NASRA Updates Issue Brief on Public Pension Plan Investment Return Assumptions

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NASRA Updates Issue Brief on Public Pension Plan Investment Return Assumptions

In February 2020, the National Association of State Retirement Administrators (NASRA) updated its standing issue brief, Public Pension Plan Investment Return Assumptions.  NASRA examined public pension investment return data and found that, on average over the past 25 years, public pension funds have exceeded their assumed rates of investment return.  The brief finds that for the 25-year period ending December 31, 2019, the median actual annual public pension fund investment return was 8.2% and for the 30-year period was 8.3%.

In addition, the brief finds that recent changes in economic and financial conditions have caused many public plans to reexamine their investment return assumptions.  Since fiscal year (FY) 2010, more than 95% of the 130 plans included in the Public Fund Survey have lowered their return assumptions.  While the dominate investment return assumption ranges from 7.0% to 7.5% for the 130 plans, the average return assumption is 7.22% in FY 2020.  The brief also provides a table showing the investment return assumptions that are in use, or announced for use, by the 130 plans included in the Public Fund Survey as of February 2020. 

The brief also discusses how the investment return assumption is established and evaluated.  It then compares these assumptions with public funds’ actual investment experience and the challenging investment environment for public retirement systems. 

The brief emphasizes that a governmental plan’s investment return assumption is focused on the long-term, typically an investment horizon of 30 to 50 years.  Investment returns are important because investment earnings account for a majority of the revenues received by most public pension plans.  According to the brief, since 1989, public pension funds have accrued an estimated $8.1 trillion in revenue.  Of that amount, investment earnings account for $5.1 trillion (63%), employer contributions account for $2.1 trillion (26%), and employee contributions account for $900 billion (11%). 

Typically, a 25-basis point reduction in the investment return assumption will increase the cost of a plan that has a cost-of-living adjustment (COLA) by 3% of pay (i.e., a reduction from 7.5% to 7.25% will increase the cost from 10% to 13% of pay).  For a plan without a COLA, the return assumption will increase the cost by 2% of pay.

The brief is available here. 

Kaiser Family Foundation Publishes FAQs on Prescription Drug Importation

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Kaiser Family Foundation Publishes FAQs on Prescription Drug Importation

On February 24, 2020, the Kaiser Family Foundation (KFF) published its issue brief, 10 FAQs on Prescription Drug Importation.  The FAQs provide information related to recent proposals to import prescription drugs from Canada and other countries in an effort to help lower drug prices for Americans.  In addition, they provide background information on drug importation in the U.S. and the challenges faced by previous importation proposals. 

Some of the FAQs include:

  • Why is importation of prescription drugs from Canada being considered as a way to lower drug costs in the U.S.?
  • What are the safety concerns related to importation of prescription drugs and why hasn’t it been implemented before?
  • What has the Trump Administration proposed regarding importation?
  • What is the estimated savings from the Administration’s importation plan?

The FAQs are available here.

SOA Releases Summary of Health Care Cost Institute’s 2020 Cost and Utilization Report

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SOA Releases Summary of Health Care Cost Institute’s 2020 Cost and Utilization Report

In February 2020, the Society of Actuaries (SOA) released its report, A Summary of the Health Care Cost Institute’s 2020 Annual Cost and Utilization Report.  The SOA summarized the annual Health Care Cost Institute’s (HCCI) health care cost and utilization report published on February 13, 2020.  The report illustrates employer group commercial health care costs and trends based on data from over 2.5 billion medical and prescription drug claims for about 40 million individuals enrolled in employer-sponsored health insurance from 2014 through 2018.

According to the report, “Overall allowed medical costs increased from 2017 to 2018 by 4.4% in this study population.  This trend is slightly higher than that observed in 2017, but very close to the 4-year average of 4.3% from 2014-2018 for the populations measured…. [F]rom 2013-2017 utilization trends showed an overall decline of 0.2%.  However, in 2018, utilization trends were on the rise again with a 1.8% year over year increase.  Average prices similarly grew by 2.6%, which was one of the lowest increases in recent years.”

The report is available here.

CRR Issues Police and Fire Pension Brief

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CRR Issues Police and Fire Pension Brief

On February 18, 2020, the Center for Retirement Research at Boston College (CRR) published its issue brief, An Introduction to Police and Fire Pensions.  According to CRR, the pension and retiree health benefit costs of public safety workers are higher than those for other local government workers mainly due to earlier retirement ages for public safety workers.  The focus on benefit costs continues to be pertinent as government plan sponsors consider and implement reforms, evaluate plan assumptions, and work to ensure adequate plan funding.  The brief is based on public safety employee group data from the Public Plans Database, U.S. Census Bureau, and governmental pension plans’ actuarial valuations to assess the size of public safety retiree benefit costs. 

Some of the key findings include:

  • In 2016, public safety workers account for only 17% of the total local government compensation costs;
  • For pension benefits, the annual cost for public safety workers comprised 15% of payroll compared to 8% for non-public safety local government employees;
  • For retiree health care, the annual cost for public safety workers comprised about 6% of payroll compared to about 4% for non-public safety local government employees;
  • Recent studies suggest that public safety workers may be able to work at later ages, which could affect retirement benefit design and plans’ retirement ages; and
  • Any shift in retirement age may involve an increase in wages to maintain total compensation for public safety workers.

