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Both the Dow Jones Industrial Average and the S&P 500 Index Have Recently Made Changes. What Does That Mean for Retirement Investors?

Researchers say U.S. pension systems can learn a lot from America's Northern neighbor

Photo by Daniel Joseph Petty from Pexels.

By ALLEN JONES/TEXPERS COMMUNICATIONS MANAGER

A new research paper suggests design changes for U.S. public pension plans based on the Canadian system, which is touted as a recognized “global gold standard” of pension management. 

The paper, Public Pension Reform and the 49th Parallel: Lessons from Canada for the U.S., released July 8, traces the history of the “Canadian Model,” highlighting its reforms during the late 1980s and the 1990s, and how it became well regarded in pension management. Researchers from the Stern School of Business at New York University then compare the Canadian Model with 25 of the largest public pension systems in the U.S., including the Teacher Retirement System of Texas.

> READ MORE: The paper's authors wrote an article for Institutional Investor.

> LEARN MORE: Find out what NASRA has to say about pension reform.

The paper’s authors, Clive Lipshitz and Ingo Walter, say there is a growing attention on the long-term sustainability of many U.S. pension funds along with concerns of equity between pension plan members, retirees, taxpayers, bondholders, and public services consumers. The ongoing COVID-19 pandemic is introducing “new fissures in state and local government finances, heightening the need to bolster long-term public pension fund robustness,” write the researchers. The Canadian public pension system, they write, may hold the key to sound reform. 

“It is widely accepted that the Canadian public pension system functions well, with enviable funding levels,” write Lipshitz and Walter. “Indeed, the so-called ‘Canadian Model’ of pension management is often seen as a global gold standard in the realm of public finance.”

Even now, according to Fitch Ratings Inc., Canada’s 11 largest pension funds should maintain their current credit ratings despite the ongoing market turmoil. The funds managed 1.7 trillion of net assets in Canadian dollars at year-end 2019. In a July 7 report on its website, Fitch Ratings indicates the Canadian plans are expected to “withstand market downturns within their respective ratings given their long-term investment horizons, ability to adjust contribution rates and the captive nature of inflows.”

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The Canadian Model wasn’t always seen in such favorable light. The Stern School of Business researchers say that in the early 1990s, the Canadian pension system’s various provincial public pension plans were financially challenged. 

“Their subsequent successes were hardly inevitable or predictable at the time,” write the authors. “[The Canada Pension Plan – comparable with U.S. Social Security] was structured as a pay-as-you-go system and many of the provincial plans were funded through superannuation accounts. They were not independent of government and invested largely in Canadian sovereign and provincial debt.”

Conducting a side-by-side analysis of primary data sources of key plan features in both countries, in their report, the researchers outline key changes undertaken in Canada in the late 1980s and during the 1990s. The changes resulted in positive reforms on Canadian public pension funds comparative to those in the U.S., write the researchers.

Their report compares data sourced directly from public filings of the 25 largest public pension systems in the U.S. and nine of the largest public pension plans in Canada as well as the Canada Pension Plan. The paper’s dataset is sourced from 11 years of annual reports for the 35 pension plans, ending in 2018.

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According to the paper, global commodity markets had led to cyclical pressures on the economy throughout the 1980s and 1990s. Debt among the federal and provincial Canadian pension systems grew, highlighting key pension plan design flaws:

• Plan funding was partially on a pay-as-you-go basis or through superannuation accounts
• Enhancement to benefit levels were retroactive and not matched with higher contribution rates
• Contributions were commingled with general government funds rather than funded into segregated accounts
• Active portfolio management was nonexistent
• Plans were defined in law that determined contribution rates by political processes and required legislative action to modify
• Because plans were sponsored by the government, beneficiaries were unable to influence plan design and lacked responsibility for ensuring plan solvency.

Between the late 1980s and the late 1990s, a series of reforms addressed these issues. Even though particulars of plans differ from province to province, common features characterize the Canadian Model. These include joint sponsorship – giving labor the ability to make decisions – and independently governed and professionally managed organizations to invest pension reserves. According to the paper’s authors, optimal governance prioritizes the interests of principals (active and annuitant plan members, taxpayers, municipal bondholders, and users of government services) over those of agents (trustees, government officials, and union representatives) and agents of agents (actuaries, fund managers, lawyers, and consultants). 

