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.

Since 1931, Colorado PERA has been providing retirement and other benefits to the public employees who keep our state running. As the workforce and retirement landscape have changed, PERA also has adapted and grown; Colorado’s largest public retirement plan now covers nearly 700,000 current and former public workers.



PERA benefits, including the hybrid defined benefit plan and the option for some members to choose a defined contribution plan, have been valuable in helping public agencies recruit and retain employees for decades. Critics of defined benefit pensions, however, argue that today’s workers would be better served by other types of plans. An upcoming study will help shed light on that debate.



<h4 class="wp-block-heading">Purpose and scope</h4>



During the 2024 legislative session, state lawmakers passed <a href="https://leg.colorado.gov/bills/hb24-1427" target="_blank" rel="noreferrer noopener">House Bill 1427</a>, which&nbsp;calls for the State Auditor, in cooperation with PERA, to enlist an independent actuarial firm experienced with public pensions to conduct a comprehensive study comparing the cost and effectiveness of the PERA Defined Benefit (DB) Plan to alternative plan designs, as well as providing an analysis of certain aspects of PERA’s current&nbsp;defined benefit&nbsp;and&nbsp;defined contribution&nbsp;plans.



The study will be similar in scope and purpose to&nbsp;<a href="https://content.copera.org/key-pera-features-make-colorados-largest-retirement-plan-efficient-and-effective/" target="_blank" rel="noreferrer noopener">a study that took place following similar legislation in 2014</a>. That study compared various facets of the PERA DB Plan—such as cost per member, contribution rates, income replacement ratio, and&nbsp;portability—to other public and private sector plan types, including Social Security. The study is <a href="http://leg.colorado.gov/sites/default/files/documents/audits/1409s_colorado_public_employees_retirement_association_pera_hybrid_defined_benefit_plan_study.pdf" target="_blank" rel="noreferrer noopener">available online here</a>.



Why refresh the study after a decade? In part, things have changed, and state leaders see value in having updated data. Since the last study, Colorado has seen tremendous growth, the public workforce has changed, and various reforms have put PERA on a path to full funding. This new study will incorporate all those changes to provide a more accurate assessment of PERA’s value to employers and the state as a whole.



While a lot has changed in the past 10 years, one thing that hasn’t is PERA’s commitment to providing retirement security to our members. The previous study concluded that PERA’s plan provides a better benefit at a lower cost than other plans, making it the best option for providing retirement benefits to the state’s public employees. We believe an updated study will show the same results.



<h4 class="wp-block-heading">What’s next?</h4>



The State Auditor and PERA have until the end of October to select an actuarial firm to conduct the study. Once a firm is selected, the study is likely to take several months to complete.



When the study is complete, PERA and the State Auditor will provide a report of the study’s findings to the governor, the Joint Budget Committee, the Legislative Audit Committee, and the House and Senate Finance Committees.



We’ll also provide a summary of the study’s findings here on PERA On The Issues. Make sure you’re <a href="https://www.copera.org/pera-on-the-issues/subscribe">subscribed</a> to our biweekly newsletter to receive all the latest updates.

Why the State is Commissioning a Study on PERA’s Plan Design

The PERA Board of Trustees has recommended <a href="https://content.copera.org/board-proposal-calls-for-clarity-in-salary-parity-in-benefits/" target="_blank" rel="noreferrer noopener">reforms to PERA</a> designed to reduce the overall risk profile of the plan and improve PERA’s funded status. In light of these recommendations, it can be helpful to see how PERA as it exists today compares to similar plans across the country and how the Board’s proposal for future changes might compare as well. Comparing the PERA benefit to that of public employees in others states can also help ensure that Colorado’s public employers can attract and retain talented employees.



In a time of shifting economic and fiscal realities, PERA is not alone in considering reforms that will impact funding levels and benefit structures over time. <a href="http://www.governing.com/news/headlines/tns-kentucky-pension-reforms-worse.html" target="_blank" rel="noreferrer noopener">Significant changes</a> have been proposed to Kentucky’s public pension systems, and in Ohio, the board of the retirement plan for teachers <a href="https://www.copera.org/colorado-pera-plan-design-compared-to-other-non-social-security-public-employee-retirement-plans" target="_blank" rel="noreferrer noopener">recently reduced</a> the cost-of-living adjustment to zero.



