Pension Plans of the Future: Defined Benefits vs' Defined Contributions 2006 Annual Meeting Keith Br

1
Pension Plans of the Future Defined Benefits
vs. Defined Contributions2006 Annual
MeetingKeith BrainardNational Association of
State Retirement Administrators August 22, 2006

2
Size and Scopeof the State Local Government
Worker Community

• 16 million people are employed full-time by
  state or local government
• More than 10 percent of the nations workforce
• Education, police, fire, and corrections comprise
  65 percent of total
• 90 percent have a defined benefit pension
• Public DB assets are 2.8 trillion

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The changing landscape of retirement benefits
for public workers

• For most of the 20th century, defined benefit
  pensions were the predominant retirement benefit
  for nearly all public employees
• The number of hybrid plans and mandatory and
  optional DC plans, is growing
• Defined contribution elements are being
  incorporated into defined benefit plans
• Changes to retiree medical benefits are on the
  horizon

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Statewide Plans for Broad Employee Groups
Defined Contribution Only

• General employees in the District of Columbia
  established 1987
• Michigan state employees established 1997
• All new public employees in Alaska since 6/30/06
• West Virginia and Nebraska recently switched back
  from a DC plan

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Hybrids as thePrimary Pension Benefit

• Traditionally
• Indiana PERF and TRF
• Texas MRS and CDRS
• Wisconsin RS optional at retirement
• More recently
• Washington state 1995
• Nebraska 2002
• Ohio PERS and STRS optional - 2001-02
• Oregon PERS 2003

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Choiceon a statewide basisfor broad employee
groups

• Florida RS 2001
• South Carolina RS 2000-02
• Ohio PERS and STRS 2001-02
• Montana PERS 2004
• Colorado state employees 2006
• In each case, overwhelming majorities elected
  the defined benefit plan

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NASRA Resolution in Support of Defined Benefit
Plans

• NASRA supports a defined benefit program to
  provide a guaranteed benefit and a voluntary
  defined contribution plan to serve as a means for
  employees to supplement their retirement savings
  and (NASRA supports) progressive changes that
  accommodate a changing workforce and better
  provide many of the features advanced by defined
  contribution advocates.

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A defined benefit plan for public employees can
and should meet objectives for all stakeholder
groups

• Public employers who need to attract and retain
  qualified workers
• Taxpayers who pay for part of the benefit and
  bear investment risk
• Recipients of public services who rely on the
  public sector to continue to provide services
• Public employees who seek fair compensation and
  an assured source of retirement income
• Everyone who has an interest in promoting the
  nations retirement security

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Core elements of a DB plan

• A retirement benefit that cannot be outlived
• Some form of annuitization
• Investment risk borne partly or fully by employer
• Employer is responsible for making investment
  decisions
• A retirement benefit that reflects the employees
  salary and length of service

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Chief Sources of Opposition to Public DB Plans

• Fiscal perceived budget savings and reduced
  cost volatility
• Ideological Ownership Society
• Vendor-driven Defined contribution plan service
  providers seeking business
• Political resistance to corporate governance
  initiatives
• Intergenerational transfers deferring current
  costs of benefits to future generations

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Change in Aggregate Public Pension Funding
LevelState and Local Pension Plans
Public Fund Survey and Standard Poors
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Primary causes ofdeclines in funding levels

• Negative market returns of 2000-2002
• Insufficient contributions
• Benefit enhancements
• Cause and extent of decline varies by plan

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Public pension funding levelsby plan size117
plans

Aggregate 85.8 Median 84.9
Public Fund Survey
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Funding Level Isnt Everything

• Actuarial funding ratios are interesting, but
  they dont tell everything
• Other considerations include
• contribution rates
• plan demographics
• plan design
• plan governance
• fiscal health of plan sponsor
• political support of plan sponsor

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Employer contribution rates for all state and
local governments
US Census Bureau
Figures include debt service payments for pension
bond issuances in New Jersey, Illinois, Oregon,
and Kansas.
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Colorados Three Percent Solution

• Earlier this year, the Colorado Legislature
  approved compromise legislation that
• increases employee contributions by 0.5 each of
  the next six years (3.0) to the PERA
• raises the minimum retirement age to 55 from 50
  and
• reduces the annual cost-of-living adjustment for
  annuitants
• Colorados governor called this bill a model for
  other states

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Nationally, taxpayers fund a small portion of
public pension costs

Aggregate public pension revenues 1983-2004
US Census Bureau
Calculate figures for your system
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State and local employees and Social Security

• Approximately one-fourth of all employees of
  state and local government do not participate in
  Social Security, including
• Most or substantially all in Alaska, Colorado,
  Louisiana, Maine, Massachusetts, Nevada and Ohio
• A majority of firefighters and police officers
• 40 percent of public school teachers, including
  those in California, Texas, Missouri, Illinois,
  Kentucky, and Connecticut

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Key Differences Between Social Security and
Public Pension Plans

• Social Security
• Is a pay-as-you-go plan
• Is highly sensitive to demographic changes
• Has a trust fund with no tangible assets
• Public pensions
• Are mostly pre-funded the aggregate actuarial
  funding level of public pensions is currently
  around 86
• Are less sensitive to demographic changes
• Hold 2.7 trillion in tangible assets

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Key Differences BetweenPublic and Private Sector
Pensions

• The public has a compelling interest in ensuring
  that certain positions remain filled with
  qualified and experienced personnel
• Police officers, firefighters, school teachers,
  correctional officers, health professionals, etc.
• Public pension plans are not subject to federal
  regulations that make them expensive to
  administer and maintain
• Governments stream of revenue is more consistent
  and reliable than the private sector

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Public DB Plans and the Economy

• Recent economic analyses have found that public
  pensions add billions to state economies
• TRS of Texas
• Pension Research Council at the Wharton School of
  Business

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Pension Plans of the Future Defined Benefits
vs. Defined Contributions2006 Annual
MeetingKeith BrainardNational Association of
State Retirement Administrators August 22, 2006