Month: August 2015

Sustainability: Digging Deeper to Understand How PERA Will Pay Benefits Over the Long Run

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There has been considerable commentary on the sustainability of Colorado PERA. Using a simple definition, PERA is sustainable. In this instance, meaning able to pay future retirements without depleting the trust funds.

But digging a little deeper, there are additional criteria pension plans should meet to be considered sustainable:

  • A sustainable pension plan has a reasonable benefit design. According to a recent study completed by Gabriel, Roeder, Smith & Company, PERA’s hybrid defined benefit plan design delivers a higher percentage of income in retirement than other plan designs – and does so at a lower cost.
  • A sustainable pension plan has a commitment from the plan sponsor (public employers, in PERA’s case) to regularly fund the plan. The Colorado General Assembly and the Governor, through the passage and enactment of 2010’s Senate Bill 1, have ensured that the contributions received by PERA’s employers will achieve this goal when the contribution increases contained in SB 1 are fully recognized in 2017 and 2018.
  •  A sustainable pension plan has a strong governance process. PERA is overseen by a 16-member Board of Trustees consisting of three Trustees appointed by the Governor and confirmed by the Senate; four members from the School Division; three members from the State Division; one member from the Local Government Division; one Judicial Division member; two PERA retirees; a non-voting representative from the DPS Division; and the State Treasurer as an ex officio, voting member. All Trustees are fiduciaries bound by law to act solely in the best interest of the PERA membership.

By these additional measures, Colorado PERA is, in fact, sustainable.

But what about the retirement system’s unfunded actuarial accrued liability (UAAL)? Doesn’t that prove that PERA is unsustainable?

In a word, no.

Having an unfunded liability does not mean that a pension plan is unable to pay the benefits for which it is presently obligated or to meet current cash flow requirements. Because of the long-term nature of pensions, funding gaps can be filled gradually, over time. Most of the current unfunded liability is a result of the market decline in 2008 and a reduction of the investment rate-of-return assumption. Think of the unfunded liability as a hole which needs to be filled. Unsustainable plans are those with a deficit which are either failing to fill in the hole, or continuing to dig it deeper. PERA is not one of those plans.

One final thing to keep in mind is that sustainability isn’t measured in weeks, months, or single years. Measuring the sustainability of a hybrid defined-benefit pension plan such as PERA must reflect the nature of the liabilities which are long-term. Pension plans operate on a long time horizon where members work 10, 20, 30, even 40 years, and draw a pension for many years after retirement.

If you only focus on a few points in time or take raw data out of context to assess sustainability, you’re likely to see a distorted picture. Like with a 30-year mortgage, PERA is paying down the unfunded liability over time. Just as with a mortgage, it takes many years to see a significant reduction in the principal owed, it will take time for the unfunded liability to show large declines. There is no basis for surprise or concern that the outstanding balance does not decline materially for many years.

PERA is sustainable.

This article is based on a New Hampshire Retirement System publication. We thank them for their willingness to share information with PERA.

Video: A Leadership Moment

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In 2010, PERA was one of the first public retirement plans in the country to initiate responsible reforms based upon an approach of shared sacrifice to ensure PERA’s long-term sustainability. Former Senate Minority Leader Josh Penry called Senate Bill 1 “a leadership moment” where the Colorado General Assembly, in a bipartisan fashion, enacted this legislation to protect PERA’s financial stability for past, current, and future public workers.

A few key legislators reflect on this landmark legislation five years after its enactment. Watch video.

PERA Board Urges Strengthening of Fiduciary Rule for Investment Advisers

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At its June meeting, the PERA Board of Trustees instructed staff to submit a comment to the U.S. Department of Labor expressing support for a proposed rule that would change fiduciary standards for investment advisers.

Colorado PERA is not governed by the Employee Retirement Income Security Act of 1974 (ERISA) or the related Department of Labor regulations. But as an organization, PERA believes in strict standards for investment advisers who help individual investors achieve retirement security, whether or not those investors are also members of PERA.

The proposed rule would expand the fiduciary responsibility for people who provide investment advice or recommendations and is intended to increase consumer protections for participants, beneficiaries, and employers who offer retirement plans to their employees, as well as employee benefit plan fiduciaries and IRA owners.

