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Philadelphia Pension Debt “An Obstacle” to Long-Term Growth, Says City Oversight Board

The Pennsylvania Intergovernmental Cooperation Authority (PICA) has released a report stating that Philadelphia’s pension system will be “an obstacle” to the growth and prosperity of the city.

The report says that pension costs need to be lower and more predictable for the city to grow.

The recommendations provided in the report, as reported by Philly.com:

The report’s recommendations included:

Making all new employees join the city’s hybrid pension plan, called Plan 10, which is similar to a 401(k). Mayor Nutter tried doing this in the last round of negotiations with the municipal unions, but lost.

Abolishing the controversial Deferred Retirement Option Plan (DROP), which allows city employees to pick a retirement date up to four years in the future, then accumulate pension payments in an interest-bearing account while still earning their salary. They collect a lump sum upon retirement. Council would need to pass legislation to abolish DROP.

Increasing employee contributions to the pension fund. Civil employees contribute between 3.95 percent and 4.75 percent of their annual wages. The median employee contribution for the 10 largest American cities is 6 percent, according to the report.

Lowering expectations for the rate of future returns on investments from 7.85 percent to near 7 percent.

The city’s pension system is 47 percent funded.

Read the full report here.

Photo credit: “GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania” by Massimo Catarinella – Own work. Licensed under CC BY 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg#mediaviewer/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg

Chart: Public Workers More Confident in Pensions, 401(k)s Than Social Security, Medicare

A recent survey found that, among all streams of retirement income and benefits, public employees were most confident in their pension and 401(k) benefits; both in terms of being there for them when they retire and being sufficient enough to get them through retirement.

People were least confident in Social Security and Medicare. Only a small portion of people were “very confident” they had enough savings to get them through retirement.

Chart credit: Retirement Confidence Survey 2014

Former Enron Trader Continues to Fund Pension Policy Reforms From Behind the Scenes

Former Enron trader John Arnold has given large amounts of money to various public pension reform initiatives around the county in recent years.

Many of those measures mandate a shift to a 401(k)-style system, or allow benefit cuts.

Most recently, he gave $1 million in support of Proposition 487, a Phoenix ballot measure that would have shifted new city hires into a 401(k)-style system.

From Politico:

When former Enron trader and Texas billionaire John Arnold donated more than $1 million to a November 2014 initiative to reform the public pension system in Phoenix, Ariz., pension activists took notice.

Arnold’s donation to Proposition 487, also known as the Phoenix Pension Reform Act, constituted close to 75 percent of total donations for the ballot measure, which failed. Had it passed, it would have moved new state employees from a defined benefit plan into a less-generous (and less expensive) defined contribution plan such as a 401(k).

Despite his Arizona defeat, no one believes Arnold is done.

Arnold’s money has also been involved in reform initiatives in Kentucky, Rhode Island and California. From Politico:

In the 2014 cycle, Arnold and his wife donated $200,000 to a super PAC that supported Democrat Gina Raimondo’s successful gubernatorial campaign in Rhode Island. As Rhode Island’s state treasurer, Raimondo had enacted pension benefit cuts that cost her union support. Rahm Emanuel, who made similar changes to Chicago’s pension system, also received financial assistance from Arnold.

San Jose Mayor Chuck Reed, another Democrat, tried, unsuccessfully, to place an initiative on California’s November 2014 state ballot that would have allowed public employers, under specific circumstances, to reduce employee benefits and to increase contributions to underfunded plans. Arnold bankrolled the entire effort, to the tune of $200,000.

According to data compiled by the NPPC, based on donations disclosed on the website of the Laura and John Arnold Foundation and on news articles, Arnold has since 2008 spent more than $53 million on pension policy reforms, not all of it in the political realm. (In an email interview with Reuters, Arnold disputed those numbers.)

Other beneficiaries listed include universities and think tanks such as Brookings and the Pew Research Center. Much of the money was spent to support pension reforms, but some was spent on education reform. Both efforts, unions point out, tend to favor benefit cuts to public employees.

