Products January 17, 2014

Academy Offers Framework for Evaluating Retirement Plans

January 17, 2014 (PLANSPONSOR.com) – The American Academy of Actuaries has released a report that provides guidance for evaluating retirement plans.
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The report, “Retirement for the AGES,” presents a framework for evaluating retirement plans and systems, both private and public, as well as retirement income public policy proposals. Such a framework can serve as the basis for objectively scoring plans, systems and proposals, according to the academy. This approach can also provide insights on how well these plans, systems and proposals meet retirement income needs and how they might be improved.

“What has been missing in the debate over America’s retirement systems, and how to improve them, is a common framework for evaluating them. The American Academy of Actuaries has developed this approach for both public officials and the general public to better understand their strengths and weaknesses,” says president Tom Terry, in Washington, D.C. “Often retirement income systems are so complex, it’s hard to judge whether they have been well-designed.” The framework presented in the report, he adds, offers an antidote to retirement policy complexity.

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The “Retirement for the AGES” framework uses the principles of alignment, governance, efficiency and sustainability to evaluate if a retirement-related system meets the following criteria:

  • Frees employers from the complications of administering plans by increasing features like portability;
  • Provides for professional management;
  • Communicates retirement savings as future income replacement;
  • Adds strong automatic features and defaults, such as auto-enrollment and better default investment options;
  • Standardizes and makes fees transparent in order to lower costs;
  • Incorporates self-adjusting mechanisms to respond to changing economic conditions;
  • Allows smaller plans to group together to take advantage of economies of scale;
  • Develops procedures to help prevent decisions that damage sustainability; and
  • Clarifies the role of members of a plan’s governing bodies and clearly defines conflicts of interest.

The “Retirement for the AGES” framework was developed by the Academy Pension Practice Council’s Forward Thinking Task Force. Later this year, the academy will release the first in a series of scorecards based on the “Retirement for the AGES” principles that qualitatively evaluate select systems and policy proposals.

The report can be downloaded here. More information about the American Academy of Actuaries can be found here.

Compliance January 17, 2014

State Not Bound by Informational Pension Materials

January 17, 2014 (PLANSPONSOR.com) – An appeals court has ruled that the state of Michigan is not obligated to follow pension contribution formulas mentioned in informational materials.
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The State of Michigan Court of Appeals recently reviewed the case of AFT Michigan v. State of Michigan and denied the plaintiffs’ appeal to a Court of Claims ruling. The plaintiffs, representative organizations of public school employees, had challenged amendments made to Michigan’s Public School Employees Retirement Act (PSERA) in 2012, which altered future health care and retirement benefit plans available to public school employees for service performed after December 1, 2012.

These amendments include the requirement that public school employees who had historically contributed nothing to their pensions would now be required to contribute a portion of their income to their pensions. In addition, these employees were asked to opt in or out of retiree health care benefits.

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The plaintiffs sued the state, alleging that the amendments were a breach and diminishment of contract, unconstitutional diminishment of accrued financial benefits and a denial of substantive due process. The Court of Claims ruled in favor of the state, saying, “We have informed consent and there are a number of choices [for employees].” In regard to the plaintiffs’ claim that pension-related pamphlets published by the state constituted a contract, the Court of Claims ruled that the pamphlets were advisory in nature and included disclaimers, adding that they did not believe that “a pamphlet can be part of a contract.”

In their appeal of the Court of Claims ruling, the plaintiffs argued that the PSERA amendments impair “existing contractual obligations to pension and retiree health care benefits in violation of both the federal and state constitutions.” The appeals court disagreed with the plaintiffs, upholding the Court of Claims contention that the state was not bound by previously published materials, especially since these materials contained disclaimers such as “The law may change at any time altering the information in this booklet.”

According to the appeals court’s ruling, “The Court of Claims did not err in concluding that the documents did not form an enforceable contract. The pamphlets and brochures were simply an informational explanation of the then-existing formula. The state was not bound in perpetuity by its contents.”

The full text of the court’s decision can be found here.

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