Pension Matters
State Employees Retirement Fund
Most Recent Market Value | Archived Monthly Profiles
October 2011
High Court Nears Pension Ruling
The ruling on the legality of Gov. Rick Snyder’s senior pension tax is close at hand, according to Michigan Supreme Court Chief Justice Robert Young, Jr.
Young said that during recent oral arguments on the pension tax, the con-con debate on the tax issue played an important role in the legal arguments advanced by both sides. He, of course, would not indicate how the decision would go but added, “The court was very conscious of the implications of this decision for the budget and the lives of Michigan residents.” (MIRS)
What Does a Well Funded Pension Look Like?
The National Institute on Retirement Security (NIRS) took a look at six well funded public pension plans to learn what practices in terms of pension funding policy, benefit design, and economic assumptions have resulted in a better financial condition for these plans.
This analysis allowed them to identify certain features which helped these plans stay affordable and sustainable over the long term:
1. Employer pension contributions that pay the full amount of the annual required contribution (ARC), and that maintain stability in the contribution rate over time, that is, at least equal the normal cost;
2. Employee contributions to help share in the cost of the plan;
3. Benefit improvements such as multiplier increases that are actuarially valued before adoption, and properly funded upon adoption;
4. Cost of living adjustments (COLAs) that are granted responsibly, for example through an ad hoc COLA that is amortized quickly, or an automatic COLA that is capped
To read the entire report, click here http://tinyurl.com/4xxxepg
Hedge Fund Investment Growth
“According to a survey of large plans, the share of plans with investments in hedge funds grew from 11 percent in 2001 to 60 percent in 2010. Over the same time period, investments in private equity were more prevalent but grew more slowly — an increase from 71 percent of large plans in 2001 to 92 percent in 2010. Still, the average allocation of plan assets to hedge funds was a little over 5 percent, and the average allocation to private equity was a little over 9 percent. Available data also show that investments in hedge funds and private equity are more common among large pension plans, measured by assets under management, compared with midsize plans. Hedge funds and private equity investments pose a number of risks and challenges beyond those posed by traditional investments. For example, investors in hedge funds and private equity face uncertainty about the precise valuation of their investment. Hedge funds may, for example, own thinly traded assets whose valuation can be complex and subjective, making valuation difficult. Further, hedge funds and private equity funds may use considerable leverage — the use of borrowed money or other techniques — which can magnify profits, but can also magnify losses if the market goes against the fund’s expectations. Also, both are illiquid investments — that is they cannot generally be redeemed on demand. Finally, investing in hedge funds can pose operational risks — that is, the risk of investment loss from inadequate or failed internal processes, people, and systems, or problems with external service providers rather than an unsuccessful investment strategy. Plan sponsors GAO spoke with address these challenges in a number of ways, such as through careful and deliberate fund selection, and negotiating key contract terms. For example, investors in both hedge funds and private equity funds may be able to negotiate fee structure and valuation procedures, and the degree of leverage employed. Also, plans address various concerns through due diligence and monitoring, such as careful review of investment, valuation, and risk management processes. The Department of Labor (Labor) has a role in helping to ensure that private plans fulfill their fiduciary duties, which includes educating employers and service providers about their fiduciary responsibilities under Employee Retirement Income Security Act of 1974 (ERISA). According to plan officials, state and federal regulators, and others, some pension plans, such as smaller plans, may have particular difficulties in addressing the various demands of hedge fund and private equity investing. In light of this, in 2008, GAO recommended that Labor provide guidance on the challenges of investing in hedge funds and private equity and the steps plans should take to address these challenges. Labor generally agreed with our recommendation, but has yet to take action. The agency explained that the lack of uniformity among these investments could complicate the development of comprehensive guidance for plan fiduciaries.” To read the GAO’s full report go to www.gao.gov/new.items/d11901sp.pdf
Governors See Pension Tax Differently
Two Republican Governors are going in opposite directions regarding pension taxes. We in Michigan face an upcoming pension tax, while the Governor of Maine intends to do away with their pension tax to “lure new residents” to Maine. Maine’s Governor seems to think that wealthy pensioners will take their “wealth” out of state and he wants them to bring their spending ability into his state. Sounds like a plan to me, Maine. Read the entire article at http://tinyurl.com/3lgsuvq
Target-Date Fund Use Grows in 401(k) plans
More and more participants in self-directed 401(k)-type retirement plans are investing in target-date funds (TDFs) according to a new analysis by the nonpartisan Employee Benefit Research Institute (EBRI).