[…]

The Arnold Foundation is also participating in the Colorado Pension Project, chaired by former Colorado governors Bill Owens, a Republican, and Richard Lamm, a Democrat. As governor, Lamm drew national headlines 30 years ago when he said that elderly people who were terminally ill had a “duty to die and get out of the way.” (Lamm will turn 80 next year.) The Colorado Pension Project’s website says that recent legislative reforms to the state pension system — which reduced cost of living adjustments, raised the retirement age for new employees and increased employee salary contributions — did not go far enough. McGee said Arnold’s foundation was drawn to the state’s history of “fruitful left ideological discussions.”

Read the full Politico report here.

Photo by c_ambler via Flickr CC License

Do Pension Plans Give Retirees a False Sense of Retirement Security?

At one time, pensions were seen as the safest, most secure stream of retirement income. But the security of pension benefits is no longer rock-solid. That raises the question: do pensions give retirees a false sense of retirement security?

Economist Allison Schrager explores the idea:

Until recently, a pension benefit seemed as good as money in the bank. Companies or governments set aside money for employees’ retirements; the sponsors were on the hook for funding the promised benefits appropriately. In recent years, it has become clear that most pension plans are falling short, but accrued benefits normally aren’t cut unless the plan, or employer, is on the verge of bankruptcy—high-profile examples include airline and steel companies. Public pension benefits appear even safer, because they are guaranteed by state constitutions.

By comparison, 401(k) and other defined contribution plans seem much less reliable. They require employees to decide, individually, to set aside money for retirement and to invest it appropriately over the course of 30 or so years. Research suggests that people are remarkably bad at both: About 20 percent of eligible employees don’t participate in their 401(k) plan. Those who do save too little, and many choose investments that underperform the market, charge high investment fees, or both.

It turns out that pension plan sponsors, and the politicians who oversee them, are just as fallible as workaday employees. We all prefer to spend more today and deal with the future when it comes. Pension plans have done this for years by promising generous benefits without a clear plan to pay for them. When pressed, they may simply raise their performance expectations or choose more risky investments in search of higher returns. Neither is a legitimate solution. In theory, regulators should keep pension plan sponsors in check. In practice, the rules regulators must enforce tend to indulge, or even encourage, risky behavior.

Because pension plans seem so dependable, workers do in fact depend on them and save less outside their plans. According to the 2013 Survey of Consumer Finances, people between ages 55 and 65 with pensions have, on average, $60,000 in financial assets. Households with other kinds of retirement savings accounts have $160,000. It’s true that defined benefit pensions are worth more than the difference, but not if the benefit is cut.

As the new legislation makes clear, pension plans can kick the can down the road for only so long. Defined contribution plans have their problems, but a tremendous effort has been made to educate workers about the importance of participating. (Even if the education campaign has been the product of asset managers who make money when more people participate, it’s still valuable.) Almost half of 401(k) plans now automatically enroll employees, which has increased participation and encouraged investment in low-cost index funds. And now it looks like a generous 401(k) plan with sensible, low-cost investment options may turn out to be less risky than a poorly managed pension plan, not least of all because workers know exactly what the risks are.

Read the entire column here.

Photo by http://401kcalculator.org via Flickr CC License

Two Pension Bills Sitting in Pennsylvania Legislature Likely to Resurface In 2015

Pennsylvania’s outgoing governor, Tom Corbett, made reforming the state’s pension system his top priority over the last year. But his plan – which would shift new hires into a “hybrid” plan with characteristics of a 401(k) – failed to enthuse most legislators.

Still, two pension bills are still sitting in the legislature, and they are likely to be brought up again in 2015. The first bill mirrors Corbett’s “hybrid idea”. As described by the Scranton Times-Tribune:

The hybrid plan, proposed by state Rep. Seth Grove, R-York, would maintain defined benefit plans for current employees and retirees and shift new hires into a plan that has features similar to 401(k) plans.

The proposal has several provisions to help municipalities reduce pension deficits, including guaranteeing a rate of investment return and allowing any excess earnings to be used to reduce the pension plan’s unfunded liabilities, said Rep. Grove.

[…]

The bill was introduced in the last legislative session, but never made it out of the Local Government Committee. Rep. Grove said he plans to reintroduce the bill in the next session.

