Wednesday, October 12, 2011

Private Sector Defined Benefit Plans in the News

Given the rhetoric of the anti-defined benefit crowd, it may be shocking to some that defined benefit plans still exist in the private sector. 

We’re here to tell you “They do.”  

Today’s Wall Street Journal carries a brief story about the impacts of declining global markets on public and private sector defined benefit pension systems. The story, “Tin-Hat Time for Pension Funds,” says this:

Stocks are getting pummeled as the prospect of a global slowdown increases. The S&P 500 is now down more than 10% year-to-date. Meanwhile, already superlow [sic] bond yields are getting even lower, thanks to the Federal Reserve's latest extraordinary easing action. The 30-year U.S. Treasury bond at one point on Thursday yielded less than 2.8%.

That is the kind of one-two punch that will worsen pension deficits while also making the contributions required to fill holes even bigger…How this dire situation plays out will differ somewhat for private and public pension funds. Private-company funds will more quickly feel the market's pain. That is in part because the way they calculate pension deficits is more closely tied to moves in interest rates than is the case for public pension funds.

The story goes on to mention a Credit Suisse analyst’s note about the funded status of pension plans at Goodyear Tire & rubber, AK Steel, Supervalu, Lockheed Martin, and Northrop Grumman. This is yet more proof, for those who don’t normally keep up with pension issues, that defined benefit plans do still exist in the private sector, and much more commonly than known. (We proved this in Texas earlier this year in an op-ed published by the Houston Chronicle. Take a look too at our blog on the issue.)

A few more points need to be drawn out about the WSJ piece:

If defined benefit plans were so totally ineffective in attracting and retaining employees, then would private sector companies still have them? 

If defined benefit plans were so detrimental to private sector company finances, then wouldn’t we hear more about contention at shareholder meetings over retirement plans? 

To answer those rhetorical questions, we don’t see private sector companies entirely dropping their DB plans. We don’t see shareholder meetings zeroing in on defined benefit plans in media coverage of financial industry matters.

Our point here is simply that the contentions that defined benefit plans don’t exist in the private sector anymore – and the corollary that public sector employers need to ditch theirs too in favor of defined contribution/401(k) plans – are false. – Max Patterson

Thursday, October 6, 2011

Texas Public Employees Association Notifies Members of Attempts to End Defined Benefit Plans

We took note of a recent communication from The Texas Public Employees Association, the oldest and largest state employee group, to their members about a story in the Austin-American Statesmen. As a non-partisan, non-union association, TPEA is the leading advocate for ALL state employees and retirees before the Texas Legislature and their communication serves to correctly frame a situation now facing all statewide public employee pension plans. Please note their call-out about the policies that two of the largest pension systems adhere to in order to maintain cost feasibility to taxpayers. – Max Patterson


Troubling Proposal To End Traditional Public Employee Retirement Plans Floated

A recent Austin American-Statesman article discusses a group in Houston that wants to amend the Texas Constitution to prevent new public employees from participating in defined benefit retirement plans, such as those under ERS and TRS, even though these state plans are in good fiscal shape. 

Although this group appears to be motivated by problems with local retirement plans in Houston, their proposal would have dire consequences for retirees and employees in all public pension plans in Texas.

TPEA believes the efforts by this group and others pose a potentially serious threat to maintaining our retirement plan. All state employees and retirees and their families should be sure to communicate with legislators their support for our current retirement plan. State employees and retirees have worked hard for this benefit and it provides modest but stable benefits that are essential for our retirement security.

While a number of states and some localities nationally have troubled retirement plans, Texas and our state leaders, by contrast, stand as a national model on how to establish and prudently manage sustainable retirement plans.

Two state-run retirement plans, ERS and TRS, include features that keep costs low, prevent abuses found in other states, and promote long-term sustainability. These features include:
·         Shared responsibility for contributions between the state and employees.
·         No pension “spiking”.
·         No contribution holidays.
·         No collective bargaining by ERS or TRS participants.
·         No automatic cost of living adjustments (COLAs).
·         Strong statutory and legislative requirements to ensure accurate actuarial impact analysis of proposed changes.

State leaders have actively managed both ERS and TRS to help ensure long-term sustainability of the plans. Legislative leaders enacted significant changes to TRS in 2005 and to ERS in 2009. These changes prefigured reform plans many other states and other plans are now attempting to put in place.