“It is the principals who should determine plan features and play a central role in plan governance,” write the researchers. “A new governance model was established in Canada, framed on joint sponsorship and governance, independence form government, uniformity in legislation and regulation, and minimum standards of professionalism on pension boards.”

The 56-page report compares the largest pension plans in Canada and the U.S., looking at demography; plan design; plan benefits and risk sharing; discount rates; funded status; investment organization; primate market and direct investing; size effects; the consortium model; investment strategy; asset allocation; portfolio leverage, derivatives and currency hedging; and investment performance.

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The lessons gained from Canada’s reform and comparison of the two countries, according to the researchers, address what is becoming a critical public finance challenge in the U.S. The report identifies 15 policy initiatives:

1. Recognize the need for change. Outside factors, such as the current economic environment, are a catalyst for change.
2. Solution needs to be at the appropriate level of government. Change should occur at least at the state level.
3. Change requires strong leadership and effective civil service. Strong leaders must operate in each state, require the support of skilled professionals, and enable forums for sharing knowledge between jurisdictions.
4. Adopt a consultative stakeholder approach to develop and implement reforms. Involve all parties in the reform process, including taxpayers, bondholders, and recipients of government services – not just plan members and retirees.
5. Focus on holistic models for pension design and funding. Restructure funding models to focus on solvency rather than have benefits, contributions, and investing determined distinctly; remove plan terms from collective bargaining.
6. Share burden of funding contributions more equitably. Understand pension funding within the framework of total compensation and consider a more equitable share of funding from plan members.
7. Mandate sponsor funding. Hold governments accountable for funding of contributions.
8. Align benefits and responsibilities through joint sponsorship. Construct a plan where members can make decisions and accept a shared risk for solvency.
9. Enhance governance. Enact high standards for trustees and trustee education.
10. Unify legislation. Utilize any existing tools for creating unified pension legislation and reconsider the possibility of setting national standards.
11. Ensure viable model for funding accumulated deficits. Amortize unfunded liabilities using combination of sponsor funding and plan member contributions.
12. Align investment strategies to liabilities and cash flows. Once plans are better funded, match asset allocation to liability management.
13. Internalize investment management, where appropriate. Evaluate ability to address governance and compensation constraints to facilitate direct investing approach.
14. Evaluate consortium model to achieve scale, where appropriate. Consider establishing consolidated investment management for groups of pension plans to achieve scale and reduce expenses.
15. Enhance advisor standards. Enhance expectations for service providers as internal resources and governance are improved.

About the Author: 

New report sheds light on retirement security and financial decision making

Photo: Karolina Grabowska from Pexels.

TEXPERS STAFF REPORT

The Consumer Financial Protection Bureau issued a new report, Retirement Security and Financial Decision Making, that finds a growing number of retirees are not experiencing the expected gradual reduction in spending after they retire.

The report, published by the Consumer Financial Protection Bureau, finds that nearly half of Americans who retired between 1992 and 2014 were unable to keep the same spending level for five years following retirement. The Bureau’s findings indicate that certain financial decisions may enhance or diminish retirees’ ability to maintain the same level of spending, according to an email from NIRS announcing the webinar. For example, for homeowners, entering retirement without mortgage debt, for those with a pension, choosing a monthly annuity rather than in a lump-sum payout, are positively associated with retirees’ ability to maintain the same spending level for five years.

The study helps identify ways to protect retirees from overspending their savings in early retirement.

> REPORT:  Access a copy of the research brief.

Key Findings

• The study found that about half of people who retired between 1992 and 2014 had income, savings, and/or non-housing assets to maintain the same spending level for five consecutive years after retiring.  
• Bureau found that the ability to maintain the same spending level in the first five years in retirement was associated with large spending cuts in later years. 

The Consumer Protection Bureau is a federal agency responsible for consumer protection in the financial sector.

Retirement and Disability Research Consortium hosts free online conference on Aug. 6

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STAFF REPORT

TEXPERS’ System Members still have time to register for a free online conference tomorrow that focuses on retirement and disability research. The sessions won’t earn TEXPERS members continuing education credits, but they may provide insight into how people are working, aging, and dying in the United States.

