Overhaul or Tweak Pensions?

Reporting for the NYT, Mary Williams Walsh asks, An Overhaul or a Tweak for Pensions:
After more than three years of deliberations, the board that sets the accounting rules for state and city governments is still far away from issuing a new standard for public pension funds.

What may seem like tedious labors over technical matters can have a large impact on public employees, taxpayers and investors. Many municipalities around the country are grappling with serious shortfalls in their pension funds caused by the recession and other woes.

Since the deliberations began, San Diego’s finances have been rocked by a pension scandal; Vallejo, Calif., has filed for bankruptcy after promising costly benefits; and New Jersey has warned that it lacks the cash to comply with its actuary’s instructions.

The panel, the Governmental Accounting Standards Board, heard impassioned testimony on Wednesday on the need to make public pension numbers more straightforward, more closely mirroring the pension accounting for corporations. But proponents of an overhaul were countered at every step by state officials and others who testified that broad changes were unnecessary and would disrupt budgets by introducing market volatility.

The board, an independent nonprofit organization that sets the accounting standards for governments, has said that the next step will be the publication, by next May, of a “due process document” to offer possible changes in the rules. That will engender a new round of public comment and revisions, and eventually a new pension accounting standard. The process is expected to take several more years.

“I have concerns that these efforts may, in fact, be too late,” one speaker, Diann Shipione, told the board. She said that the existing accounting rules were too loose, allowing “pension mischief” to go on for many years.

“As a result of the fuzziness and imprecision,” she said, “we now have many large systems that are essentially insolvent.”

Ms. Shipione, a former trustee of the San Diego city pension fund, eventually became a whistle-blower, insisting that the fund’s financial reporting was false, constituting securities fraud. After a long legal battle, the Securities and Exchange Commission agreed with her. She is now earning a master’s degree in public administration at the Kennedy School of Government at Harvard.

Ms. Shipione told the accounting board that she thought revisions were needed to make it easier to see when states and cities were falling behind on their pension contributions, which she hoped would prompt them to pump more money into the plans.

But some members of the board took issue with her goals. William W. Holder, one member of the accounting board, told Ms. Shipione that the board’s duty was to write rules that produced accurate and informative financial reports — not to promote desirable activities like funding pension plans more robustly.

“We try to avoid bias in setting accounting standards,” he said. “What we don’t try to do is develop some preconceived notion of what that behavior would be, and then write a standard that would encourage it.”

In the corporate world, the Financial Accounting Standards Board writes the rules for pension disclosures. It also seeks to avoid bias, and also works at a slow, deliberative pace.

But FASB has a great deal more power and independence than its governmental cousin. Its rules are enforced by the S.E.C., and it was given an independent funding source in the post-Enron accounting reforms. The corporate pension accounting rules came under harsh criticism at the beginning of this decade, and the FASB has already issued some revisions. Others are still in the works.

The governmental board, by contrast, must still raise its own money. And because no government agency enforces its policies, it must issue rules that states and municipalities will adopt voluntarily. Six of its seven members work on a part-time basis.

Others who spoke on Wednesday sought to assure the accounting board that its existing rules were sound. They acknowledged that some governments had had pension debacles in the last few years but said that was because they did not follow the rules.

Robert A. Wylie, executive director of the South Dakota Retirement System, said that pension woes were largely absent in his state and that his plan had a well-established funding policy.

Mr. Wylie said South Dakota had the ability to reduce promised benefits when times were tight, something forbidden by statute or constitution in many other states. Because of this flexibility, he said, South Dakota had always been able to keep its contributions in line with its benefits. For a state like South Dakota, he said, the existing pension rules were “very workable.”

“Major changes may add to what would be, in our mind, confusion,” he said.

Questions posed by the board members suggested they were leaning toward making narrow changes in the existing rules, like shortening amortization schedules or reducing the number of actuarial methods that plans may use. They did not seem eager to grapple with the question of which discount rate to use to measure public pension obligations — the biggest issue in the minds of critics of the current rules.

A recent study published by the National Bureau of Economic Research found that the discount rates now in use were masking a pension shortfall of $1.2 trillion at the state level.

The questions from the board members also suggested that they were interested in making public pension funds more comparable to each other. The current accounting rules allow so much flexibility that comparisons can be unfair.

