• Clarify Fiduciary Rules and Responsibilities

Require pension and state trust fiduciaries only base investment decisions on pecuniary factors like investment performance and risk, not nonpecuniary factors like politics, ESG, etc.

• Require Advance Proxy Vote Notice and Annual Reporting

Surface activism in proxy voting by allowing the public to view proxy votes well in advance of being cast, as well as requiring a compiled annual report of all proxy votes annually. 

• Require Limited Partner Status Reporting

Help mitigate activism through alternative asset managers like private equity and hedge funds by requiring the annual reporting of limited partners and all committed and allocated capital.

• Require Investment Fee Reporting

Reporting of investment fees will allow for more transparency around the cost and benefit of generally higher-risk alternative investments like private equity and hedge funds.

• Require Pension/Trust Board Meeting Transparency

Ensure taxpayers and stakeholders have access to major planning and investment decisions by requiring materials and meetings are broadcast, published and granted open access to all stakeholders.

Step #2: Set Up Systemic Oversight

• Institute a Pension Oversight Board

Creating a dedicated agency or center of excellence to oversee all public retirement systems in your state, both state and local, regarding their actuarial soundness and compliance with state reporting requirements.

• Require XBRL Reporting Standards

Because government financial reports are mostly published in PDF format and are hard to analyze, compare and aggregate, transitioning to a more data-friendly XBRL format would make government finance more transparent.

• Require Public Trustees to be Insured

Unlike in the private sector, public pension trustees are not required to carry liability insurance. Requiring coverage against claims brought alleging a wrongful act in relation to their role as fiduciaries ensures the appropriate amount of accountability.

Step #3 – Install Protective Policies

• Remove Investment and Actuarial Management Privileges

Return important fund management duties to taxpayers by suspending management privileges until sound funding policies and metrics are achieved.

• Mandate “Excess Value” Consultant Compensation

Pioneered by the Public Employees Retirement Association of New Mexico, this limited partnership compensation method replaces the widely used carried interest compensation formula with one based on absolute returns, completely removing any consideration of the risk associated with such an asset.

Steps to protect public finance from ESG activism

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With this move, Florida continues to demonstrate its commitment to maintaining a retirement system that works for both taxpayers and public workers. It will align the state’s default defined contribution retirement option offered to most newly hired public workers with private-sector retirement contribution best practices. This will have the long-term effect of mitigating financial risk to taxpayers while improving employees’ ability to contribute to a secure, future retirement no matter how long they work in public service. 

In combination with previous reforms, the Florida Retirement System Investment Plan (FRS IP) rate changes in House Bill 5007 make Florida a leader in providing attractive, choice-based, and affordable benefits to an increasingly flexible and diverse workforce. The change also improves the footing of the state’s defined contribution plan, which plays a critical role in addressing the financial risks borne by public employers and taxpayers. 

The Pension Integrity Project at Reason Foundation played an integral role in thought leadership related to this landmark reform, educating policymakers on the issue for years. After reporting on the needs of the Florida Retirement System (FRS) in 2019, the Pension Integrity Project began communicating the importance of ensuring the benefit offered in the FRS Investment Plan—the state’s default defined contribution plan—meets best practices typical of private sector corporate retirement offerings. From there, we engaged in educational outreach with policymakers, detailing the problem and proposing potential solutions to help bring the FRS Investment Plan up to industry standards. 

With the help of several key stakeholders in the state, including Gov. DeSantis’ office, legislative leaders such as State Sen. Jeff Brandes and State Rep. Jay Trumbull, and local groups like Americans for Prosperity-Florida, we were able to raise awareness of the issue in preparation for the 2022 regular session. We most recently testified on the subject before the Florida Senate Committee on Governmental Oversight and Accountability in October 2021. The collaborative effort was rewarded when Gov. DeSantis released his administration’s 2022 budget proposal, which included the recommended policy proposal that ultimately became law with the recent signing of HB 5007.

The Problem

Originally adopted during the 2000 legislative session as an alternative option to the state’s traditional defined benefit pension, the Florida Retirement System Investment Plan (FRS IP) has taken on increasing importance in Florida state and local government administration and now serves as the state’s primary vehicle for providing retirement security to most public workers. 

Seeing that most public employees weren’t staying in the system long enough to maximize their pension benefits, Florida lawmakers appropriately switched the FRS IP to be the default choice for most new workers (excluding first responders in the “Special Risk” class) in 2016. Today, over a quarter of the FRS membership has either selected or defaulted into the Investment Plan, and its share continues to grow rapidly. 