TPEA researched some of the claims made about defined benefit retirement plans during consideration of HB 2506 during the past legislative session and found that most are not supported by the facts. For instance, claims have been made that the decline in participation in defined benefit plans by private employers has taken place because such plans are inherently too expensive. In fact, changes in federal laws and regulations played the major role in the decline of private sector DB plans. This NIRS study found “the public sector has not been subject to the regulations that so drastically changed funding and accounting rules in the private sector.”

Analyses of defined contribution retirement plans such as 401(k) plans also show that they are a poor choice as a primary retirement savings vehicle because many eligible plan participants fail to contribute sufficiently, invest less than optimally, and frequently withdraw contributions prematurely. An analysis comparing DB and DC plans also found that traditional defined benefit plans are much more cost-effective. “The cost to deliver the same retirement income to a group of employees is 46% lower in the DB plan than in the DC plan.”

Since state employee salaries are 15 to 20 percent below pay for comparable private sector jobs, the promise of a stable and predictable retirement income is a key motivator in maintaining an affordable and competent workforce for Texas taxpayers. While these issues will continue to be studied and debated, it is essential that decision makers look at the facts here in Texas and not rely on faulty comparisons based on problems in other states.

Wednesday, September 21, 2011

Radio Interview Contrasts Pension Advocates and Detractor

KUHF Radio reporter David Pitman spent three hours with me in my office earlier this month discussing pensions for public employees. From that, he created this 2-minute news piece (read here or click the Listen Now button on the page) highlighting the contrasting positions of TEXPERS and a new group that opposes defined benefit plans for public employees. The group is being organized by Houston attorney Bill King, the former mayor of Kemah, and likely an aspiring candidate for future office, somewhere. I don’t want to rehash Mr. Pitman’s story, but instead would like to make a few points.

Interviews are never set up as point-counterpoint occasions, with people of opposing views sitting in a room together debating their positions in front of a reporter who is diligently taking notes. Instead, reporters interview the two sides separately and do their best to provide their listener with appropriate overviews of the contrasting positions. The great thing about blogging is that it does provide opportunities to add to the “moderated” debate in a news piece. As such, I have some editorial comment about positions Mr. King takes in the last two paragraphs of Mr. Pitman’s article/radio piece.

Mr. King asserts that “If you suddenly went defined contribution, we’d still be able to recruit all the police, fire, teachers want today, because all those jobs have waiting lines that go out forever.”

That’s conjecture, but while arguably true today, it certainly has not always been the case.

In robust economic times, the public sector has always ceded great disadvantage to the private sector in terms of attracting potential new hires with salaries they would desire to start a career. It would not take too much digging on our part to demonstrate that in boom economic times most cities have had great difficulties attracting qualified candidates of good moral character to replace retiring officers, firefighters, or staff. That’s why we have the system we do today. It’s made good business sense to the public administrators tasked with finding and retaining good public servants.

Remember that the public is asking young men and women in the primes of their lives to forego the corporate career path and, in the case of firefighters and police especially, to ask for the sacrifice of their bodies in terms of the continuous conditioning and training necessary to perform their jobs. The men and women understand that they will not be receiving salaries commensurate with the potential they lose. By potential we mean the opportunities to attain wealth and perks through ascension in the corporate or entrepreneurial world, as well as the potential of their future lives past 40 as they risk their lives in the performance of duty.

In boom times, cities have often found themselves to be in the unenviable position of needing to compete with private sector opportunities. It seems a long time ago now but the Internet Boom of the 1995-2002 period drew millions of young people into the Gold Rush of that time, so much so that today major industries like the energy and utilities sectors are scrambling to find qualified replacement workers for an entire generation of their older employees who did not have their ranks filled behind them during the Internet Boom.

Thus it’s important for the everyday reader to keep perspective on Mr. King’s observations.

Sure, today there are lines of applicants for many public sector jobs. But that is more a sign of the times than a fundamental shift in the type of work that Americans predominantly seek for their livelihoods. When boom times return – and they will – taxpayers do not want the future that Mr. King would take us to, when low pay and inadequate retirement benefits for public sector work would attract only those not qualified for any other type of employment. Cities like New York and Los Angeles sometimes offer us sad demonstrations of the types of official and police corruption that can occur when salaries and benefits attract and retain only people that might not have obtained other types of employment.

