Month: July 2018

Reviewing the positive impact of SB 200

Posted on by planeteria

To briefly summarize the reasons why the PERA Board sought legislation in 2018 that would adjust benefits and increase contributions:

  • Full funding in 30 years complies with Colorado statute and the PERA Board’s policy.
  • Full funding in 30 years gives PERA the ability to withstand inevitable future market shocks.
  • Full funding in 30 years matches the employment pattern of Colorado’s public employees better, thus ensuring intergenerational equity.
  • Full funding in 30 years strengthens the State’s credit rating.

Although the changes included in SB 200 are difficult, they were necessary to ensure the long-term retirement security of PERA members. Some of the positive outcomes of SB 200 are below.

Reducing liabilities.
With the changes in SB 200 and the 2017 investment return, PERA’s liabilities were reduced by $3.4 billion. This is a significant amount that reflects the sharing of responsibilities for righting the system among current and future members (who will pay more, will potentially have to work longer, and will have to wait at least three years before becoming eligible for an annual increase), retirees (who will have no annual increases in 2018 and 2019 and then a 1.5 percent cap), employers (who will contribute more), and the State of Colorado’s payment of the direct distribution.

Improving PERA’s funded status.
The funded ratio is a measure of funds available today compared to current and future payable benefits and is expressed as a percentage. PERA’s funded status also increased as a result of SB 200 and 2017 investment returns, going from 58 percent at the end of 2016 to 61 percent at the end of 2017.

Accelerating the time to reach full funding.
The time to reach full funding in each division is now within a 30-year time frame. By shortening the time it will take to reach full funding, the trust funds are better able to withstand inevitable fluctuations in the financial markets.

DivisionProjected Period of Time to Reach Full Funding Prior to SB 200Projected Period of Time to Reach Full Funding
Post SB 200
State58 years27 years
School78 years30 years
Local Government55 years15 years
Judicial54 years15 years
Denver Public Schools (DPS)56 years17 years

SB 200 changes positively recognized by S&P.
One of the primary reasons cited for needing to pass SB 200 this year was the possible negative effect PERA’s unfunded liability could have on the State’s credit rating. Last fall, the Standard & Poor’s (S&P’s) credit rating agency issued a warning that a potential downgrade to Colorado’s credit rating could occur, due in part to the State’s long record of underpaying its share of the PERA fund costs. After the enactment of SB 200, S&P Global Ratings revised the outlook to stable from negative.

SB 200 is in line with PERA’s mission.
The actions taken by the PERA Board, the General Assembly and Governor, alongside PERA’s membership and stakeholders are notable and fulfill a commitment to promote the long-term financial security of the PERA membership while maintaining the stability of the fund.

For more information, see The Positive Impact of SB 200 fact sheet.

Calculating the need for changes to PERA

Posted on by planeteria

The pension equation is relatively simple: Contributions and investment income must equal benefits and expenses, or C + I = B + E. As with all equations, the task is getting the two sides to balance. When one side of the equation exceeds the other, challenges arise. In the case of PERA, there was an imbalance caused by contributions and investment income being insufficient to fund current and future benefit payments. The difference between those two sides is the unfunded liability.

Let’s look at that equation in greater detail as a way to better understand the need for changes to PERA, many of which were included in SB 18-200, passed in the Colorado Legislature and signed into law earlier this year.

Contributions
Contributions from members ($910 million in 2017) and their employers ($1.6 billion in 2017) are invested and used to pre-fund retirement benefits. These amounts represent a steady stream of capital that is invested every day the financial markets are open. Currently, most members contribute 8 percent of their pay. Employers also contribute a percentage of salary. Research by the National Association of State Retirement Administrators (NASRA) has shown that the member contribution rate for most public non-Social Security retirement plans has increased since 2009. At PERA, the member contribution rate will begin to increase gradually on July 1, 2019, to equal an additional 2 percent of pay (for most members) by July 1, 2021. The employer contribution rate will also increase on July 1, 2019, for PERA employers (except in the Local Government Division).

Investment Income
PERA is a long-term investor, with a diversified portfolio of investments currently totaling more than $48 billion. With billions of dollars to invest, the investment team at PERA is able to attain low fees. Most members will work 20 or more years, so investments from contributions have time to compound and grow before they will be used to pay benefits. Investment income in 2017 was $7.7 billion.

