Month: February 2018

Understanding the role of Trustees

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PERA’s Trustees – the 16 professionals who oversee PERA’s investment program and benefits administration – are each bound by a set of fiduciary responsibilities requiring them to act in the best interest of PERA members and retirees.

As fiduciaries, Trustees have duties of loyalty, care, and prudence to act in the best interest of another party, acting “solely in the interest of his or her client” and “perform with a high level of competence and thoroughness, in accordance with industry standards.” Colorado law makes it clear that PERA fiduciaries have a responsibility to “carry out their functions solely in the interest of members and benefit recipients and for the exclusive purpose of providing benefits.” (C.R.S. § 24-51-207(2)(a)).

Both PERA employees and PERA Trustees receive regular training on what it means to be a fiduciary and the legal and ethical standards involved in fulfilling their roles.

In addition to attending extensive education and training to prepare them for their role, Trustees participate in five regular board meetings each year as well as committee meetings and, potentially, special meetings to review and consider proposed legislation that could impact PERA.

While only the Colorado General Assembly has the authority to make changes to the PERA benefit and contribution structure, as fiduciaries, PERA Trustees play an important role in the administrative oversight of PERA and have the responsibility to set the actuarial assumptions used by the plan, including the long-term rate of return assumption. Trustees have access to world-class consulting firms to assist them in setting the assumptions (both demographic and economic) used in the measurement of the financial health of the system.

Setting the long-term rate of investment return – a case study

Economic assumptions used by PERA include price inflation, wage inflation, and the long-term investment rate of return. The long-term rate of return assumption is the most powerful of all the assumptions therefore it receives a lot of attention.

How does the Board determine what rate of return will be used?

In October 2016, the Board conducted an Actuarial Assumption Workshop. The purpose of the workshop was to review economic and demographic information and receive presentations from actuarial and investment professionals. The process began prior to the workshop when Trustees received:

At the workshop, key activities included:

  • Investment professional presentations. Presentations from an economist from Goldman Sachs and the Vice Chairman of Blackstone.
  • Capital market analysis. Aon Hewitt provided a capital market analysis
  • Actuarial analysis. The Board’s actuarial consultant (Cavanaugh Macdonald Consulting, LLC) presented the results of their analysis of future returns based on the capital market assumptions provided by Aon Hewitt. The Board also reviewed a presentation by Xerox (formerly Buck Consultants) which projected investment returns based on a proprietary model.

Following the workshop, at the November 2016 Board meeting, the Board adopted the following economic assumptions for the 2016 valuation:

  • Price Inflation – 2.4%
  • Investment Return – 7.25%
  • General Wage Growth – 3.5%
  • Wage Inflation – 1.1%
  • Total Salary Increase – Adjust all ages and divisions by 0.40% for decrease in general wage growth.

These assumptions are still in place today. As a leading public retirement plan, PERA conducts regular experience studies and examines its assumptions on a regular basis.

Pension changes offer cautionary tale

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Unsuccessful Shift to Costly 401(k) Accounts Led to Unprecedented Public Employee Turnover

A new case study released by the National Institute on Retirement Security (NIRS), Retirement Reform Lessons: The Experience of Palm Beach Public Safety Pensions, looks at a decision by the Palm Beach Town Council to close its defined benefit (DB) pension retirement plan in 2012 and move its police officers and firefighters to a “combined” plan that offered a dramatically lower pension benefit along with individual 401(k)-style accounts.

As the case study shows, public safety workers quickly fled Palm Beach, retiring or finding employment in other cities that continued to offer DB retirement plans. Only four years after the sharp cuts to the traditional pension, the town found that about a third of its police department had three years of experience or less. Along with a retirement rate of 20 percent after the 2012 change, 53 mid-career safety officers left Palm Beach from 2012 to 2015. By comparison, only two mid-career employees departed from 2008 to 2011.

Palm Beach faced significant financial challenges as a result of the high attrition. The town had to cover high levels of overtime to fill staffing gaps and soaring training costs as it brought in rookie police officers and firefighters. And as the case study notes, “the move to (defined-contribution) accounts does nothing to reduce plan liabilities on its own.”

After the costs of employee turnover and recruitment skyrocketed, Palm Beach reversed course and, in 2016, abandoned the defined-contribution aspects of new retirement plans and strengthened the defined benefit provisions. As a result of the exodus of workers, the town council strengthened the pension elements of the plan with the aim of improving recruitment and retention.

The high rate of retirements and departures from the town might not be that surprising, given the value that public sector employees place on retirement benefits. A 2015 NIRS study found that 88 percent of public-sector employees rate retirement benefits as extremely or very important, compared to 57 percent who said the same the about salary.

The experience in Palm Beach mirrors similar experiences of statewide plans in Alaska, Michigan, and West Virginia, where shifts from DB pensions to 401(k)-style accounts caused pension plan costs to skyrocket.