The brief concludes, “From a plan design standpoint, governments may choose to pursue reforms to ensure that retirement benefits align with employees’ work-ability at later ages.  But any reforms would have limited impact on government finances because public safety retirement costs represent only 2 percent of total local government expenditures.” 

The brief is available here.

CRS Updates Report on Social Security’s Windfall Elimination Provision (WEP)

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CRS Updates Report on Social Security’s Windfall Elimination Provision (WEP)

On February 10, 2020, the Congressional Research Service (CRS) published its updated report, Social Security: The Windfall Elimination Provision (WEP).  The WEP affects Social Security benefits paid to individuals who earn Social Security benefits from Social Security covered employment, but who also earn pension benefits from state or local government employment not covered by Social Security.  In these cases, Social Security benefits are lowered by the WEP. 

Social Security benefits are designed to replace a larger percent of pre-retirement income for lower-paid workers than for higher-paid workers.  This is done by: 1) calculating an employee’s average indexed monthly earnings (AIME) from employment covered by Social Security; and 2) calculating the employee’s primary insurance amount (PIA) using a formula that applies a higher replacement percentage to lower earnings than to higher earnings. 

In 2020, the PIA formula is:

  • 90% for the first $960 of AIME, plus
  • 32% of AIME over $960 and through $5,785 (if any), plus
  • 15% of AIME over $5,785 (if any). 

Before the WEP was established, for those who split their careers between covered and non-covered Social Security employment, the PIA formula resulted in a higher proportion of covered earnings being subject to the 90% rate.  This resulted in what some perceived as a “windfall.”  In 1983, Congress passed the WEP to eliminate this perceived advantage by lowering the 90% rate to 40% for those subject to the WEP. 

As of December 2019, the Social Security Administration data indicated that about 1.9 million individuals (or 3% of all Social Security beneficiaries) were affected by the WEP, most of whom (94%) were retired workers. 

The report is available here.

NIRS Issues Brief on State and Local Government Millennial Employees Views on Employment and Benefits

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NIRS Issues Brief on State and Local Government Millennial Employees Views on Employment and Benefits

On February 5, 2020, the National Institute on Retirement Security (NIRS) published its issue brief, Millennial State & Local Government Employee Views on Their Jobs, Compensation & Retirement.  The brief indicates that Millennial employees that work in state and local government are satisfied with their jobs and intend to stay with their employers so long as their benefits are not reduced.

In a nationwide poll of state and local employees, 84% of Millennials are satisfied with their jobs and total compensation.  In addition, 80% of Millennial employees in state and local government believe they could earn a higher salary working in the private sector, and only about one in four consider their salary to be very competitive.  The brief also reported that 85% of state and local Millennial employees plan to stay in their job until they retire or can no longer work.  Over 84% indicated that having a pension benefit was the primary reason for retaining a state and local government job.  About 92% indicated that pensions serve a vital role in incentivizing longer public service careers and 94% believe that offering a pension serves as an effective recruitment tool for new employees.  However, Millennials’ job loyalty would differ if their benefits were changed.

According to the U.S. Bureau of Labor Statistics, over 22.5 million workers are government employees with 14.6 million at the local level, 5.1 million at the state level and 2.8 million at the federal level.  Over 58% of state and local employees work in education, 13% work in public safety and 12% work in health and safety.  In 2019, 32% of state and local employees were Millennials.

The brief concludes, “This research is intended to help government employers and policymakers make informed decisions related to the public workforce and their employee benefits.  Given the value that Millennials place on their benefits, policymakers should use caution when modifying benefits, as such changes could have the unintended consequence of driving Millennials out the door and harming public services.”

The brief is available here.

Groom Law Group Releases Brief on the Impact of the SECURE Act on Church Plans

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Groom Law Group Releases Brief on the Impact of the SECURE Act on Church Plans

On February 3, 2020, the Groom Law Group released its publication, Church Plans Under the SECURE Act.  The brief summarizes the most significant provisions of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”) that apply to church plans.  Groom Law indicates that church plan sponsors should begin to consider the impact of the changes on their defined benefit (DB) and defined contribution (DC) plans.  Specifically, they should evaluate any required changes of the new distribution rules in plan terms, recordkeeping, reporting and communications.

The brief summarizes the following provisions:

  • Clarification that non-qualified church-controlled organizations can participate in Internal Revenue Code section 403(b)(9) retirement income accounts;
  • Treatment of 403(b) custodial accounts upon plan termination;
  • Treatment of part-timers under 401(k) plans where the 410(b) nondiscrimination rule applies; and
  • Distribution changes affecting church plans.

The brief is available here.

GRS to serve on CCA webinar speaker panel

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February 12, 2020

GRS to serve on CCA webinar speaker panel

Judith Kermans and Brian Murphy will serve as panel speakers on the topic “Developing Discount Rates in Public Sector Pension Valuation.”  The webinar, which is sponsored by the Conference of Consulting Actuaries (CCA), is being held on March 11, 2020.  More information is available here.