The 22^nd Annual Meeting of the Retirement and Disability Research Consortium is hosting a virtual event from 9 a.m. to 5 p.m. EST on Thursday, Aug. 6. The video conference’s various session presenters and panelists will discuss topics including Social Security benefits and demographic trends, housing for the retired and disabled, economic impact on life expectancy, health risks impacting employment and finances, state and local labor markets, working conditions, and retirement finances.

The digital conference is free and open to the public. 

> REGISTER: Sign up here.

> AGENDA: Access conference schedule.

Economist Anne Case will discuss her book, “Deaths of Despair and the Future of Capitalism,” as the event’s keynote speaker from 11:40 to 12:20 p.m. EST. The book, which Case co-wrote with Nobel Prize winner Angus Deaton, looks at falling life expectancy rates in the U.S. and suggests that flaws in capitalism are proving fatal for America’s working class. Published by Princeton University Press, the book offers solutions to rein in capitalism’s excesses and make it work for everyone. 

> AUDIO PREVIEW: Hear an excerpt from the book.

The Retirement and Disability Research Consortium was established by the U.S. Social Security Administration in 2018. The consortium provides support to the Center for Retirement Research at Boston College, which is hosting the event. The National Press Club, Washington, DC, is producing the online event.

NIRS webinar focuses on idiosyncratic risks that drive returns

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By TEXPERS STAFF

Nuveen, an Associate Member of TEXPERS, is taking part in a webinar with our friends at the National Institute on Retirement Security at 3 p.m. ET on Tuesday, July 28.

The webinar, Factors First: A Risk-based Approach to Harnessing Alternative Sources of Income, focuses on how institutional investors such as pension funds can capitalize on the yield of alternatives by focusing on the idiosyncratic risks that drive returns.

There is no charge to register for the informational webinar.

> REGISTER: Click here to sign up for the free webinar.

NIRS' synopsis of the webinar:

During the webinar, you will hear how investors can stitch together multi-asset portfolios in an efficient and coherent fashion. The session also will cover why a risk factor-based approach works well for alternative asset classes; how to capitalize on the yield and diversification benefits of alternatives; and how institutional investors can leverage the factor-based approach for multi-asset portfolio construction.

Speakers include:

• Dan Doonan, Executive Director, National Institute on Retirement Security

• Nathan Shetty, Head of Multi-Asset Portfolio Management, Nuveen

The National Institute on Retirement Security is a nonprofit retirement security research and education organization. To see what other webinars NIRS has to offer, see a list of scheduled sessions and replays of past webinars on the organization's website.

When it comes to retirement, 

public employees are looking for security

It’s St. Valentine’s Day and the Texas Association of Public Employee Retirement Systems asked a few of the nonprofit’s board members to share their love of defined-benefit retirement plans.

Based on their comments, their earnings represent their commitment as police officers and firefighters to their communities. Their retirement benefits are hard-earned after putting in years of often dangerous work and contributing their own funds to their programs. The benefits allow them to have a safety net of income for spouses when Social Security may not provide enough or anything at all when they die.

If your unfamiliar with defined-benefit pensions let’s give you a brief description. Essentially, it is a retirement safety net that firefighters, police officers, educators, and millions of other state and local government workers in Texas earn in exchange for their job dedication – and honestly, often low wages. Providing retirement benefits help state and local governments compete with the private sector in the recruitment and retention of public employees.

Studies have shown that 401(k)s and other defined-contribution plans are not as successful in ensuring public employees have a secure retirement. Those investing into 401(k)s or similarly constructed defined-contribution pension plans on their own also are not investing enough and do not know how to invest their hard-earned money properly. Plus, Social Security either won’t provide enough retirement income or, in many cases, none because some public employees do not qualify for the federal benefit.

Also consider that millions of Texans have not saved enough for retirement. Without enough income, older adults will not be able to afford the resources that enable them to live independently, pay for medical and other health care expenses, and continue to contribute to society. Defined-benefit pension plans provide a consistent and predictable stream of revenue to public employees – the men and women who have dedicated their careers to the public sector (to you).