With so many teachers and public employees dependent on the FRS IP as a means to support a dignified retirement, it is crucial that the default retirement plan provide sufficient contributions to allow workers to make continuous progress toward saving for a healthy and comfortable post-employment lifestyle. Financial advisors and industry experts typically recommend total contributions into a plan like the FRS IP should total at least 10% of an employee’s pay—with many even preferring 12% to 15% percent to ensure benefit adequacy—for the eventual accrued benefits to be sufficient for retirement. 

For over two decades, Florida’s public employers at the state and local levels were required to contribute 3.3% of an employee’s salary to their FRS IP account for the largest grouping of employees (the “Regular Class”), which includes teachers and most civilian government employees. Employees in turn contributed a fixed 3% of their pay to their FRS IP account to bring the historic savings rate of FRS IP members to 6.3%,  far below industry standards. This contribution combination placed Florida well below other states who offer defined contribution plans, further highlighting the unique need to address the funding flowing into the IP (see Table 1).

Table 1. Contribution Rates for State-Run Primary Defined Contribution Retirement Plans

Insufficient contributions to a public retirement plan should be a major concern for employees, policymakers, and taxpayers alike. A generation of retirees inadequately prepared for retirement creates a risk of increased reliance on the state’s social safety net. This shortcoming also creates more immediate challenges that can impact many stakeholders. Benefits below industry standards and below those available in the private sector can significantly hinder the state’s ability to compete for talent—especially in areas like information technology and data security—to ensure the continued delivery of quality public services to Floridians. Before the governor’s recommendation and the subsequent policy enactment, public employers were at risk of falling behind in attracting qualified employees and creating a generation of retirees with benefits insufficient to outlast them.

The Reform: Summary and Evaluation of HB 5007

For FRS Investment Plan members, HB 5007 increases the employer contribution to employee IP accounts by 3% of payroll over current levels, covering all membership classes, meaning all present and future members of the FRS IP will see an equal increase. The largest grouping of employees—the Regular Class, which includes teachers and most non-public safety workers—will see the employer rates into their IP accounts rise from 3.3% of pay to 6.3%. In combination with their own 3% contribution, which will remain unchanged, the total contribution into the IP plan for Regular Class members will now be 9.3%. Those in the Special Risk class, which includes public safety officers—will see their total contributions rise from 14% to 17%.

According to the House’s fiscal analysis of the House Bill 5007, the 3% increase in employer contributions to the FRS IP is estimated to require an additional $249 million in the first year from all state and local government employers in aggregate.

With the passage of HB 5007, lawmakers have moved the state into a more competitive position by providing employees with more resources to meet their retirement needs. The increased amount employers will contribute to their employees’ FRS IP accounts comes on the heels of lawmakers also agreeing to a 5.38% across-the-board pay increase for public employees. For those participating in the FRS Investment Plan, this will bring the total increase in compensation to more than 8%.

As states around the country scramble to recruit qualified employees, HB 5007 and the FRS Investment Plan will make Florida a more competitive employment option for new workers, especially those highly skilled technical professionals the state expects it will need in the future. 

This notable step also improves the long-term viability of the Florida Retirement System. The more the FRS IP membership continues to increase, the less the inherent risk of cost overruns associated with the alternative FRS Pension Plan, which remains $7.6 billion underfunded today. By bringing contributions up closer to industry best practices, HB 5007 ensures that the defined contribution plan will continue to be an attractive option for future public workers. This, in turn, will result in more members joining a retirement plan that, unlike the pension, has a steady and predictable price tag with no risk of runaway costs and debt.

House Bill 5007 also included an unrelated policy provision that expanded law enforcement officers’ access to an existing Deferred Retirement Option Program (DROP) for those participating in the traditional FRS pension system. Reason has not performed an in-depth analysis of this particular aspect of the bill, but there are many risks involved in DROPs that are frequently overlooked, and there are likely more efficient ways to improve the retention of public workers.

Conclusions and Next Pension Reform Steps

Through a collaborative effort grounded in Reason Foundation’s experience with best practices of retirement policy, House Bill 5007 changes the FRS IP in a way that is undeniably important for the long-term future of Florida’s taxpayers and retirees. While the 3% increase appears simple at face value, this reform marks a significant improvement in the retirement security of most incoming workers. It will also improve the ability to attract and keep quality employees at a time when this is a growing concern for state and local employers. 

Another important, and quite possibly longest-lasting impact of the reform is that it bolsters the FRS IP so it can continue to be a valuable retirement option for employees while also working for employers—or taxpayers—by managing risks and runaway costs.

