• Holds $1.8 billion in unfunded liabilities;
• Is structurally underfunded by legislatively set contribution rates;
• And is expected to become insolvent around the turn of the century even if all its actuarial assumptions are met (faster if they do not).

This backgrounder examines claims the North Dakota Public Employees Retirement System is making about North Dakota House Bill 1040.

Scrutinizing NDPERS’ cost claims on House Bill 1040

The post Scrutinizing NDPERS’ cost claims on House Bill 1040 appeared first on Reason Foundation.

The post Does the defined contribution plan in North Dakota’s HB 1040 meet gold standards? appeared first on Reason Foundation.

The post Does North Dakota House Bill 1040 meet the objectives for good pension reform? appeared first on Reason Foundation.

The post Examining the pension reform benefits of North Dakota House Bill 1040 appeared first on Reason Foundation.

Thank you for inviting me to provide our technical analysis of House Bill 1040 based on our experience evaluating pension solvency and design quality nationally, as well as answer any questions the committee may have. Reason Foundation’s Pension Integrity Project operated as pro-bono technical assistants during the interim committee process that led to this bill, building an actuarial model for the North Dakota Public Employees Retirement System (NDPERS) to help inform the process. We’ve thoroughly examined the details of this legislation, as well as the funding history of NDPERS. I have provided several supplemental materials to the committee that I hope are helpful in your consideration of this bill. 

The context for the current discussion is the looming insolvency of the North Dakota Public Employees Retirement System. Today, NDPERS is estimated to be about $1.8 billion underfunded. Even according to a recent report from the National Conference on Public Employee Retirement Systems, an organization that represents and advocates for defined benefit public pension plans, North Dakota is one of just five states that has an unsustainable public pension debt trajectory. 

Without any changes, the North Dakota Public Employees Retirement System will continue to accrue unfunded liabilities, ultimately exhausting its assets in approximately 80 years. HB 1040 would meaningfully address many of the longstanding challenges facing NDPERS, help turn it away from a path of perpetual underfunding and set it on a course to be fully paid off in the next 20 years. 

First and most importantly, House Bill 1040 fixes the systematic underfunding that the North Dakota Public Employees Retirement System has undergone over the past two decades by swapping from contribution rates set in statute to an “actuarially determined rate,” or ADEC for short. ADEC is a calculation performed during the pension valuation process that shows what plan contribution rates need to be to pay for both benefits and debt service costs. The pension benefits promised to members of NDPERS are ultimately the responsibility of the state, local governments, and taxpayers. Continuing to fall short of fully funding these pension promises unfairly passes on the cost of today’s public services to future generations. Adopting an ADEC funding policy is a crucial first step in getting North Dakota on the path to living up to its pension obligations. 

Second, this bill closes the current structurally underfunded defined benefit plan to all future new hires and instead offers them a defined contribution retirement plan that our analysis finds meets the high standards of best practices in retirement system design. The proposed reform would avoid the accrual of new unfunded liabilities related to future hires and would, in most cases, offer a more generous benefit than the current NDPERS pension. 

Our analysis, along with research from the Teachers Insurance and Annuity Association (TIAA), a Fortune 100 financial services organization, presented to the interim committee, showed that for almost any age an employee begins work, the proposed defined contribution plan’s benefits would be more generous than the current NDPERS defined benefit plan’s benefits. This is due to the extremely low multiplier of 1.75% that the NDPERS defined benefit uses for calculating benefits and the high rate of turnover in the plan. I’m unaware of any other fully defined benefit pension plan with that low of a benefit multiplier. 

While the cost of offering the current defined benefit should be low, it is saddled by years of underpaying contributions and the high-interest rate on the pension system’s accruing debt. Those are the two main factors that have moved NDPERS from being overfunded in 2000 to being $1.8 billion in debt. 

To help you visualize the thought process behind this bill, think of the North Dakota Public Employees Retirement System’s unfunded liabilities as an oil spill. The two most urgent actions are: (1) to cap the spill and (2) to clean up the oil that’s spilled already. The transition to the defined contribution plan for future hires caps the spill because no new hire would ever have the risk of an unfunded liability attached to them in the future. The second course of action is to clean up the oil already spilled, which is what the shift to proper actuarial funding does. Over the next 20 years, the state and, on a smaller scale, its local governments would be able to pay off the pension system’s $1.8 billion in debt by making full actuarial contributions to the NDPERS defined benefit plan. 

