NCPERS Releases 2016 Public Retirement Systems Study
On January 12, 2017, the National Conference on Public Employee Retirement Systems (NCPERS) announced the results of its 2016 NCPERS Public Retirement Systems Study. The comprehensive survey provides information on investment experience, actuarial assumptions, plan administration and operations, trends, innovations and best practices.
The key findings include:
- During 2016, the average funding levels (the value of the assets in the pension plan divided by an actuarial measure of the pension obligation) increased for the third consecutive year. Funding levels reached 76.2% in 2016, up from 74.1% in 2015 and 71.5% in 2014.
- Although interest rates began to increase, funds continued to tighten assumptions. Nearly 40% of responding funds reported that they have reduced their actuarial assumed rate of return and about 30% more are considering doing so in the future. As a result, real returns will more closely align with the assumed returns.
- Pension funds continued to monitor benefits to help balance the money they are taking in with benefit payments. Over 30% of respondents have increased employee contributions and raised benefit age or service requirements.
- The funds experienced solid three-year, five-year and 20-year returns, close to or exceeding 8%. In recent years, returns were lower than in the 10- and 20-year range. Aggregated 10-year returns were 6.2%, while one-year returns averaged 1.7%. (Note: The one-year figure was 2.4% for plans with fiscal years ending in December.)
- Pension funds reduced the cost of administering funds and paying investment managers to 56 basis points (or 56 cents per $100 invested) versus 60 basis points in 2015. This is lower than the average fee of 68 basis points for stock mutual funds and 77 basis points average for hybrid mutual funds (which include stocks and bonds).
The survey included 159 state and local government pension funds with more than 10 million active and retired members and total assets exceeding $1.5 trillion. Of the pension funds surveyed, 77% were local government funds and 23% were state pension funds.
According to Hank Kim, NCPERS Executive Director and Chief Counsel, “The funds are improving cost-efficiency, increasing funding ratios and fine-tuning benefits to strengthen their capacity to serve retired public servants for years to come.” He added, “All signs point toward continued improvement in increasing public retirement systems’ funded status.”
The report is available here.
CRR Releases Issue Brief on State and Local Government Pension Reforms
On January 3, 2017, the Center for Retirement Research (CRR) at Boston College released its issue brief, State and Local Pension Reform Since the Financial Crisis. Since 2009, the majority of public pension plans have enacted several pension reforms after the financial crisis. The brief examines state and local government pension reforms to mitigate increasing costs following the financial crisis of 2008. The report was based on data from 2009 to 2014 for all 114 state plans and 46 local plans in the Public Plans Database, as well as for an additional 86 local plans.
The key findings include:
- 74% of state plans and 57% of large local plans have raised employee contributions or reduced benefits to offset rising costs. Plans with higher pension cost burden and lower initial employee contributions were more likely to enact these changes. Furthermore, the states with robust legal protections for current workers were more likely to limit these reductions to new hires.
- New employees experienced the largest reductions in core benefits including: increases in the age and tenure eligibility for retirement; reductions in the benefit multiplier; and increases in the number of years used to calculate final average salary.
- About 25% of plans have made changes that impact current employees. The most common changes were to increase their employee contributions and to reduce cost-of-living adjustments (COLAs).
According to the report, pension plans that most commonly experienced plan changes had a higher annual required contribution (ARC) as a percentage of revenue or had lower employee contributions. The report concludes, “This pattern is not surprising as plans with high ARCs, as a percentage of revenue, put greater budgetary pressure on governments, and increasing the employee contribution often avoids running afoul of the legal protection of benefits. Interestingly, plan characteristics do not make it any more likely that cuts are extended to current employees. Instead, the strength of a state’s benefit protection was the only factor that mattered, significantly decreasing the likelihood of benefit cuts for this group.”
The brief is available here.
Michigan Governor Signs Legislation Related to Summary Annual Reports for State Employees’ Retirement Systems
On January 5, 2017, Michigan Governor Rick Snyder signed into law Public Act (PA) 530 of 2016 (HB 6075), which amends Act 314 of 1965, Public Employee Retirement System Investment Act (sections 13 and 20h).
Changes made by HB 6075 include, but are not limited to:
- Requiring the retirement system’s summary annual report to include the actuarial assumed rate of health care inflation;
- Requiring the system’s investment fiduciary to submit its summary annual report to the Department of Treasury not less than 30 days after its publication;
- Requiring the Department of Treasury to post on its website an executive summary of each summary annual report received, including the system’s unfunded actuarial accrued liability (UAAL) for health care and pension; and
- Requiring a system with an actuarial accrued liability for retiree health or pension that is less than 60% funded to post an informational report on the internet outlining the steps (if any) the system may be taking to decrease its unfunded actuarial accrued liability.
Currently, the reporting requirements of Act 314 apply only to “a public employee retirement system created and established by this state or any political subdivision of this state.” Although the amendments enacted under PA 530 commonly reference health care, the legislation does not create a separate reporting obligation applicable to the public employee health care funds established by local units of government within the state. Consequently, the amendments to Act 314 contained within PA 530 are mostly unrelated as they pertain to retiree health care liabilities.
HB 6075 is effective on March 29, 2017 and is available here.
Groom Law Group Releases Issue Brief on the Proposed New IRS Mortality Table
On January 13, 2017, the Groom Law Group released its issue brief, Proposed New IRS Mortality Table May Impact Plan Funding and Benefit Payouts. The brief summarizes the proposed new regulations on the mortality tables to be used by most defined benefit retirement plans that were issued by the Treasury Department and Internal Revenue Service (IRS) on December 29, 2016.
Although the most significant effects of the proposed regulation would be on the calculation of the minimum funding requirements and lump sum optional forms of benefits under ERISA, public sector plans may also be affected. Specifically, the mortality table prescribed by the IRS may affect the calculation of the maximum benefit limitations under Internal Revenue Code § 415.
The proposed regulation updates the mandated mortality basis to the RP-2014 mortality table and a static mortality projection scale MP-2016. For public sector plans, the new mortality table may affect the § 415 maximum benefit limitation calculations; however, the impact will vary based on individual circumstances.
The proposed regulation would be effective for plan years beginning on or after January 1, 2018. The comment period is open until March 29, 2017 and a public hearing is scheduled on April 13, 2017. The mortality tables for 2019 and beyond are expected to be published in future Internal Revenue Bulletins.
The Groom Law Group’s brief is available here.
The proposed regulations are available here.