For more on defined benefit and defined contribution research, see these PERA on the Issues posts:

Cautionary Tales: Case Studies Show How States Face Funding, Debt Challenges After Switching to Defined Contribution Retirement Plans

Report: Defined Benefit Plans Increase Retention and Reduce Turnover Costs

Importance of Public Sector Defined Benefit Plans

Retirement Roundup: Social Security retirement age going up

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

The Social Security Retirement Age Increases in 2018 | U.S. News & World ReportMost Baby Boomers are eligible to claim their full Social Security benefit at age 66. However, Americans who will turn 62 in 2018 need to delay claiming Social Security for an additional four months in order to claim their full benefit.

Borrowing from Social Security is the wrong way to finance student debt and parental leave |  MarketWatch
Recently two proposals have emerged that would essentially allow individuals to tap Social Security today in exchange for lower benefits in the future. The first was Congressman Tom Garrett’s (R-Va.) Student Security Act of 2017, which would allow young people to pay off a portion of their student loans today in exchange for a reduction in their future Social Security benefits. The second was a Wall Street Journal op-ed by Kristin Shapiro and Andrew Biggs that would use the Social Security Disability program’s formula to fund 12 weeks of paid parental leave in exchange for retiring about six weeks later.

Planning to Retire Later Doesn’t Reflect Reality |PLANSPONSOR
Studies show that many employees expect to retire later as part of their plan to have more income in retirement. However, a study from Prudential finds 51 percent of retirees retired earlier than planned. Among those, only 23 percent retired earlier than planned because they either had enough money to retire, wanted to retire, or were tired of working. Forty-six percent of those who retired earlier than expected did so due to health problems, 30 percent were laid off from their jobs or offered an early retirement incentive package, and 11 percent left work to take care of a loved one.

What now? How to make sense of the stock market’s wild ride |MarketWatchWhen markets go crazy, financial writers feel compelled to dust off the keyboard and cook up profound insights. But, with the bar set a little lower, here are 13 modest observations following the 4.1 percent plunge by the S&P 500 early in February.

Why So Many Men Die at 62 |The Wall Street JournalIf you’re approaching age 62, thoughts about retirement and collecting Social Security may be on your mind. Here’s something else to think about as well. A significant increase in mortality starts at 62, according to a new study. The escalation is much more dramatic for men than for women. And the fatal catalyst, the study’s authors believe, might be the availability of Social Security.

Support eroding in Kentucky House for 401(k)-style public pensions | Lexington Herald-Leader
Sentiment appears to be waning in the Kentucky House to switch public pension systems to 401(k)-style accounts as Gov. Matt Bevin proposed last October. House Education Chairman John “Bam” Carney, R-Campbellsville, said Monday he is “leaning against” moving public employees from a defined-benefits system to a defined-contribution system. A defined pension plan is one in which an employer offers a specified pension payment on retirement predetermined by a formula based on the employee’s earnings history, tenure and age instead of depending directly on a person’s investment returns. A defined contribution plan depends on individual investments like 401(k) programs.

PERA advocates for increased transparency at the federal level

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PERA CIO sends comments to the SEC to improve transparency in equity trading and research after MiFID II impacts European markets

New government regulations are rarely thought of as transformational, but a recent regulatory change out of Europe is proving the exception. New rules for the investment community have increased transparency and, ultimately, fairness for investors – including the members and retirees who belong to PERA.

PERA staff work diligently to stay aware of the latest trends in investment markets and to advocate for increased shareholder rights, transparency in investments, and strong corporate governance. Recently, PERA Chief Investment Officer (CIO) Amy McGarrity wrote to the Securities and Exchange Commission (SEC) asking for guidance that would increase pricing transparency in investment research.

McGarrity wrote the letter in part as a response to the regulation known as MiFID II. On January 3, 2018, the Markets in Financial Instruments Directive came into effect impacting the UK and European markets. The intent is to provide greater transparency and protection to investors in various asset classes, including the equities, bonds, and currencies in which Colorado PERA invests. While the new rules directly apply to European investors, banks, asset managers, and other market participants, McGarrity’s letter was a direct result of the impact of MiFID II on the investment landscape across the globe.

PERA is particularly interested in sections of MiFID II related to the distribution of investment research and how such research is compensated. Why is PERA focused on this area? PERA invests a significant portion of Fund assets “in house,” including the internal management of approximately 70 percent PERA’s stock investments. In their active asset manager roles, PERA analysts use broker-generated research to help explore investment ideas in detail. This research can range from data in specific industries to company-specific research that would be burdensome and redundant for PERA to replicate.

