Transcript A national perspective of state and local government pensions SACRS State Association of County Retirement Systems May 15, 2009 Keith Brainard, Research Director National Association of.

A national perspective
of state and local government pensions
SACRS
State Association of County Retirement Systems
May 15, 2009
Keith Brainard, Research Director
National Association of State Retirement Administrators
Overview
• How public sector retirement benefits
compare
• Distinguishing elements of traditional
pensions
• Public pension SWOT
• Industry statistics
• Prognosis and outlook
Size and scope of the state and local
government pension community
• ~15 million actives
– 12 percent of the nation’s workforce
•
•
•
•
7.4 million annuitants
$2.3 trillion in assets
$165 billion in annual benefit payments
$70+ billion in employer (taxpayer)
contributions
• $30+ billion in employee contributions
Retirement Benefits Comparison
Private Sector
Public Sector
• Two of five have no access • Nearly all have access to
to an employer-sponsored
an employer-sponsored
retirement benefit
retirement benefit
• One-third of those eligible • Ninety percent have
do not participate
access to a traditional
• Fewer than one in five
pension (DB plan)
have a traditional pension
• Three-fourths
(DB) benefit
participate in Social
• Some employers have
Security
suspended or eliminated
their 401k plan match
• Universal Social Security
Why have pension benefits diminished
in the private sector?
• Increased international economic
competition
• A more mobile workforce
• Federal regulations
• State and local government employers are
largely immune from these factors
Reliance on Social Security
• More than half (56 percent) of those on Social
Security rely on it for more than half of their
income.
• For 30 percent of Social Security recipients,
Social Security accounts for 90 percent of
retirement income.
• For almost one of every five Social Security
recipients, (19 percent) Social Security is the sole
source of income.
Source: Social Security Administration
Social Security Cost and Income
20%
18%
Cost Rate
As a percentage
of national payroll
16%
14%
Income Rate
12%
10%
8%
2000
2010
2020
2030
2040
2050
2060
2070
2080
Social Security
Administration
Distinguishing elements of a defined
benefit plan
• A benefit that cannot be outlived
• A benefit that reflects the worker’s salary
and length of service
• Assets that are pooled and professionally
invested
Who bears the risk?
• A key difference between a traditional
pension and a defined contribution plan is
who bears certain risks, including the risk
of:
– Investment performance and
– Longevity
• Private sector workers with a DC plan bear
these risks
SWOT analysis
•
•
•
•
Strengths
Weaknesses
Opportunities
Threats
Strengths
• Public pensions have the ball: a DB plan
• Flexibility: DB plans can be designed to
work for all stakeholders
• A large asset base invested in diversified
portfolios
• Existing streams of revenue from
contributions are in place
Aggregate market value of state and local
government pension funds, 90 - 08
$3.2
$3.0
Trillion
$2.7
$2.6
$2.3
$2.3$2.3
$2.2
$2.0
$1.9
$1.8
$2.4
$1.5
$1.3
$1.1$1.1
$1.0
$0.8$0.9
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
U.S. Federal Reserve
Flow of Funds
Contribution streams
Billions
$70
Employer Contributions
Employee Contributions
$60
$50
$40
$30
$20
$10
$0
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
US Census Bureau
State and local
government
employee and
employer
pension
contributions,
82-07
Public pension fund sources of revenue,
82 - 08
Investment
Earnings
57.5%
Employer
Contributions
28.5%
US Census Bureau
Employee
Contributions
14.0%
Employer pension contributions
by state and local government
ER contributions as a
