This newsletter from Reason Foundation’s Pension Integrity Project 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:
- Pension Funds and Investment Risk
- Optional Defined Contribution Plan Proposed for Maryland State Employees
- More Evidence for the “New Normal” for Investment Returns
- Changes to Pension Plans Since the Financial Crisis
- Cognitive Aging and Managing Retiree Finances
Over the past several decades, public pension funds have substantially changed their risk profiles, going from mostly-bonds portfolios in the 1980s to investing the bulk of their money in equities and alternative assets today. How did this happen, and how much risk-taking is appropriate for those pension funds? Reason’s Truong Bui writes that recent research by the Rockefeller Institute of Government provides valuable answers to such questions.
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A new proposal by Maryland Gov. Larry Hogan would give new state employees the option to forgo a defined benefit pension entirely in favor of a defined contribution plan. While this proposal alone is almost certainly insufficient to solve the funding crisis facing the state’s $45 billion retirement system, Reason’s Daniel Takash writes that it would definitely be a step in the right direction, and is one piece of what could be a complete pension reform package if bundled with meaningful funding policy changes.
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The “new normal” of a lower-yield investment environment for state and local pension funds is quickly becoming an established fact. A new report from J.P. Morgan Asset Management Company suggests that this lower performing investment trend is likely to continue, with low returns for most asset classes within the next 10 to 15 years, and marginally higher fluctuations in annual yields, all relative to what plans used to get 10 to 15 years ago. According to Reason’s Anil Niraula and Anthony Randazzo, this offers yet more evidence justifying continued efforts by public pension funds to adjust their long-term return assumptions, and ‘de-risk’ investment portfolios.
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Market losses since the financial crisis, unrealistic actuarial assumptions, and an aging workforce are reshaping the way public pension plans approach the funding of increasingly costly retirement benefits. What have state and local governments been doing about it? Reason’s Anil Niraula writes that the answer is a lot of little things, but very few substantive reforms, according to data collected by the Center for Retirement Research at Boston College.
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As we age, there is generally a decline in fluid intelligence (general reasoning capacities used to solve new problems), but an increase in crystallized intelligence (the ability to call upon knowledge and experience to solve problems). This process, called “cognitive aging,” and its effect on the ability of retirees to manage their savings is the subject of a new report published by the Boston College Center for Retirement Research (CRR). In a new article, Reason’s Daniel Takash writes that the report’s findings suggest that grandma and grandpa are, on balance, more than capable of managing their retirement—a finding with important implications for debates related to public sector pension reform.
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CalPERS’ Lower-Risk Asset Allocation Expected to Return 5.8%: In December, CalPERS’s board established a policy to lower its assumed rate of return to 7.0% by 2020. But according to a recent Reuters article, the board established a new, lower-risk asset allocation around the same time that is expected to return 5.8% over the next decade. The full article is here.
Moody’s Cites Rising Budget Pressures from Lowered Pension Return Assumptions: A new report from Moody’s Investors Service finds that state and local budget pressures are accelerating in the wake of moves by many public pension systems to lower their assumed rates of return to reflect lower investment return expectations. According to the press release, “[t]he rising cost dynamic highlights the importance of future revenue growth in analysis of state and local government credit stability.” More information is available here.
New Report Examines Teacher Pension Inequities: In a report issued late last month by the Fordham Institute, EdChoice Fiscal Policy Director Martin Lueken identified the “crossover point” for each state’s largest school district (and D.C.), which is the point in time at which a new teacher needs to remain in the same pension system for their level of retirement benefits to exceed the value of their contributions. Lueken finds that the median crossover point of the 51 districts is 25 years, and in 35 districts, nearly 75% of teachers will leave the profession before they reach the crossover point. The full report is available here.
“Clearly, this nation’s pension imbroglio can no longer be relegated to the back burner. Well, perhaps not so clearly. But it certainly shouldn’t be: unfunded liabilities are a disaster in the making that lurk behind a gray wall of numbers, graphs and pie charts. As Flint and Detroit found out, expecting the problem to recede with an uptick in the stock market or the imposition of a new tax or the wave of a consultant’s wand is simply delusional.”
—Thomas Healey, “In the Trenches with Pension Reform,” Milken Institute Review, January 17, 2017.
“Discount rates and pension contributions are inextricably linked. Cutting the rate increases pension contribution costs—that’s how the math works. And that’s why the decision to reduce it is so difficult and why it was made only after carefully reviewing and thoroughly analyzing the current economic climate. You can’t have it both ways. You can’t beat the drums for a rate reduction and then unleash an onslaught of criticism and complaints when we do.”
—CalPERS board member Richard Costigan, “Criticism of CalPERS is often misplaced,” Sacramento Bee, February 15, 2017.
“I just worry that if we don’t fix our roof, we’re going to create damage to the structure of our state. Maybe it’s through bond ratings and maybe it’s through children that aren’t properly educated.”
—Katie Durant, former chair of the Oregon Investment Council, quoted in Jeff Mapes, “Huge Bill Is Coming Due For Oregon’s Past Pension System Mistakes,” Oregon Public Broadcasting, February 2, 2017.
“When the county hires senior managers externally, many are mid- or late-career professionals. A ‘thirty-years-and-a-gold watch’ retirement benefit is rarely compelling to a person with less than 10 or 15 years left to work.
In our recent recruiting experience, Millennials also are not terribly enthusiastic about a benefit that takes 30 years to fully realize. This is crucial because a retirement plan isn’t simply a way to enrich public employees; it is a tool for recruiting and retaining a quality workforce.”
—Caroline County, MD Administrator Ken Decker, “Maryland should look to local government for pension solutions,” MarylandReporter.com, February 21, 2017.
“Payroll growth was negative and you assumed 4 percent (growth)? Were any of you paying attention?”
—Kentucky Retirement Systems Board Chairman John Farris, quoted in, John Cheves, “Troubled Kentucky pension system might need billions more than assumed,” Lexington Herald-Leader, February 17, 2017.
“That’s not a pension system. That’s a checking account, and it’s about to go bankrupt.”
—Kentucky Gov. Matt Bevin in his 2017 State of the Commonwealth address, quoted in, John Cheves, “Troubled Kentucky pension system might need billions more than assumed,” Lexington Herald-Leader, February 17, 2017.
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Senior Managing Director, Pension Integrity Project
Managing Director, Pension Integrity Project