To assist that paydown, the state has also put other cash infusions into this bill, beginning with $250 million in year one and another $70 million per biennium until the plan reaches full funding. Our modeling forecasts show that these added funds, coupled with the swap to a proper actuarial funding method, would save North Dakota $1.1 billion dollars over the next 20 years relative to the status quo and finally put NDPERS back on proper financial footing. 

Lastly, I’d like to make it clear to this committee that if you hear discussions about the costs associated with this bill, those costs are not the inevitable consequence of shifting to a defined contribution plan for future hires. Instead, the costs reflect the state needing to make an overdue commitment to fully pay for the retirement benefits it has already promised generations of public workers and retirees of North Dakota, who understandably expect to have the pensions promised to them adequately funded. 

Swapping to a different retirement plan design has a negligible impact on the overall costs of any pension reform bill. No new workers are needed to “fund” previously granted benefits; pensions do not operate as Ponzi schemes and should not be treated as such. The cleanup of years of underfunding is where the costs of this bill—and most pension reform bills across the country—come from.  

The post Testimony: North Dakota’s HB 1040 would address many challenges facing NDPERS appeared first on Reason Foundation.

Currently, the North Dakota Public Employees Retirement System (NDPERS) has a traditional defined benefit (DB) pension plan for most state and local government employees but also offers to a limited set of state employees the choice of electing to participate in a defined contribution retirement plan instead of the pension plan.

The optional NDPERS DC plan was available to most employees from 2013 to 2017, but effective August 1, 2017, the special enrollment period to all permanent employees ended and plan eligibility returned to just a limited number of employees. With the legislature poised to potentially take a major step by making this optional DC plan the primary retirement plan design for most new state workers outside of higher education, public safety and the judiciary, this analysis examines how well the current North Dakota DC plan meets certain best practice retirement plan design principles and where it may fall short on others.

Strong Contributions Create Foundation for Employee Retirement Security

The greatest strength of the NDPERS DC plan is in its contribution policy. Employee contributions are 7 percent of salary (4 percentpicked-up by the employer and only 3 percent deducted from payroll). Employer contributions are 7.12 percent of salary. This total 14.12 percent of salary adequately meets the contribution recommendations by many retirement experts for non-safety employees, especially considering that participants in this plan are also in social security. This is a contribution schedule that, over a career of employment and combined with Social Security and personal savings, will produce a retirement income that allows plan participants to maintain their pre-retirement standard of living.

One consideration worth noting is that the DC employer contribution of 7.12 percent is the same as in the DB pension plan. While the rates between the two plans are not linked statutorily, the legislature should make clear that there is no link between the contributions in the two plans; different factors and policy considerations are used to determine the proper contribution rates in  DB and  DC plans so it is never a best practice to have the two linked.

Areas for Improving the Current Defined Contribution Plan

Outside of the strength of plan contributions, several important areas of the NDPERS DC plan are not consistent with best practices in DC design. The first among these is unfortunately common in many retirement plan designs today. Plan objectives are not fully and clearly defined in the governing statutes nor any material that participants or others can easily access. In the Statement of Investment Policy for the DC plan, NDPERS states, under Objectives of the Plan, that, “The Plan is a long-term retirement savings option intended as a source of retirement income for eligible participants.

Without a more comprehensive statement of objectives, it is not surprising that the current DC plan lacks certain features that would help it better meet employer and employee long-term retirement needs. It is also impossible to measure the plan’s effectiveness if its very objectives are unclear.

For the sake of this analysis, the objective of the NDPERS DC plan should be to meet employer workplace needs in the recruiting and retention of qualified workers and for the maintenance of an employee’s standard of living through retirement, in combination with Social Security and personal savings, following a full career of employment. (Note that this statement does not specify that the “full career of employment” is with one employer.)

The objective should further include that this benefit is provided in a cost-efficient way without the creation of unfunded liabilities. Preferably, the actual statement of objectives would be comprehensive and detailed enough to include specific income replacement goals and cost targets.

Perhaps the greatest shortcoming that is evident regarding the North Dakota DC plan today is that its very existence may not be clear to those eligible to participate in it as there is very little marketing or promotion of the DC plan.

The DB plan is referred to as the “main” retirement plan, implying, if not outright stating, that the DC is a lesser option. If the current legislative discussions result in defaulting most new hires by the state into the DC, both NDPERS and state employers will need to develop robust ways of helping to articulate the benefit to new hires and communicate the value of this option to those entering the retirement plan.

