The pension equation is relatively simple: Contributions and investment income must equal benefits and expenses, or C + I = B + E. As with all equations, the task is getting the two sides to balance. When one side of the equation exceeds the other, challenges arise. In the case of PERA, there was an imbalance caused by contributions and investment income being insufficient to fund current and future benefit payments. The difference between those two sides is the unfunded liability.

Let’s look at that equation in greater detail as a way to better understand the need for changes to PERA, many of which were included in SB 18-200, passed in the Colorado Legislature and signed into law earlier this year.

Contributions
Contributions from members ($910 million in 2017) and their employers ($1.6 billion in 2017) are invested and used to pre-fund retirement benefits. These amounts represent a steady stream of capital that is invested every day the financial markets are open. Currently, most members contribute 8 percent of their pay. Employers also contribute a percentage of salary. Research by the National Association of State Retirement Administrators (NASRA) has shown that the member contribution rate for most public non-Social Security retirement plans has increased since 2009. At PERA, the member contribution rate will begin to increase gradually on July 1, 2019, to equal an additional 2 percent of pay (for most members) by July 1, 2021. The employer contribution rate will also increase on July 1, 2019, for PERA employers (except in the Local Government Division).

Investment Income
PERA is a long-term investor, with a diversified portfolio of investments currently totaling more than $48 billion. With billions of dollars to invest, the investment team at PERA is able to attain low fees. Most members will work 20 or more years, so investments from contributions have time to compound and grow before they will be used to pay benefits. Investment income in 2017 was $7.7 billion.

Benefits
In 2017, PERA paid $4.8 billion in benefits to more than 118,000 benefit recipients. This amount also includes refunds and rollovers made to those members who withdrew their accounts after leaving PERA-covered employment.
Changes included in Senate Bill 18-200 combined with investment returns resulted in a significant improvement of PERA’s funded status for all five divisions, with each reaching full funding within 30 years. These significant changes made to the benefits side of the equation reduced PERA’s liabilities by $3.4 billion, bringing the equation further into balance.

Expenses
Some have questioned whether or not PERA’s expenses could be reduced. PERA invests $48 billion in member assets and pays more than $4 billion in benefits annually – all with the foremost attention to cost. The overall cost to invest assets and pay benefits has averaged about 50 basis points (0.50%) over time – an extremely cost effective and competitive sum that allows PERA to have more assets to invest.

The changes in benefits included in SB 200 were necessary to rebalance the equation, ensuring that C + I = B + E.