Actuary highlights House Bill 55’s costs and risks to the Alaska Public Employees’ Retirement System

No official risk-focused actuarial forecast has been conducted on Alaska House Bill 55 (HB 55), despite the potential for major financial impacts that could drive unfunded pension liabilities higher.

• Pension systems operate over generations, but legislators have only been presented with minimal 5-year cost projections based on an assumption that the proposed pension tier would do the impossible: get 100% of its assumptions 100% right, 100% of the time.
• Major retirement plan design changes necessitate long-term actuarial analysis and stress testing to ensure financial risks to governments are transparent and clearly understood beforehand.

Despite these limitations, Buck Global—the PERS consulting actuary— gives policymakers an idea of the limited information available on the long-term impacts of HB 55. In a March 2022 Fiscal Note on House Bill 55, Buck Global concluded that Alaska taxpayers would see increases in Alaska Public Employees’ Retirement System contributions as a result of opening a new defined benefit tier. Buck Global wrote:

• “Adverse plan experience (due to poor asset returns and/or unexpected growth in liabilities) or changes to more conservative assumptions will increase the PERS DB unfunded liabilities, resulting in higher contribution rates.”
• “The impact of HB 55 on projected contribution rates depends on how large the PERS DB unfunded liabilities become.”
• “Since HB 55 will increase PERS DB liabilities and actuarial contribution rates, the State-as-an-Employer contributions increase.”
• “By shifting active P/F members (and all future P/F hires) from DCR to DB, the State will be taking on greater risk of higher contributions in future years.”

Bottom Line: Changes of the magnitude being proposed in House Bill 55 should receive rigorous actuarial and risk analyses that have not yet been conducted.

Questions Alaska Policymakers Should Ask About House Bill 55

• Given the high discount rate used by PERS (7.38%) what is the risk of underfunding in the new tier created by allowing all current DC plan participants to immediately transfer assets to the new pension system?
• Under HB 55, what happens if PERS only achieves a 7%, 6%, or 5% long-term average investment return?
• Does the timing of returns matter to the cost borne by employers?
• What happens if PERS only achieves a 5-6% average return over the next 10 years—at what point do unfunded liabilities start growing again?
• What happens if we have another pandemic?
• What happens if HB 55 doesn’t solve Alaska’s retention issues?
• What happens if there is an unforeseen major geopolitical challenge in the next several years that results in a major investment underperformance early in the new tier, increasing unfunded liabilities in the legacy plan at the same time costs start rising on the new pension plan?
• Why does HB 55 set the all-important investment return assumption at 7.38% (38 basis points higher than the national median) when Alaska Retirement Management Board advisors project 6.6% for the next decade?
• What does it take to push the actuarially-determined employer contribution over the 9% employer contribution floor?
• Why was the discount rate not adjusted in HB 55 as it was in House Bill 79 from 2020?