pension reform presentation to pa house

7/31/2019 Pension Reform Presentation to PA House

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A Comprehensive Proposal for

Reforming PennsylvaniasUnsustainable RetirementSystems

Richard C. DreyfussBusiness Consultant and Actuary

Senior Fellow - The Commonwealth Foundation

Senior Fellow - The Manhattan Institute

PA House State Government & PA House FinanceCommittees

August 14, 2012


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Managing Pension Liabilities

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The Public Pension CrisisAugust 18, 2006; Page A14

the fundamental problem is that publicpensions are inherently political institutions.

the current public pension system simplyisn't sustainable in the long run.


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Three Factors Drive the PoliticalInstitution of Public Pensions

1) Poor Benchmarking

2) Poor Liability Management

3) Politics

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#1 Poor Benchmarking

Pennsylvania public pay and benefits aretypically only benchmarked against publicsector practices in other states versusconsidering market practices in thePennsylvania private sector.

Market trends in the private sector are

directly relevant to the public sector.

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2012 Hewitt/Aon Survey:Retirement Benefits

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PACompanies

USCompanies

Number of companies in survey 35 738

Number with Defined Benefit plans 9 or 26% 197 or 27%

Number of DB plans where benefits are

based upon highest average pay

1 74

Number with 401(k) plans 35 738

Average employee contribution

matched percentage in 401(k) plan

5.2% 5.4%

Average employer matching rate $.80 $.81

Average employer cost

(Basic savings plan match to maximum

often discretionary)

4.13% to

6.58%

4.17% to

6.14%

Number of companies offering some

retiree medical insurance coverage

18 or 51% 390 or 53%

Number of companies where retiree

pays all

9 or 50% 206 or 53%


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Towers Watson Survey

Average DC Employer Cost 4.77% to 7.67%http://www.towerswatson.com/assets/pdf/mailings/TW-21621_July-Insider.pdf

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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Traditional DB Plans 64 59 58 53 47 40 37 36 33 29 22 20 17 13

Hybrid DB Plans 8 13 14 18 23 29 29 28 24 21 23 20 20 17

DC Plans 28 28 28 29 30 31 34 36 43 50 55 60 63 70

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Fortune 100 Companies - Trends in Retirement Plans

Traditional DB Plans

Hybrid DB Plans

DC Plans


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#3 Politics

Pensions as political capital

Pension Fund Surplus = Political Capital & BenefitImprovements for Participants and/or Retirees

Pension Fund Deficits = Underfunding by Taxpayers

Maintaining or Improving Benefits = High PoliticalRate of Return

Reforming and Properly Funding Plans = LowPolitical Rate of Return

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True Pension Reform Must Satisfy Three BasicPrinciplesUsing Realistic Funding Assumptions

1. Funding must be current. Benefits should be funded as they are earned and paid-

up in the aggregate at retirement. Achieving a 100%funded ratio.

Significant private sector pension funding reforms occurredin 2006. (Lower investment assumptions ~ 6%, fundingperiods


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Five Step Statewide Pension Reform Plan

1. Establish a single statewide Defined Contribution plan for all new

state, school and local government employees with an annualemployer cost of 4% to 7% of pay.

No unfunded liabilities

Eliminates long-term taxpayer commitments

Removes politics from pensions

2. Prohibit pension obligation bonds or other post-employment benefit(OPEB) bonds on a statewide basis. This concept would alsopreclude other borrowing to finance benefit plans.

Prevents generational theft deferment of liabilities

3. Adopt statewide funding reforms consistent with GASB 67 & 68. Shorter amortization periods, use of market value of assets

Goal is an annual employer cost of 4% to 7% of payroll

Prohibit benefit improvements if this would result in a funded ratiobelow 90%

New GASB requirement requires unfunded liabilities to appear onbalance sheets 10


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Five Step Pension Reform Plan

4. Modifying unearned pension benefits (as legally permitted) This includes increasing member contributions, reducing formula

benefits, increasing the normal retirement age, curtailing earlyretirement subsidies

Eliminating pension COLAs

Revising Other Post-employment Benefits (OPEB) Statewide ban on Deferred Retirement Option Programs (DROPs)

5. Consider funding reforms only after prior steps are achieved

Challenge is to do this without increasing taxes or through newborrowing

Omitting any steps comprehensive pension reform

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A Half-Truth : The nature of transition costsin converting from DB to DC plans

GASB (the accounting requirement) currently stipulates that aclosed DB plan needs to amortize unfunded liabilities on a leveldollar basis and is silent on the duration. This higher near-termrecognition of costs is referred to as thetransitioncost.

Some DB plan apologists claim this required accounting treatmentconstitutes a funding mandate which should preclude considerationof major reform initiatives such as adopting a DC plan for newhires.

Consider the mandate of funding the transition cost versus a

frequently observed practice of otherwise not contributing theAnnual Recommended Contribution.

For additional information:http://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensions
http://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensionshttp://www.arnoldfoundation.org/news/foundation-debunks-myths-about-fixing-public-pensions

pension reform presentation to pa house

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