PERS Study Examines All Facets of Miss. Pension Program

December 16, 2011 (PLANSPONSOR.com) – The Mississippi Public Employees’ Retirement System (PERS) Study Commission released a report with recommendations to protect the plan. 
 

The Commission, created by Mississippi Governor Haley Barbour in August to study the state’s retirement system, created a report offering recommendations, including several investment, management and policy changes to protect the longer-term solvency of the state’s public pension system. The report also includes a legal analysis of benefit modifications.

The PERS Study Commission reviewed nearly all facets of the state’s retirement program. Some of the report findings include:

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•  The PERS Board should reconsider lowering its investment return assumption from 8% to 7.5% as recommended by PERS’ own actuary, Cavanaugh MacDonald. Over the last 10 years, PERS has achieved a 5.41% investment return. Many states are lowering their investment return assumptions to more accurately reflect market conditions.

•  The Legislature and/or PERS Board should continue studying the issue of adding a defined contribution component in the state’s overall retirement program. There is no recommendation that PERS be converted to a defined contribution plan. 

•  The Legislature should consider revising the make-up of the PERS Board to include more financial subject matter experts and include non-participant taxpayer members.

•  While the ultimate determination of the legality of any changes to PERS will rest with the state judicial system, the legal subcommittee believes the following modification tiers are allowable: new hires are subject to any new standards of retirement; current employees are subject to changes for future accruals, but no changes to benefits already earned for previous service; and retirees are only subject to changes in future accruals of the COLA.

 Retirement Age and Tiers for Drawing Benefits 

The report recommends the Legislature should provide that 62 is the normal retirement age with the following tiers for drawing retirement:

•  Eligible to draw full retirement at age 62 if vested;

•  Eligible to draw full retirement at age 55 with 30 years or more of service, but with no cost-of-living adjustment until age 62; or

•  Eligible to draw an actuarially reduced benefit before age 55, after completing 30 years of service.

Implementing these changes (effective for current members’ future service and all new hires) would:

•  Decrease the employer contribution rate by 1.61%;

•  Increase the plan’s funded status to 64%; and

•  Produce a cost-savings of $92.8 million.

COLA

The report found the COLA is one of the costliest benefit provisions in the PERS plan, accounting for an estimated 25% of the plan’s payout during a single year. The current COLA is 3% simple until age 55; the COLA is compounded after age 55. 

A statutorily fixed cost-of-living adjustment does not provide a mechanism for ensuring COLA payments track inflation. 

•  For example, PERS beneficiaries received at least a 9% (or higher) COLA from 2008-2011. During this same time period, inflation rose half that amount (4.54%) based on the latest Consumer Price Index (CPI) data available. 

•  Additional study by the actuarial consulting firm GRS found PERS pays out approximately $10 million more in COLA benefits each year than it would if the COLA program were indexed to the CPI. This means some members are, on average, receiving more in COLA than they actually lost through inflation.

The Study Commission did not recommend elimination of the COLA or any changes to the current option to take the COLA as a lump sum payment. However, the Commission recommends freezing the COLA for three years and thereafter tying the COLA to the CPI with a cap of  3%. (For retirees, COLA payments would continue but just not increase for three years. For individuals not yet retired, no COLA would be received for three years after retirement.) Implementing these changes for future accruals of current members and retirees, as well as all new hires, would result in:

•  Reduction in contributions by 2.12%;

•  Estimated funded status of 67%; and

•  Reduction in first year employer contributions of $122.2 million.

Other recommendations include lowering the vesting period from eight to four years and continued study of SLRP (since the Legislature must address the question of whether it’s appropriate to have an additional benefit for members of the Legislature and the Lieutenant Governor).

"Mississippi has a retirement plan that is underfunded by more than $12 billion – a figure that has only worsened over the past decade despite hikes in taxpayer and employee contributions," said Governor Haley Barbour. “In 2001, PERS had a funded status of 88% of assets needed to fund its liabilities; today, that level has dropped to 62%, far below the level recognized for such plans. Taxpayers are putting in about 50% more than they once were, but the system continues to fall farther behind. We must reverse this trend to protect our retirees and taxpayers future.

"The PERS Study Commission has presented reasonable recommendations, and I appreciate their hard work," he added. "Neither I nor the Commission can implement any changes. It is up to the next administration and the Legislature to reform the system and ensure PERS remains solvent."

The Commission is comprised of current and former public employees, businesses leaders and individuals with expertise in pension issues.