The other bill takes a different approach. From the Times-Tribune:

The other bill focuses on reforming Act 111, which requires binding arbitration when a municipality is unable to reach a contract with its police or firefighters unions.

State Rep. Rob Kauffman, R-Chambersburg, introduced a bill last year that would, among other things, require an arbitrator to consider a municipality’s ability to pay when issuing an award. It did not make it out of committee, but is expected to be reintroduced this session, said Rick Schuettler, executive director of the Pennsylvania Municipal League, which supports the legislation.

Municipal officials statewide have long-complained that binding arbitration is stacked in favor of the unions, with arbitrators often issuing excessive awards.

How likely are these bills to gain any traction? The second one has the better chance, because incoming Gov. Tom Wolf is opposed to changing the pension system to a “hybrid” plan.

Private Equity Likely to Target 401(k)s As Next Big Capital Source

According to a survey released Monday, nearly 90 percent of institutional investors believe that defined-contribution (DC) plans are firmly in the cross-hairs of private equity firms.

Reported by Investments and Pensions Europe:

Coller Capital’s latest quarterly Global Private Equity Barometer suggests the world’s limited partner (LP) community is almost unanimous in its expectation that defined contribution (DC) pension schemes will become a source of private equity capital over the next five years.

The findings, based on the private equity secondaries specialist’s survey of 114 investors worldwide, also show growing enthusiasm for private equity in general, and buy-and-build and private credit in particular – despite some concern over what the exit environment for private assets might look like in 3-5 years’ time.

Almost nine out of 10 investors see DC providing private equity capital within five years, with 27% of European LPs believing DC schemes will provide “significant” capital to the asset class.

Stephen Ziff, a partner at Coller Capital, said: “The backdrop to the finding about DC assets going into private equity is one of more capital in general moving into alternatives, and private equity in particular.

“But in addition there has been a shift in the pensions landscape over the past several years, and GPs are certainly looking for new sources of capital. The industry is slowly starting to get to grips with the challenges, to varying degrees – particularly features of DC investments like liquidity and daily pricing.”

The survey interviewed a representative sample of institutional investors, including pension funds and endowments, based across the globe.

Photo by TaxCredits.net

Controversy Surrounds Pensions of Retired Detroit-Area Politicians

Some Michigan residents are questioning the retirement package of Detroit-area politician Robert Ficano, who lost re-election last month after becoming embroiled in several scandals but still retired with a 401(k) worth between $1.5 and $2 million.

But experts say the retirement package is relatively “normal”, and the public’s outrage should be directed at a policy implemented by Ficano that sweetened the pensions of his appointees. From Detroit News:

[Ficano’s deal] allowed workers to use retirement savings to buy into defined benefit plans that guaranteed them a percentage of their best years’ salaries.

In 2011, he upped the offer to his appointees, waiving rules that required retirees to be at least 55 and allowing them to buy years of service at a discount.

Among others, the plan created pensions that paid former Ficano adviser William Wolfson $124,000 per year at age 50; personnel director Tim Taylor $118,000 per year; and former chief of staff Matt Schenk $96,711 per year at age 41. Schenk’s plan alone will cost taxpayers $4 million over its lifetime if he lives to be 82.

Pension officials say the deals strained the retirement system, which is funded at 48 percent.

The average pension for county retirees is about $22,000 per year. Retired workers don’t feel bad for Ficano, said Joyce Ivory, president of AFSCME Local 1659.

“Our workers suffered tremendously under Bob,” said Ivory, whose 700-member union represents clerks, wastewater treatment workers and others.

“So there’s no sympathy for his retirement plan. It’s just ‘goodbye.’ ”

Ficano declined requests for comment.

Documents obtained by Detroit News contain estimates that Ficano contributed about $100,000 to his 401(k) during his career.

Illinois Workers Opt Into 401(k)-Style Plans In Record Numbers

SURS members chart — CREDIT: Illinois Policy

All around the country, employers are funneling new hires into 401(k)-type retirement plans instead of traditional pension schemes.