Benefits
In 2017, PERA paid $4.8 billion in benefits to more than 118,000 benefit recipients. This amount also includes refunds and rollovers made to those members who withdrew their accounts after leaving PERA-covered employment.
Changes included in Senate Bill 18-200 combined with investment returns resulted in a significant improvement of PERA’s funded status for all five divisions, with each reaching full funding within 30 years. These significant changes made to the benefits side of the equation reduced PERA’s liabilities by $3.4 billion, bringing the equation further into balance.

Expenses
Some have questioned whether or not PERA’s expenses could be reduced. PERA invests $48 billion in member assets and pays more than $4 billion in benefits annually – all with the foremost attention to cost. The overall cost to invest assets and pay benefits has averaged about 50 basis points (0.50%) over time – an extremely cost effective and competitive sum that allows PERA to have more assets to invest.

The changes in benefits included in SB 200 were necessary to rebalance the equation, ensuring that C + I = B + E.

Retirement Roundup: Retirement savings and pension funding 101

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

Retirement savings and pension funding 101 (some actuary-splaining) | Forbes
How do employers fund and account for pensions?  How should workers save for retirement?  Revisiting the basics of pension funding methods might provide a different way of thinking about these issues.

How to shockproof your retirement health care costs | Reuters
In a national survey by Brightwork Partners, four in five baby boomers said they worry but they are too confused to plan for medical costs. Tools are on the way. While most retirement health care research focuses on broad lifetime numbers, like Fidelity’s recent estimate that a couple will spend $280,000 on health care costs in retirement, a new study by Mercer Health and Benefits and Vanguard Research broke it down more specifically.

Study: MA outperforms Medicare for people with chronic conditions | Healthcare Dive
Medicare Advantage enrollees with chronic conditions had 23 percent fewer inpatient stays and 33 percent fewer emergency room visits than beneficiaries in traditional fee-for-service Medicare, according to a recent Avalere Health study. There were similar results for dual-eligible beneficiaries, among which MA recipients had 33 percent fewer hospitalizations, 42 percent fewer ER visits, and 20 percent lower costs.

Minnesota’s pension changes “far from a cure-all,” Moody’s warns | Star-Tribune
Just one month after Gov. Mark Dayton signed a massive overhaul of Minnesota’s pension system into law, the prominent credit rating agency Moody’s warned that the changes are “far from a cure-all.” Moody’s was one of several rating agencies that recently published articles saying the state’s reform, which is expected to stabilize the benefits of 511,000 retirees and public employees, is a step in the right direction. But the agencies warned more work will be needed to handle high pension burdens.

Commentary: Public pension funds must not divest from reality | Pensions & Investments
Pension funds must invest long-term to meet the anticipated needs of retirees. Every dollar counts, and long-term growth is essential, especially because markets do not always go up. Managing other people’s money is not a trivial pursuit — it demands prudence, patience and perception, not political gamesmanship.

In a tight labor market, retirees fill gaps their previous employers can’t | New York Times
At a moment when the unemployment rate is low, hovering around 3.9 percent, some employers are turning to their pool of retirees to fill holes in their staff. As with many of the unretired, the benefits of going back to work are more than financial. Full retirement, after all, isn’t right for everyone. For some seniors, work gives meaning. Losing it can be devastating.

Retirement Roundup: Women outlive men yet retire earlier

Posted on by planeteria

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

Women outlive men. Why do they retire earlier? | New York Times
Based on current life expectancy tables, a typical girl born in the United States today will most likely live until she is almost 87 years old — nearly four years longer than a typical boy born in 2018. But if current trends remain in place, she will probably earn less than he will, thanks in part, to a career that may be delayed or interrupted by bouts of caregiving, including motherhood. That’s what the statistics show.

The case for using an institutional approach for DC plan investments | PlanSponsor
A report, “Defined Contribution Investments on Trial,” from the Institutional Relationship Group at PGIM, the asset management arm of Prudential Financial, notes that recent lawsuits have challenged the investment menu selection approach of many defined contribution (DC) retirement plans. Some plans use what PGIM calls the Retail Approach with a primary focus on appealing to what is believed to be what participants want, using a wide array of choice and an emphasis on name recognition. Others use what PGIM calls the Simple Approach, focusing on minimizing fees and maximizing simplicity, using heavy or exclusive use of passively managed funds and basic asset classes.

