criteria Based on staff recommendations (with expert advice) Minimum criteria used to limit competition to firms that have necessary size, experience Board chooses weight to give to technical factors vs. cost. As criteria become more objective, cost weighting can be greater. Decisions made by Board members at public meeting

25 TSP Costs Total TSP expenses were $90 million in 2008 Includes both administrative and investment management costs Employing agencies provide some free services Expense ratio was 4 basis points (.04% or 40 cents per $1000 of account balance) Forfeitures ($40 million) and loan fees ($12 million) reduced amounts charged to participants to 1.9 basis points (.019% or 19 cents per $1000 of account balance)

26 0.40% TSP Expense Ratio % 0.20% 0.10% 0.00%

27 Why are expenses so low? Use of low-cost index funds Simple plan structure (only 5 investment funds) Huge economies of scale Use of commingled trust funds instead of mutual funds for investing Only invest one amount per fund each day investment manager maintains only one TSP account; not 4 million accounts Individual accounts are maintained in TSP record keeping system. Competitive procurement of all functions

28 Loans Used to attract participants who might need access to their money Loan rules One general purpose loan and one residential loan Limited to employee contributions and earnings Maximum loan amount $50,000 Loan deducted from participant s account balance. Loan is not a debt to the TSP Pay loan back to account with interest Interest rate is current G Fund rate If do not repay, loan principal and interest become taxable income

29 Loans (continued) Loans add cost and administrative complexity Can detract from retirement income TSP placed new restrictions on loans in Charging $50 loan fee Currently have over 700,000 loans outstanding. Decrease of almost 200,000 since restrictions added About 4% in delinquent payment status 5 % take taxable distributions when leave service

30 In-service withdrawals Hardship Certain defined hardship events Casualty loss, medical expenses, certain legal expenses Negative cash flow Age-based Age 59 ½ or older One time only These have been increasing in number with economic distress

31 Post-employment withdrawals Three options: Lump-sum payment Phased withdrawals Annuity Can mix options Transfer certain payments to IRAs or other plans One-time partial withdrawal Required to begin by age 70 ½

32 1,200,000 Withdrawal History (Civilian and Uniformed Services) Number Disbursed 1,000, , , , , Numbers 1,070,699 *Monthly Payment Data Missing for These Years 0 $8,000, * 96* 97* Dollars Disbursed (000 s) $7,000,000 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000, Dollars $7,958,712 $1,000,000 $

33 Separated Participant Withdrawals 2008 (Civilian and Uniformed Services) $4,551,073 Single Payments $474,902 Monthly Payments $182,279 Annuities $1,004 Cashouts Total Amount Paid in 2008 $ 5,668,727 Total Amount Paid in 2007 $ 5,960,484 Total Amount Paid in 2006 $ 4,885,780 Total Amount Paid in 2005 $ 3,725,568 Total Amount Paid in 2004 $ 3,104,280 Dollars (000 s) $459,468 Partials

34 Annuities Only an option (not required unless spouse insists) 18 different annuity types (single life, joint and survivor, etc.) TSP selects vendor and monitors performance. No liability once annuity is purchased Annuity provider competitively procured Insurance companies compete on price Not yet a popular option, although numbers increasing

35 Death and Disability Upon death, designated beneficiaries receive account If no designated beneficiary, use statutory order of precedence No insurance for death or disability Disability handled by defined benefit component

36 Administration About 80 TSP employees Policy Legal Accounting Oversee operations and IT system Other functions outsourced Investment management Record keeping Call centers Computer center

37 Administration (continued) Payroll function Essential to control data, prevent mistakes Contribution records must balance Accounting controls Individual account plan, need to balance every day Audit Have annual internal audit, certify books and records Auditors report directly to Board Computer system Robust computer system essential to proper functioning Run system every night

38 Communications Website is now primary communications vehicle Transactions on-line: Investment decisions, some loans, withdrawals. Over 90% of investment transactions online Latest information Account balances and statements Voice response system (ThriftLine) Automated account information Some automated transactions Opt out to call centers Agency responsibilities

39 REFERENCES Thrift Savings Plan authorizing statute (Federal Employees Retirement System Act or FERSA): 5 U.S.C. Chapter 84, subchapters III (administrative provisions) and VII (governance provisions) Thrift Savings Plan regulations: 5 CFR Part 1600 TSP website: Federal Retirement Thrift Investment Board website: