Public Pension Financial Forum

Transcription

1 Public Pension Financial Forum The Future of Retirement in America Presented by: Cathie Eitelberg Senior Vice President, National Director Public Sector Market, Washington, DC October 26, 2014 Rocky Joyner ASA, MAAA, FCA, EA Vice President and Actuary Atlanta, GA Copyright 2014 by The Segal Group, Inc. All rights reserved.

2 Pension Environment Accountants and Actuaries No fault Exhaustion Theory Flawed math Investigative Ideology Discount rates Policy Pundits Easy Target Bond Rating Agencies Suspenders after the belt failed The Policymakers Power of the Purse 2

3 Divide and Conquer Strategies Risk, Cost or Something Else? Pew Center for the States Reports on funding status of state and local plans Assessment uses financial economic theory to calculate liabilities riskless discount rates Exhaustion date calculation No additional contributions Estimates higher liabilities Pew Public Retirement Project Financed by the John and Laura Arnold Foundation Enron trader/hedge Fund manager Posits redesign of public pension plans to accomplish: Wealth accumulation equality Intergenerational and tenure fairness Communication simplicity Teacher quality improvement Urban Institute Wealth Accumulation Report Card These are game changing positions 3

4 Retirement Savings Gap Estimates Range from $8-14 Trillion U.S. WORKERS: Does your employer offer a pension or retirement plan? By Sector 100% 80% 60% 40% 20% 51% 54.6M workers 49% 53.2M workers 21% 4.5M workers 79% 16.9M workers No Yes 0% Private Sector (not self-employed) Public Sector (federal, state, & local) This has grown to 57 million private sector workers who do not have access to an employer-sponsored retirement plan. About 60% of those individuals work full-time. Source: Analysis of Current Population Survey, March 2011 Supplement 4

5 Participation in a Retirement Plan 100% 80% U.S. WORKERS: Do you participate in the retirement plan? By Sector 21% 11% 11.1m workers 1.9m workers 60% 40% 79% 42.1m workers 89% 15.0m workers No Yes 20% 0% Private Sector (not self-employed) Public Sector (federal, state, & local) Another 11 million private sector workers do not participate in their employer s retirement plan. Source: Analysis of Current Population Survey, March 2011 Supplement 5

6 Economic Value Expenditures made from public and private pension benefits in 2009: Total economic impact of $1 trillion. Supports more than 6.5 million American jobs that paid more than $315 billion. Supports more than $134 billion in federal, state, local tax revenue. Multiplier effects. For every dollar paid out in pension benefits, $2.37 in total economic output was supported. Every taxpayer dollar contributed to state and local pensions $8.72 in total output was supported. Paid $426 billion in pension benefits to nearly 19 million retired Americans and beneficiaries. Source: Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures, March 2012 National Institute on Retirement Security 6

7 Economic Value Employment and Economic Output Impacts by State 7

8 Economic Value Saving deficit $8-14 trillion Average retirement savings $25,000-50,000 Multiple proposals to expand security Public Sector plans replace on average 60 percent of pre-retirement pay Most retirees, nearly 90 percent remain in their local area or state States are passing legislation to attract higher income retiree---tax forgiveness, tout university health centers and quality of life why? Retirees provide a reliable revenue stream 8

9 Recent Public Plan Design Directions Plan redesign has included these elements: Contribution rate changes Employer and employee changes Mandate payment of employer contributions Cost-of-living-adjustments (COLAs) Limits on future COLAs, including retired participants COLA tied to plan experience Other Plan features Anti-spiking limits Delayed retirement eligibility Reduced multipliers Alternative plan design Hybrids and Defined Contribution Plans 9

10 Impact of Changes State and Local Pension Costs: Pre-Crisis, Post-Crisis, and Post-Reform This study examines the long-term effects of pension reforms on employer costs and on state budgets for a sample of 32 plans in 15 states. The results show: For most plans, the reforms fully offset or more than offset the impact of the financial crisis on the sponsors costs. For the sample as a whole, pension costs as a share of state-local budgets are projected to eventually fall below pre-crisis levels. A few caveats: the projections assume that the reforms stick, that plan sponsors consistently make their required payments, and that they earn expected returns. Source: State and Local Pension Costs: Pre-Crisis, Post-Crisis, and Post-Reform, Boston College, Center for Retirement Research - March