Traditionally, investment research generated by brokers has been paid via a “bundled” relationship. That is, when PERA would need to trade stocks, the broker or investment bank that executed the trade would then allow PERA access to their research products. MiFID II prohibits this bundling of trading and research. Instead, trading must be compensated for on its own merits, as must research. Consequently, in Europe, research is now paid for primarily by asset managers out of their profits. Similarly, trading relationships must rest solely on the best, or most cost-effective, execution of stock trades.

The benefits of this disruption of the status quo are being felt. Direct payment for research has already greatly improved the transparency of research service pricing, as specific research charges are negotiated. In the bundled model, research pricing has been opaque, with banks avoiding any discussion of explicit costs, thus limiting the ability of investors such as PERA to determine if they have been paying an appropriate amount for the product. MiFID II also has liberated the trading side of the equation by making the choice of transacting broker clearly based on execution skill, rather than unrelated research quality and access. Again, when bundling, trading decisions are less transparent given that the research product cost must be considered.

In the letter from PERA to the SEC, McGarrity recommended that the SEC increase pricing transparency by providing clear guidance that would allow U.S. investors to pay directly for research, rather than receiving research as part of a bundle of services paid for by commissions. PERA’s Equities Division is already in the process of negotiating clear, specific research arrangements with a variety of providers, and form of payment remains a topic of debate. While many of PERA’s research relationships will accept a check from PERA, others have interpreted the latest SEC guidance as limiting the ability of investors to directly pay for research due to on-going regulations.

PERA will continue discussions with the “holdout” brokers still requiring trade commissions to access research, while also engaging with the SEC on the issue. In the meantime, PERA will set firm expectations with research providers, pay for research directly where permitted, and create as much transparency as possible where bundling remains. These efforts will continue to ensure that investment costs are low, ultimately benefiting the PERA membership and Colorado taxpayers.

Read PERA Chief Investment Officer’s letter to the SEC.

Retirement Roundup: Another delay for ‘Cadillac tax’

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

Cadillac Tax Delayed Again | PLANSPONSORThe congressional bill that ended the government shutdown and provided funding until February 8 also included another two-year delay in the Affordable Care Act’s (ACA) excise tax on high-cost health plans, known as the Cadillac tax. The Consolidated Appropriations Act, passed in 2016, included a two-year delay of the 40 percent excise tax, making it effective in 2020. The new bill pushes the effective date to 2022.

The Argument for Ditching the 401(k) and Starting Over |Bloomberg ViewThere have been some modest attempts in the past few years to shore up and fill in gaps in this country’s haphazard system of retirement savings. These attempts — federal myRA accounts, state-run retirement accounts, and fiduciary standards for retirement account providers — have also all been shut down, rolled back or delayed since Donald Trump moved into the White House a year ago. So it may seem like a curious time to talk about tossing aside the current system of 401(k)s and individual retirement accounts in favor of an entirely new retirement savings system, as Teresa Ghilarducci and Tony James do in their book, “Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans,” which after an earlier iteration in 2016 is now out in hardcover.

Still no action yet on Kentucky pension reform |The Morehead NewsThe 2018 Kentucky General Assembly is now one-third of the way toward its constitutionally limited 60 days to pass legislation — and still there is no pension bill in sight. Ask nearly any member of the General Assembly — Democrat or Republican, House member or senator — what they’ve heard about a possible pension bill and when it might be filed, and odds are that person will say he or she hasn’t heard anything. The holdup on pension reform — originally Gov. Matt Bevin and Republican legislative leaders hoped to pass a bill in special session last fall — is also delaying work on the two-year budget, Senate Minority Caucus Chair Dorsey Ridley said.

Why Part Time Work Doesn’t Always Work In Retirement |Forbes
The idea of working a few hours or days a week in retirement has become an increasingly popular planning tool because of the possibilities of using it to supplement retirement income, stay connected to the work world, and yet have the flexibility to play golf, enjoy the grand kids, and other retirement based activities. However, many people base their plans for working part-time in retirement on limited knowledge and experience or a short-term series of events that are unlikely to happen again.

Retirement Risks Keep Rising, and This Is Why |Bloomberg ViewHalf of working-age households in the U.S. were on track in 2016 to be able to maintain their standard of living in retirement, according to the National Retirement Risk Index report out this month from the Center for Retirement Research at Boston College. Thanks mainly to rising home values, that’s better than in 2010 or 2013. But it still means that half of working-age households aren’t prepared for retirement, up from just 30.4 percent in 1989.

Guess How Many Gen Xers and Baby Boomers Have No Retirement Savings | The Motley Fool
We’re all told time and time again how crucial it is to save for the future. But unfortunately, a large chunk of workers in their late 30s, 40s, 50s, and 60s continue to put their retirement at risk. In fact, 41 percent of Gen Xers and 42 percent of Baby Boomers have yet to start building their nest eggs, according to data compiled by Comet. And that’s obviously a lot scarier for the latter group, since they’re the ones with the least amount of time to play catch-up.