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John Bury: 4 Things The New Jersey Pension Panel Failed To Say

Over at Bury Pensions, actuary John Bury covers New Jersey pension developments as close as anyone. And there’s been a lot to talk about lately, as the New Jersey Pension and Health Benefit Study Commission just released their first report last week.

But what wasn’t in the report is just as important as what was. While the report served as a great primer on how New Jersey’s pension mess came to be, it fell short on some counts.

Here’s John Bury’s take on what was left out.

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By John Bury

The report did a good job of piecing together available public information but anyone could have done that. What this panel of experts was supposed, and failed, to do is bring their knowledge of the truth of the situation to the general public. Perhaps some did not possess that knowledge and others who did wimped out but here is what should have been in the report:

Actuaries lie

A 54% funded ratio and $37 billion shortfall for the state portion of the New Jersey pension sounds bad enough but people should be aware that these figures are generated by actuaries whose sole responsibility to their politician clients is to keep contribution amounts low. Ask yourself how a plan returning 16.9% in trust earnings when it is assuming 7.9% worsens their shortfall. It’s primarily because of a flaw in basic actuarial math which is not being adjusted for since getting it right is not what public plan actuaries are paid for when right means higher contributions. Then there is the smoothing canard that the panel completely ignores, quoting the $44 billion actuarial value of assets as real rather than the $39.5 billion market value.

Politicians cheat

$14,9 billion in skipped ARC payments under Christie in cahoots with the legislature who not only get to decide how much they put in but they also get to brag that their selected mini-contributions are the full statutorily required amounts though they get to define what is statutorily required.

Benefits are protected

Hinted at on page 18:

One of the reasons the reforms described above have had little impact on the unfunded liability is that many of them do not apply to all current employees.

And the reason many recent reforms are not applied successfully (witness the COLA fiasco) is that Christie Whitman in 1997 exchanged constitutional protection of those benefits for the ability to reduce contributions to a desired level (i.e. nothing). That needs to be admitted and reforms must include either paying for all those promised benefits in full or coming up with some strategy to get public employees to agree to reduce their benefits voluntarily.

Hybrid plans won’t work here

Though a Defined Contribution plan is the only type of plan that governments, run by political considerations and without independent funding discipline, should be allowed to sponsor moving new employees into these plans would only worsen the underfunding since a valuable input into the ponzi scheme New Jersey currently runs (employee contributions) would be shut off and new hires who are typically younger could wind up getting even higher benefits than under an age-weighted defined benefit system. In the private sector the shift to cash balance plans worked because older employees could be forced (or tricked into) accepting them. It would take a massive amount of ‘creativity’ and will to work the same magic in the public sector where employees have more leverage and politicians are not bargaining with their own money.

Video: Pennsylvania’s Pension Predicament

The 2014 CSG National Conference was held last month, but videos of the presentations are just beginning to surface.

This presentation, on public pensions in Pensylvania, was given by state Senator Pat Browne (R).

Sen. Browne has previously proposed and supported legislation to shift workers into a 401(k)-style plan. In 2012, he said:

“Significant policy decisions regarding Pennsylvania’s pension system must be made soon,” Senator Browne said. “Without significant changes in the design of Pennsylvania’s pension system, including a switch to a defined contribution system, the long-term costs will be unaffordable to Pennsylvania taxpayers.”

“Over the past few decades, virtually all of the private sector has shifted to defined contribution retirement plans,” Senator Pileggi said. “It’s time for Pennsylvania government to do the same.”

“A switch to a defined contribution plan will benefit Pennsylvania taxpayers by forcing fiscal discipline,” Senator Corman said. “Retiree benefits will become predictable and sustainable, costs will be easily defined, and future liabilities will be fully funded; it’s an excellent choice prospectively.”

