Pension Reform News: Florida improves defined contribution plan, Alaska pension reform roll back blocked, and more

This newsletter from the Pension Integrity Project at Reason Foundation highlights articles, research, opinion, and other information related to public pension challenges and reform efforts across the nation. You can find previous editions here.

In This Issue:

Articles, Research & Spotlights 

• Florida Law to Improve State DC Plan
• Alaska Avoids Attempt to Unwind Pension Reform
• Examining NIRS’ Cost Efficiency Report
• Jacksonville’s Successful Reform Leads to Credit Rating Boost
• Proxy Voting May Be a Distraction to Pension Investors
• Lack of Focus on Lifetime Income Among Retirement Plans

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

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Articles, Research & Spotlights

Major Florida Legislation Improves the State’s Default Defined Contribution Plan 

Adopting the long-time recommendation of the Pension Integrity Project, Florida lawmakers have now made much-needed improvements to the state’s defined contribution plan that serves the majority of new teachers and public employees. House Bill 5007—recently signed by Gov. Ron DeSantis and proposed as an element of his 2022 budget —will increase government contributions into public employees’ individual defined contribution accounts by 3%. This increase brings the state’s flagship vehicle for retirement benefits up to general standards for adequate savings, reinforcing the Sunshine State’s dedication to providing competitive retirement options. Now with this success solidified, Florida policymakers should continue to seek out ways to improve both defined contribution and defined benefit components of its retirement system.

Alaska Avoids Attempt to Roll Back 2005 Pension Reform 

Alaska was an early adopter of the defined contribution plan, which has been an effective plan design for providing valuable retirement benefits to public employees while not taking on additional unpredictable costs and risks. This last legislative session, two bills to replace the state’s defined contribution plan with poorly structured pension plans made it through the state House of Representatives, but eventually failed in the state Senate. The failed legislation was ostensibly introduced to help the state with its challenges with recruiting and retaining public workers, but little actual research was done to explore the fiscal effect this reform would have had, and it is unlikely that the change would actually improve the state’s ability to attract and keep employees. Seeing the need for informed analysis on these proposals, the Pension Integrity Project at Reason Foundation stepped in to educate key stakeholders of the potential risks and costs that could arise from the proposed changes. 

NIRS’ Assessment of the Retirement Efficiency Gap Leaves Out Some Key Details

Research from the National Institute on Retirement Security (NIRS) claims that an “efficiency gap” exists when comparing defined benefit (DB) and defined contribution (DC) plans. Theoretically, this gap suggests that, for the same amount of money, DB plans are able to generate more in retirement benefits. This analysis takes too narrow of a view, however, argues Reason’s Swaroop Bhagavatula. First, by only applying scenarios in which plans accurately predict actuarial outcomes–most notably returns–NIRS’ analysis seems to overlook the significant funding challenges that have plagued public pensions. Second, the analysis applies too much importance on cost efficiency, while not addressing other important factors in retirement policy, like what is optimal to the modern workforce. Devoting one’s entire attention on cost efficiency is missing the bigger picture when the majority of new workers will not remain long enough to enjoy the benefits of a DB plan.

Jacksonville’s Public Pension Reform Helps the City Get an Improved Credit Rating

Citing a package of pension reforms from 2017, Moody’s Investors Service just improved the credit rating for the city of Jacksonville, Florida. Five years ago, Jacksonville’s city council directed a major shift in retirement policy, electing to use a defined contribution plan for all new hires to slow the growth of costly and unpredictable pension debts. This, along with prudent payments to accelerate the elimination of legacy pension debt, has greatly improved the city’s financial standing. Reason’s Jen Sidorova explains the benefits that Jacksonville will enjoy thanks to its retirement reform and the improved credit rating that came about from these efforts.