Improving the Investment and Distribution Options for Participants

Plan investments available in the NDPERS DC plan present a mixed bag of positives and negatives. To the system’s credit, they offer a solid mix of investment funds with acceptable fees and also have a series of target-date funds, also well priced, for participants preferring a “one-choice” option. The number of available funds is not overwhelming nor is it repetitive.

On the downside, there are no deferred annuities offered in the investment menu thereby limiting employee flexibility in preparing for retirement income. Also, it would be preferable to see some guaranteed investments included in the target-date portfolio constructions, again enabling better retirement preparation for participants.

Additionally, asset distribution options available under the DC plan are not consistent with a retirement plan designed to meet the key objective of predictable and stable post-employment income. The standard distribution method offered under the DC plan is a lump-sum withdrawal upon separation from service. The employee can roll this distribution over to an IRA or take periodic distributions. Lifetime annuity purchases are only available by the employee purchasing such annuity on the open market with the lump-sum distribution.

While common, these distribution choices limit the attractiveness of the DC plan as a core retirement plan. The plan sponsor could require annuitization of some or all assets (as they do in the DB plan) but they do not, effectively treating the core DC retirement plan as a supplemental savings plan. DC plans can do better in terms of operating as a true core retirement plan and meeting lifetime income security for employees.

Benefit portability is a key strength of most DC plans. That, however, is limited in the NDPERS DC plan. Savings attributable to employer contributions are vested for the employee over four years of service. This vesting schedule is not ideal and inhibits retirement benefit portability. Full and immediate vesting would be preferred. This schedule also treats defined contribution plan participants less favorably than the DB plan, which vests over three years. The DC vesting period should be reduced from its current level to enhance portability and value for the state’s future workforce.

Improved Disability Provisions Needed for Plan Participants

Finally, the DC plan does not include provisions for disabled employees other than giving them the ability to withdraw assets from the plan. A simple solution to this deficiency would be for the plan sponsor to slightly lower the employer contribution (likely by less than 50 basis points) and purchase insured disability benefits for all participants in the DC plan.

Conclusion

Overall, the NDPERS DC plan has a solid foundation with its excellent contribution rate.  With a few simple changes that would add little if any cost to the state, North Dakota’s DC plan could become a model for public retirement plans across the country.

The post Evaluating North Dakota’s Defined Contribution Retirement Plan for State Employees appeared first on Reason Foundation.

The North Dakota Public Employees Retirement System (NDPERS) has seen a significant increase in public pension debt in the last two decades. In the year 2000, the public pension plan, which serves North Dakota’s state employees, was 115 percent funded and had a $135 million surplus of funds for retirement benefits. Today, the pension plan is only 68 percent funded and has $1.4 billion in debt.

The latest analysis by the Pension Integrity Project at Reason Foundation, updated this month (January 2021), shows that for decades policymakers have created structural underfunding problems for the pension plan. Between 2003 and 2020, employer contributions into NDPERS were consistently less than the actuarially determined employer contribution (ADEC) rate, leading to an increase in unfunded liabilities.

In fact, since 2003, the state has not paid over $585 million in actuarially determined employer contributions to NDPERS because the contribution rate is set in the North Dakota state statute.

Additionally, deviations from the plan’s investment return assumptions have contributed to its unfunded liability growth. This growth in unfunded liabilities has driven pension benefit costs higher while crowding out other taxpayer priorities and programs in North Dakota.

The chart below, from the full solvency analysis, shows the increase in the North Dakota Public Employees Retirement System’s debt since 2000:

Today, NDPERS has only 68 percent of the assets needed to fully fund the pension system in the long-term.

This underfunding not only puts taxpayers on the hook for growing debt but also jeopardizes the retirement security of North Dakota’s state employees. Left unaddressed, the pension plan’s structural problems will continue to pull resources from other state priorities.

The solvency analysis also offers stress-testing designed to highlight potentially latent financial risks the pension system is facing. Reason Foundation also provides a number of policy suggestions that, if implemented, would address the declining solvency of the public pension plan. A new, updated analysis will be added to this page regularly to track the system’s performance and solvency.

Bringing stakeholders together around a central, non-partisan understanding of the challenges the North Dakota Public Employees Retirement System is facing—complete with independent third-party actuarial analysis and expert technical assistance—the Pension Integrity Project at Reason Foundation stands ready to help guide North Dakota policymakers and stakeholders in addressing the shifting fiscal landscape.

North Dakota Public Employees Retirement System (NDPERS) Pension Solvency Analysis

The post North Dakota Public Employees Retirement System Pension Solvency Analysis appeared first on Reason Foundation.