Trustee Toolkit: Facts from NIRS Research on Pensions

Transcription

1 27 Trustee Toolkit: Facts from NIRS Research on Pensions TMRS Board and Advisory Committee Meeting August 22, Diane Oakley Executive Director

2 28 NIRS: Getting the Facts on Pensions Right Nonprofit, nonpartisan research organization founded in 2007 by NASRA NCTR and CII with NCPERS joining them a bit later. Contribute to informed policy making by fostering a deep understanding of the value of retirement security to employees, employers, economy. Research and education programs available at 2

3 29 KEY FACT: Pensions Fiscally Responsible 3

4 30 DB More Economically Efficient How $10,000 Invested Grows over 30 Years Longevity Risk Pooling Manage the chance of running out of money in retirement Avoid the over-saving dilemma and do more with less Maintenance of Portfolio Diversification Take advantage of enhanced investment returns from an ongoing balanced portfolio Superior Returns Achieve greater investment returns vs. individual accounts Source: Pension Trustee Advisors, 2011

5 31 DB Plan Can Deliver Same Benefit at About Half the Cost of DC Plan 25% Cost of DB and DC Plan as % of Payroll 20% 15% 10% 46% Savings Lower Returns/Higher Fees Less Balanced Portfolio No Longevity Risk Pooling DB Cost 5% 0% 12.5% 22.9% DB Plan DC Plan 5

6 32 KEY FACT: Pensions Sustainable Lessons from Well-Funded Pensions Studied Six Well-Funded Public Pension Plans Including: Texas Teacher s Retirement System

7 33 Lessons Learned Study 1. Employer pension contributions that pay the full ARC, and that at least equal the normal cost; 2. Employee contributions to help share the plan cost; 3. Benefit improvements that are actuarially valued before adoption and properly funded upon adoption; 4. COLAs granted responsibly; 5. Anti-spiking measures that ensure actuarial integrity, transparency; 6. Economic actuarial assumptions that can reasonably be expected to be achieved long term. Employee and Employer Pension Contributions, 1982 to 2009

8 34 Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan. DB plans are more cost efficient than DC plans, due to: Higher investment returns Longevity risk pooling

9 35 Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers

10 36 NIRS Public Pension Plan Investing NIRS Outlined How Public Pensions Invest..

11 37 Overview of Public Pension Investment Process Determination of Liabilities Investment Policy Statement (IPS) Investment Management Evaluation Goal is to generate enough returns, combined with contributions, to pay promised benefits over long term Each plan has unique liabilities Board determines acceptable level of risk Investment consultants and staff update capital market assumptions Actuaries model risks/returns for different asset mixes Board selects target asset allocation and sets performance benchmarks for the fund and each portfolio Actuaries estimate fund returns based on asset mix Staff and/or external money managers buy and sell securities and monitor performance Investment managers report short-and long-term returns Board evaluates the returns and risk incurred

12 38 Public and Private Funds Similar in Risk until 2006 Source: Federal Reserve Flow of Funds Accounts,

13 Change in Average Asset Allocation among State Pension Plans Source: Adapted from Wilshire Consulting Public Equity and Fixed Income subtotals are authors calculations. Other category includes cash and alternative non-equity assets. 39

14 40 ON THE RIGHT TRACK? State Pension Reforms in the Aftermath of the Financial Crisis 14

15 41 ON THE RIGHT TRACK? Public Sector Difference Commitment to stable employment relations and internal labor markets. Greater ability to smooth out the effects of business cycles on funding requirements. Public interest mission: DB pensions help provide high quality public services in a cost effective manner, while also providing retirement security. Public employers have more in common with the largest private employers, who have maintained DBs.

16 42 Public Pension Reforms After 2008 Financial Crisis Vast majority have modified their existing pension plans. Most common: increased Employee contributions; reduced DB benefits for new hires, including higher retirement age Cost of Living Adjustment (COLA) reductions for retirees and existing workers.

17 43 After 2008 Financial Crisis: All States Make Pension Reforms One state, Oklahoma, has shifted to a DC-only plan since Four mandatory hybrid arrangements with a DC component, new hires only. Three Cash Balance Plan for new hires Only one state, Rhode Island, enacted a Hard Freeze for current employees.

18 44 Aggressive Reforms In Virtually All States to Ensure Sustainability of Public Pensions Types of Changes Enacted Reduced benefits for new hires 39 Employee contribution increase 29 Reduced COLA for current members 16 Employer contribution increase (statutory) Number of States Source: Author s analysis of NCSL data. Changes affect some or all members of state-run plans in each state. 18

19 45 Higher Age and Service Requirements for New Members Total: 32 States 19 P R

20 Employee Contribution Increases, (NCSL) Employee Contribution Increases: 6 States - Increased contributions for future members; 24 States Increased contributions for at least some current members. Source: The National Conference of State Legislatures 46 20

21 Reductions in Post-Retirement Benefits, Post-Retirement Cost of Living Adjustments (COLAs) : 8 States - Reduced COLAs for future members; 6 States Reduced COLAs for some active members 15 States Reduced COLAs for already retired and active employees. Source: The National Conference of State Legislatures 47 21

22 48 Reductions in Post-Retirement Benefit Increases Future hires only (7 states) At least some active employees (6 states) People already retired and active employees (11 states) Total: 24 States 22 P R

23 Public Pension Reforms Tennessee Hybrid Apply: State employees, teachers and Higher Ed hired after July1, 2014 Reduced DB: new 1% multiplier ( 1.575%) and NRA 65 or rule of 90. Contributions: Employee: 5% for DB and 2% for DC Employer: 4% for DB and 4% for DC.