Jeremy Gold, an actuary and economist who testified at Wednesday’s meeting, said he expected that when the new standard was finally issued, it would improve the comparability of pension plans.

“The center of gravity is still in favor of sharper pencils, rather than a whole new way of doing things,” said Mr. Gold, who called for radical changes. “This will make Texas, California and New Jersey all comparable while they go to hell in a handbasket.”

The accounting board will reconvene in Washington on Friday for additional testimony.

Some comments on this story. First, I commend Ms. Shipione for stepping forth to speak out at what was going on at San Diego's city pension fund. Last September, I wrote about the need to defend whistleblowers, something which is still not being taken seriously at public pension funds.

San Diego's Retirement System was notorious for taking huge risks in all sorts of alternative investments and lost big money in the Amaranth gamble. But city pension funds across North America are in dire straights and instead of consolidating them into the state funds to save costs, powerful interests want to keep the status quo. When it comes to municipal pension plans, Pennsylvania is king:

Pennsylvania has four times more pension funds than any other state, and more than one-fourth of all the municipal pension plans in the country, according to the Public Employee Retirement Commission, an agency that advises the Legislature on pension issues and oversees the soundness of local plans. The number of local plans is growing by about 30 a year.

Most of the 3,100 retirement systems, for police, firefighters or nonuniformed workers, are small. That's costly for members and taxpayers. Of 2,462 that reported administrative expenses, the cost was $36 million, or $509 annually per member.

The cost per member is $1,519 for administrative expenses for plans with fewer than 10 members, the retirement commission says, and 67 percent of Pennsylvania's local pension systems are that small.

The USA Today asks whether campaign contributions help win pension fund deals:

More than two dozen firms that have surfaced in a broad corruption investigation of public pension funds gave at least $1.97 million in campaign contributions to officials with potential influence over the funds' investments, a USA TODAY analysis shows.

The givers included private-equity giants such as the Blackstone Group, the Carlyle Group and the Quadrangle Group, the firm founded by Steven Rattner, who in July resigned as the White House point man for the auto industry rescue. The contributions are legal, and the firms haven't been accused of wrongdoing related to the giving.

[Note: They should ban these contributions once and for all! Read John Bury's comment, Rules By and For Insiders - Public Pension Plans.]

The Government Accountability Office – the investigative arm of Congress – has laid some of the groundwork for pension reform by publishing a study of the “retirement risks” posed by private pension plans in the United States:

“Many experts agree reforms are needed to make the U.S. private pension system more effective in protecting workers from risks to accumulating and preserving adequate savings for retirement,” says the GAO report. “If no action is taken, a considerable number of Americans face the prospect of a reduced standard of living in retirement."

The July 2009 report is addressed to Rep. George Miller (D-Calif.), chairman of the House Education and Labor Committee. Miller is an advocate of “retirement security.”

As part of its study, the GAO examined the pension systems of the Netherlands, Switzerland and the United Kingdom and found that private pensions in those countries “represent alternative approaches” that could “yield useful lessons for the U.S. experience.”

The GAO also examined four “key” domestic proposals to reform the U.S. private pension system – including a government-sponsored, mandatory system called the Guaranteed Retirement Accounts (GRA) plan.

Under this plan, the federal government (Social Security Administration) would establish and administer a system of retirement savings accounts – guaranteeing a specified rate of return on those accounts.

Currently, pension plans offered by private employers in the United States are voluntary and include tax incentives to encourage participation.

The problem

According to the GAO study, stock market losses and poor economic conditions have put many U.S. workers at risk of not having an adequate retirement income from their private pension plans. Older Americans are less confident in their ability to retire. “Even before the current economic recession, research indicated that pension benefits are likely to be inadequate for many Americans,” the GAO study said.

Pointing to national survey data, the GAO noted that about half of the U.S. workforce was not covered by a pension plan in 2008.
Workers covered by defined contribution plans -- such as 401(k)s and IRAs -- risk making inadequate contributions or earning poor investment returns, the study found, while workers with traditional employer-sponsored, defined-benefit plans risk future benefit losses due to a lack of portability if they change jobs.

Leakage (withdrawing money before retirement), high fees, and “the inappropriate drawdown of benefits in retirement” are other concerns, the GAO said.