In addition, taxpayers in cities that accept Mr. King’s premise should be concerned about the competition – of other cities. Let’s say that City A in a large metroplex area, like Dallas and Ft. Worth, decides to change their retirement benefit structure so that less benefits, or more risky retirement systems like defined contribution plans, are used. A well-qualified candidate for a public sector position, one who grew up in the area, wants to stay close to home, has the choice of seeking the same position with City A or City B, which has a solidly performing defined benefit retirement system. Where will that person apply? City B, obviously.

As a former politician, Mr. King knows how to parse words very well. In Mr. Pitman’s article, King is paraphrased as saying that he doesn’t have a problem with publicly funded retirement accounts, “but he doesn't believe public employees should be guaranteed a certain amount in retirement, when most private sector workers are not.”

Some in the retirement benefits industry describe that as "pension envy" – of one group of people wanting what the others have. Instead of remedying the situation by acquiring a guaranteed amount themselves in the private sector, they want to take away what others have, to level the playing field. We could quibble over the word “guaranteed” as well as a more fundamental question of Mr. King’s understanding of the role of Social Security, but we won’t, at this time.

In our view, it would be much more productive for Mr. King and others to deploy the same energy (and cash) in seeking so-called guaranteed benefits for private sector employers. At one time, most Americans in the private sector did have defined benefit plans provided by their employer. Certain companies abused the privilege of retaining their employees retirement contributions, using the moneys as low-cost or no-cost sources of capital for their expansion, only to find their industry go the way of the buggy whip and leaving their retirees in the lurch. The U.S. Government stepped in and created ERISA laws so onerous as to make administration of defined benefit plans nearly impossible for corporations. (However, it should be pointed out that many corporations still do offer employees defined benefit plans – see our blog here.)

But the point is that instead of seeking to pressure the revision of ERISA laws (or Social Security, for that matter), Mr. King and others are seeking to force public sector employees into the same poorly functioning defined contribution plans that are increasingly unpopular today. If only there were more productive uses of their time and considerable energy. – Max Patterson

Tuesday, August 30, 2011

Actuary Study Confirms Cost-effectiveness of DB Plans for Three Texas Systems

We released a study last week from the actuarial firm Pension Trustee Advisors that confirms, using actual data from three Texas systems, that the costs to taxpayers for defined benefit programs are less those that would be needed for defined contributions to provide the same level of retirement.

The study is interesting and timely because it substantiates a core reason cities have been using defined benefit plans: they deliver reasonable retirement benefits at a reasonable cost to taxpayers.

Municipal employees, firefighters and police who are asked to forego the opportunity for the greater salary and bonus opportunities in the private sector are deserving of a defined benefit in retirement. In the current system, this benefit is one that takes 20 years or more to grow using contributions from the employee and taxpayers over the course of a person’s career.

In addition to steady contributions, the study found that “longevity risk” or “longevity pooling” is a key reason for the savings that taxpayers achieve through the use of defined benefit plans. Longevity pooling is recognition of the actuarial reality that there are fewer older retirees in a system with each passing year. The city (representing taxpayers) can calculate this mortality rate to reduce the amount of total contributions it must make toward defined benefit plans. The city would not be able to make the same calculation – and reduction in contributions – if it uses defined contribution plans. The taxpayers would have to fund all the employees’ retirement account with the expectation that they will live to some pre-determined age that is not actuarially adjusted for the expected rate of expiration.

Here’s how the study discusses the “longevity pooling” dynamic:

Longevity risk describes the uncertainty an individual faces with respect to their exact lifespan. While actuaries can tell us that, on average, for example, our pool of male police officers who retire at age 57 will live to be 82, they can also predict that some will live only a short time, and some will live to be over 100.  Figure 2 illustrates the longevity patterns among our 1,000 police officers. With each passing year, fewer retirees are still living. Age 82 corresponds to the year when roughly half of retirees are still alive. In a DB plan, the normal form of benefit is a lifetime annuity, that is, a series of monthly payments that lasts until death. A DB plan with a large number of participants can plan for the fact that some individuals will live longer lives and others will live shorter lives. Thus, a DB plan needs only to ensure that it has enough assets set aside to pay for the average life expectancy of all individuals in the plan, or in the police officer’s case, to age 82. Based on our target benefit level, the DB plan needs to have accumulated $921,807 for each police officer in the plan by the time they turn 57. This amount will ensure that every individual in the plan will receive a regular monthly pension payment that lasts as long as they do. The contribution required to fund this benefit, smoothed over a career, comes to 20.1% of payroll.
So longevity pooling gives taxpayers a break they wouldn’t have if their city uses defined contribution plans.

