Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

In this story:



<ul>
<li>More than 3,000 PERA members and retirees took part in two town hall meetings</li>



<li>Topics of discussion included PERA’s financials, state funding, investments, and Social Security</li>



<li>Read summaries of questions/answers and view clips from the events</li>
</ul>



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This year’s town hall meetings with PERA Executive Director Ron Baker and Chief Investment Officer Amy C. McGarrity, which featured new ways for members and retirees to connect, drew more than 3,000 live participants across the web, phone, and social media. Many more have since watched the events online.



The conversation centered on PERA’s recently released 2020 Annual Report but also touched on topics such as state funding, green energy investments, and Social Security.



Below is a summary of some of the questions and answers from the events. For full recordings of the town halls, visit <a href="https://www.copera.org/about/pera-town-hall" target="_blank" rel="noreferrer noopener">copera.org/townhall</a>.



<h5 class="wp-block-heading">How are PERA’s investments doing?</h5>



While 2020 was turbulent for investors, it ultimately was a strong year in the markets. PERA’s total fund return for the year was 17.4%. The 10-year annualized return is 9.4%. PERA’s funded ratio at the end of 2020 was 62.8%.



More information is available in PERA’s <a href="https://content.copera.org/how-its-made-peras-financial-report/" target="_blank" rel="noreferrer noopener">Annual Report</a>.



<h5 class="wp-block-heading">What is PERA doing about the Windfall Elimination Provision and reductions in Social Security benefits?</h5>



Executive Director Ron Baker discussed PERA’s efforts to work with Colorado’s congressional delegation on this issue and the challenges with changing the WEP at the federal level. Watch the clip below for more:



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<h5 class="wp-block-heading">Will member contributions be going up again?</h5>



Member contribution rates increased by 0.5% on July 1 for all members except those in the Local Government Division due to the scheduled increases established in 2018’s Senate Bill 200. This is the third and final year of the three-year phase-in of the 2% rate increase for member contributions.



In addition, because of changes to PERA’s liabilities (<a href="https://www.copera.org/what-to-know-about-peraplus-401k-457-dc-plans-in-2022" target="_blank" rel="noreferrer noopener" class="broken_link">learn more about this here</a>), the <a href="https://content.copera.org/thousands-participate-in-peras-interactive-town-hall-meetings/" target="_blank" rel="noreferrer noopener">Automatic Adjustment Provision</a> will go into effect next year. That means member contributions will increase by 0.5%, and the annual increase for benefit recipients will decrease by 0.25%, in July 2022.


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“We understand how difficult that is to hear,” Baker said. “For our active members, that is more money out of your pocket, and for our benefit recipients, that is less money in your pocket in increases. The reason we need to do this is so we continue to have a strongly funded system.”



<h5 class="wp-block-heading">Will retirees receive an annual increase this year?</h5>



Yes, the <a href="https://www.copera.org/retirees/annual-benefit-increases" target="_blank" rel="noreferrer noopener">Annual Increase</a> (AI) paid in July 2021 will be 1.25% for most retirees. The AI amount for eligible PERA benefit structure retirees hired on or after January 1, 2007 will be 1.2%.



<h5 class="wp-block-heading">Did the state make its $225 million direct payment to PERA this year?</h5>



The state paid its $225 million direct distribution to PERA on July 1, 2021. While the direct distribution from 2020 will not be paid, the Legislature underscored its commitment to PERA and the retirement security of hundreds of thousands of Coloradans by creating a cash fund to pay for future contributions to PERA.



<h5 class="wp-block-heading">Why doesn’t PERA divest from fossil fuels and invest in green energy instead?</h5>



PERA invests in a wide variety of asset types with the goal of securing the best possible risk-adjusted returns for its members. Hear more from Chief Investment Officer Amy C. McGarrity in the clip below:



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<h5 class="wp-block-heading">I’m counting on PERA for my retirement income; do you have my back?</h5>



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“This organization, and I think more importantly, the General Assembly, has your back,” Baker said. “The PERA Board absolutely has your back; they are members and also governor appointees. All of us in this organization work very diligently to ensure that we’ll be here for the long term as well.”



To watch the town hall events in full, visit <a href="https://www.copera.org/about/pera-town-hall" target="_blank" rel="noreferrer noopener">copera.org/townhall</a>.

Thousands participate in PERA’s interactive town hall meetings

Innovative strategies for responding to changing
demographics and market conditions are keeping public retirement plans
sustainable, and Colorado PERA is a leading example, according to a new <a href="https://www.plansponsor.com/variable-arrangements-can-introduce-stability-public-db-plans/">report</a>
from the <a href="https://www.slge.org/assets/uploads/2019/09/proactive-pension-management.pdf">Center for State and Local
Government Excellence</a>
(SLGE) and <a href="https://www.aarp.org/">AARP</a>.



Since
the recession in 2008, many retirement systems have struggled with changing
demographics and reduced expectations for their investment returns, resulting
in lower funded ratios for their pension plans. In many cases, making changes
to address these challenges and maintain plan stability required legislative
action.