Given that an increased level of responsibility for advisers could lead to better decision making by individual investors as well as employee benefit plans, the capital markets where PERA makes and holds many investments would only improve.

Furthermore, PERA believes individuals who are investing their own money in the markets should be able to access the same quality of advice as PERA’s investment professionals and trustees receive.

PERA also believes its own members will make better choices and increase their chances for a secure retirement if their advisers are fiduciaries.

As an example, at retirement or after leaving employment with a PERA-affiliated employer, account holders have the choice to either leave their money with PERA and retire with a monthly benefit or take a lump-sum distribution, plus any match for which they are eligible, and invest elsewhere.

PERA frequently receives reports from members that financial advisers recommend leaving behind the security of a monthly benefit from PERA and moving their significant retirement savings to other investments – often sold by a broker/dealer. While this may be the best decision for some participants, that advice should be subject to the fiduciary standard that it is in the best interest of an adviser’s client, not simply the broker/dealer’s suitability standard.

In its comment letter, PERA urged the Department of Labor to “adopt the proposed rules that require a fiduciary level of advice by investment advisers.”

A public hearing is being held on the proposed rule in mid-August.

Fee-Shifting in Litigation: Concerning Decision in Delaware (Update)

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UPDATE: On June 24, 2015, Delaware Governor Jack Markell signed into law Delaware Senate Bill 75. This is certainly a step in the right direction to limit the impact of the ATP Tour decision. But there is still likely some question as to whether the new law as approved covers fee-shifting in securities litigation cases. The way that Delaware SB 75 reads, it provides protection to stock corporations (but not nonstock corporations) by invalidating a provision in the certificate of incorporation that purports to impose liability upon a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an “internal corporate claim.”

“Internal corporate claims” means claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which Delaware law confers jurisdiction upon the Court of Chancery. It is likely that “internal corporate claim” is written broadly enough to encompass securities fraud claims based on a corporate officer’s breach of a common law duty of loyalty. Although this is helpful to shareholder rights, it is still not a settled area of the law.

***

As conscientious investors already know, committing to own a piece of a company often requires just a bit more than throwing a dart at a list of ticker symbols and writing a check. Company policies are important! So when companies begin making changes to bylaws that could restrict their shareholders’ rights to bring a lawsuit, and the courts say that the company can do that legally, it’s time to sit up and take notice.

In 2014, the Delaware Supreme Court held in ATP Tour v. Deutscher Tennis Bund that a board of directors could unilaterally adopt bylaws (that is, without member or shareholder approval) to shift the payment of litigation costs to shareholders who bring a lawsuit against a company and do not obtain relief.

And that is not all — the bylaws can apply to anyone who is already a member or a shareholder, as well as those potential future members or shareholders. As long as the company’s Certificate of Incorporation provides that the board may unilaterally amend bylaws, everyone will be subject to the new bylaws.

This court holding represents a significant departure from how shareholder rights are typically set. Often, shareholder rights are established by the terms in place on the day a shareholder purchases a share in a company. However, if a board may adopt bylaws unilaterally that apply to existing members or shareholders, those existing shareholders are bound to the new bylaws to which they did not explicitly agree or agree to change. The unilateral shift of responsibility for the payment of litigation costs is clearly a significant use of that authority.

The Court created a couple of caveats to the decision. First, the bylaws have to be adopted and used for an equitable purpose (in other words, the reason for the bylaw must be fair)—and avoiding litigation may be an equitable purpose. Second, the Court’s ruling applies only to a bylaw that requires the plaintiff shareholder to pay if the plaintiff shareholder obtains no relief at all. This leaves open the question of whether a bylaw would be valid if it permits fee-shifting on a less-than-total recovery.

Caveats notwithstanding, the ATP Tour decision is concerning because of the erosion of shareholder rights that it represents. Shareholders need to have the ability to hold the company and its directors responsible for their actions, whether it is concerning a bad act or poor, unsupportable decision making. This is such an important part of investing that PERA has adopted a Securities Litigation Policy to guide PERA in decision making. (An earlier PERA on the Issues article addresses that policy.) And although the ATP Tour decision currently is limited to state actions, specifically Delaware, and does not include actions brought under federal securities laws, investors are apprehensive that fee-shifting may become a trend.