11 Impact of Changes Pension Costs as Percent of State-Local Budgets, Sample Average, Pre-Crisis through Post- Reform Source: State and Local Pension Costs: Pre-Crisis, Post-Crisis, and Post-Reform, Boston College, Center for Retirement Research February

12 Lewis Carroll, Alice s Adventures in Wonderland 12

13 The Future Option 1 The Current Rabbit Hole Continue down the current path without direction What will the impact be on America if we continue to gut retirement programs? Unemployment will rise Since older Americans will not have enough income to retire, they will continue working, thus preventing new high school and college graduates to find employment The housing market will suffer Since these new entrants will not have jobs, they will have to live at home longer Higher education will decline Paying for an education will be difficult especially if jobs are scarce Retiree medical coverage and Medicare will be reduced Since savings for retirement is a stretch, savings for retiree medical will be less Of course without adequate health care, our elderly may not live as long thus helping the retirement problem 13

14 The Future Option 1 The Current Rabbit Hole continued Other impacts As noted by many authors, as retirement funding for most workers has declined, executive retirement compensation has skyrocketed. This will lead to even greater wage disparity than today which is already at a higher level than recent history If this sounds like gloom and doom, it is. This is the path we are following when we are tyrannized by the pressure of the immediate to make short-term, shallow reactions to a long-term intricate issue. Is there any other path? Yes, there is! 14

15 The Future Option 1 Balance Risk and Cost RISK COST 15

16 The Future Option 1 Setting a Path In 1980, the President s Commission on Pension Policy presented their vision for a National retirement philosophy. Their report memorialized certain concepts that continue as a solid foundation for establishing retirement policies. Two major concepts are: The balanced three-leg stool of retirement income, including Social Security, employer pension and personal savings (strength through diversification) Adequate replacement of pre-retirement income in order to maintain one s standard of living (establishing targets 80% on average) Social Security Pension Personal Savings 16

17 The Future Option 1 It s About Retirement Balance and Adequacy Unfortunately, in today s polarized political climate, long-term objectives for balance and adequacy have been sacrificed to short-term budgetary and legislative expediency. While America has never had universal retirement coverage, for many in 2014 the only retirement income they will have is Social Security. In the private sector, the idea of a pension is almost unheard of. For those with access to a 40l(k) type plan, the average employer contribution is about 4% of pay which when combined with Social Security will be significantly less than the 80% replacement ratio target needed by most to maintain their standard of living. If we continue down this path the future may look as described earlier. It is time to review our priorities and develop a new pardigm. The following provide some guiding principles. 17

18 The Future Option 1 AGES Principles Alignment a retirement system should align stakeholder roles with their skills Governance good governance provides a balance framework for making and implementing good decisions Efficiency systems should maximize retirement income while avoiding excessive risk Sustainability the system should be designed to support retirement income over all generations of participants while being able to withstand financial shocks such as recession or prolonged inflation. 18

19 The Future Option 1 Principles of Retirement Security Stable Contributions Equalize Risk Committed Funding Universal Retirement Plan Coverage Replace Adequate Income Efficient and Transparent Governance When time allows, cooler heads prevail, resulting in better outcomes. 19

20 The Future Option 1 Common Aspects of Proposed Approaches Flexibility Portability Predictability Simplicity Sustainability Manage and share risk Lifetime Retirement Security Component 20

21 The Future Option 1 Protecting the Future Doing it right Invite all affected parties to the table Elected Officials Government Staff Employee Groups Interested Community and Corporate elements Eliminate preconceived notions Consider multiple options Balance budget, mission and employee objectives Schedule sufficient time to be thorough Avoid unrealistic expectations Easy answers are usually wrong answers Avoid personal attacks, keep it professional 21

22 The Future Option 1 Protecting the Future Stories from the trenches The unyielding city council person The excluded union Keeping data from the actuary Dueling actuaries Arriving at consensus Busy body know-it-alls Cooperating actuaries 22