A defined-benefit plan delivers retirement income with little effort on the part of public employees while providing retirement security. And unlike private-sector workers, public employees share in the cost of their retirement benefits. A public employee’s contributions typically make up a set percentage of their salaries.

How critical is the need to offer public servants a secure retirement? Retirement benefits is an essential job feature, even more so than salary, according to a newnational poll by the nonprofit, nonpartisan National Institute on Retirement Security.

In a published report on its findings, nearly all state and local workers (93 percent) indicated in the survey that pensions incentivize public workers to stay with their jobs. Even more agree that a pension is a useful tool for attracting and retaining employees. NIRS published the results of their polling in a report, State and Local Employees Views on Their Jobs, Pay and Benefits, in November. 

Here is what else the NIRS poll found:

• Cutting benefits could have severe workforce consequences. Seventy-three percent of respondents indicated they would be more likely to leave their jobs if their pensions were cut. 

• Nearly 92 percent of all state and local employees believe that abolishing secure-retirement plans for public employees would weaken a government’s ability to attract and retain qualified workers. A majority also indicates that doing away with pensions would undermine public safety and the U.S. education system. 

• Among Millennials, those who reached young adulthood in the early 21st century and are collectively known as “dissatisfied job hoppers,” 84 percent working in state and local government indicate they are satisfied with their current jobs. Nearly 74 percent claim that a pension benefit is a significant reason they decided to work in the public sector, and 85 percent said they plan to stick with their current employer until they are eligible for retirement or can no longer work. 

That’s enough statistics. Let’s hear from some of TEXPERS’ own board members, who have or still work in public-sector jobs:

"I love my pension because it represents the years I worked as a firefighter for the City of Big Spring, Texas. The City of Big Spring Fire Department first initiated the pension plan back in the late 1930s and early '40s. Through the many years of change, the trustees have made steady improvements to the plan with the help of city leaders. The retirement plan provides security for my family and me."

- Paul Brown, TEXPERS Board President 

Big Spring Firemen's Relief & Retirement Fund 

Here are a few job-specific fact sheets provided by NIRS:

Firefighters (double click images to expand)

 

Police (double click images to expand)

 

Teachers (double click images to expand)

 

State Employees (double click images to expand)

 

The Texas Association of Public Employee Retirement Systems is a statewide nonprofit educational association organized in 1989. Our members are trustees, administrators, professional service providers, employee groups and associations engaged or interested in the management of public employee retirement systems. TEXPERS member systems and employee group members represent 2.3 million active and retired public employees with assets totaling nearly $89 billion. To learn more, visit www.texpers.orgwww.texpers.org.

By Allen Jones

TEXPERS, Communications Manager

Getting ready to leave a public sector job for retirement can be a daunting task that usually results in many employees flipping through their plan’s guidebook to find out what forms must be submitted and by when. However, those nearing retirement often have questions beyond what is on the pages of their fund’s Summary Plan Description, and it's prompting some public pension system administrators to develop creative ways to prepare their members for the day they leave the workforce.

Corpus Christi

Each October, the Corpus Christi Firefighters’ Retirement System hosts a pre-retirement seminar for its members. The half-day program is open to all of CCFRS’ active firefighters but focuses on employees who are within five years of retirement.

“We host presenters and speakers to inform our members of what they should be aware of before retiring,” says Gracie Flores, the fund’s administrator. “It’s important that our members are ready for retirement. It is a big transition to move from work to retirement. Our seminars provide them the tools and information they need to make the process as smooth as possible.”

The CCFRS program is an example of what other public pension funds can do to ensure members are ready to enter their golden years. The Corpus Christi fund’s pre-retirement seminar explains the retirement process, lays out the benefits members can expect and addresses post-retirement issues. The workshop outlines the deferred compensation process and even uses role playing to demonstrate what steps members must take before their retirement dates arrive.

“Our Path to Retirement role play is a very popular portion of the seminar,” Flores says. “We have a person taking on the role of a future retiree. I’m there acting as the plan’s administrator, and we have a fire department official. We show our members exactly what they must do to retire, who they must talk to and what the process is like.” 

System members learn about documents they will need to file for retirement benefits, deadlines they will need to meet, eligibility requirements, how to calculate the income they will earn during retirement, and when benefits are likely to start after retirement. Flores also demonstrates the fund’s Internet-based membership portal so members know how to log in, what information they can find there and how the software works.