Immediately following the ATP Tour decision, legislative efforts began in the hopes of undoing the potential damage caused by that decision. PERA, as well as other institutional investors with collective assets of almost $2 trillion, has made a point to join advocacy efforts to support legislative changes in Delaware that would prohibit this erosion of shareholder rights.

One of the primary efforts has been a letter from 21 different institutional investors, including Colorado PERA, to the Chair of the Delaware State Bar Association’s Corporation Law Council, an actively involved advocate to the Delaware legislature. In March 2015, the Delaware State Bar Association’s Corporation Law Council issued the most recent proposed legislation which, among other things, prohibits fee-shifting provisions in charters and bylaws of stock corporations. A bill accomplishing these goals was introduced into the Delaware Senate as Senate Bill 75 in April and passed on May 12, 2015. The bill has now been assigned to the House Judiciary Committee.

This world of fee-shifting bylaws is a new one. And PERA, along with its peer funds, is hopeful for a solution that will restore the balance of shareholder rights to where they belong – with the shareholders who are, after all, part owners of the company. Stay tuned!

Retirement Roundup: Focus on Retirement Income, Not Investment Return

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A digest of timely information and insight about finance, investing, and retirement.

Focus on retirement income, not investment return | BenefitsPro

Retirement plan participants need to understand the importance of focusing on potential income in retirement rather than the investment returns of their retirement portfolio, according to a new “Cerulli Edge – Retirement Edition.”

Choice a Detriment to Public Worker Retirement | PlanSponsor

Retirement plan restructuring may affect public employees’ savings behavior, according to research published by the National Bureau of Economic Research (NBER). The analysis considered employment patterns, turnover and voluntary supplemental savings for workers in Utah hired before and after the state moved from a traditional defined-benefit pension plan to two less generous options.

Researchers found that nearly 35 percent of pre-reform new hires voluntarily contributed to supplemental retirement plans but only 18 percent of post-reform new hires did.

How a Harvard Economist Screwed Up – and Then Saved – Her Retirement | Bloomberg

Retirement expert and Director of Boston College’s Center for Retirement Research Alicia Munnell was not immune to making mistakes in her own retirement planning. But wise lifestyle decisions like cutting expenses and working longer helped put her back on track.

States Forge Ahead of Feds to Address Retirement Crisis | Governing

With research showing that many working Americans are ill prepared for retirement, some states are gaining momentum in a push to develop programs that may improve retirement security. Roughly 45 percent of working-age households have no retirement savings at all, according to data from the National Institute on Retirement Security.

Millennials least prepared for retirement, survey finds | Denver Business Journal

Millennials are the least prepared for retirement, with 37 percent of workers ages 18 to 34 saying they have no money saved for retirement and 24 percent reporting they owe more than they’ve saved. These young workers who lived through the 2008 recession are looking for safer, alternative retirement products compared to other age groups.

New Pension Rules Enhance Disclosure

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GASB rule changes do not affect contribution rates or what employers owe.

Recently, new accounting rules adopted by the Governmental Accounting Standards Board became effective for governmental employers who provide their employees with a defined benefit pension plan. These new rules apply to pension plans administered by the Colorado Public Employees’ Retirement Association (PERA). They will impact virtually all participating employers of PERA and change how they measure and disclose information for financial reporting purposes related to their participation in PERA’s defined benefit plans. PERA serves as the retirement plan for more than 400 public employers in Colorado.

Historically, participating employers have reported a liability in their financial statements to the extent that contributions paid to PERA were lower than the amount required by Colorado statute. Typically, the liability calculated under this approach represented contributions that were owed to PERA for the last payroll period in the employer’s fiscal year and not paid until the next fiscal year. The new accounting rules require participating employers to report a portion of the difference between PERA’s assets under stewardship and today’s value of future benefit obligations in their financial statements. This is referred to as the net pension liability and currently represents a much larger liability than what was historically reported.

While these new rules impact how governments state their pension obligations for financial reporting purposes, the new rules do not change in any way the actual liabilities owed by state government, school districts, or other local and municipal governments. The new rules also do not change or affect the contribution rates to PERA, which are set in statute by the Colorado Legislature. Therefore, there is no change to the contribution amounts employers are required to pay under Colorado law based on the new reporting requirements. In fact, even if employers had the financial resources to do so, under Colorado law they would not be able to send additional payments to PERA with the objective of removing their portion of the liability from their financial statements.