There’s another noteworthy point we should discuss. At first glance, the statement above, that “The contribution required to fund this benefit, smoothed over a career, comes to 20.1% of payroll” seems high and out of line with what private sector employees earn.  The typical private sector employee might rightfully say “I know I don’t get 20% of my salary set aside for retirement. Why should a public sector employee get that much?”

Truly though, most private sector employees do contribute 20% or more – they just don’t know it.

First, consider that a private sector employee’s total “contribution” to Social Security is usually about 12.4% when including their employer’s matching “contributions.” Then consider that many private sector employers match some percentage – anywhere from 3-10% --  of salary that an employee contributes to their own 401(k). Combined contributions into a 401(k) could easily be 6-12% of a private sector employees salary.

So, at the upper limits, a private sector employee and their employer might be contributing as much as 24% of a person’s salary to their retirement, (not counting the set asides for old age medical benefits and even their federal unemployment insurance). At the lower limit, that contribution might be 19%. That’s roughly the same as the 20% contribution of cities for their employees for defined benefit plans that’s cited in the PTA study.

It’s easy now to see the comparability and similarity of amounts. In fact, private sector employees could be viewed as receiving more with their Social Security and defined contribution plans. Oh, have we mentioned lately that, according to the 2010 GAO report, fully 50% of Texas’ public employees don’t contribute to or receive Social Security? (Here’s our blog on that.)

Of course many private sector employees don’t feel that 20% or more of their salaries go toward their retirement. They don’t know that their employer is required to make the matching contributions to Social Security/Medicare. And the 3-10% contribution to their 401(k) feels puny by comparison to the 20% figure that’s bandied about for public sector employees. And their defined contributions plans have proven to be very inefficient over the last 10 years in terms of delivering a consistent return.

In fact, in our view, that perception among many private sector employees, of inefficient defined contribution plans and a lack of knowledge about the 12.4% of salary that’s contributed to Social Security, is probably the root cause of “pension envy.” It is one of the drivers of today’s public policy debates that some are using to push defined contribution plans onto city employees.

Public sector employees have a well defined benefit based on very transparent contributions by them and their employers. Private sector employees don’t have clear defined personal accounts in Social Security. They do know that Social Security benefits are subject to the discretion of the U.S. Government for their payout. There has been much discussion in recent years over cuts to Social Security. Over the last few years, low inflation rates have created circumstances where cost of living adjustments aren’t being granted to Social Security recipients. Retirees have no recourse or control of their Social Security accounts. While many people would like to opt-out of the Social Security system, they can’t.

There’s a lot more information about the study that we will convey in future blogs, but in the meantime please review this very important contribution to the pension debate. – Max Patterson

Thursday, July 28, 2011

Deloitte Study: Employers Skeptical about Retirement Security for Private Sector Employees

Previous entries to this blog have cited studies by Deloitte, an international consultancy, on retirement security and 401(k) plans. In recent months they’ve published the results of their 2010 studies and there is a lot to be learned. We’ll dedicate several new blog entries to their findings and offer our thoughts on their relevance to Texas public employees’ retirement security. 

The Deloitte “Annual 401(k) Survey of Retirement Readiness” builds on several years of study for Deloitte’s research group. The details of their summary finding are telling:
Only 15% of surveyed employers believe most employees are or will be prepared for retirement, leaving an astounding 85% that believe some or very few will be prepared for retirement (Exhibit 7.7).

A mere 25% of surveyed plan sponsors offer managed accounts (Exhibit 7.8).
For those that do not offer this service, potential fiduciary responsibility was listed as the top reason (60%) for not offering managed accounts (Exhibit 7.10).
Where to begin?