24 Public Pension Reforms Kentucky Cash Balance Plan Apply: State employees and County employees hired after July1, 2013 Contributions (vest in 5 years) : Employee: 7.5% for hazardous & 4% for non Employer: 8% for hazardous & 5% for non Guaranteed Interest Credit: 4% annually with additional credits equal to 75% of return in excess.

25 Public Pension Reforms Texas Teacher Retirement System Contributions: Employee: 6.4% currently increases to 7.7% by State: from 6.4% to 6.8% Non-Social Security SD: contribute 1.5% of payroll. 3% COLA Because actuarially sound, first retiree COLA since 2001.

26 52 Recent Reforms Projected to Work Center for Retirement Research: For most plans, reforms fully offset or more than offset the impact of the financial crisis on the sponsors costs. Normal cost for employer will be halved, from 8.2% to 4.5% of payroll. Pension costs as a share of state-local budgets will fall below pre-crisis levels over long run. Munnell et al., Feb

27 NIRS/NRTA Tool Kit: Pension Reforms Explains scope of pension reforms across states in wake of 2008 financial crisis. Notes that most states refined pension plans to ensure sustainability. Only 7 adopted hybrids or cash balance. Indicates that shifting from pension increases costs. Finds that pensions meet dual goal of fiscal responsibility and retirement security

28 54 KEY Opinion Research Support for public pensions.

29 55 Strong Support for Public Pensions Because Employees Pay To what extent do you agree/disagree that state/local employees deserve benefits because they finance cost by contributing from every paycheck?

30 56 Americans Want Pensions for All To what extent do you agree/disagree that all workers, not just those employed by state/local governments, should have a pension?

31 What Do Americans Think About Retirement? Anxious How concerned are you about current economic conditions affecting your ability to achieve a secure retirement? Source: NIRS Pensions & Retirement Security

32 58 45% of Households Age Have No Assets in Retirement Accounts, Wealth Concentrated At Higher-Income Levels Retirement account ownership status by household income quartile, 2010 Source: Author's analysis of 2010 SCF. Universe is households with heads age Households with negative earnings excluded. Household income adjusted by marital status for ranking purposes.

33 59 Typical Working-Age Household Has $3,000 in Retirement Assets; Near- Retirement Household Has $12,000 Median retirement account balance, households with retirement accounts vs. all households, 2010

34 60 4 out of 5 Households Have Less than One Times Their Income in Retirement Savings Retirement account balance as a percentage of income among working households, 2010 Source: Author s analysis of 2010 SCF. Universe is households with heads age 25-64, with total earnings $5,000 and < $500,000 and total income < $1M.

35 61 Financial Security Scorecard Economic Pressures Facing Future Retirees

36 62 Scorecard Categories/Variables Retirement Income Retiree Costs Labor Market Private workplace retirement plan participation Average defined contribution account balance Marginal tax rate on pension income Medicare out-ofpocket costs Medicaid generosity Housing cost burden Unemployment rate for people aged 55 years old and older. Median hourly earnings (real) for people aged 55 years old and older

37 63 Texas Financial Security Score

38 64 KEY FACT Pension Spending Fuels State and Local Economies 38

39 65 Pensionomics: What We Found Expenditures from public and private pension benefits supported Over $940 billion in economic output nationwide Over 6 million jobs that paid over $300 billion in income Over $550 billion in value added nationally $130 billion in federal, state, and local tax revenue 39

40 Impact of Pension Payments to Texas Public Retirees Expenditures by government retirees provide steady economic stream to Texas and its communities expenditures supported: 146,387 jobs that paid $7.5 billion in wages. $23.7 billion in total economic output. Each dollar in DB benefits supported $1.51 in total economic activity. $3 billion in federal, state, and local tax revenues. Each taxpayer dollar invested in plans supported $6.91 in total economic activity in the state. Source: NIRS, Pensionomics

41 67 KEY FACT Pensions Keep Americans Out of Poverty 4.7 million fewer poor and near poor households. 41

42 68 In 2010 We Found: Income from DB Pensions is Associated with Rates of poverty among older households nine times lower than households without DB pension million fewer households receiving means-tested public assistance, saving taxpayers $7.9 billion. 42

43 69 KEY TAKE AWAY: Value of DB Pensions Are Extremely Cost-Efficient Drive Public Assistance Savings Ensure Self- Sufficiency Pensions Get Retirement Right Help Recruit & Retain Quality Employees Create Jobs, Fuel the Economy Over Regulation Cause of Private DB Plan Decline All American Want Pensions

44 70 NIRS Can Help You Bring out the Facts