It’s also important to note that while the new rules provide an alternative method for measuring a government’s pension obligations, they are not meant to assess the adequacy of assets under stewardship to pay future benefit obligations, the adequacy of contribution rates set by the Colorado legislature, or the overall sustainability of PERA. Historically, these assessments have been made by an actuarial firm at the direction of PERA’s Board who is held to the standard of conduct of a fiduciary for PERA’s membership. These assessments will continue to be made in the future according to PERA’s funding policy pursuant to Colorado statute.

Rating agencies have been aware of the funding policies and status of governmental pension plans. They have historically incorporated that information into their analysis of a government’s ability to meet its debt obligations. Standard and Poor’s issued a publication stating that it does not anticipate significant revisions to states’ ratings solely based on the changes promulgated by the Government Accounting Standards Board. Moody’s approach to analyzing pension liabilities does not incorporate these new accounting rules and their methodology to assess creditworthiness remains fundamentally unchanged. In a recent announcement, Moody’s has indicated it expects the credit impact due to the new accounting rules to be minimal.

In 2010, the Colorado Legislature enacted significant reforms, known as Senate Bill 1, to ensure PERA’s long-term sustainability. Under this bipartisan legislation, members pay more and work longer, retirees receive less in retirement and employers gradually contribute more. Over time, these reforms will accelerate the rate at which employers pay off their pension liabilities. Over the next several decades, the net pension liabilities reported by government employers in PERA are projected to decrease until the plan is fully funded. As a result of Senate Bill 1, PERA is on track to become fully funded while continuing to pay retirement dollars to former public employees.

Although it will take time for PERA to achieve fully funded status provided by the reforms of Senate Bill 1, employers will continue to benefit today from the sound fiscal management and economies of scale PERA offers. Members of PERA will continue to have an attractive and secure retirement benefit. PERA will continue to provide the State of Colorado with a continuous economic stimulus in the form of retirement dollars that are returned to retirees in every Colorado county.

Resources

Colorado PERA GASB web page

GASB Q & A

GASB Glossary

PERACare Select Offers New Solutions that Simplify Health Care

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Few decisions in life are more important than those having to do with health care. Yet, medical decisions are often the most complicated—especially when facing a significant treatment or procedure. Simply seeking out a diagnosis can be challenging enough, but that’s only the first step in a process that can be fraught with worry and uncertainty. That’s why Colorado Public Employees’ Retirement Association (PERA) recently launched a new hip and knee replacement benefit option called PERACare Select, which is available to its PERACare Anthem Pre-Medicare participants.

According to a study by the Mayo Clinic, more than seven million people in the U.S. are living with a hip or knee replacement, and this number is expected to increase greatly as the population ages. Put another way, 2.3 percent and 4.6 percent of adults age 50 or older have an artificial hip or knee, respectively. With so many people relying on these procedures for their health and well-being, it’s critical the care be accessible and affordable.

The process for getting a hip or knee replacement is hardly straightforward, even though the procedures themselves are quite common. Many patients feel confused and overwhelmed by vast inconsistencies in price and quality of care resulting from choice of doctor, facility, and geographical location.

For example, when seeking out a hip or knee replacement, Colorado patients may encounter a price variation of $40,000 across the state. What’s more, there’s no correlation between price and quality, so one patient could potentially pay thousands of dollars more than another patient for the same procedure—with no better outcome or experience. This unpredictability makes it impossible for patients to plan for the future or make informed decisions about their health.

Recognizing the need for reliable health care at a fair and predictable cost, PERA created PERACare Select as a solution to cost and quality confusion. By contracting with a select group of doctors and facilities, PERA is able to provide its members with a full suite of services related to a hip or knee replacement with no out-of-pocket cost for HMO and PPO members, and no coinsurance for HDHP members. Under this program, costs of services typically billed separately like anesthesiology, X-rays, and nursing assistance, are included in one fixed price for the total procedure. This cost predictability means patients can feel confident they’ll have access to the comprehensive health services they need.