The GAO says its study focused on the Netherlands, Switzerland, and the United Kingdom because their private pension systems address many of the risks that U.S. workers face. Those systems also demonstrate “mandatory approaches can be used to increase coverage or contributions,” the GAO said.

But, as the GAO also noted, mandatory approaches – which have produced nearly universal coverage in the Netherlands and Switzerland -- also pose trade-offs. For example, in the Dutch and Swiss systems, sharing investment risk requires assets to be pooled and thus limits individual choice. And requiring annuities as a way for retirees to draw down their benefits limits people’s access to their assets.

Mandatory, government-run pension system here?

Of the four domestic proposals examined in the GAO report, only one is both mandatory and run by the government. Guaranteed Retirement Accounts (mentioned briefly above) would increase retirement savings by low- and middle-income households and provide a basic retirement income for workers, the GAO said.

Under GRA, both workers and employers would pay a mandatory minimum contribution of 2.5 percent each. Borrowing from the plan would be prohibited; and hardship withdrawals would be allowed only in case of disability.

Tax preferences for 401(k) plans and Individual Retirement Accounts would be replaced by a uniform $600 tax credit for all workers, regardless of income. State and local governments would have to notify the federal government of marriages and divorces so that contributions can be apportioned evenly between husbands and wives. State governments also would have to report who is receiving unemployment benefits to the Internal Revenue Service.

A centralized pension plan such as GRA would make “portability” easier and economies of scale would lower administrative costs, the GAO report said. But such a plan “may also be a costly and complex effort that requires new regulatory and oversight efforts. These costs could be passed on to workers, employers, and taxpayers in general.”

Three other domestic pension proposals examined by the GAO were more voluntary in nature. Two of those three were run by the private sector.

The GAO study concluded that no retirement system or pension proposal is perfect: “The challenge for Congress will be to balance the interests and responsibilities of workers, employers, and the government and find the most promising steps to help Americans achieve retirement security.”

Rep. Miller, to whom the GAO report is addressed, promised in October 2008 that his Labor and Education Committee would continue to “examine what measures may be needed to ensure a safe and secure retirement for workers, retirees and their families.”

At a House Education and Labor Committee hearing in February, Miller said it’s time for Congress to address “difficult questions about the state of our nation’s retirement system as a whole and look to see whether we need to create a retirement system that works for all Americans, not just the fortunate few.”

Over in the U.K., Dr. Ros Altman writes Get Real On Public Sector Pensions:

Today's Times suggests ministers are planning significant changes to council workers' pension arrangements – and probably to most other public sector pensions, too. Naturally, unions have reacted angrily, while taxpayer lobby groups welcome the proposals.

In my view, however, change is inevitable. With private sector final salary schemes across the country in deep deficit, employers are desperately looking for ways to reduce future pensions, or are closing schemes altogether. These economic realities cannot escape the public sector. The costs of these pension commitments have soared way beyond all previous expectations, as public sector employment levels and salaries have risen much faster than expected and workers are living ever longer.

Like almost all private sector schemes, local authority pension funds are in deficit (an estimated £60bn) as investment returns have not kept up with rising pension liabilities. Council tax increases alone cannot fund this shortfall, especially as the number of workers retiring will rise sharply in coming years. Already, about a quarter of some areas' council tax receipts is spent on pensions, and there is a limit to how far this can increase without jeopardising services or risking taxpayer revolts.

Ultimately, central government – that is, taxpayers across the country – will be forced to make up the difference between what councils can afford and the pension obligations they are committed to. But they already underwrite all other public sector pensions and, unlike local authority pensions, most public sector schemes are unfunded, which means absolutely no money has been set aside to pay the future pensions. Taxpayers in years to come will somehow have to find the money.

Government has not properly budgeted for this, having consistently tried to hide the true costs. When considering public sector pay, comparisons are generally made with the private sector, but the costs of pension accrual are not factored in, almost as if they do not exist. Of course pensions are paid many years hence, but the costs are nevertheless real.

A public sector pension is now probably worth about 30% extra salary, but public workers contribute well below 10% to their pensions, and sometimes nothing at all. Taxpayers have to make up all the difference. Also, unlike state pensions, there is no flexibility in these arrangements. When it comes to national insurance pensions, government can decide to change the parameters in order to control taxpayer costs. Indeed, national insurance pensions have been cut over the years, and pension ages will rise sharply, especially for women, as we are all living longer and healthier lives.