Using data from the EBRI/ICI 401(k) database, the largest of its kind in the nation, EBRI finds that the use of TDFs in 401(k) plans has increased rapidly in recent years. The percentage of all 401(k) plan participants using TDFs increased from 25 percent in 2007 to 31 percent in 2008 and to 33 percent in 2009.
The Pension Protection Act of 2006 contained provisions designed to encourage 401(k) plan sponsors to automatically enroll their workers in the plan, so as to boost retirement savings. Workers can opt out of the retirement plan if they choose. Target-date funds are often used as a “default” investment for workers who are auto-enrolled. While there has been rapid growth in the use of TDFs in 401(k) plans in recent years, TDFs are still relatively new for most participants.
The data come from the November 2010 EBRI Issue Brief and ICI Perspectives annual update on the EBRI/ICI 401(k) database, online here: www.ebri.org/pdf/briefspdf/EBRI_IB_011-2010_No350_401k_Update-092.pdf. More data on consistent users of TDF are published in the August 2011 EBRI Issue Brief, “Target-Date Fund Use in 401(k) Plans and the Persistence of Their Use, 2007"2009,” online at www.ebri.org
The Center for Retirement Research at Boston College has released a new Issue in Brief comparing compensation of state-local workers and Private Sector Workers
Another new brief from The Center for Retirement Research at Boston College states that critics claim that the compensation of state-local workers is overly generous, but previous studies have found mixed results. Their analysis finds that compensation of state-local and private sector workers is roughly similar in that:
- state-local workers earn 9.5 percent less than comparable private sector workers; but
- This wage gap is mostly offset by higher pension and retiree health benefits.
The Brief suggests that before making major changes to public compensation, policymakers should carefully consider the specifics of their state or locality.
The brief is available at http://crr.bc.edu/briefs/comparing_compensation_state-local_versus_private_sector_workers.html
Defined Benefit Wins Out
A new study, Decisions, Decisions: Retirement Plan Choices for Public Employees and Employers, from the National Institute on Retirement Security , analyzes the choices made by employees and finds that:
- When given the choice between a primary DB or DC plan, public employees overwhelmingly choose the DB pension plan.
- DB pensions are more cost efficient than DC accounts due to higher investment returns and longevity risk pooling.
- DC accounts lack supplemental benefits such as death and disability protection. These can still be provided, but require extra contributions outside the DC plan which are therefore not deposited into the members’ accounts.
- When states look at shifting from a DB pension to DC accounts, such a shift does not close funding shortfalls and can increase retirement costs.
A “hybrid” plan for new employees in Utah provides a unique case study in that it has capped the pension funding risk to the employer and shifted risk to employees. To read the full report, go to www.nirsonline.org
“Comparing Wealth in Retirement: State-Local versus Private Sector Workers”
The Center for Retirement Research at Boston College has released a new Issue in Brief.
The brief’s key findings are:
- Overall, 65-year-old couples with a state-local worker do not end up with more wealth at retirement than their private sector counterparts.
- The results, however, differ by tenure in the state-local sector:
- The one-third with long tenure has 11 to 18 percent more wealth at age 65.
- The other two-thirds have less wealth at age 65.
- For long-tenure workers, the wealth gain may be more from having a defined benefit plan, which forces saving, than from having higher compensation.
The complete paper is available at http://crr.bc.edu/images/stories/Briefs/slp_21_508.pdf
October 2011-12 Insurance Rates
Currently there are no premium changes for retirees in the State Health Plan PPO administered by Blue Cross Blue Shield of Michigan (BCBSM) for the 2011-2012 fiscal year. See more details in the Retiree Benefits Bulletin from Michigan Civil Service Commission.
Will Medicare Premiums Rise in 2012?
According to the September 15, 2011 Washington Times, Department of Health and Human Services (HHS) officials said that enrollment will rise another 10% more in 2012 and that premiums will fall 4%. Extra benefits in some Medicare Advantage plans, such as for vision or hearing, also are expected to remain the same.
Editor’s note: June Morse is the Lansing SERA Chapter President. She may be contacted at jmorse10@comcast.net or 517-886-9323.
Return to top of page