Pension Reform News: Ohio’s pension challenges, ESG proxy votes, and more

In This Issue

Articles, Research, and Spotlights

• Ohio’s Public Pension Challenges
• Public Pension Proxy Votes Demonstrate Dedication to ESG
• Private Retirement Plans Don’t Need Government Intervention

News in Brief

Quotable Quotes on Pension Reform

Data Highlight

Articles, Research and Spotlights

Ohio’s Pensions Remain Vulnerable to Market Stress
Despite several major reforms to manage the state’s growing unfunded liabilities, Ohio’s pension systems for public workers maintain a concerning level of exposure to market volatility. According to Reason Foundation’s Pension Integrity Project analysis, presented in testimony to the Ohio House of Representatives Pensions Committee on Dec. 5, the state still has a long path ahead to eliminate its $68 billion shortfall in total public pension obligations. With a low probability of achieving plan investment return assumptions over the next few decades and the threat of more recessions always looming, lawmakers need to act quickly to avoid perpetual underfunding. Actuarial modeling of the State Teacher Retirement System shows that a recession scenario could more than double its unfunded liabilities over the next 30 years. Modeling of the Ohio Police and Fire Fund indicates that a single bad year of market returns could make the plan insolvent and cause it to run out of assets needed to pay for benefits within the next 25 years. Also worrying, an active proposal to add additional employer contributions to the plan would not be enough to prevent insolvency. Ohio policymakers need to make the state’s retirement systems more resilient through reforms to funding policy and more cost-saving measures.
Pension Integrity Project Analysis on Ohio Pensions
Video: Ohio House of Representatives Pensions Committee Hearing With Reason Testimony

Public Pension Plans’ Support for ESG Proposals Remains High
As significant shareholders in publicly traded companies, public pension systems can influence the decisions made by corporations through proxy voting. Increasingly, these companies are considering proposals to adopt policies that reflect environmental, social, and governance (ESG) objectives. Highlighting a recent Morningstar report, Reason Foundation’s Jordan Campbell compares the proxy voting behaviors of public pensions to those of other types of shareholders. The analysis finds that public pension systems vote in favor of ESG proposals at a much higher rate (88%) than the general pool of shareholders (56%). The observed public pension systems also vote in favor of these proposals at a higher rate than “sustainable funds,” which openly advocate for environmental priorities. Given that these pension plans consist of public funds and are bound by a fiduciary duty to consider only matters of risk and returns in their decision-making, policymakers should seek to understand why public pension systems vote in favor of ESG proposals at this high rate.

Public Pension Plans Should Not Get into the Private Retirement Annuity Business
A recent idea proposed in a Governing opinion piece would allow state-run pension systems to offer annuity products to anybody in the private sector. The aim of this recommendation is to provide an affordable retirement product, thus generating competition among existing options already available and theoretically addressing ongoing post-employment security concerns for the country’s workers. As Reason’s Rod Crane and Richard Hiller point out, however, inserting a government-backed product would not be as sound of a solution as this proposal purports, especially considering the troublesome track record governments have had with underestimated retirement costs and unfunded liabilities.

News in Brief

Report Discusses the Continued Rise in Public Pension Contributions
A new brief from the National Association of State Retirement Administrators (NASRA) details the rise of annual contributions among pension plans for state and local government employees. The brief finds that employer contributions constituted 78% of all contributions to public pension plans in 2022, accounting for 5% of all non-federal spending. In 2022, aggregate contributions to pension plans increased by 11.1%, reflecting both rising costs and a trend of state and local governments getting better at making full or even excess contributions to their pension plans. The median percentage of actuarially determined contributions received was 100%, with the dollar-weighted average reaching 103.6%. This rising level of contributions reflects continued efforts to address funding shortfalls following the 2007-09 recession and market decline. Various states have also established dedicated public pension funding sources, such as dedicated taxes and budget surplus allocations. The full NASRA brief is here. 

Quotable Quotes on Pension Reform 

“All else being equal, the more active employees earning benefits, the more money required to fund those benefits during their working career.” 
— Washington Senior Actuary Luke Masselink in “Washington State’s Pension Plans’ Contributions Double over Last Nine Years,” The Center Square Washington, Dec. 8, 2023

“If we have to give more as a district, we will not be able to hire those teachers, even if they reduce the age down.”
—Executive Director of Human Resources with Perrysburg, Ohio, Schools Don Christie, in “‘A Lot of Unhappiness’: State Teachers Retirement System Board Hears Concerns About Bonuses, Future,” The Blade, Dec. 6, 2023

Data Highlight

Each month, we feature a pension-related chart or infographic of interest generated by our team of analysts. This month, we are showcasing a graph from Reason’s Mariana Trujillo, visualizing the relationship between public pension funding ratios and interest rates. Access the visualization along and a detailed examination of the topic here.