To view the full study results, visit http://www.governorbarbour.com/features/PERS/PERS%20report%2012.2011.pdf

Plan Sponsors Can Expect Contribution Increases in 2012

December 16, 2011 (PLANSPONSOR.com) – Corporate pension plan sponsors face increases in contributions and expense in 2012. 
 

These increases will affect competitiveness, investment and job growth and possibly create a further drag on corporate earnings and cash flow, according to the Mercer and CFO Research Services Redefining Pension Risk Management in a Volatile Economy survey report.

More than half of the respondents surveyed (59%) said their company’s defined benefit (DB) pension plan poses at least a moderate risk to their companies’ near-term financial performance. More than half of the respondents said the impact of DB plans on company health is a focus of attention of equity analysts and investors; nearly two-thirds of respondents said it was a focus of credit analysts and rating agencies.

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Respondents cited a number of factors affecting their pension plan funding, risk management and investment policies. Over the past five years, market volatility and low interest rates have had the greatest impact, coming on the heels of the higher funding requirements of the Pension Protection Act of 2006, the introduction of mark-to-market balance sheet requirements and expanded disclosure under U.S. and international pension accounting standards.

“Plan sponsors have made some efforts to manage their pension risk exposure by making a variety of plan design and investment changes. However, their efforts may not be enough relative to their benefit obligations,” said Jonathan Barry, Boston-based Defined Benefit Risk leader for Mercer’s U.S. Retirement, Risk and Finance business. “With no expectation for a quick recovery, plan sponsors should evaluate the effects of the recent turmoil on their future cash requirements, as well as the impact on their P&L and balance sheet.”

The survey found over the past five years, more than three-fourths (78%) of the employers have made some form of change in their DB plan’s design. Companies have been most likely to close existing plans to new employees (47%), freeze plans for all employees (21%) or terminate their plans outright (13%). This trend toward changing DB plans is likely to continue: roughly one in three of the executives surveyed say it is at least somewhat likely they will freeze or terminate their DB plans in the next two years

“There has been a low level of plan termination in the last five years. Plan termination activity could increase significantly in the next several years,” Barry said during a live webcast.

While relatively small percentages of plan sponsors are currently employing some level of liability-driven investing (LDI), the survey indicated significant acceleration in various risk management strategies over the next few years. Roughly half of sponsors say they are at least somewhat likely to match fixed income duration to their plan liabilities and increase their fixed income allocations. Similar trends also apply to other strategies, such as dynamic de-risking (lowering risk as the funded status improves), lump sum cash-outs for terminated vested employees and annuity purchase.

The survey found that finance executives seem confident in their ability to execute their companies’ DB-plan strategies over the next two years, but not by an overwhelming margin. Forty-seven percent of respondents said the senior finance team at their companies is “very well equipped” to develop and carry out DB plan strategy; another 44% of respondents said their finance teams are “fairly well equipped” to do so.

Despite this confidence, finance executives recognize they face formidable barriers that are largely out of their control. Queried on the obstacles most likely to limit their finance teams’ ability to make needed changes to DB plans over the next two years, more than half of all respondents (56%) cite “economic volatility and uncertainty.” More than one-third of respondents (35%) cite “regulatory or accounting requirements.” 

The obstacles most likely to hold companies back are largely external, according to the survey data and to the executives interviewed for this study. Ultimately, the results of the survey suggest, for finance executives weary of managing the volatility and risk that accompany DB plans, there is little relief in sight. However, the good news is finance executives have a clear view of the plan-design and investment strategies that will make that risk and volatility more tolerable—and many finance executives are confident they are well-equipped to make needed DB plan changes.

“We see plan sponsors positioning themselves for rising interest rates or equity market recovery – either would improve funded status and we expect there will be a significant shift from equities to bonds,” said Nick Davies, Washington, DC-based principal in Mercer’s Investments business. “Corporate defined benefit plan sponsors are intently focused on risk management issues and many are poised to make significant changes. The open questions are, how quickly will market changes occur, and do sponsors have the conviction and capability to carry out their intended changes?”

Redefining Pension Risk Management in a Volatile Economy surveyed 192 senior finance executives at U.S. companies with annual revenues of $500 million or more and representing a wide range of industries. All companies sponsor defined benefit pension plans with an asset value of $100 million or more. The research was conducted in October 2011 by CFO Research Services, the research unit of CFO magazine, in collaboration with Mercer.

To view the full report, visit http://www.mercer.com/referencecontent.htm?idContent=1434825.

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