Professional Documents
Culture Documents
Richard C. Dreyfuss
Business Consultant and Actuary
Senior Fellow - The Commonwealth Foundation
1. Poor Benchmarking
3. Politics
4
#1 Poor Benchmarking
Pennsylvania public pay and benefits are
typically benchmarked only against other public
plans rather than the entire marketplace
5
Towers Watson Survey
Average DC Employer Cost - 5.77%
http://www.towerswatson.com/united-states/research/2106
90%
80%
70%
60%
50%
Traditional DB Plans
40%
Hybrid DB Plans
30% DC Plans
20%
10%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Traditional DB Plans 67 61 60 55 48 42 40 39 36 30 22 20 17
Hybrid DB Plans 7 13 14 18 24 30 30 29 25 23 26 25 26
DC Plans 26 26 26 27 28 28 30 32 39 47 52 55 58
6
Public Policy Principle #1
“Government has nothing to give anybody
except what it first takes from somebody.”
Source: “Seven Principles of Sound Public Policy” Remarks before the Economic Club of Detroit by Lawrence W. Reed | Oct. 29, 2001
7
#2 Poor Risk Management Practices
Few absolute metrics defining the affordability or
reasonableness of pension costs given the “perpetual
life of the government entity”.
Source: “Seven Principles of Sound Public Policy” Remarks before the Economic Club of Detroit by Lawrence W. Reed | Oct. 29, 2001
9
#3 Politics
Pensions as political capital
Pension Fund Surplus = Benefit Improvements
for Participants
10
Public Policy Principle #3
Source: “Seven Principles of Sound Public Policy” Remarks before the Economic Club of Detroit by Lawrence W. Reed | Oct. 29, 2001
11
Politics
Pensions are not well understood
Abundance of half-truths
12
“Pension Magic” in Florida
(and elsewhere)
30.00%
25.00%
20.00%
Current Law
15.00% HB 2497
10.00%
5.00%
0.00%
2019
2028
2037
2011
2012
2013
2014
2015
2016
2017
2018
2020
2021
2022
2023
2024
2025
2026
2027
2029
2030
2031
2032
2033
2034
2035
2036
2038
2039
2040
2041
2042
2043
2044
14
100%
50%
55%
60%
65%
70%
75%
80%
85%
90%
95%
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Current Law
2025
2026
2027
2028
HB2497
2029
2030
2031
PSERS Projection of Funded Ratio
2032
2033
Senate Amended 2034
2035
2036
2037
2038
2039
PSERS Projection of Funded Ratios
2040
2041
2042
2043
2044
15
Negative Implications of HB 2497
Unacceptable Risks, Generational Theft, Non-Reform
During the next 30 years all this will be made worse if we:
1. Fail to earn the 8% annual assumed rate-of-return on the
assets
5. Given all this, what are the financial incentives to live, work, or invest
in Pennsylvania?
“While options for closing the funding gap abound, none are palatable.”
1. “They can de-risk by better matching existing bond holdings to the duration of
their liabilities, but this would lock in their underfunded status to the point they
may need to make additional contributions.”
2. “They can implement various hedging strategies for the interest rate and
equity risk, which is costly and not a perfect solution.”
3. “They can step up their investments into high yield bonds or alternatives such
as hedge funds and private equity, which would involve more risk-taking.”
4. “Or, if they don't have cash on hand, they might be forced to revisit payouts.”
Milliman's annual pensions study shows the average equity allocation has fallen
more than 15% over the past three years.
21
Thoughts for Pension Asset Managers
4. DB pension plans will face liquidity challenges as politicians are faced with
a combination of raising taxes, enacting reforms or further deferring costs
while triangulating the politics – bankruptcies likely to occur.