Administration February 29, 2016

Ill. Considering Use of Private-Sector Tactics to Reduce Pension Liability

Two bills propose to offer retirees lump-sum payments.
Reported by

An Illinois House committee has begun hearings about a new approach for dealing with the state’s crushing pension debt, according to news reports.

Two bills propose allowing workers at retirement to take pension benefits as a lump-sum cash payment and give up guaranteed pension payments for life. However, a retiree would not have to take the entire amount as a lump sum, but could take a certain amount as a lump sum and leave some in the retirement system to continue getting a monthly payment from the state, albeit at a reduced level.

Get more!  Sign up for PLANSPONSOR newsletters.

For some workers, this could mean a payout of hundreds of thousands of dollars. At the same time, proponents say, it would help reduce Illinois’ crushing pension debt that now stands at $111 billion, the news reports say.

State Representative Elaine Nekritz said she believes the buyout plans would be found constitutional. “To my mind it is clearly constitutional because the choice is completely within the control of the annuitant,” she said. “If you don’t want to do it, don’t do it. We’re not changing your benefit. We’re offering you an additional benefit, frankly.”

NEXT: How to pay for the lump sums

The key for employees is the payout would be based on the present value of their pension benefits. As an example, State Representative Mark Batinick said, a teacher about to retire at age 62 with a $60,000 annual benefit would have a net present value of nearly $800,000.

He added that the value of this plan to the employee is two-fold. Assuming the worker puts the lump-sum payment into a retirement account, it can help reduce the federal tax liability on the pension benefit. Also, money in a retirement plan can be willed to other family members in the event of the retiree’s death, while pension benefits cannot.

“Pensioners don’t have access to basically what is their money,” Batinick said. “The money’s in a piggy bank. The state gives them an allowance for the rest of their life.”

The news reports note that finding a source of money to pay for the lump sums could be an issue. “At the level at which we are funded, it would be challenging to take assets out of the pension systems to pay for this,” Nekritz said. “Is the state willing to bond the dollars to do this and does that make financial sense for us to do this?”

Nekritz said she anticipates several hearings will have to be held on the plans to bring in additional experts who can advise lawmakers about who is likely to participate in such a plan, how many people would participate and how it has worked in the private sector, where similar proposals have been used.
Data and Research February 29, 2016

Several Factors Affect Costs for DB Plans

The Bureau of Labor Statistics looked into why costs are greater for some plans than others.
Reported by

Employer costs for defined benefit (DB) plans differ by industry, occupation, establishment size and region, according to data from the Bureau of Labor Statistics.

Costs for defined benefit plans are collected by the Bureau of Labor Statistics through the National Compensation Survey. For defined benefit plans, the survey collects data on premiums, administration fees, and dollar amounts placed by employers into pension funds. These amounts may be from cash, stock, corporate bonds, and other financial instruments. For private industry estimates, the National Compensation Survey does not collect actuarial estimates or actual costs of pension benefits paid to retirees. Benefit costs collected by the survey are converted to hourly rates by dividing the annual costs by the annual hours worked, thus producing the employer costs for employee compensation estimates.

Get more!  Sign up for PLANSPONSOR newsletters.

The estimates include all employees regardless of access to benefits; this calculation produces lower costs than when eligibility is considered. Costs for only those employees with access to a benefit (called access costs) can be derived by dividing the benefit costs estimate by the benefit access rate. For example, if the benefit costs were 48 cents per employee hour worked and 12% of employees had access to the benefit then the costs for employees with access would be $0.48 ÷ 12% = $4.00 per employee hour worked.

The costs for providing access to defined benefit plans do not necessarily increase as an employer’s establishment size increases, the Bureau’s data found. Costs were at $4.08 for establishments with 50 to 99 workers in March 2015, compared with $3.14 for establishments with 100 to 499 workers. This is an increase from $1.93 for establishments with 50 to 99 workers and an increase from $1.83 for establishments with 100 to 499 workers in March 2010. Data show relative stability in the change in costs for establishments with 500 or more workers.

In goods-producing industries, access costs have increased from $2.73 per employee hour worked in March 2008 to $4.48 in March 2015, and from $1.79 to $3.00 in service-providing industries. In March 2014, data show that access costs ranged from an average of $1.10 per employee hour worked in the financial activities industry sector to $7.63 per employee hour worked in the other services sector. In comparison, access costs in March 2008 ranged from an average of 67 cents in the leisure and hospitality sector to $5.61 in the construction sector. The construction sector has had access costs in excess of $5.00 per employee hour worked from 2008 to 2015.

NEXT: Why do some some defined benefit plans have larger costs?

These costs fluctuations raise questions about why some industries see larger cost changes than other industries.

Employees covered by unions tend to have greater access to employee benefits, including retirement plans. Therefore, unionization may affect an employer’s costs for defined benefit plans. Higher unionization increases the likelihood that employees will have access to benefits such as defined benefit plans. Data show that 72% of union workers had access to defined benefit plans in March 2015, compared with 13% of nonunion workers with access. The access costs for union workers were $4.44 in March 2015, compared with $2.77 for nonunion workers. For all workers combined, employer costs for employees with access to defined benefit plans were $3.39 in March 2015, which is an increase from $2.05 in March 2008. This indicates that other factors, such as the differences in the generosity of the plan and funding, may contribute to increased costs.

The investment performance of the pension fund plays a role in determining the amount and frequency of employer contributions, data about which are collected through the National Compensation Survey, the Bureau notes. When plans are underfunded, employers have to catch up and may make additional contributions. When plans are overfunded, employers might not make regular contributions. If a plan earns a rate of return that is equal to or greater than the rate of return promised to retirees, then the plan may become fully funded without additional contributions made by the employer.

More generous plans have higher associated costs. Frozen defined benefit plans are closed to employees not previously participating, or limits are placed on future benefits for some or all active participants. Some frozen plans may no longer allow participants to accrue benefits. Others may change the prospective benefit formula to limit future accruals. A soft freeze means that a plan is closed to new entrants, but benefit accruals continue for current participants. A hard freeze indicates that a plan is closed to new entrants, and benefits are no longer being accrued for current participants. To reduce costs, employers may freeze plans and provide less generous plan provisions, benefits, and features.

The Bureau of Labor Statistic’s Beyond the Numbers report is here.

«