Browne is a board member on the Public Employee Retirement Commission and the Public School Employees’ Retirement System board

New Jersey Lawmaker Puts New Pension Proposal On Table

Chris Christie’s pension commission members aren’t the only ones brainstorming pension reforms in New Jersey lately. A Democratic assemblyman has proposed a plan that would shift new hires into a hybrid plan with some attributes of defined-contribution plans and some attributes of defined-benefit. Reported by The Star-Ledger:

Assemblyman Troy Singleton (D-Burlington) last week sent some public union leaders a draft of a bill he’s considering introducing that would keep the current pension system in place for those already enrolled in it, but shift new public workers to a “collective defined contribution retirement program” – a sort of mix between a traditional pension plan and a 401(k).

“It may be something we don’t introduce, but it may be something we do in a different form. But I’d like to start some dialogue in where our pension system goes in the next step for our pension system,” Singleton said in a phone interview “The only thing I would tell you is it’s still a work in progress.”

The idea did not get a warm reception from the public worker labor unions, even though Singleton himself comes from the private side of organized labor, as an official in the Northeast Regional Council of Carpenters.

And Singleton acknowledged that the plan would not do anything to solve the pension’s unfunded liability of about $40 billion, which he said must be dealt with through increased state payments.

Singleton provided the Star-Ledger with an outline of how the plan would function. The gist:

Workers would establish accounts that both they and their employers would pay into, though the workers would pay three times as much as the employer. The money would be managed by a “professional money management provider” that could charge fees of no more than 0.25 percent of the total, while the plan’s appointed board and the State Investment Council would determine where the money would be invested.

The investment returns would be annually credited to the retirement accounts. But if the return is greater than 8 percent, the excess would go into a reserve fund, which would later be used if the investments lost money. The plan would allow for “bonus” payments to the retirement accounts if the reserve fund is healthy enough.

It’s far from the current pension system, in which workers’ final retirement payments stay the same, no matter how good or bad the funds’ investments are doing.

Christie appointed a commission last month to examine the state’s pension system and propose reform ideas. The commission’s final report will come in the next few months.

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.

Retirement Confidence Climbing (For Most) As Workers Become More Engaged With Their Plan

A recent survey reveals that more workers are confident in their retirement income in 2013 than in 2009, but most are still worried about their long-term prospects–especially those 50 and older. From Pension Benefits:

Retirement confidence climbed between 2009 and 2013, and nearly one-quarter of employees are now Very confident’ of having enough income for the first 15 years of retirement. This reflects improving financial conditions over the past four years as employees have rebuilt their savings. When asked to assess their prospects 25 years after retiring, however, only 8% remain confident of a financially comfortable retirement.

Since the start of the financial crisis, confidence levels for workers age 50 and older have declined by 10 percentage points. In 2007, 34% were very confident of their ability to afford the first 15 years of retirement, compared with only 24% in 2013.

Workers with defined-benefit plans are more confident than those with defined-contribution plans. On the flip side, the prospect of benefit cuts worry workers in DB plans. From Pension Benefits:

Participants in defined benefit plans (DB) are 35% more likely to be satisfied with their finances than those with only a defined contribution (DC) plan.

Roughly half of DB plan participants (45%) are afraid their retirement plan might be cut and about one-third (36%) fear having to bear more investment risk in the future. And for DB plan participants who have recently undergone a cut to their retirement program, 70% fear more curtailments are on the horizon.

Another interesting trend: Workers are becoming more engaged with their retirement plans. From Pension Benefits:

Since 2010, employees have become more involved and interested in retirement planning. Slightly more than half of all employees review their retirement plans frequently. Sixty-three percent of DB plan participants track their savings carefully compared with 48% of DC-plan-only participants. Older and midcareer workers report greater engagement with retirement than younger workers and saving for retirement is their number one financial priority.

You can read the full survey results by clicking here (subscribers only).

The article is published in Pension Benefits.

Photo by www.SeniorLiving.Org

Private Equity Coming to Your 401(k)?

Private equity has become a staple in defined-benefit plans around the world. But it’s becoming increasingly common for employers to phase out defined-benefit plans and shift new hires into defined-contribution systems.

Accordingly, private equity funds are now setting their sights on 401(k) plans. Daisy Maxey writes in the Wall Street Journal:

Some big names of the private-equity world are working to make private-equity funds an option in defined-contribution retirement plans, such as 401(k)s, as soon as next year.