percentage of SLG payroll
10.5%
10.1%9.9%
9.3%
10.5%
10.1%
9.8%
9.4%
8.8%
8.0%
7.3%
7.8%
6.8%
ER contributions as a
% of all SLG spending
3.0%3.0%3.1%2.7%
*
2.7%2.5%2.6%2.8%
2.6%2.3%
2.0%1.9%2.1%
* Estimate
95
96
97
98
99
00
01
02
Fiscal Year
Source: U.S. Census Bureau
03
04
05
06
07
Strengths
• Supportive plan participants
• Supportive employers
• Growing public awareness of the
importance of reliable retirement income
• Public pension expertise
• Cost-effectiveness
• Recent scrutiny = favorable results and
publicity
Weaknesses
• The cost of underfunded plans
• Instances of poor governance structures
• Complexity of funding methods and plan
designs
• Pension envy
• A large asset base
Weaknesses
•
•
•
•
•
Investment market uncertainty
Pension abuses
Media relations
Conflicting time horizons
Availability bias (a few bad apples)
All state and local government pension
revenues and benefits paid, 82-08
Billions
$400
Employee Contributions
Employer Contributions
Investment Earnings
Benefits Distributed
$200
$0
$-200
$-400
$-600
$-800
82 83 84 85 86 87 88 89 90 91 92 93 9495 96 97 98 99 00 01 02 03 04 05 06 07 08*
* Estimate
Threats
• Unsustainable plan designs
• Taxpayer rights groups
• Employer failure to pay required
contributions
• Pension abuse
• Contribution rate volatility and uncertainty
• Plan sponsor fiscal distress
Threats
• Improving life expectancy
• Confusion between pensions and retiree
health care benefits
• Policymaker term limits
• Federal regulation
• Market value of liabilities
Opportunities
•
•
•
•
Be part of the retirement benefits solution
Be part of the capital markets solution
Economic benefits
Employer cost flexibility
Change in Aggregate
Public Pension Funding Level
State and Local Pension Plans
Aggregate Public Pension Funding Levels
101.8
100%
97.6
96.0
91.8
90%
89.0
85.0
88.5
86.8
86.0
85.7 86.1
82.0
80%
79.0
90
92
94
96
98
00 01 02 03 04 05 06 07
Fiscal Year
Source: Standard & Poor's and Public Fund Survey
Distribution of
Public Pension Funding Levels
Median: 84.3%
Aggregate: 86.1%
116.5%
100%
• 75 of 121 plans
(62%) were funded
at or above 80%
80%
• Plans representing
more than 75% of
assets were funded
above 80%
60%
45.1%
Size of bubbles is
approximately proportionate
to plan size
Change from prior year in
actuarial assets and liabilities
Median Change
from Prior Year in
Actuarial Value
of Liabilities
7.9%
7.9%
6.3%
6.3%
6.7%
6.4%
6.4%
6.3%
3.7%
3.2%
2.8%
Median Change
From Prior Year in
Actuarial Value
of Assets
1.1%
02
6.3%
6.2%
03
04
05
Fiscal Year
06
07
08*
*Preliminary
Funding
Level
Change
%
6
4
2
0
-2
-4
-6
-8
-10
-12
Distribution of
Changes in
Actuarial
Funding Level,
FY07 to FY08
45 Plans
Projected Aggregate Pension Funding Levels
Based on Selected Rates of Investment Return
Liability Growth: 5.0%
90%
80%
70%
Funding
Level
60%
15%
12%
Annual
8% Investment
5% Return
50%
40%
0%
08
09
10
11
12
13
Median external cash flow*
FY 01 to FY 07
0
* External cash
flow is the
sum of revenues from
sources other than
investment earnings
(chiefly contributions),
minus expenses (benefits
and administrative costs).
Approximately 90 percent
of plans in the Survey have
a negative cash flow.
-1.6%
-1.9%
-1.9%
-1.9%
-2.1%-2.1%
-2.2%
01
02
03
04
05
06
07
Median
contribution rates,
Social Securityeligible,
FY 02 to FY 07
Employee
Employer
8.5
8.5
8.0
7.1
6.5
6.0
5.0
02
5.0
03
5.0
04
5.0
05
Fiscal Year
5.0
06
5.0
07
Median
contribution rates,
Social Securityineligible,
FY 02 to FY 07
Employee
Employer
10.3
8.0
02
10.3
8.0
03
10.3
8.0
04
10.7
8.0
05
Fiscal Year
10.7
8.0
06
11.2
8.0
07
Annual Required Contribution
(ARC) History
Avg ARC paid
% plans paying 90%+
104%
Many plan sponsors have
not been making their full
Annual Required
Contribution (ARC); only
about three-fifths are
paying at least 90 percent.