Proxy Battles Are Usually an Inefficient Use of Public Pension Systems’ Resources

As major institutional investors, public pension plans can influence the companies they invest in. This influence is formally realized in the way a pension engages in what is called proxy voting, which is when a corporation allows its investors to vote on board membership decisions and other resolutions. Reason’s Marc Joffe examines some trends in how pensions have participated in this process, finding 81 recorded instances of funds formally making a case to their fellow shareholders to vote a particular way. California’s main pension for public workers, CalPERS, was the source of more than half of these, and they used their shareholder status to advance official positions ranging from climate change to board diversity. Joffe questions the purpose and effectiveness of this practice, and notes that public pensions usually have more pressing matters related to risk and funding that should take priority.

The Case for In-Plan Lifetime Income Solutions for DC Plans Is Clear, So Why the Reluctance to Implement? 

Annuity options offer an excellent solution to the largest critique of defined contribution plans, a lack of guaranteed lifetime income. But there is still a stark reluctance among retirement plans to offer these options to their members. Reason’s Rod Crane explores some of the barriers to providing annuities, namely the complexity of these options and a misaligned focus on wealth accrual over retirement income.

News in Brief

Proposed Funding Policies for Legacy Pension Debt

Jean-Pierre Aubry at the Center for Retirement Research at Boston College has published follow-up research on his previously introduced concept of legacy debt in public pensions. A number of pension plans began without policies to prefund promised benefits. As nearly all plans eventually changed this practice, a good deal of debt was generated that—as the author of this brief postulates—should not be under the same expectation of payment by the current generation. Aubry advises plans change the way they account for and pay down both legacy and new debt. For legacy debt, plans should adopt amortization policies that pay down the liability over multiple generations. For new debt they should adopt lower risk return assumptions and maintain amortization that ensures payment within the current generation. These changes would decrease annual contributions required for legacy debt, but would also reduce future funding risks with higher required contributions for new debt. The full brief is available here.

State Unfunded Liabilities Over $8 Billion When Discounting at Risk-Free Rates

The American Legislative Exchange Council (ALEC) releases an annual report that recalculates unfunded pension liabilities using a discounting method that accounts for the guaranteed nature of benefits backed by state governments. Using a risk-free rate, unfunded liabilities held by states have now exceeded $8.2 billion by 2021, which is a significant increase from the previous year. Much of this jump is attributed to declines in the risk-free rate. The report also examines the states that have enacted reforms, naming Alaska, Michigan, and Oklahoma as standouts for adopting effective changes that have significantly reduced taxpayer and budget risk. The analysis finds that 25 states have yet to adopt major contribution or plan design reforms. The full brief is available here.

Quotable Quotes on Pension Reform 

“Market volatility is the prevailing headwind for public pension funding, and over the first three months of 2022 we saw the majority of the plans in our study decline in asset values, ranging from losses of 5.52% to a mild gain of 0.50%…Given the continued fixed income and equity volatility in April and May, we expect this downward funding trend to continue in the near-term” 

– Author of Milliman’s Public Pension Funding Index Becky Sielman, cited in “Milliman Analysis: Rocky Markets Cause $167 Billion Drop in Public Pension Funded Status During Q1,” PR Newswire, May 20, 2022

“If you look at reasonable expectations going forward, it’s going to be very hard to maintain current asset/liability funded ratios in public pensions without making significant changes…Pensions have had a good decade-long run of strong investment returns, recently combined with higher liability discount rates. But those trends will eventually reverse, placing renewed downward pressure on funded ratios. If you combine that with boards that aren’t willing to make structural changes to their business model, it’s a Catch-22.”

– Co-founder of CEM Benchmarking and CEO of KPA Advisory Services Keith Ambachtsheer, cited in “Governance Issues Loom Over US Pension Funds,” Chief Investment Officer, June 2, 2022

Contact the Pension Reform Help Desk

Reason Foundation’s Pension Reform Help Desk provides information on Reason’s work on pension reform and resources for those wishing to pursue pension reform in their states, counties, and cities. Feel free to contact the Reason Pension Reform Help Desk by e-mail at pensionhelpdesk@reason.org. 

Follow the discussion on pensions and other governmental reforms at Reason Foundation’s website and on Twitter @ReasonPensions. As we continually strive to improve the publication, please feel free to send your questions, comments, and suggestions to zachary.christensen@reason.org.