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Public Pension Trends
Alex Brown
Minnesota Legislative Commission
on Pensions and Retirement
February 6, 2018
Research ManagerNational Association of State Retirement Administrators
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~$4.2 trillion in assets as of Q3 2017
~14.5 million active (working) members
~10 million retirees and their survivors receive $280+ billion annually in benefits
Annual contributions = $190 billion
▲ $140 billion from employers
▲ $50 billion from employees
▲ In FY 15 approximately 4.6 percent of all state and local government spending went to pensions
Median benefit multiplier for Social Security eligible plans = 1.8 percent
Median age required for age-based normal retirement = 63
Public Pensions in the U.S.
Census, Federal Reserve
As of FY 16 unless otherwise noted
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~$59 billion in assets
~316,000 active (working) members
~217,000 retirees and their survivors receive $4.6 billion annually in benefits
Annual contributions = $2.3 billion
▲ $1.3 billion from employers
▲ $1.0 billion from employees
▲ In FY 15 approximately 2.3 percent of all state and local government spending in Minnesota went to pensions
Multiplier of 1.7% for SRS, PERA, TRA for service prior to 7/1/06; 1.9% for TRA service after 6/30/06
Normal retirement age tied to Social Security normal retirement age (age 66 max)
Public Pensions in Minnesota
Census
As of FY 16 unless otherwise noted
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Wide disparity in funding levels and costs
Increased effort on the part of employers’ to fund their pension plans
Employees bear more risk for funding and managing their retirement income as a result of recent pension reforms
Investment return assumptions are being reduced
Notable public pension trends 4
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Distribution of public pension funding levels, FY 16
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MN TRA
MN PERA
MN SRS
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Median contribution rates, Social Security eligible general employees and teachers
ER
PERA: 7.50%
MSRS: 5.50%
TRA: 7.50%
EE
PERA: 6.50%
MSRS: 5.50%
TRA: 7.50%
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ARC/ADC Experience, FY 01 to FY 15
NASRA Issue Brief: State and Local Government
Contributions to Statewide Pension Plans: FY 15
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ADC Experience, FY 15
NASRA Issue Brief: State and Local Government
Contributions to Statewide Pension Plans: FY 15
MSRS &
TRA: 74% PERA: 83%
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112 plans
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Weighted average required contribution paid, by state, FY 01 to FY 15
NASRA Issue Brief: State and Local Government
Contributions to Statewide Pension Plans: FY 15
MN: 81.1%
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Pay the actuarially determined contribution
Commit a portion of the budget surplus to the unfunded liability, either ad hoc or in statute (AK, HI, RI)
Issue pension obligation bonds
Establish a dedicated funding stream, such as revenue from tobacco, liquor, gambling, or severance taxes (KS, MT, OK)
Dedicate a portion of sales, use, and/or corporate income tax revenues (OK)
Reduce the funding amortization period/change the method
Funding [email protected] http://www.nasra.org/funding
Methods states are using to amortize unfunded pension liabilities
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Change in use of amortization methods
Public Plan Database, Public Fund Survey
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Change in average amortization period and plans using closed amortization
Public Plans Data, Public Fund Survey
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Nearly every state modified public pension benefits, financing arrangements, or both, since 2009
Lower benefits, higher employee contributions
Increased use of hybrid plans
Limited use of defined contribution plans
Transfer of risk from employers to employees
▲ Investment risk: the risk that investment returns will be less than expected
▲ Mortality risk: the risk of outliving one’s retirement assets
▲ Inflation risk: a benefit that does not keep up with inflation
Pension reforms in recent years13
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States that increased employee contributions
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“Significant Reforms to State Retirement Systems, NASRA 2016”
updated through 2017
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States that reduced pension benefits 15
“Significant Reforms to State Retirement Systems, NASRA 2016”
updated through 2017
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States that reduced automatic COLAs16
“Cost-of-Living Adjustments,” NASRA, 2017
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New hybrid plans are being created by legislatures nearly every year
Usually apply to new hires only
Mostly DB-DC, some cash balance plans
DB-DC plans maintain a DB component, with a lower benefit accrual rate
Cash balance plans contain key features of DB plans, but also transfer some investment risk to workers
Hybrid Plans 17
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Statewide Hybrid Plans, 199518
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Statewide Hybrid Plans, 2017
“State Hybrid Retirement Plans,” NASRA 2017
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The cost of benefits being accrued in the current year
Generally expressed as a percentage of covered employee payroll
Funded through employee and employer contributions
Can serve as a proxy measure for the value of a pension plan
Normal Cost 20
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Distribution of normal cost for general employees and teachers, FY 16
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*Social Security eligible
Public Plans Database, compiled by NASRA
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Distribution of percentage of normal cost paid by general employees
and teachers, FY 16
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*Social Security eligible
Public Plans Database, compiled by NASRA
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Retirement systems typically change their investment return assumption in response to a study of their assets and liabilities (aka experience study or asset liability modeling study)
▲ Minnesota is one of three states where the legislature sets the investment return assumption (also SC, WA)
These studies contain capital market assumptions, which are consensus outlooks of returns for individual asset classes and the total portfolio
In the wake of the 2008-09 capital market decline, global interest rates and inflation have been low by historic standards
See NASRA Issue Brief, Public Pension Plan Investment Return Assumptions
Changes to theinvestment return assumption
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Distribution of Public Pension
Investment Return
Assumptions,FY 01 to FY 18
PERA: 8.0%
MSRS: 8.0%
TRA: 8.5%
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Key Stakeholders
Public employees, public employers, taxpayers
Distinguishing elements of sound retirement plan design
Mandatory participation
Employee-employer cost sharing
Targeted income replacement
Assets that are pooled and professional invested
Death & disability protection
A benefit that cannot be outlived
Providing a retirement benefit that aligns with key stakeholder objectives
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