101%
100%
87%
89%
93%
84% 84%
87%
73%
61% 64%
67%
58%
59%
FY01 FY02 FY03 FY04 FY05 FY06 FY07
Distribution of
Asset Valuation “Smoothing” Periods
66
19
7
7
7
1
3
4
1
MKT 3 4 5 6 7 8 10 15
Smoothing Period in Years
Median public fund investment return
for years ended 12/31
21.3%
13.9%
11.5%
7.5%
9.2%
1.5%
-4.0%
-8.3%
-25.9%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source:
Callan
Associates
Average Asset Allocation
96 Funds
Equities
57.9%
Cash &
Other
2.9%
Alternatives
6.3%
Real
Estate
5.6%
Fixed Income
27.2%
Since FY 01, the
average allocation to
Fixed Income has
been reduced and
allocations to Real
Estate and
Alternatives have
grown.
Daily close of S&P 500
and most-used fiscal year-end dates
06/07
06/08
1600
1400
1200
1000
800
600
400
01/02
12/06
12/07
12/08
Comparison of Median Public Fund Returns,
6/30/08 and 12/31/08
6/30/2008
12/31/2008
One Year
-4.7
-25.9
Three Years
8.1
-2.3
Five Years
10.1
2.6
Ten Years
6.5
3.6
Annualized percentage returns
Source: Callan Associates
Projected Effect of Market Decline
on Public Pension Funding Levels
130%
Median
120%
110%
100%
Market Value
Funding Level,
Pre-market decline
90%
80%
70%
50%
Estimated Market Value
Funding Level,
Post-Market Decline*
40%
* Based on a 25 percent
60%
30%
decline in assets
S&P on the effect of the market decline
–
“[T]he budget impact of these declines will not be
immediate.”
–
“[S]tates will have some flexibility in planning for
these increased costs.”
–
“[S]tate governments have a history of funding
increased contributions resulting from the
investment losses.”
Moody’s Investor Service
on the Effect of the Market Decline
•
“More state and local governments may decide to issue
pension obligation bonds (POBs) to help address
emerging or widening pension funding gaps.”
•
“(Following the 2000-2002 market decline) [m]any
states made use of their statutory flexibility to defer
making the full ARC, a practice that has greatly
contributed to existing pension funding shortfalls in
states such as Illinois and Massachusetts. They may
follow a similar course in coming years, allowing
further deterioration in funded status. However, these
plans are unlikely to require cash infusions to remain
solvent.”
Center for Retirement Research
at Boston College
•
“[T]he impact will become evident only over time,
because … actuaries tend to smooth the impact of
both gains and losses by averaging the market value
of assets over a five-year period.”
•
Pessimistic assumption (no change in equities for
five years): 59% funding level.
•
Optimistic assumption (equities return to their peak
October 9, 2007 values by the end of 2010): 75%
funding level.
Prognosis and Outlook
• Higher costs
– Generally around three to six percent of payroll
– For most, not effective until 2010 or 2011
– Employees may share in these costs
•
•
•
•
Few benefits enhancements
Renewed focus on liability management
New tiers for new hires
Increased interest in hybrid plans and greater emphasis
on supplemental DC plans
• Efforts to use public retirement systems as vehicles to
provide retirement benefits for non-public employees
Public pensions in perspective
• Despite investment losses, the system of
retirement benefits for employees of state and
local government is in better shape and has
more to commend it, than all leading
alternatives:
–
–
–
–
Social Security
Federal retirement plans
Individual accounts
Corporate pensions
For more information:
• Keith Brainard, NASRA Research Director
–
–
[email protected]
512-868-2774
A national perspective
of state and local government pensions
SACRS
State Association of County Retirement Systems
May 15, 2009
Keith Brainard, Research Director
National Association of State Retirement Administrators