Top line, this seems to confirm our poll results, where the holders of 401(k) retirement plans aren’t convinced about their ability to retire on time, or as they’d previously planned. In this case, employers don’t seem convinced that their employees will be prepared for retirement. We would have liked to have seen a break-out on this question, where we learned the views of those 25% with “managed accounts” (which we assume to be defined benefit plans). Did those employers feel their employees would be prepared? We will work to find out.

Interestingly, managed accounts are seen by companies to be prohibitive because of their liabilities for ‘fiduciary responsibility.’ This is another topic we will have to take up in the future. – Max Patterson  

Monday, July 25, 2011

Houston Chronicle Publishes TEXPERS’ Research: 80% of Texas Fortune 500 Offer Defined Benefit Plans

In late June, right before the Fourth of July weekend, the Houston Chronicle published our op-ed on defined benefit plans in the private sector. Here’s what we said:
We confined our research to the 35 publicly traded companies on the Fortune 500 list in Houston and Dallas. Some of the notables include ConocoPhillips, Texas Instruments, Southwest Airlines, Continental Airlines and CenterPoint Energy. Out of those 35 companies, 28 still have traditional defined-benefit plans for their employees in one way or another as stated in their most recent 10-K filings. In effect, 80 percent of Fortune 500 companies located in Texas' two biggest cities retain defined-benefit-style plans.

It’s an interesting finding and worthy of note because all too many people think defined benefit plans don’t exist in the private sector. Not true. They do exist, but their administrative and fiduciary costs are prohibitive for most companies to implement for all their employees. A Deloitte study of corporate employers confirms as much, and we’ll be talking more about that in future blogs.
After reviewing the data, our non-confirmed hunch is that defined benefit plans in the private sector exist mostly for upper echelon employees, not the rank and file. Again, we have no evidence of this – it’s just a hunch. But because administrative costs are so high, it makes sense for corporations to limit the expense to key employees and officers who are part of an increasingly exclusive club, no doubt. We will continue our research and learn more about these plans in the private sector. – Max Patterson

Thursday, June 9, 2011

Texas Public Policy Foundation Misconstrues Poll Results; Proposes Skewed Alternative

Our last blog discussed our release of an informative poll about Texans’ views on public employee pensions – and their own 401(k)s. After the news was released we saw only one organization attempt to negate or dismiss our poll findings.
Jordan Brownwood with the Texas Public Policy Foundation wrote a dismissive article, “Inconclusive TEXPERS poll confirms…nothing,” that was long on implied pejorative and short on facts.

For instance, Brownwood said “Without guaranteed pension benefits, TEXPERS would be forced to cede significant power to private investors and the individuals they currently represent.” It’s really difficult to deconstruct that sentence and respond to it appropriately because it displays a very fundamental ignorance of what TEXPERS is and who we represent. Our website is, for Mr. Brownwood’s future reference.

Nonetheless, if we’re interpreting his statement correctly, Mr. Brownwood should know that none of our members (the pension systems themselves) have members (policemen, firefighters, and municipal workers) who are currently asking for 401(k)s. If they were asking for it – because of the poor performance of their plan administrator or the possibility that the benefits wouldn’t be there when they retire – then we would respond to our members’ requests for private investments. That’s just not the case. Plans are performing well and most cities and their pension systems have good plans for fulfilling their actuarial obligations. If there’s another interpretation to Mr. Brownwood’s assertion, we’d be happy to address it.

And then Mr. Brownwood  wants his readers to rethink our wording of questions. He says:

The first question in the poll asks respondents if public employees should give up their current defined benefit pensions for a 401(k) plan.

That’s not what we asked and that’s not what we said in the press release.

The exact question was “Public employees who receive defined benefit pensions should be forced to change to 401(k) type plans like most employees in the private sector.” Our question was about the assertion of legislative force by elected officials to change the current pension option for public employees. Like we said in the release, 43% of the public disagreed with that statement while only 28% agreed.  Another 11% weren’t sure. It’s clear that forcing public employees into 401(k)s is not an action that would be well-received by the general public – even those who themselves own and use 401(k)s!

Then, in the same paragraph as his statement above, Mr. Brownwood says that:
Since a majority of Texans agreed that public employees have the right to continue with their contractually-obligated pensions (which few are suggesting), TEXPERS makes the assumption that Texans are opposed to pension reform. How different do you think the responses would have been if worded something like: “Using a portion of your personal income, would you be willing to promise every public employee in Texas a retirement package worth over $1 million?” I doubt very many respondents would have agreed, yet it is one way (albeit a very different way) of asking the question.

