The following was a study commissioned by the Minnesota State Legislature and conducted by Mercer Consultants about the cost of converting future state employees in Minnesota to a Defined Contribution Plan.
Switching Minnesota's current public employee pension plans to defined contribution or hybrid plans would not come without significant costs attached. That's one of the findings in a draft study released by the state's three statewide public pension plans Friday, April 1.
According to actuarial analysis completed by Mercer Consulting, there are high costs to transitioning from the existing DB to a DC for new hires. Costs increase during a transition period because once a plan is closed to new members any unfunded liabilities remaining in the existing DB plan must be paid off over a shorter timeframe.
“We ask that legislators and other interested individuals take the time to analyze the many issues involved in any significant alterations to our existing retirement system,” said Laurie Hacking, TRA’s executive director. “ First, there are significant additional costs involved in switching from our current defined benefit plans to defined contribution or hybrid plans – over $1 billion in the first 10 years in the case of TRA. There would be no overnight savings. Only after 12 years might overall costs decline."
Louisiana must get financial control over its four state retirement systems, which are draining more and more funds away from essential state services and programs, House Speaker Jim Tucker said Monday.
Tucker described legislation he is pushing that would move retirement plans from a defined benefit to a defined contribution plan. Another bill Tucker described would create an expert panel to oversee $23 billion in investments of all four retirement systems to help them reap higher returns.
The legislation would affect the Louisiana State Employees Retirement System, the Teachers Retirement System of Louisiana and systems covering State Police and school employees.
However, the chief of one of the larger systems said Tucker’s bills won’t fix the retirement problem he noted.
The legislative package is scheduled to go before the House Retirement Committee on Thursday, where opposition is expected to line up from the affected retirement systems that cover some 280,000 active and retired workers.
“The unfunded accrued liability continues to be of great concern to us. We appreciate efforts to pay down this debt,” said Cindy Rougeou, executive director of LASERS. “But neither of these proposals … involves reduction of that obligation that the state is constitutionally required to address. And they certainly cannot assure increased investment returns.”
I would like to thank The Advocate for its recent editorial recognizing the importance of securing the financial soundness of our public pensions.
The Louisiana State Employees’ Retirement System understands the significance of this matter and continues to stress, to the Legislature and the public, the importance of paying down the unfunded accrued liability, or UAL.
I also appreciate the opportunity to clear up some misinformation that has been published regarding the soundness of the system and the effect of various proposals to reduce the debt.
One very misleading report was recently issued by the Kellogg School of Management. The report raised alarm by erroneously suggesting that the pension system would run out of funds within 10 years. Unfortunately, the author based his projections on investment return rates of approximately 5 percent and ignored completely the amortization payments made to LASERS. In fact, through June 2009, we had a 25-year compounded actuarial return of 8.41 percent. Our current fiscal year market rate of return is 20 percent. The report disregarded our statutes, the Louisiana Constitution and market experience.
A Pew Center report focused on state retirement systems and potential reforms. It affirmed that public pensions work and play an important role in enabling public employers to attract and retain qualified workers. It should be noted that Louisiana took an important step in 1987, constitutionally requiring the financial soundness of state pension systems. The Pew report recognized Louisiana as a top 10 state for paying the actuarially required rate.
In 2009, the Louisiana Legislature revised the debt payment schedule, reducing the UAL by $500 million. Louisiana enacted sweeping reform in 2005 for LASERS new rank-and-file members; the legislation reduced debt, increased employee contributions and minimum retirement age. The legislation also reduced pension costs.
The Advocate editorial cited an opinion by House Speaker Jim Tucker. He has introduced a bill (HB930) that would shift new state employees into a defined contribution plan instead of the current defined benefit plan. According to the editorial, a change from a defined benefit plan to a defined contribution plan is designed “to bring the state in line with the private sector, where IRA-type defined contribution systems are the norm.”
IRA-type plans are a norm in the private sector, but so is Social Security. Too often forgotten is that state employees are not in Social Security. They do not have that form of a defined benefit and are dependent on their LASERS pension.
In summary, the Louisiana State Employees’ Retirement System Board will continue to work with our Legislature on debt reduction and improvements in our pension system reform. The board opposes HB930, seeing no short-term fiscal savings, reduction of debt or definitive long-term savings. Cindy Rougeou, executive director Louisiana State Employees’ Retirement System
