ISTA watched with great interest WISH-TV’s recent feature on the move by INPRS to privatize the annuity work under the Teachers Retirement Fund (TRF) and the Public Employees Retirement Fund (PERF).
ISTA found the report to have been comprehensive and balanced and believes that the “human face” that the report gave to this issue in science teacher Clark Hadley, long-time ISTA member from Martinsville, was very helpful to its viewers in understanding what is at stake.
Since last summer, INPRS has been on a mission to contract out the annuity work to a single vendor who will annuitize the funds using far lower discount rates than what is currently used “in-house.” The annuity work in question consists of annuitizing members’ own compensation (this is the defined contribution part of the state retirement plan—a mandatory employee-paid 3%) and is separate from the state’s pension obligations. When a member chooses to annuitize in-house, both the pension and the annuity payments are combined to constitute the member’s monthly retirement benefit.
Currently, INPRS uses a 7.5% rate when it annuitizes in-house. The market rate is lower—somewhere in the low 4% range. Generally speaking, for every 1% reduction from the 7.5% benchmark, a member stands to lose 8% in benefit.
Therefore, INPRS’ end-game will cut into members’ annuity fund payments upwards of 25% overnight--some even more. Over the course of a 20-year retirement, for an average career teacher, we are talking about cuts of well over $40,000. As the WISH-TV report suggests, this is causing good, experienced, and highly effective teachers like Mr. Hadley to retire earlier than they would otherwise have. After a lifetime of work, these dedicated teachers simply can’t afford the cuts.
Even though the pension management oversight commission recommended otherwise and even though the general assembly is seriously discussing alternative measures through HB 1075, INPRS continues to forge ahead with its own plans—having recently put out an RFP to vendors with a timetable to choose a vendor by mid-April of this year.
ISTA has been working with legislators to find a better solution than the INPRS privatization plan. ISTA is working with other stakeholder groups as well. All parties have been coming at this in a reasonable, measured fashion, understanding that the status quo rate was not going to be acceptable—but that something far better than an open-market rate of return model is both feasible and sustainable. After all, INPRS itself is assuming a 6.75% long-term rate of return.
For the most part, HB 1075 embodies the work of many legislators and stakeholder groups and is a reasonable approach to the annuity work for both PERF and TRF. It is an approach that will keep in-house the annuitization calculations but more closely reflect both the plan’s actual historical performance (which is far better than market rates) together with some market rate-type benchmarks. HB 1075 may not keep every teacher from retiring earlier than otherwise, but it will help.
As to the issue of taxpayers’ funding these things, INPRS can’t have it both ways.
On the one hand, when INPRS testifies before legislative hearings, it falls over itself to assure the legislature that INPRS and the funds it purports to represent are doing just fine. See the INPRS report to the Pension Management Oversight Commission last August in which INPRS notes that on the 5 key measures used by the National Institute on Retirement Security Study characterizing well-funded plans, Indiana hits on all the marks.
One needs only go as far as the INPRS website itself to read about the pension plans’ low taxpayer load and high value:
Indiana pension facts:
- Indiana has the lowest burden per household to fully fund public pensions in the country.
- Indiana has the second lowest combined pension and long-term debt liability as a percentage of GDP in the country.
Absent general assembly intervention, INPRS is on the verge of unnecessarily outsourcing a large part of its work to the private sector (at the expense of the members closest to retirement) and it wants and needs to paint a picture of excess and crisis to match this agenda.
With HB 1075 working its way through the process as a bona fide response to the very narrow dilemma Indiana faces with the annuity work, the real questions here should be:
- Why is INPRS so insistent on outsourcing this work to the private sector when other, less harmful to members alternatives are available?
- Why is INPRS not working alongside the stakeholder groups whose members are the same members of the retirement funds it oversees?