His question’s setup, “Using a portion of your personal income,” is the way that he wants you to think about the taxes required to pay for employee benefits. In my view that’s a pretty aggressive attempt on his part to skew poll results to fit a “what’s yours is yours-what’s mine is mine” political point of view. Skewing results by inserting political viewpoints is not something we tried to do with our poll.
And in the second part of his sample question, Mr. Brownwood engaged in hyperbole and scare tactics. There is no proposal by TEXPERS or any of its members to promise every public employee in Texas retirement packages over $1 million. That’s ludicrous. Again, Mr. Brownwood shows his inclination to skew questions with non-facts that align to his political views.

The reality is that after 15-20 years of service, with their and their employers’ matching funds, most public employees retire with $200-300,000 in their accounts and receive on average $2-3,000 per month, if that. And since most don’t pay into Social Security over their working lives as public employees, that’s all they receive in their “Golden Years.” Not so ‘golden’ if you ask me.
We enjoy vigorous discussion of these types of issues, but we would also like everyone to play on a fair and level playing field. Mr. Brownwood does not appear to want that. – Max Patterson

Friday, June 3, 2011

TEXPERS Poll Questions Underlying Assumptions in Public Discourse

Last week TEXPERS released the results of a public opinion poll we commissioned in March seeking Texans’ views on public employee pensions.
The results were very informative to discussions of public attitudes toward the men and women who provide services to the general public as firemen, police and municipal employees, like sanitation workers, librarians, etc. In fact, we know of no other poll that seeks to understand this dynamic in Texas. We will be writing about the poll results a great deal in the future as we think they provide a lot of insights into people’s attitudes toward their own retirements as well as their attitudes toward the retirement plans for public employees.

But for this blog post, the headline is really the most important point:  “TEXPERS Poll Confirms Texans’ Positive View of Public Employee Retirement Plans.” Our hunch that most Texans’ view the current systems as working in the public interest was validated by this poll of 503 Texans, across the state, both retired and working. And these Texans weren’t just anybody. They were registered voters with 401(k) plans themselves.

So why did we select this group of Texans to the exclusion of all other viewpoints?

A number of reasons really, but the core reason is our sense that there seems to be a general assumption by many – especially some newly elected politicians – that 401(k)s are the end-all, be-all retirement vehicle for all people. Don’t you get that sense as well? Don’t you feel that most people just unquestioningly accept that 401(k)s are the only best option available to them? And then they just assume that 401(k)s should be the only option public employees should have?

Our view is that we need to question those assumptions. Before we change a system that is working well for public interests, we need to consider what the alternative would be. And our poll, by interviewing only 401(k) holders, sought to find out whether the people most familiar with 401(k)s think that those plans are all that they are cracked up to be. If 401(k)s were really doing their jobs as well as their proponents suggest, wouldn’t all respondents or at least large majorities support that perceived popularity?

That certainly wasn’t the case in our poll. That’s why it’s interesting and deserves further discussion. We’ll do so frequently in this blog. – Max Patterson

Tuesday, May 10, 2011

News Coverage of Pew Report Confirms Texas Doesn’t Have Problems

When the Pew Center on the States released it’s “Widening Gap” report a few weeks back we noted that Texas was nowhere near the worst performers.

Indeed, other critics of the report noted that it used data for investments on June 20, 2009, which was near the bottom of the market. Hank Kim at the National Conference on Public Employee Retirement Systems  and Gerald McEntee of the American Federation of State, County and Municipal Employees made the charge on Special Report with Bret Baier on the day of the report. You can see the video clip here.

We also noted a report on 24/7 Wall Street that used the Pew Report to determine the “10 States Where Pensions Are Running Out of Money.” Texas was not among the states listed, primarily because, as the Pew report noted, our state is very good about making its funding contributions, which enables pensions to keep up with their actuarial obligations.

We want to bring attention to these nuances so that casual readers of pension news don’t use headlines to jump to negative conclusions about pensions here in Texas. Plans are doing well here and now is not the time to fix something that isn’t broken. -- Max Patterson.