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State pension oversight commission now considering less stable retirement plans
09/17/2014

 

The Pension Management Oversight Commission (PMOC) convened yesterday to discuss three substantial issues related to potential pension changes in the future. PMOC meets during the interim to study and discuss and make recommendations for proposed legislation for the next session of the Indiana General Assembly.

 

COLA

 

Cost of Living Adjustments (COLA) for retired teachers and public employees in PERF and TRF are under consideration, as a true COLA has not been provided since 2008-09. Rather, 13th checks have been issued from the General Fund as a budget line item in past years. ISTA and other stakeholders have strongly pushed for a COLA because retirees have seen a decrease in their purchasing power since the Great Recession together with the impact of inflation. Thirteenth checks pay out only a one-time amount based on the number of years retired, whereas a COLA attaches to one’s base pension and compounds from the base, which means one’s actual benefit increases over time.

 

Actuaries already build in a 1 percent assumption for a COLA every year in both TRF and PERF, but the legislature has discretion as to offer it or whether to issue 13th checks as an alternative. Since 2008-09, the legislature has decided to provide 13th checks and has used the savings in cost differentials between checks and a COLA to pay down the unfunded liability. However, PMOC has reinitiated talks of a COLA for next session. At the end of the day, providing an automatic COLA each year would only delay the payment of unfunded liability by 2 years while retirees would stand to benefit substantially.

 

ISTA is part of a public pension coalition, which advocates for a pre-funded automatic COLA. The proposal would be a 2 percent COLA in years when the aggregate “fundedness” of Indiana’s pension plans (other than the pre-1996 TRF fund) are above 80 percent. Pre-1996 was always a pay-as-you-go plan and would not be used to factor the 80% threshold, but members in that fund would be included in the COLA as a point of fairness.   In years when there may be a drop below 80 percent, a “skip” would be triggered for that year and no COLA would be provided. The legislature would still maintain discretion to provide 13th checks in years when there is a “skip.” The funds are, by all accounts (including INPRS’ own projections), in great shape at a level that is around 89 percent funded overall.  All TRF and PERF Indiana remains near the top in U.S. for the health of its pension plans.

 

ISTA will continue to advocate for a COLA for retirees as the 2015 legislative session approaches.

 

Defined Benefit (DB) versus Defined Contribution (DC) Plans

 

PMOC has begun discussions of shifting to a Defined Contribution plan to reduce employer costs. PMOC members have cautioned that these talks are only preliminary considerations and that no legislation is in the works for next session. Yet, the mere suggestion of DC plans as an alternative raises concerns about changes down the road.   States whose pension plans are not in as good shape (certainly, not the case for Indiana) are starting to make changes to their pension plans.  Despite Indiana’s good pension standing, Governor Pence has indicated his support for DC, 401k-style plans.

 

ISTA opposes DC plans and urged PMOC to maintain the current hybrid plan. The fund is in good health and does not require an urgent “fix” that would be a drastic shift to the detriment of PERF and TRF members. Results over the past decade have clearly shown that DC and 401k-style plans are far from adequate to ensure retirement security. DC plans have higher fees, lower returns on investments, greater volatility, poorer planning, more early withdraws, require actuarial assumptions that are impossible to project and place larger burdens on workers. DC plans yield about half the benefit per dollar as DB plans. In a survey of 401k providers (those who offer these plans), only 13 percent believe that these plans provide adequate retirement security for their employees.

 

DB plans, on the other hand, have shown much stronger returns and continue to outperform DC plans by providing guaranteed benefits, more diversification, lower fees and lower investment risk over time.

 

Stay tuned.

 

Exclusion of New Hires

 

Another issue of concern is the growing number of political subdivisions and employers withdrawing from PERF for new hires, which has resulted in cost-shifting to existing members to cover the unfunded liability left to others. The cost-shifting is unfair in that it reduces payroll and increases costs to employees already in the funds.

 

PMOC is addressing these concerns, as around 13 percent of the new hires in the funds have already been withdrawn. As more and more employers exclude their new hires, it could create a downward spiral where even greater numbers of members are withdrawn as contribution rates increase – a negative rippling effect that could worsen over time.

 

PMOC has proposed a preliminary draft that would require employers to meet their obligations to the unfunded liability rather than shirking their responsibilities to pay their share of the costs. As this threat to the funds’ stability rises, ISTA believes that legislation is needed to close the loopholes in statute that are allowing employers to exclude new hires. It is a matter of fairness to existing members. PMOC is in the process of finding a solution.