23 The Future Option 2 Revive the Dual Concepts of Adequacy and Balance Understand that short-term gain can be long-term pain. As shown earlier, inadequate retirement income will have significant repercussions in seemingly unrelated areas. Future Retirement Arrangements will have to: Be Flexible with Benefits Adjust for changing Economic Conditions Share Retirement Readiness (balance between government, employer and employee) Recognition increasing life expectancies by using Phased or Delayed Distribution concepts Future Retirement Arrangements will also have to consider economic realities for funding and delivering benefits. Some of these potentials measurements are shown on the next page. 23

24 The Future Option 2 Fiscal Stress Measures: Ratio of Required Contributions to the Total Budget of the Sponsoring Entity Required Contributions as a Percentage of Payroll Ratio of Market Value of Assets to Total General Fund Revenue of the Sponsoring Entity Ratio of Unfunded Actuarial Accrued Liability (UAAL) to Sponsoring Jurisdiction Population (UAAL per Capita) Ratio of Annual Required Contribution (ARC) to Sponsoring Jurisdiction Population (ARC per Capita) 24

25 The Future Option 2 As noted earlier, in 1980, the Presidential Commission on Retirement suggested a balanced policy to assure retirement for all This policy introduced the 3-legged stool of Social Security, employer pension and personal savings and established income adequacy. Reenergizing this concept would assure a more secure and promising future for all of us. Other issues that complement this policy. Social Security is a key element so stop using it as a political ping pong ball. Fund it, protect it and when necessary make balanced modest changes. Make pension/retirement money secure. Stop allowing corporate raiders to steal our retirement future. Develop universal retirement options to supplemental Social Security Get serious about health care for all Americans that is available and sustainable 25

26 Future Retirement Challenges Will we have strategic patience? Will the changes provide adequate savings and risk sharing? Will participants start to question the guarantee? Will alternatives provide enough flexibility in benefit adjustments? How would Social Security participation affect plan design? Will the legal challenges to DB changes, and the conflicting judgments force a higher court to decide the ability to change benefits? Will employer-based benefits continue to move to hybrid structures? How will this change the employment relationship? Will the referendum replace legislators? 26

27 Share Risk: Other Approaches Australia Superannuation Guarantee Mandatory DC plan combined with Age Pension Employee contributions 9% - increases to 12% by 2020 No annuity option Median Earner combined replacement 50% Netherlands Mandatory employer-sponsor (DB career average or DC plan) Combined with Dutch National Pension Industry or corporate based plans Only annuity distribution Reductions in retiree benefits permitted based on economic conditions Median Earner combined replacement 89% 27

28 Share Risk: Other Approaches Britain (2009) NEST new DC program combined with National Pension plan Mandatory if non-covered by an employer plan All workers are enrolled can opt out if covered by an employer plan Employer 3% Employee 4% National Government 1% New Zealand Kiwi Saver (2007) Optional DC plan companion to Social Pension All workers are enrolled can opt out Employer 3% Employee 3, 4 or 8 percent Employee directed/default investment option 28

29 Hot Topics State-Sponsored Private-Sector Plans 29

30 Guiding Principles of Plan Design Overriding Principle: A partnership among private sector workers and employers, with the plan sponsor, to address the crisis in retirement savings Lifetime retirement security Flexibility, portability, predictability, simplicity and sustainability Carefully manage and share risk Effectively use the investment power of public plans Augment (and not replace) existing pension programs 30

31 Range of Proposals: Voluntary Account Options Social Security Add-on Individual self-directed DC accounts Public Administration Secure Choice Pension Leverage economies of scale Career Accumulation-Cash Balance Separate Trust Separate employer liability Professional investment management Private Financial Institution Multiple Employer Plan (MEP) Unrelated employers Defined Contribution/design flexibility Joint administration/individual employer compliance required Multiple Small Employer Plan (MSEP) Same as MEP except Employers with100 or under employees Employee contributions only Professional investment management MYRA Federal proposed DC program Payroll deduction Employee contributions only Target employers not sponsoring a plan Maximum balance $15,000 T-bill type investment USA Accounts Senator Tom Harkin (D-Iowa) Targets employers not sponsoring a plan Permits employee and employer contributions Professional asset management Annuity distribution 31

