Despite the trend toward pension freezes, fund managers increasingly rely on sustainability

The Archdiocese of Philadelphia recently announced that it will freeze its traditional pension to keep the plan’s estimated $ 150 million deficit under control and reduce it over time. The Archdiocese’s current plan, known as a “defined benefit plan” because it guarantees certain levels of benefits to participants, had $ 478 million in assets as of June 30, 2012, approximately 76 percent of the $ 630 million that you need to meet anticipated long-term obligations. . Defined benefit plans are commonly called “traditional pension plans”.

The change will take effect on June 30, 2014, after which nearly 8,500 current employees of the Archdiocese of Philadelphia, including parochial school teachers, church office workers and other lay employees, will no longer be able to increase benefits under the plan. Instead, a 401 (k) style plan will be offered instead.

In recent years, pension freezing has established itself as a viable approach in many religious and nonprofit sectors. For example, the Archdioceses of Boston, Chicago, and Minneapolis-St. Paul has frozen his traditional pension plans for lay employees. Additionally, a national trend is for more employers to offer retirement plans that set a contribution rate, as opposed to plans that guarantee a pension benefit upon retirement.

Detroit City Emergency Manager Kevyn Orr has proposed freezing pensions as part of a broader strategy to pull the city out of bankruptcy. Orr argues that the changes are necessary to stabilize pension funds, which he says are $ 3.5 billion underfunded, for current workers and those nearing retirement. His proposal aims to reduce Detroit’s staggering inherited costs to help resolve about $ 18 billion in debt and long-term liabilities overall.

Under the proposed plan, around 9,700 current city workers, including police and firefighters, would be affected. Starting January 1, city workers could enroll in a 401 (k) style account, and the city would contribute 5% for non-uniformed workers and 10% for police and firefighters. Workers can also deposit their own money in the accounts. As part of the proposal, employees who did not yet have fully vested rights in city pension plans (8-10 years depending on position) would have their pension service credits erased by the end of this anus. However, any money they have contributed in the past from their paychecks will be refunded and placed in an annuity account.

Pension reform is not easy to tackle, as the state of Illinois has painfully found out. Underfunded at $ 100 billion, the state’s pension liability is causing cuts in funding for other state services and is a key reason why the credit downgrades have left Illinois at the bottom of the ratings among the US states

On December 5, Illinois Governor Pat Quinn signed the law in an ambitious financial, legal and political effort to revitalize the state’s falling credit ratings and unstable economy.

As of June 1, 2014, the new law aims to save $ 160 billion over the next thirty years by curbing cost-of-living increases for retirees and by requiring many current workers to refrain from up to five annual increases. of the cost of living when they become retirees. It will also increase the retirement age of current workers by up to five years.

Governor Quinn says the law is a sign that “Illinois is moving forward.” However, both union representatives and members of the Republican Party are less optimistic about the implications of the law.

The Republican Party and Democrats are currently debating the constitutionality of the new law. At issue is a clause in the 1970 Illinois state constitution that states that public pensions are enforceable contracts with benefits that cannot be diminished or impaired.

For the law to be considered constitutional, employees would have to give 1 percentage point less to their wages, and pension systems could file a lawsuit to force the state to pay the employer’s mandatory share for retirement. Additionally, a limited number of workers may join a 401 (k) style defined contribution plan. The courts must decide whether Governor Quinn’s new law is constitutional or not.

Although the focal point of pension reform has been the freeze, administrators of public pension plans are increasingly optimistic about the prospects for their funds, as well as their willingness to address future retirement concerns, a New survey from the National Conference on Public Employees Retirement Systems (NCPERS) reveals.

The 2013 NCPERS Public Retirement System Study also shows continued financial strength for public funds, with continuous improvement in long-term investment performance.

In conjunction with Cobalt Community Research, NCPERS surveyed 241 state and local government pension funds with more than 12.4 million active and retired members and with assets in excess of $ 1.4 trillion. For the first time, NCPERS included responses from non-members.

Notable findings from the research coalition survey include:

There is a slight uptick in confidence among administrators of public pension plans about their ability to address future retirement trends and issues.

· The profitability of long-term investments continues to increase. Three-year investment returns were 10 percent, up from 4 percent in 2012; 10-year investments were seven percent, up from five percent in 2012; and 20-year investments were stable at eight percent, up from nine percent in 2012.

Overall average spending to administer public pension plans and pay investment managers’ fees decreased dramatically from the 2012 level of 73.1 basis points to 57.3 basis points (100 basis points equals one percentage point).

Public pension plans are taking a series of measures to strengthen funding levels, including:

1. Reduction of the assumed actuarial rate of return

2. Increasing the age of benefits and service requirements

3. Reinforce the rules of return to work withdrawn

4. Shorten payback periods

5. Reduce the number of employees receiving health care benefits

· Overall, the funds reported exposure to domestic equities of 35 percent, slightly down from 36 percent in 2012. Exposure to international equities was stable at 17 percent. Over the next two years, the funds plan to increase allocations to international equity investments, domestic fixed income, private equity and hedge funds, slightly reducing domestic equity.

The average capitalization level of all the public pension plans that responded was 70.5 percent. Among NCPERS member plans, the level was 71.5 percent, down from the 2012 figure of 74.9 percent. For non-NCPERS plans, the level was 69 percent. The reduction in the assumed actuarial rate of return and market volatility were the two most notable reasons for the decline.

According to NCPERS CEO and Advisor Hank Kim, Esq., The survey results are contrary to public perception of pension funds.

“What it tells us is that despite the hyperbole of some high-profile politicians, public pension plans are not in crisis. On the contrary, they are alive and prosperous, more than adequately funded, inexpensive to operate, and sustainable through and through. long term. “he said in an NCPERS news announcement.

December 2013