Florida policymakers and those involved in this reform process deserve credit for achieving meaningful and lasting change. This should not be the end of thoughtful improvements to the state’s retirement system, however. To build on this session’s success and remain competitive with the private sector, stakeholders should continue searching for ways the FRS IP can better serve public employees. 

In the fall of 2021, the Pension Integrity Project testified before the Florida Senate Committee on Governmental Oversight and Accountability that, in addition to addressing the below standard contribution rates, there were a few other opportunities for the FRS IP to better serve its members:

• The first opportunity to expand on HB 5007 lies in the stated objectives of the FRS IP, or lack thereof. Currently, the Florida Retirement System as a whole is governed by a set of objectives, but the unique nature of its two retirement options presents an opportunity for additional mission clarity and transparency. Framing explicit language delineating the specific objectives of the Investment Plan—such as lifetime income and retirement security—could help communicate the goals of the plan to new and existing public workers. 

• The second area of opportunity lies in the types of investments offered to those participating in the Investment Plan. Well-designed plans like the FRS IP should also offer the correct age-appropriate investment mix. This is generally accomplished by using target date funds that adjust investment risk to the employee’s retirement horizon. Given the serious role these funds play in the lives of public workers and their families, protecting the value of a member’s FRS IP account from market fluctuations as the worker nears retirement should be a high priority.

• Providing annuities to improve members’ retirement security has long been an established practice in the FRS IP, but it could still be improved. Offering annuitization at retirement allows retirees to use their accrued retirement funds to buy a stream of guaranteed lifetime income. Despite a lifetime annuity option being available to members already, distribution choices offered by the FRS IP are limited. Expanding those offerings to include deferred annuities could present an opportunity to further improve this offering to retirees. 

• Lastly, the increases in HB 5007 brought total contributions nearly, but not quite, to the 10% minimum standard set by industry experts. Despite the prudent dedication of funds to address this pressing issue, Florida will still be below all other states in total contributions for most members of the FRS IP. There is still room for improvement in this regard, and it may be prudent to consider ways to increase the fixed employee contribution toward their own retirement. Lawmakers should recognize that with future efforts they can build upon the benefits that will come from this latest legislation.

Although there are still potential improvements to be made to the Florida Retirement System Investment Plan, there is no denying lawmakers took the most important step in HB 5007 by raising total contributions to be closer to the levels needed to provide for an adequate retirement. Gov. Ron DeSantis and members of the state legislature deserve recognition for their work to bring the Florida Retirement System one step closer to becoming a model for public retirement systems around the country. 

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During the 2021 legislative session, Florida lawmakers considered a proposal that they hoped would eliminate the financial risk public sector pensions currently pose for the state. The legislation, Senate Bill 84, aimed to limit the growth of the nearly $30 billion in Florida Retirement System (FRS) unfunded liabilities by requiring newly hired state and local employees to join the state’s defined contribution FRS Investment Plan. The measure ultimately stalled in the Florida House of Representatives after being approved by the majority of senators. Since then, Senate President Wilton Simpson has signaled interest in renewing the conversation during the 2022 legislative session while Governor Ron DeSantis included FRS Investment Plan benefits increases as part of his 2022-2023 budget recommendations.

Senate Bill 84 intended to close the defined benefit FRS Pension Plan to all new hires (except Special Risk members). But the bill did not include other funding or risk-related policy changes. Increasing contributions to bring FRS Investment Plan benefits up to industry standard is required for long-term solvency but only if reform includes a plan to tackle current liabilities.

The following analysis examines Senate Bill 84 and its impact on risk and cost compared to maintaining the state’s retirement plan status quo. Drawing on public pension policy best practices, the analysis offers an alternative policy package that, unlike Senate Bill 84, preserves the current retirement choice structure and applies solutions to pay down current debts, avoids future unfunded liabilities, and build on making the FRS Investment Plan much more attractive to future public employees.

The alternative reform scenario offered by the Pension Integrity Project keeps both the FRS Pension Plan and FRS Investment Plan open but also institutes the following changes:

• Gradually reduces the FRS Pension Plan’s assumed rate of return from 6.8% to 6% over 8 years.
• Adopts a 50-50 cost sharing policy for new Regular employees.
• Raises by 2% each the employee and employer contribution towards a member’s FRS Investment Plan – a 4% increase in total. (Governor DeSantis 2022-2023 Budget Proposal)
• Reduces the amortization period for new UAAL layers from 25 years to 15 years.

In order to make a comparison between the status quo, SB 84 and the alternative reform scenarios, the following assumptions were made:

• FRS is assumed to reset amortization payments and UAAL bases to zero after full funding.
• FRS is assumed to reset the AVA to match the MVA after full funding.