Medicare allows more benefits for chronically ill, aiming to improve care | New York Times
Congress and the Trump administration are revamping Medicare to provide extra benefits to people with multiple chronic illnesses, a significant departure from the program’s traditional focus that aims to create a new model of care for millions of older Americans. The changes — reflected in a new law and in official guidance from the Department of Health and Human Services — tackle a vexing and costly problem in American health care: how to deal with long-term illnesses that can build on one another, and the social factors outside the reach of traditional medicine that can contribute to them, like nutrition, transportation, and housing.

Firms offer framework for planning for retirement costs | PlanSponsor
Vanguard has issued a new framework, jointly developed with Mercer, that helps pre-retirees and retirees better understand the financial planning implications of annual health care costs and long-term care expenses. The research paper, “Planning for healthcare costs in retirement,” outlines key health care cost factors and personal considerations, as well as frames health care expenses as an annual cost rather than a lifetime lump sum.

The media’s coverage of retirement saving really is terrible | Forbes
Americans worry about retirement, and understandably so. Not because there’s an actual retirement crisis in the making, but because Americans are everywhere told that there is. A recent lengthy Wall Street Journal treatment of Americans’ retirement savings – titled “A Generation of Americans Is Entering Old Age the Least Prepared in Decades” – is one of the most depressing examples. The Journal’s coverage of Americans’ retirement prospects serves up flawed data tied to touching, but unrepresentative personal case studies, all the while ignoring clear indications that retirement savings and retirement incomes have never been higher.

Why enhanced investment transparency creates a new set of risks

Posted on by planeteria

In recent years, “transparency” has become a buzzword among those—citizens, political candidates, advocacy groups—who want a more informed view of what really goes on behind doors that have long been closed to public eyes.

It’s a logical request. The ubiquity of the internet has made information more widely available and digestible, so it’s only natural that people would want to extend that privilege of access into boardrooms and statehouses. Having more visibility into these processes, the theory goes, would help people make more informed decisions about how to cast a vote, choose a career, or invest their money.

In the world of public pensions, lately the transparency requests have focused on private equity (PE) fees, the payments made to investment managers (aka General Partners or “GPs” in private equity parlance) to invest in private companies. These charges are typically higher than fees for public markets, and in some jurisdictions, people have begun demanding more information about where their tax dollars and pension contributions are going, and whether there’s a more economical investment option.

These are worthy discussions to have. But for all the good intentions behind these appeals, there’s a point at which unchecked transparency into PE fees becomes bad business.

Take California and its public pension funds, CalPERS and CalSTRS, which are by far two of the largest in the country. New and well-intentioned disclosure rules related to improving transparency have heightened the scrutiny around what these funds pay in investment fees. But as more people become aware of these terms, they’ve raised objections to the expenditures, particularly when/if investment returns have fallen short of expectations.

What’s more, the new laws have made some private equity GPs reluctant to share their information—which they regard as valuable trade secrets—causing the California funds to miss out on several potentially lucrative investment opportunities. (Something similar recently unfolded in Kentucky, where a prominent Wall Street hedge fund stopped taking the state pension fund’s business after the state enacted new and more stringent transparency requirements.)

The PERA Board of Trustees has always tried to provide as much transparency as is legally allowed, and the recent passage of Senate Bill 200 by the Colorado General Assembly—which established a legislative oversight committee focused on PERA—will increase the visibility into the fund and its investment practices. PERA also was an early backer of the Institutional Limited Partner Association (ILPA), a private equity trade organization that aims to increase transparency and investor reporting.

PERA has been making investments in privately held companies since 1982, and these assets have long been a key part of the PERA portfolio; an internal analysis showed for the 10-year period ending December 2017, the PERA fund added about $3.1 billion from private equity investments to its bottom line. PERA has accomplished all this by limiting costs wherever possible, and by seeking the most promising deals.

As the pension fund that directly affects one out of every 10 Coloradans and indirectly affects the entire state economy, PERA has the fiduciary responsibility to maximize its investment returns. In order to ensure the retirement security for about 580,000 of the state’s educators, safety officers, and other public servants, PERA regularly must make complex investment decisions and will always share a reasonable amount of information about its business practices. But while improving investment transparency is a desirable goal in general, once it starts to compromise the fiduciary duties of any public pension fund, it risks becoming too much of a good thing.

See also:

Asset class in-depth: private equity

PERA’s Private Equity Portfolio