Pantheon Ventures LLP, a private-equity fund investor overseeing $30.5 billion, is shopping its plan to offer a private-equity product to defined-contribution plans. The firm is in talks with plan sponsors, and anticipates striking a deal to bring the product to defined-contribution plans next year, says Michael Riak, head of the firm’s U.S. defined-contribution business.

…Private-equity investments are already offered within some defined-contribution plans, though that is rare and the products don’t offer daily pricing and liquidity, says David O’Meara, a senior investment consultant at Towers Watson Investment Services.

Private equity isn’t being welcomed into defined-contribution plans with open arms—plan sponsors maintain skepticism that those investments are the right fit for 401(k) plans.

But those in the private equity field think some plan sponsors will soon change their tune, especially if they’ve dealt with private equity in the course of administering defined-benefit plans. From the WSJ:

Though some asset managers, such as Pantheon, have the products ready to go, and are now looking for plan sponsors to participate, there remains some healthy skepticism within the 401(k) marketplace, he said.

“I would presume that the early adopters of private equity in defined-contribution plans would be large plan sponsors that have used private equity within their defined-benefit plans historically, and understand the asset class and how to evaluate its risks and returns,” he said.

The Double DB Plan: An Experiment in Plan Design

Several retirement plan consultants have put their heads together and come up with an interesting new idea for designing defined benefit plans. Why is it interesting? Because it’s a defined benefit plan, but it is fixed-cost; on top of it, the creators claim that both employees and employers will benefit.

It’s called the “Double DB”. Will the plan work? We won’t know until its put into action. For now, it’s certainly serves as an interesting though experiment.

You can hear an in-depth conversation on the topic in the video above. Or, you can read an explanation below, from Kamp Consulting:

Here is an example for illustrative purposes only and does not imply any future results as outcomes are based on specific plan and market data.

Suppose that a plan sponsor of an existing traditional DB plan wants to soon transition their employees to a DC structure. Let’s also assume that the plan sponsor’s existing DB has current annual cost of 30% of salary, with 20% paid by the employer and 10% by the employees. Instead of shuttering the DB plan and adopting the DC plan, the plan sponsor can adopt Double DB, a hybrid DB structure whose assets can be commingled with the existing trust assets.

For accounting purposes, there are two component pieces in the Double DB design. Once the plan is established, each of the two DB components receives 15% of payroll in the initial year (or, half of the hypothetical current annual cost). The first component (DB one) is a regular DB plan with features similar to a traditional DB plan, but with more modest fixed benefits. The second DB component is referred to as a partner plan, and its benefits are not fixed.

Based on our selected funding method, actuarial assumptions and plan design, assume that the traditional DB plan is calculated to provide a multiplier of 1.5% of FAS (final average salary). However, if investment experience in the first year is poor and the first DB plan now requires 16% of the contribution instead of the 15% paid in year one to support the 1.5% multiplier, DB one (regular DB) gets 16% and DB two (partner DB) gets 14%.

If instead, the plan’s experience in year one was favorable and the regular DB plan requires only 13.5% of pay to support the 1.5% multiplier, regular DB gets 13.5% and the partner DB gets 16.5%.

This process continues year after year. The actuarially determined percentage of payroll cost of continuing the 1.5% multiplier in the regular DB is always provided and the partner DB always gets the residual amount. Annual benefits to the pensioner from the regular DB are always 1.5% of one’s FAS times the number of years of service. Partner DB assets contributed to one’s final benefit will be determined year-by-year and by experience.

Upon retirement, the beneficiary will receive one check with the benefit from the first DB component being added to the variable benefit from second DB accounting to provide a monthly payment. With this plan design, the assets of both the traditional DB and residual DB can be commingled, whereas a traditional DB and its new DC assets can’t be combined. The same investment management team can be used, as well as all service providers, granting the plan sponsors greater economies of scale, less complication, and potentially happier employees who don’t have to manage their retirement program.

Photo by American Advisors Group via Flickr CC License

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