Public sector pensions cannot escape such realities forever, and the leaked proposals may herald a new round of reform. It is important to stress that any changes will not affect existing pensioners and will not reduce pensions that existing workers have already accrued.

However, unrealistic expectations will have to change, and we need transparency on the true costs of public sector pension commitments.

Workers are likely to have to either contribute much more each year or face the choice between working longer or receiving less pension in future.

Yes, of course public sector workers deserve a decent pension, but so do all pensioners. With such a low state pension, is it sustainable for good public sector pensions to be increasingly funded by taxpayers, who themselves have no such generous pension arrangements?

Public sector pensions should not be an alternative social welfare pension that is denied to, yet supported by, other taxpayers.

Finally, Pensions & Investments reports that Kennedy remembered for role in pension policy:

Sen. Edward M. Kennedy, D-Mass., who died of brain cancer Tuesday night, played a leading role in shaping U.S. pension policy, including the Pension Protection Act of 2006, the largest single reform of the U.S. pension system since the Employee Retirement Income Security Act of 1974.

Mr. Kennedy, chairman of the Senate Health, Education, Labor and Pensions Committee, was active even through his final weeks, working on pension-related issues in Congress and with the Obama administration.

He was “known for attracting the best and brightest minds, so it (came) as no surprise that Kennedy staffers would be mentioned for any number of positions” for top pension-related posts in the Obama administration, Anthony Coley, a spokesman for Mr. Kennedy, said in a Nov. 10, 2008, Pensions & Investments story, underscoring Mr. Kennedy's influence on pension policy and legislation in his Senate career, stretching back to 1962.

“Sen. Kennedy was very involved in pension issues and always took a pragmatic approach,” James A. Klein, president of the corporate pension advocacy group American Benefits Council, said in an interview.

In regard to Mr. Kennedy's work last December on the Worker, Retiree and Employer Recovery Act of 2008, providing corporate pension funding relief from the market meltdown and economic downturn, Mr. Klein said, “Sen. Kennedy tried to address issues on funding that wouldn't unduly burden the system.”

While Mr. Kennedy was better known for his work on health care, education and civil rights, “on pension issues that were not in the headlines, he worked very collaboratively with his Republican colleagues,” Mr. Klein said.

Ted Godbout, manager-communications at the ERISA Industry Committee, another pension policy advocacy group, said in a statement, “While we did not always agree with Sen. Kennedy's approach to pension and retirement policy, he was a friend of ERIC's and we always respected and admired his leadership and willingness to work with both parties to find common ground. He truly will be missed.”

”Sen. Kennedy was a national treasure,” Amy Borrus, deputy director of the Council of Institutional Investors, said in a statement. “He was one of the most effective leaders in the Senate and a widely respected voice on pension issues.”

In May, concerning allegations that Charles E.F. Millard, a former PBGC director, was inappropriately involved with the hiring managers to invest $2.5 billion, Mr. Kennedy joined five other senators, Republicans as well as Democrats, to refer the case to the Department of Justice, according to a June 1 P&I report.

The landmark Pension Protection Act toughened corporate funding requirements to strengthen the financial condition of pension plans and encouraged automatic enrollment in 401(k) plans, furthering retirement security.

I was chatting with Diane Urquhart today and we both agreed that even though Senator Kennedy went through some personal tragedies and controversies, he was a once in a lifetime politician - a true national treasure. She told me that the Canadian House of Commons couldn't accomplish a fraction of what he has accomplished in over 50 years.

Indeed, Senator Ted Kennedy's legislative record speaks for itself. He championed many great causes that I hold dear to my heart, including the American Disabilities Act, to prevent discrimination against people with disabilities.

If Senator Kennedy were alive today, he would be spearheading the health care debate as well as the pension crisis. And he wouldn't be tweaking anything, but going for an overhaul of the entire system to ensure everyone retires in dignity and security.

Below, I leave you with one of his greatest speeches ever - his 1978 speech on health care. The Senate's last lion will be sorely missed by everyone. May he rest in peace and may we all remember him and fight for what is right to make our society a better one for all, not just for the privileged few.