The alternative scenario intends to:

• Allow current unfunded liabilities to be paid off under most future market scenarios,
• Cost approximately the same or less than SB 84, and
• Ensure benefit adequacy.

Full Analysis: Modernizing Florida Retirement

The post Modernizing Florida retirement: Analyzing recent reform concepts appeared first on Reason Foundation.

As stakeholders consider future changes to the Florida Retirement System, it is important to understand the structural problems within the pension plan that are impacting costs for taxpayers and retirement security for employees.

This series of one-pagers aims to explain why the Florida Retirement System’s debt is rapidly growing, the ways Florida is failing to provide retirement security to workers, and more. The series includes:

• Why Florida’s 2016 Pension Reforms Did Not Solve the State’s Pension Problems
• Two Major Problems Currently Facing the Florida Retirement System
• Does the Florida Retirement System Meet Gold Standards For Defined Contribution Plans?
• Examining the Florida Retirement System’s Investment Returns
• Why Being 80 Percent Funded Is Not Enough
• Important Terms and Definitions, Showing How Public Pension Plans Work, Plus a Summary of How Pensions Are Funded

Why Florida’s 2016 Pension Reforms Did Not Solve the State’s Pension Problems

Despite changes made in 2016, the Florida Retirement System (FRS) reported a record-high unfunded pension liability of $36 billion in 2020. An analysis of FRS  going back to 2009 makes it possible to identify the key factors that are driving growth in FRS’s pension debt. These key factors include the pension plan’s unrealistic investment return expectations, out-of-control interest owed on debt, and exposure to market volatility. Read more about the historic performance and future outlook of FRS in this one-pager.

Download the one-pager here.

Two Major Problems Facing the Florida Retirement System

Florida policymakers, public employees and taxpayers should be alarmed that the state’s public pension system has added an additional $6 billion in debt since 2018. Not only is the public pension plan’s growing debt threatening the retirement security of employees, but the Florida Retirement Systems defined contribution plan is also failing to set aside an adequate amount of funds for employees’ retirement. This one-pager describes these two problems in more detail.

Download the one-pager here.

Does the Florida Retirement System Investment Plan Meet Gold Standards for Defined Contribution Plans?

Industry experts say that government-sponsored defined contribution plans should set aside 10 to 15 percent of an employee’s annual income to provide adequate retirement income for the future. The Florida Retirement System’s defined contribution plan, titled the FRS Investment Plan, has a 6.3 percent aggregate contribution rate for employees that falls well short of industry best practices. Furthermore, the Investment Plan does not provide adequate asset distributions and disability coverage options. Read more about how the FRS plan matches up to industry gold standards in this one-pager.

Download the one-pager here.

Examining FRS Investment Returns

When a pension plan falls short of its assumed rate of investment return, debt is created. The Florida Retirement System has historically used an assumed rate of return on investments as high as 8 percent and gradually lowered the plan’s expected rate of return to 7 percent over the last 17 years. But because FRS has only averaged a 6.81 percent rate of return on investments in the last 20 years policymakers should be considering further changes. This one-pager also explains how lowering a pension plan’s assumed rate of return does not cut pension benefits.

Download the one-pager here.

Why Being 80 Percent Funded Is Not Enough

At the end of 2020, the Florida Retirement System (FRS) reported having 82 cents for every dollar of pension benefits promised to public employees. This is a sharp decline from the year 2000 when the plan was 118 percent funded. This one-pager explores why pension plans simply must be 100 percent funded to prevent expensive debt growth and intergenerational inequality. Anything less than 100 percent won’t do for Florida public employees or taxpayers.

Download the one-pager here.

Important Terms and Definitions, How Public Pension Plans Work, Plus a Summary of How Pensions Are Funded

Public pension reform discussions can be filled with unfamiliar terminology and complicated financial projections. This one-pager seeks to define the most important pension terms, like assumed rate of return, unfunded actuarial accrued liability, normal cost, and more. The one-pager also looks at how defined benefit pension plans are funded and explains how pension funding differs from Social Security benefit funding.

Download the one-pager here.

The post The Challenges Facing the Florida Retirement System Explained appeared first on Reason Foundation.

The series includes recommendations to help states structure attractive retirement systems that meet the needs of both employees and taxpayers.

The Gold Standard in Public Retirement System Design Series includes:

• Best practices in the design and utilization of defined contribution plans 
• Best practices in incorporating risk sharing into defined benefit pension plans
• Best practices for cost-of-living adjustment designs in public pension systems
• Best practices in hybrid retirement plan design
• Best practices for pension debt amortization

If you have any questions or would like more information, please email the Reason Pension Reform Help Desk at pensionhelpdesk@reason.org.