32 NCPERS Initiative Feasibility Review Principles How can we harness the efficiency and strengths of the public sector systems to aid in addressing the private sector problem? DO NO HARM to PERS Design a plan that requires the least change in Federal Law and /or ERISA exemptions Design a meaningful benefit that is sustainable and limits sponsor risk Leverage PERS infrastructure to capture economies of scale and expertise Ensure Retirement Opportunity for all Protect PERS Share Risk 32

33 The Secure Choice Pension (SCP) What is SCP? It is a supplemental DB pension plan It was developed by NCPERS and Segal under Hank Kim s leadership It is intended to take advantage of the efficiencies in administration and investment that public sector plans have developed Its purpose is to develop sustainable lifetime retirement income for private sector employees who have seen most of their retirement security disappear; particularly for employees of small businesses 33

34 Plan Design Multiple-Employer Plan DB Career Accumulation Plan (Hybrid): each participant will have an individual account providing for a minimum guaranteed benefit and an opportunity for participation in additional earnings Flexibility, portability, predictability, simplicity and sustainability Conservative Funding Flexibility in Sharing Risk of Underfunding: Improvements in life expectancy Poor investment experience Employer withdrawals 34

35 Issues to Be Addressed and Resolved What will the relationship be between the SCP, the sponsor, the employers and the participants? ERISA single employer funding rules currently apply to multiple employer plans. Can this be changed to allow SCPs to fall under multiemployer plan rules? How will initial development and start-up costs for an SCP plan be paid? How will ongoing administrative expenses of the SCP plan be paid? How will contributions to a SCP plan be made? By employers, employees, or both? Can employee contributions be pre-tax? Should eligible employers be restricted? (With less than 100 employees ERISA reporting requirements are less onerous.) 35

36 Preferred Federal Legislation Define each SCP as a single, multiple-employer plan (MEP) Current DOL rulings indicate MEP with unrelated employers may not be treated as single employee benefits plan under ERISA. Options: Amend ERISA to allow SCP as MEP; or Amend ERISA and IRC to treat SCP as multiemployer plan Allow SCP to use multiemployer minimum funding requirements Multiemployer rules provide less volatile funding requirements and increase administrative efficiency of SCP Need to amend ERISA and IRC to accomplish this PBGC applicability options, both will need ERISA and IRC amendments Exempt SCP from PBGC coverage Offer alternative benefits safety net (e.g., State reinsurance by statute) Or subject SCP to multiemployer PBGC requirements Provides for lower premiums and lower benefit guarantees 36

37 State Retirement Plans for the Private Sector 37

38 Current SCP State Initiatives States that have enacted some form of SCP legislation. State Year Action California 2012 Enacted bill (SB 1234) to create a state-sponsored payroll deduction IRA for employees of employers with 5 or more employees that don t offer a retirement plan. Assets would be pooled and professionally managed, with a privately-underwritten guarantee. Board has issued a Request for Information, must conduct a market analysis and feasibility study and obtain authorization from state legislature as well as approval from federal Dept. of Labor and IRS before opening plan for participation. Massachusetts 2012 Enacted bill (HB 3754) to create a state-sponsored 401(k) for non-profits with 20 employees or less, to be administered by the State Treasurer. Not yet implemented. Oregon 2013 Enacted bill (HB 3436) to create a task force to study retirement insecurity and make recommendations to the state legislature by September, Task force has been appointed and has been meeting. 38

39 Current SCP State Initiatives States that have enacted some form of SCP legislation. State Year Action Arizona 2014 Rep. Quezada & others introduced HB 2063 modeled after California s SB The legislature adjourned without taking any action. Colorado 2014 HB 1377, which would have created the Colorado Retirement Security Task Force to develop recommendations to provide greater retirement security for state residents, passed the House but lost by 1 vote in the Senate. Connecticut 2014 Legislature passed budget bill creating the Connecticut Retirement Security Board and appropriating $400,000 to conduct a market feasibility study and develop an implementation plan for a public retirement plan. The board has been appointed and held its first meeting on August 6, Illinois 2014 An Auto-IRA bill, SB 2758, partly modeled on California s SB 1234, passed the Senate, and is still pending possible action in the House during the endof-year veto session. Indiana 2014 Sen. Walker introduced SB 66 to create a state-assisted retirement plan under IRS Section 401(a) for employers and employees that do not have a workplace retirement plan. The bill would provide a 1-time $250 tax credit to participants who have not previously participated in a retirement plan. The legislature adjourned its session without further action. 39