In response, some plans have created formulas that
give plans the flexibility to make adjustments to their benefits and/or
contributions to maintain long-term stability that do not require unpredictable
or time-consuming legislative changes. 
 
The report
notes that such formulas “enable all stakeholders to understand how, when, and
to what extent contributions or benefits might be subject to formula-based
changes, and as a result, enable them to plan for the long term.”



Legislation passed in 2018 included this type of
provision for PERA, called the <a href="https://content.copera.org/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3/">automaticadjustment</a>. Every June, PERA reviews progress toward its funding
goal. If PERA is behind schedule, member and employer contributions will increase,
and the annual increase decreases. If PERA is ahead of schedule, the annual
increase will rise and contributions will decrease.



Prior to that legislation, making any changes to
PERA’s contributions or benefits required legislation. Over the previous 15
years, annual contribution deficiencies resulted in a <a href="https://content.copera.org/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3/">fundingdeficit</a> of $4.6 billion.



The report highlighted PERA’s lengthy research and <a href="https://content.copera.org/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3/">stakeholderengagement process</a>. The resulting legislation, <a href="https://www.copera.org/pera-on-the-issues/colorado-pera-provides-roadmap-for-sustainable-public-retirement-plans-3">Senate Bill 18-200</a>
affected employers, employees and retirees. Together with adjustable
contributions and rate of annual increase, “PERA may be better able to meet its
fiduciary responsibility to ensure all members will receive their earned
pension benefit both in the short and long term.”



The report notes that while the economy has
stabilized since the 2008 recession and many public pension plans have
maintained or improved their funding rates, “relatively stable economic
conditions are not guaranteed to prevail.” However, these variable funding
structures may help pension plans in responding to shifting conditions.



SLGE does not recommend a particular pension
funding structure, according to an <a href="https://www.plansponsor.com/variable-arrangements-can-introduce-stability-public-db-plans/">article</a>
from <a href="https://www.plansponsor.com/">PlanSponsor</a>.

Colorado PERA provides roadmap for sustainable public retirement plans

A recent paper from the National Association of State Retirement Administrators, <a href="https://www.nasra.org/files/Spotlight/Risk%20Sharing%20in%20Public%20Retirement%20Plans.pdf">In-Depth: Risk Sharing in Public Retirement Plans</a>, looks at how different public retirement plans have incorporated a variety of risk-sharing features into their plan designs. Colorado PERA is included as a case study for its use of automatic changes to contribution rates and benefit levels.



<h4 class="wp-block-heading">Why risk sharing</h4>



As the paper notes, a primary objective of any retirement plan is to provide income during retirement by moving a portion of compensation from the working to the retirement years. And while a variety of factors impact the effectiveness of a retirement plan, a few things are especially important: adequate contributions and investment returns, as well as predictions of inflation and the life expectancy of plan members. There are risks – meaning there is a chance of a financial loss compared to what is expected – with each of these factors.



Long-time
readers of PERA on the Issues will be familiar with the following formula:



C+I=B+E 



Which stands for: Contributions + Investment earnings = Benefits + Expenses.



The revenue a retirement plan receives must, over time, equal the cost of the benefits and expenses the plan pays. If the assumptions underlying any of those factors change over time – if contributions decrease or investments earn less than expected, or if benefits or expenses grow faster than inflation – another factor of the equation must shift or the plan gets out of balance.



Who bears the impact of those changes – who takes on the risk and when those changes should occur – must be addressed. As the paper notes, “Nearly every state in recent years enacted reforms to [their] pension plans&#8230;. As a result, although most public employers in the U.S. have retained [Defined Benefit] plans, in many plans, more risk has shifted from employers to employees.”



In different states, cost-of-living adjustments have been reduced, employees have been required to work longer or to a higher age, employee contributions have been increased, and employers have paid higher costs.



The paper focuses on risk sharing plans that do two things compared to traditional defined benefit or defined contribution plans. First, they distribute risk among both employees and employers. And second, they articulate who bears what risk and how, before the loss or gain actually occurs.



Plans in which either the employees or the employers bear all the risk may experience bad outcomes. “Plans in which risks are strategically and optimally assigned&#8230;may be found to be more sustainable,” the paper notes.



The paper points to the automatic adjustment feature of <a href="https://leg.colorado.gov/bills/sb18-200">Senate Bill 200</a>, <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" class="broken_link">approved in 2018</a>, as an example of risk sharing based on the relationship between contribution rates, which are set by the Legislature, and the rate determined by the actuarial experience of the plan’s level of funding (the actuarially-determined contribution, or ADC). Put simply, when the actual rate of contributions to PERA is less than 98 percent of the ADC, the statute requires that employer and employee contribution rates go up by up to 0.5 percent in any one year, not to exceed an additional 2 percent total increase. Conversely, if the rate of contributions were to reach 120 percent or more of the ADC, the contribution rates would decrease. A direct payment to PERA from the state as well as changes to retirees’ cost-of-living adjustments are also triggered. 



The paper notes that it is unusual for such contribution and benefit increases or decreases to be contingent on the ratio between actual contribution levels and the ADC, and that they are projected to eliminate PERA’s unfunded liability by 2047.



