Pension Reform News: ESG divestment lawsuit, fiduciary principles, and more

In This Issue:

Articles, Research & Spotlights 

• Major pension reform passes in North Dakota
• New York City’s pensions sued over ESG divestment
• Fiduciary duty should protect pensions from politics and ESG
• The potential costs of undoing pension reform in Alaska
• Retirement plans are ineffective at recruiting and retaining teachers
• How to fix Mississippi’s pension contribution problem

News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

North Dakota Enacts Landmark Public Pension Reforms

To address North Dakota’s growing $1.8 billion in pension debt, state lawmakers passed a landmark reform that will put the North Dakota Public Employees Retirement System, NDPERS, on the path to full funding and reduce the growth of liabilities in the future. House Bill 1040, signed by Gov. Doug Burgum, updates the state’s pension funding policy to no longer shortchange payments on the pension promises made to public workers and retirees. HB 1040 also sets the state’s existing defined contribution (DC) plan as the exclusive retirement plan for all new hires in the future, eliminating the chances for new runaway pension costs. The Pension Integrity Project provided actuarial modeling and technical assistance to the interim retirement committee and several committees during the legislative session.

Pension Plan Members Sue New York Pensions Over ESG Divestment

Some members of the New York City Employees’ Retirement System, the Teachers’ Retirement System, and the Board of Education Retirement System have filed a lawsuit against their pension plans, claiming they have violated their fiduciary duty in their investment decisions. The public plans, covering the city’s teachers and public employees, divested roughly $4 billion from fossil fuel assets in 2021, with the intent to achieve net-zero emissions in their investment portfolios. The plaintiffs claim that because this investment decision was based on factors other than return projections, the divestment breached the fiduciary agreement administrators have made with those contributing to the fund. Reason’s Ryan Frost details why this could be the first of many legal challenges aimed at public pension systems that are encountering growing pressures to throw their assets behind political and environmental causes.

Strengthening and Reaffirming Fiduciary Principles in Public Pensions

With politicians and groups on both the left and right calling for public pensions and funds to engage in environmental and social activism, fiduciary duty is more critical than ever. A new Reason Foundation policy brief by actuary Larry Pollack details the principles that have long protected pension trustees from motives beyond their strictly defined interests. Pollack examines recent cases of politicians attempting to use public funds to promote or punish industries to further their interests, not those who paid into the funds. The paper also outlines ideas to strengthen the rules applied to fiduciaries, which would improve protections from outside parties seeking to use public pension funds as their vehicles of influence.

Webinar: Can investing public pension assets to further nonfinancial goals be consistent with fiduciary principles?

Related Commentaries: Some critiques of anti-ESG proposals miss the mark

California legislature shouldn’t politicize public pensions

The Costs and Risks of Proposed Public Retirement Changes in Alaska

Going into the next legislative session, Alaska lawmakers will continue to deliberate on several proposals to bring back pensions for the state’s teachers, public safety, and other public workers. Reacting to an explosion in unexpected costs, Alaska elected to close its public pensions, which are still underfunded by more than $6 billion, to new workers in 2005. Several state bills under consideration would undo this pension reform and expose Alaska to the risk of more debt and runaway costs. In partnership with the Alaska Policy Forum, the Pension Integrity Project has deployed its actuarial modeling of the state’s two pension plans, the Teacher Retirement System, TRS, and the Public Employees’ Retirement System PERS, to examine the potential immediate and long-term costs that these legislative proposals would impose on Alaska’s budgets. The analysis suggests this move could generate $8.6 billion in additional costs in the coming decades.

Commentary: Alaska’s defined contribution plan is better for most workers than the defined benefit plan

Studies Suggest Pension Benefits Don’t Help Recruit or Retain Teachers

Pensions are often touted as an effective means to help public schools recruit and retain teachers, but recent studies suggest that retirement plans are not much of a draw to this evolving workforce. According to an online poll of over 2,000 teachers, early-career teachers were largely indifferent to the type of retirement plan offered by their employers. The teachers surveyed were more concerned with salaries and health insurance. In this commentary, Reason’s Jen Sidorova identifies some takeaways that policymakers can apply to the challenge of attracting and keeping good teachers.

Mississippi Needs to Fix the Way it Pays for Public Pensions

Responding to ongoing increases in required public pension contributions, Mississippi lawmakers considered legislation requiring legislative approval for further contribution hikes. While the challenges of ever-growing costs for public pensions are serious, restricting contributions is the opposite of what is needed in states with underfunded retirement plans. Sidorova highlights this challenge in Mississippi, noting the state’s contribution policy needs to be more, not less, reflexive to fluctuations in pension costs if the state is going to meet its obligations to public workers.

News in Brief

Report Shows Continued Drop in Pension Return Assumptions

The latest annual report from the National Association of State Retirement Administrators (NASRA) shows state pension systems are reducing their expectations of investment returns. In 2001, the median investment return assumption for all state pension plans was 8%. Over the last two decades, that median assumption has dropped to 7%, with the average rate now down to 6.93%. Public pension plans are responding to multiple decades of investment returns coming in below their previously assumed returns, and market forecasts are predicting low probabilities that their assets will achieve such lofty targets in the coming years. As return rate assumptions continue to fall, pension plans can expect their estimated unfunded pension liabilities to increase. The full brief is available here.

Quotable Quotes on Pension Reform 

“We thought given the significant market changes in light of inflation and interest rates, and the general view that these market changes are likely to persist for at least the intermediate term, now would be a good time to revisit asset allocation,” 

—Interim Executive Director of Florida’s State Board of Administration Lamar Taylor, in “Pension Funds Consider Unloading Stocks, Adding Credit,” The Wall Street Journal, May 5, 2023.

“What we’re seeing is people want to manipulate retirement funds and their trust funds for future generations, to step through that and feel it’s their money…I see portfolio managers who admit they now have bilingual brochures: one for red states and blue states. That’s really sad.”

—Chief Investment Officer of the California State Teachers’ Retirement System Christopher J. Ailman at the 2023 Milken Institute Global Conference in “Milken Institute Global Conference Live Blog,” Pensions & Investments, May 3, 2023.