40 Current SCP State Initiatives States that have enacted some form of SCP legislation. State Year Action Maine 2013 Rep. Russell introduced LD 1473 modeled on California s SB 1234, which died in committee. Maryland 2014 SB 921, which would create Secure Choice Retirement Savings Plan modeled after California s, was introduced in House and Senate. The legislature adjourned its session without further action. It is expected that the Governor will be signing an executive order to create a task force to study retirement insecurity in Maryland and steps the state can take to address it. Minnesota 2014 House passed Women s Economic Security Act on April 9 th, which includes a study of a state-administered retirement plan similar to California Secure choice. Bill now moves to Senate for consideration. Nebraska 2013 The Retirement Systems Committee introduced LR 344 to conduct a study of the availability and adequacy of retirement savings of Nebraska private sector workers. The committee held a hearing on December 20, The legislature took no further action before adjourning. Ohio 2013 Sen. Kearney introduced SB 199 in October modeled after California s SB Vermont 2014 FY 2015 Appropriations Bill creates a Public Retirement Plan Study Committee to study the feasibility of establishing a public retirement plan. 40

41 Current SCP State Initiatives States that have enacted some form of SCP legislation. State Year Action Washington 2014 A bi-partisan bill called START, Saving Toward a Retirement Today, was introduced in both houses, HB 2474 and SB HB 2474 passed the House on Feb. 14 but the legislature adjourned its session without further action. West Virginia 2014 HB 4375 passed the House, but the legislature adjourned its session without further action. The bill would have created the WV Voluntary Employee Retirement Accounts (VERA) Program, a savings plan under the state treasurer open to private employers with 100 employees or less who don t offer a retirement plan. Following the session, the legislature adopted a resolution creating an interim study commission (SCR 91) enabling the Joint Standing Committee on Finance and the Joint Standing Committee on Pensions and Retirement to study the retirement readiness of the citizens of West Virginia and a group governmentmanaged retirement savings plan (VERA). Wisconsin 2014 Sen. Dave Hansen and Rep. Eric Genrich introduced LRB , the Wisconsin Private Secure Retirement Act on Feb. 19 th. The bill would create a board charged with creating a private plan as similar as possible to the Wisconsin Retirement System. 41

42 Current SCP State Initiatives States that have enacted some form of SCP legislation. Hawaii New York North Carolina 42

43 Senator Harkin s Principles for Reform Principles For Reform 1. The retirement system should be universal and automatic. Saving should be easy and automatic, making it much more likely for people to put money aside. By ensuring that every American has access to a retirement plan at work and making participation automatic, we can drastically reduce the retirement income deficit and promote retirement security. 2. The retirement system should give people certainty. The retirement system should give people certainty that they will have a reliable source of income in retirement. It needs to provide people with the opportunity not just to save for retirement but also to secure a predictable stream of retirement income that they cannot outlive. 3. Retirement is a shared responsibility. Individuals, employers, and the government all have a role to play in ensuring that every American has the opportunity to retire with dignity and financial independence. It is unfair for any one party to shoulder the burden alone. 4. Retirement assets should be pooled and professionally managed. The retirement system should not force people to become investment experts. Most people simply do not have the background, interest, or time to manage their retirement funds effectively. Instead, it should give everyone access to prudent, professional asset management and allow people to pool their assets with others to reduce costs and risk, including the risk of living longer than expected. 43

44 The Universal, Secure and Adaptable Retirement Fund (USA Retirement) 1. Professional Management 2. Lifetime Income Benefits 3. Risk Sharing 4. Universal Coverage 5. Employer Responsibility 6. Encouraging Competition 7. Coordination with Other Retirement Plans 44

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46 Thank You! Cathie G. Eitelberg Senior Vice President National Director, Public Sector Market Leon (Rocky) Joyner, FCA, ASA, MAAA Vice President and Actuary