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Thursday, June 27, 2013

Media Echo Chamber Doesn’t Apply to Texas, Again

Upon reading the Asset International Chief Investment Officer article “MomentumBuilding Toward DC in US Public Sector,” we paused” to ask ourselves “Is this true in Texas?”

As we’ve said so many times with previous assertions about Texas pension systems, “No, this is not true in Texas!” Not only is the implication untrue, but the facts are wrong as well.

The aiCIO article leads with the anecdote of Arizona Governor Jan Brewer last week signing a law creating defined contribution plans for judges and other elected politicians taking office after January 1, 2014. It goes on to note how problems in Illinois and Kentucky “brought the problems [of pension liabilities] to the forefront of public debate.” Then the story makes this statement:
Pennsylvania, Florida, Washington State, Kentucky, and Texas all have bills or serious proposals to shut or swap open DB pensions for DC schemes that have appeared in legislatures over the past few months.
Did we miss something?

We’ve been here watching the entire Texas legislative session in 2013 and we are completely unaware of any proposals to shut or swap open DB pensions for DC schemes, either for the statewide pension plans or local pension plans. This topic just wasn’t part of the legislative discussion, at all.

Here’s what did happen. The 2011 Legislature required the Texas Employees Retirement System (ERS) and Texas Teachers Retirement Systems (TRS) to report on their funding status, in what is known as an interim report, between Texas the 2011 and 2013 legislative sessions. The pensions included a consideration for switching from DB to DC plans among their options for improving funded status. Members of the legislature reviewed the report and no bills were filed in this regard in the 2013 session.

We gave the reporter the benefit of the doubt and actually went back over all the bills to see whether we missed anything – we didn’t.

So, given all this, we’re scratching our heads about the mention of Texas in this story.

The most significant legislation affecting pensions that did become law was the passage of House Bill 13, the transparency and training bill that was requested by Texas Comptroller Susan Combs. We’ve written about that bill many times on this blog, so we won’t waste your time with a rehash. But, we should note that HB 13 had nothing to do with switching or ending DB to DC plans.


We guess the moral of the story is, “Don’t believe everything you read in the media, even if it is on the internet.” Bonjour! – Max Patterson

Tuesday, June 11, 2013

Federal Reserve Report Shows Troubling Trends in Retirement Plans

Pensions & Investments Online recently reported on the June 6 Federal Reserve’s Financial Accounts report with many interesting findings. We need, in this and subsequent blogs, to unpack some of the facts that were revealed and discuss their meaning.

1) “State and local government pension assets rose 6.81% in the first quarter of 2013.” This is a deceptive statistic in that we don’t know whether this increase was due to market performance, or contributions from employees and public sector employers, or, most likely, a combination of the two. Nonethless, this increase is significant when we compare it to the next fact:
2) “U.S. corporate retirement plans assets rose just 2.78% in the quarter, to $6.82 trillion.” We should probably understand this statistic as some combination of the lack of comparative rate of contributions by employers and employees in addition to some lack of asset performance. The key learning here is that – for whatever reason – public sector pension assets are growing at twice the rate of private sector retirement assets. From a policy perspective, it would appear that people employed by state and local governments would most likely enjoy better retirement benefits at some point in the future.
3) “The real story, according to plan experts, was the level of net asset flows. A modest $4.4 billion in net asset inflows for defined contribution plans was a surprise in light of strong market returns. “I would expect that to be a lot bigger,” said Tim Barron, chief investment officer of investment consultant Segal Rogerscasey, Darien, Conn.” Incredibly interesting statistic here. The net inflows to DC plans – meaning 401(k) plans – were a small percentage of total assets. Private sector employees aren’t contributing to their retirement. Maybe they can’t – meaning that they need all their paychecks’ money being dedicated to current living expenses. Retirement savings are being deferred. Of course, corporate matching contributions are dependent on employees first making their contributions. It does not appear that this is happening.
4) “Comparing the 4.06% increase in defined contribution assets to a typical return of 5% based on a composite portfolio tracked by J.P. Morgan Asset Management (JPM), “it appears that they underperformed the market,” said Mr. Barron. “If that is a trend, it would be disappointing. If defined contribution is going to replace defined benefit, this pattern has to be continuously on the upswing.”” This is evidence of what we’ve been saying for some time now, that individuals are poor decision makers when it comes to investments. Even if they are turning their money over to mutual fund managers who make their investments, they must first decide which sectors in which to deploy money, e.g., small cap stocks versus large cap stocks, corporate bonds versus treasuries, etc.
We’ll have more to say on the P&I report in another blog, but here are yet more statistics that the continuing Siren call to move public employees to the failed defined contribution plan system is a wrong policy prescription that should be avoided. Similarly, something must be done about the failure of defined contribution plans for private sector employees. – Max Patterson