The program doesn’t only focus on pension forms and retirement filing procedures, however. Other topics include such as estate planning, retiree health insurance plans, and Social Security fundamentals.

During last year’s pre-retirement seminar, Melissa Sirus, a Social Security representative, discussed eligibility. Nearly 30 percent of state and municipal employees are not covered by Social Security, according to the National Institute on Retirement Security. Not everyone understands that, Flores says.

Flores tries to offer different topics each year and recruits professionals from the Corpus Christi community to speak to the seminar’s attendees.

“To reduce our liability, I only get speakers who have a relationship with the retirement system,” she says. “For example, CCFRS’ attorney presents the estate planning information.”

To promote the program, Flores sends flyers to system members who are within five years of retirement. She also emails the system’s membership to announce the seminar and promotes the program through board agendas and minutes, which are mailed directly to each fire station within Corpus Christi.

The number of attendees fluctuates each year. Her largest attendance was about 60 people, and she has had as few as 25 people show up. She also arranges to serve lunch to the attendees.

Elvin Bates, a captain with the Corpus Christi Fire Department, is nearing retirement. He has spent more than 40 years with the department and is currently a fire inspector with the department’s fire prevention division. He is a regular attendee of his fund’s annual pre-retirement seminar.

“It’s a fantastic program,” Bates says. “I learn a lot each year.”

He says the program has helped him better understand what steps he must take to leave the fire department with his proper benefits and has provided him insight into other aspects of retirement he might not have considered.

“Getting ready for retirement can be stressful,” Bates says. “There are so many things you have to be aware of. I think all plans should have some program to help retirees prepare for retirement. Gracie [Flores] has done a wonderful job with the seminar.”

Flores says her program has gotten the attention of a few other fund executive directors who have sent representatives to sit in on her CCFRS' pre-retirement seminars to bring back ideas to their own systems. She modeled CCFRS’ program off of a similar program hosted by the San Antonio Fire and Police Pension Fund, which hosts a full-day pre-retirement seminar for its members twice a year.

“Ours, of course, is on a smaller scale due to our member size and resources,” she says.

San Antonio
The San Antonio fund’s program attracts 60 to 80 people each time, says Warren Schott, the system’s executive director.

“If we had more demand, we would hold them more often,” he says. “But currently, twice a year seems to be working fine.”

The seminar is used to get members prepared for retirement and does not focus on pension issues. The program usually focuses on 10 issues that are important for public employees to consider before retiring. During the fund’s May seminar, attendees learned about common tax issues retirees face, legal planning, financial planning, health and wellness, and psychological matters. Individuals outside of the system usually conduct the sessions so a lot of staff time isn’t consumed. Doctors hosted the health and psychological sessions.

“Soon-to-be retirees – regardless whether they are from a small or large fund – need to begin thinking about the numerous issues they will face in retirement,” Schott says. “No one else prepares them for this, so it seems logical that the pension fund would provide it.”

The San Antonio system encourages active members who have been on the job at least 20 years to begin attending the seminars. Schott says those within one year of retirement are invited to participate again.

Schott suggests executive directors sit in on his seminars and “steal” ideas to conduct their own pre-retirement workshops for their members.

Houston

The Houston Police Officers’ Pension System doesn’t host a pre-retirement seminar like San Antonio and Corpus Christi. However, the fund hosts an annual conference for its members already in retirement. 

The fund’s retirement program began about 20 years ago. The system’s executive director, John Lawson, says 500 to 600 people attend the program, which runs a full day. He says because people are often busy and don’t have time to read and research the retirement topics on their own, it is important that pension systems work to educate their members after retirement.

Topics include many of those included in the Corpus Christi and San Antonio programs. During this year’s Houston retirement conference, a recap of what bills passed and what didn’t during a recent state legislative session will be discussed. Lawson says he also often invites the mayor of Houston to speak during the assembly and provides attendees with a lunch - two things smaller systems may be able to replicate for their own pre- or post-retirement programs.

Allen Jones

About the Author:

Allen Jones is the communications manager for the Texas Association of Public Employee Retirement Systems. Email him at allen@texpers.org or call 713-622-8018.