But the members of one Illinois fund are given the choice of participating in a defined-benefit or defined-contribution plan–and more than ever, they’re choosing 401(k)s. From Illinois Policy:

Today, more than 13 percent of all active employees in the State Universities Retirement System, or SURS, participate in a 401(k)-style plan instead of a traditional pension plan run by the state. These state-university workers control their own retirement accounts and aren’t part of Illinois’ increasingly insolvent pension system.

And recent data from SURS obtained through a Freedom of Information Act request shows the popularity of 401(k)-style plans is growing.

Nearly 20 percent of all SURS employees eligible for a retirement plan in 2014 have chosen a self-managed plan over the traditional pension scheme. Just a few years after the Great Recession, the number of SURS members choosing self-managed plans has reached an all-time high.

In 1998, SURS began allowing its new workers to opt into self-managed retirement plans. In these plans, an employee contributes 8 percent of his or her salary toward retirement savings and the employer puts in a matching 7 percent. That means the employee has the equivalent of 15 percent of each paycheck put into an account that’s entirely theirs.

As for why employees are opting into 401(k)s over traditional pensions? The growing concern over the health of Illinois’ pension funds probably plays a big role. Strong stock market gains over the last few years likely play a part, as well.

Defined-Benefit Plans Continue To Dwindle Among US Firms

States and municipalities are steadily shifting away from defined-benefit plans and moving workers into 401(k)-style or hybrid plans. But the trend isn’t exclusive to the public sector; as a recent survey reveals, the shift is just as pronounced among the country’s largest private sector firms. Reported by Business Insurance:

Just 118, or about 24%, of Fortune 500 companies offered a defined benefit plan to new salaried employees in 2013, down from 123 in 2012 and a steep decline compared with the 277, or 55%, that offered the plans in 2003, according to a Towers Watson & Co. survey released Thursday.

Frequently cited reasons for the decline in employer sponsorship of defined benefit plans include longer employee lifespans, which increases benefit costs; decreased corporate tolerance of fluctuating contribution requirements, which can jump up and down due to investment results; and escalating Pension Benefit Guaranty Corp. insurance rates.

The switch from defined-benefit to defined-contribution shifts more risk onto workers. But 401(k)s carry risk for employers, too, according to Towers Watson.

Such a move “carries risks for employers, such as having workers delay retirement when market performance is poor, which in turn can result in higher benefit costs and less mobility within their organizations,” said Alan Glickstein, a senior retirement consultant at Towers Watson in Dallas, in a statement regarding the survey.

Photo by 401kcalculator.org

The Accounting Implications of Job-Hopping and the Shift to 401(k)s

Two trends have been building in recent years, and now they are set to collide: on one hand, employers are increasingly shifting workers into defined-contribution plans. On the other, workers are becoming more likely to move between companies numerous times over the course of their working lives. Those trends together are bound to butt heads. Canover Watson writes:

As with many other major Western economies, the US in recent decades has seen its pensions landscape shift away from “defined benefit” (DB) to “defined contribution” (DC) plans […] The move from the former to the latter is unmistakable. […] DB plans tend to favour long-tenured employees, are not transferred so easily between employers, and so are less suited to a highly mobile workforce.

The effective result of this transition is that individual savings accounts, originally intended to supplement DB plans, have ended up supplanting them. This has rendered the question of optimizing returns from investments a cornerstone of the pension debate, as these returns now directly dictate the employees’ eventual retirement income.

Present and future retirees’ exclusive dependence on 401(k)s has upped the ante for all stakeholders–these funds need to achieve consistent returns required to provide liveable, income during retirement. But different funds and managers operate in different ways, and those differences are amplified when a worker switched employers numerous times. From Canover Watson:

What is required is the consistent application of a single accounting approach to underpin accurate portfolio valuations. The answer to achieving this, as with many things in our modern world, lies partly with technology and automation-namely the adoption of a master accounting system at the level of the pension fund.

The shift to DC plans and the multimanager model, both represent a step forward: the creation of a more sustainable, efficient system for ensuring that citizens are able to generate sufficient income for their retirement years. Yet, unless these changes are met with a more sophisticated, automated approach to accounting, pension returns ultimately will be short-changed by the march of progress.

To read the rest of this journal article, click here.

The article was published in the Journal of Pension Planning and Compliance.

Photo by TaxCredits.net

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