PERACare Select ensures patients can afford their hip and knee replacement surgery and receive consistently high quality care. By working with qualified, experienced surgeons at local HealthONE health care facilities, PERA is cracking the code on cost confusion and taking the guesswork out of choosing a reliable health care provider.

Colorado’s school teachers, snowplow drivers, state patrol, and other public employees spend their careers taking care of the public—and PERA works for them to ensure they have a healthy, stable, and secure quality of life in retirement. In overcoming cost and quality disparities, PERA’s model of health care helps not only its retirees, but all Colorado families.

PERACare Select is available now to PERACare Anthem Pre-Medicare participants. Visit the PERACare Select website for more information.

Financial Literacy, Retirement Planning, and Hopelessness

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Colorado PERA takes a holistic approach to retirement

The future seems hopeless to me and I can’t believe that things are changing for the better.

I am satisfied with my present financial situation.

Is either sentiment relevant to financial literacy? The U.S. Social Security Administration’s Office of Retirement and Disability Policy studied Psychosocial Factors and Financial Literacy and found a positive correlation between financial satisfaction and financial literacy (but a negative correlation with hopelessness). Perhaps most relevant to Colorado PERA and its members is the study’s finding that while financial literacy is essential to retirement planning and readiness, most Americans do not have adequate knowledge and understanding of financial matters.

(Eduardo Porter of The New York Times makes a similar argument, as discussed in an earlier PERA on the Issues post.)

The University of Michigan Health and Retirement Study (HRS), a longitudinal study that surveys 20,000 Americans over the age of 50 every two years, asked,

“Let’s say you have $200 in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?”

Tellingly, Annamaria Lusardi, in Planning for Retirement: The Importance of Financial Literacy, reported that only 18 percent of respondents correctly computed the compound interest question. And these are Americans over the age of 50 who have presumably made important financial decisions throughout their lifetimes, including opening checking accounts, applying for mortgages, and saving for retirement.

As Lusardi observes in FLAT World (Financial Literacy Around the World):

Across the world, people are being asked to assume more responsibility for their financial well-being. Because of changes in the pension landscape, notably a shift from defined benefit to defined contribution type pensions, individuals must determine not only how much to save for retirement but also how to allocate that retirement wealth. This responsibility is paired with financial instruments that are increasingly complex.

According to Lusardi, financial literacy is linked to retirement planning and those who are more knowledgeable about financial matters are more likely to plan for retirement. This means financial literacy affects retirement planning and retirement planning leads to retirement security. Ted Beck, President and CEO of the National Endowment for Financial Education, a nonprofit organization providing financial education resources at all financial stages, asserts that the retention rate for financial lessons learned among adults is less than two years. He argues that adults need “boosters” to maintain knowledge. Having practical information readily available is essential for adults to make informed decisions on financial matters.

The Federal Reserve studied the effect of financial literacy efforts on consumer behavior (Financial Literacy: An Overview of Practice, Research, and Policy) and found borrowers who had received individual counseling had a 34 percent lower delinquency rate than those who received no counseling. Additionally, those receiving financial training had increased average monthly net deposits with each additional hour of training (up to 12 hours). Workplace training programs are also an effective way to increase participation in 401(k) plans according to the study, with a significant positive relationship between financial education and the total savings rate.

Here in Colorado, there are several initiatives underway to increase financial literacy and provide for retirement security. PERA recently partnered with the Colorado Jump$tart Coalition, a nonprofit organization dedicated to improving the personal financial literacy of Colorado youth by “teaching the teachers” about their own personal financial situations through professional development opportunities. The last two Colorado legislative sessions have also seen bills proposed to study, assess, and report on the factors that affect Coloradans’ ability to save for a financially secure retirement.

In addition to providing its members with a hybrid defined benefit plan, PERA also encourages its members to supplement their savings with several voluntary retirement plans, including a low-cost 401(k) plan. And to help members become more informed about personal financial issues, The Dime contains information on topics relevant to public employees busy balancing work and family. By educating members on retirement planning and supporting their financial literacy, PERA hopes to ensure members feel in control of their financial future and will be able to answer in the affirmative if asked if they are satisfied with their present financial situation.

How did you answer the financial literacy question posed earlier in this article?

“Let’s say you have $200 in a savings account. The account earns 10 percent interest per year. How much would you have in the account at the end of two years?”

If you said $242, give yourself an A!