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Most of the nation’s teachers and other K-12 educational employees are members of their state’s public pension plans. After years of service to the community, these plans have promised a secure retirement for educators and support staff. Unfortunately, a significant number of public pension plans that serve these employees were severely underfunded before the pandemic and will likely be pushed further into debt this year due to poor plan assumptions and the economic downturn. This pension debt not only takes funding away from classrooms but could also put future benefits and pay increases in jeopardy.

As states prepare to face mounting budget challenges, this tool can help you understand what impact the coronavirus pandemic and economic crisis may have on public pension plans serving active and retired educators.

In the tool below, choose a public pension plan and the investment return rate to see how that plan’s unfunded liabilities and funded ratios may be impacted by volatile market conditions. 

We recommend viewing this interactive chart on a desktop for the best user experience. If you are having trouble viewing the chart and interactive options on your device, please find a mobile-friendly version here. 

Please note that the interactive tool will automatically sleep after a certain idle and can be restarted by simply refreshing the page.

To examine the impact the current market volatility and coronavirus pandemic may have on all public pension plans that service state employees—beyond educators—please visit this page.

The post How Teacher Pension Plans Are Impacted by the Economic and Market Volatility appeared first on Reason Foundation.

Pension funding involves calculating the cost of promised benefits and making sufficient contributions into a fund so that it can grow through investment gains to meet the cost of providing benefits. Two of the most common metrics to gauge the health of pension funds are the dollar value of unfunded liabilities and the funded ratio percentage, both of which are dependent on the value of accrued liabilities and the value of assets.

This new interactive tool from the Pension Integrity Project allows you to see the history of asset and liability values for state-run pension plans across the nation. The tool also includes a 2020 market forecast feature that adjusts to the selected return scenario of the user’s choosing.

By selecting a state’s public pension plans, users can see how plan assets have progressed in comparison to the cost of the benefits promised to state workers. Adjusting the 2020 return input shows how one year of bad returns can affect the funding status of a plan and gives a preview of the challenges ahead for state-run pensions.

We recommend viewing this interactive chart on a desktop for the best user experience. If you are having trouble viewing the chart and interactive options on your device, please find a mobile-friendly version here. 

Please note that the interactive tool will automatically sleep after a certain idle and can be restarted by simply refreshing the page.

The growth in funding shortfalls amid a record streak of bull market outcomes highlights a major problem in pension policy. And this issue is sure to be exacerbated by losses stemming from COVID-19. Looking forward, state policymakers need to find ways to restructure public pension plans so they are more resilient to market turbulence and are better able to recover from unforeseen events.

The post State Pension Challenges – Unfunded Liabilities Before and After COVID-19-Related Economic Downturn appeared first on Reason Foundation.

As states and cities prepare to face mounting budget challenges, we can help you understand what impact the COVID-19 economic crisis will have on public pension plans across the nation. 

In the tool below, choose your preferred state public pension plans and investment return rate to see how their unfunded liabilities and funded ratios are being impacted by the market and economic downturn. Please note that the interactive tool will automatically sleep after a certain idle time and can be restarted simply by refreshing the page. 

We recommend viewing this interactive chart on a desktop for the best user experience. If you are having trouble viewing the chart and interactive options on your device, please find a mobile-friendly version here. 

With the above interactive data tool, you can view how the COVID- 19 economic fallout may affect public pension plans in each state. The simple-to-use tool shows how state pension assets will react in a variety of economic scenarios. By selecting plans and toggling between a range of potential investment returns, you will be able to view how multiple plans’ funding ratios and total unfunded liabilities would change based on the selected market conditions. 

You can also select the “Unfunded Liability per Capita Map” to see projected public pension debt levels broken down on a per capita basis. Using the same tool to predict a variety of investment returns, you will see how unfunded liabilities grow and continue to impact taxpayers. This tool also allows you to see the progression of your state’s public pension debt per capita among all states between 2001 and 2019. 

While the entire country has been impacted by the COVID-19 pandemic, several states had their public pension plans better positioned to take this economic hit than others. Prior to the coronavirus crisis, the primary culprit of growing pension debt has been the across-the-board investment underperformance of pension assets relative to plans’ own return targets. 

After the financial crash of 2007-08, several state pension systems were so underfunded that even the longest economic recovery in history did not appear to help them dig out of the deep underfunding trenches. Now that the bull market has come to a grinding halt and the country is facing a severe economic downturn, it is more important than ever to address public pension solvency issues to better protect our retirees and taxpayers alike.

The post Previewing the COVID-19 Impact on State Pension Plans appeared first on Reason Foundation.