<h5 class="wp-block-heading">Read more about PERA’s Automatic Adjustment Provision <a href="https://content.copera.org/peras-automatic-adjustment-provision-a-case-study-for-pension-risk-sharing/">here</a>.</h5>



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PERA’s Automatic Adjustment Provision a Case Study for Pension Risk Sharing

On June 21, the Colorado PERA Board of Trustees released the 2018 Comprehensive Annual Financial Report (CAFR). The report includes 2018 information on PERA&#8217;s financials, including the funded status of the plan and the 2018 investment performance. The report, as well as an abbreviated interactive overview, is available on the PERA <a href="https://content.copera.org/2016-legislative-session-wrap-up/">website</a>. 



For the year ending December 31, 2018, one of the major factors influencing the fund was passage of <a href="https://www.copera.org/contributions-to-colorado-pensions-lower-than-average" class="broken_link">SB 18-200</a>. This landmark legislation included major changes to the plan including provisions to help PERA stay on the path to reach full funding by 2047, even when there are departures from PERA&#8217;s core assumptions, including the investment return. When needed, these provisions will automatically trigger changes in contributions and annual increases.



For most investors, 2018 was a difficult year. For the year ending December 31, 2018, PERA&#8217;s investment portfolio returned a negative 3.5 percent, net of fees. Beyond economic conditions, changes in demographics also contributed to overall actuarial losses to the fund. The fund closed the year 2018 with a fiduciary net position of $45.2 billion, representing a $3.8 billion decrease compared with the year ending 2017. Over 30 years, the fund has increased the fiduciary net position by $37.2 billion. 



The <a href="https://www.copera.org/pera-staff-keep-legislators-prepared-for-2019-legislative-session" class="broken_link">automatic adjustment</a> is already working as intended: Last year&#8217;s investment losses coupled with demographic shifts mean that the automatic adjustment will be used in July 2020, adjusting member contributions, employer contributions, and the AI paid to retirees. Recall that SB 200 contained scheduled increases for members of 0.75 percent in July 2019 and 0.75 percent in July 2020. (Except for members in the Local Government Division.) In addition, the AI paid to retirees was suspended for the second year. Due to the automatic adjustment, member contributions will increase by an additional 0.5 percent in July 2020 and the AI paid to retirees will be set at a maximum of 1.25 percent. As such, starting in 2020, most members will contribute a total of 10 percent to PERA from each paycheck. The amount all employers contribute to PERA will also increase by one half of one percent in July 2020. Total employer contributions will range from 14.2 percent to 23.6 percent, depending on the Division, in addition to the $225 million direct distribution from the State of Colorado.



For more details, please see:



<a href="https://content.copera.org/how-its-made-peras-financial-report/">Colorado
PERA 2018 Financial Snapshot</a>



<a href="https://www.copera.org/pera-board-releases-2018-financials" class="broken_link">Colorado PERA 2018 ComprehensiveAnnual Financial Report Infographic</a>



<a href="https://www.copera.org/pera-board-releases-2018-financials" class="broken_link">Colorado PERA 2018 SummaryAnnual Financial Report</a>



<a href="https://content.copera.org/proxy-voting-an-obscure-term-with-real-implications-for-pera/">Colorado PERA 2018 Comprehensive
Annual Financial Report</a>

PERA Board releases 2018 financials

As regular readers of PERA on the Issues know, Senate Bill 18-200 (SB 200) was passed by the General Assembly and signed by Governor Hickenlooper earlier this year. Changes resulting from this legislation will put PERA on a path to full funding in approximately 30 years and give PERA’s members and retirees, as well as Colorado taxpayers, a stronger, more stable retirement fund.



Included in SB 200 is an innovative mechanism that automatically adjusts both contributions to and distributions from the PERA trust funds in order to keep the plan on track to that goal of full funding.



The provision requires automatic changes to four components of PERA funding: member contributions, employer contributions, the State’s direct distribution and the annual increase (AI) paid to retirees. Prior to SB 200, the only way that contribution rates or annual increase percentages could change was by passing legislation.



If PERA’s period to reach full funding falls behind the funding goal, contributions and the direct distribution would increase while the AI would decrease. If the funding period moves ahead of the goal, contributions and the direct distribution would decrease, and the AI would increase. There are limitations on increases or decreases in a single year.



Through implementation of the automatic adjustment, PERA’s funding will continue to make progress toward full funding within 30 years of SB 200.



A fact sheet on the automatic adjustment can be found <a href="https://content.copera.org/peras-automatic-adjustment-provision-a-case-study-for-pension-risk-sharing/" target="_blank" rel="noreferrer noopener">here,</a> and a video explaining the provision can be viewed <a href="https://youtu.be/aePAHw2hhLY">here</a>.

Tag Archives:

Thousands participate in PERA’s interactive town hall meetings

Colorado PERA provides roadmap for sustainable public retirement plans

PERA’s Automatic Adjustment Provision a Case Study for Pension Risk Sharing

PERA Board releases 2018 financials

Senate Bill 200’s automatic adjustment keeps PERA full funding on track

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