(More information on the Board’s recommendation is available at a dedicated website, <a href="https://www.copera.org/colorado-pera-board-endorses-package-reforms" target="_blank" rel="noreferrer noopener">PERAtour</a>.)



Looking at various features of similar public pension plans across the United States – that is, large public plans with members who, for the most part, do not participate in Social Security – shows that PERA is somewhat typical. Features such as member and employer contribution rates, cost of living adjustments (COLAs) or automatic increases, and benefit multipliers vary across plans, but Colorado’s plan tends to fall in the middle of a range of these features.



The charts below indicate how these public retirement plans compare, and where PERA fits in – both today and if the Board’s proposal were to be implemented in the future.



One area where PERA is an outlier is in excluding Section 125 and 132, or so-called “Cafeteria Plan” and flexible spending account deductions from PERA-includable salary. In a survey conducted by the <a href="http://www.nasra.org/" target="_blank" rel="noreferrer noopener">National Association of State Retirement Administrators</a>, Colorado is the only one of 28 plans surveyed that excludes these deductions.



(It should be noted that the data presented here are simplified for purposes of this discussion and caution must be used in interpreting the information. For example, in Colorado, State Troopers pay a higher employee contribution because they can retire sooner than other members. While a few of those exceptions are noted, in most cases the most common or average data point for a given plan is used. Our sources include data compiled by PERA staff in February of 2017 and comparison data from the <a href="https://www.copera.org/colorado-pera-plan-design-compared-to-other-non-social-security-public-employee-retirement-plans" target="_blank" rel="noreferrer noopener">Wisconsin Legislative Council</a> from December, 2016.)



<figure class="wp-block-table"><table><tbody><tr><td colspan="2">Member contribution rate by state</td></tr><tr><td>State</td><td>Rate as percent of payroll</td></tr><tr><td>Connecticut Teachers</td><td>6</td></tr><tr><td>Alaska Public Employees</td><td>6.75</td></tr><tr><td>Maine</td><td>7.65</td></tr><tr><td>Colorado (current)*</td><td>8</td></tr><tr><td>Louisiana State Employees</td><td>8</td></tr><tr><td>Louisiana Teachers</td><td>8</td></tr><tr><td>Illinois State Universities</td><td>8</td></tr><tr><td>Alaska Teachers</td><td>8.65</td></tr><tr><td>Illinois Teachers</td><td>9</td></tr><tr><td>Kentucky non-University</td><td>9.105</td></tr><tr><td>California</td><td>9.205</td></tr><tr><td>Colorado proposal*</td><td>10-11</td></tr><tr><td>AVERAGE of current plans</td><td>10.34</td></tr><tr><td>Massachusetts State Employees</td><td>11</td></tr><tr><td>Massachusetts Teachers</td><td>11</td></tr><tr><td>Ohio Public Employees</td><td>14</td></tr><tr><td>Ohio School Employees</td><td>14</td></tr><tr><td>Ohio Teachers</td><td>14</td></tr><tr><td>Nevada</td><td>14.5</td></tr><tr><td>Missouri</td><td>14.5</td></tr><tr><td>Texas</td><td>15.1</td></tr></tbody></table></figure>



*Note that Colorado State Troopers currently contribute 10 percent of payroll. The Board proposal would increase contributions for members hired before January 1, 2020, by an additional 3 percent above current contribution rates and for those hired on or after January 1, 2020, by an additional 2 percent. This is because for new hires starting in 2020, and for members with less than five years of service credit as of January 1, 2020, more years of salary will be considered to calculate an average salary used to determine the total retirement benefit and the retirement age will be higher.



<figure class="wp-block-table"><table><tbody><tr><td colspan="2">Employer contribution rate by state</td></tr><tr><td>State</td><td>Rate as percent of payroll</td></tr><tr><td>Massachusetts State Employees</td><td>12.41</td></tr><tr><td>Ohio Public Employees</td><td>14</td></tr><tr><td>Ohio School Employees</td><td>14</td></tr><tr><td>Ohio Teachers</td><td>14</td></tr><tr><td>Missouri</td><td>14.5</td></tr><tr><td>Nevada</td><td>14.5</td></tr><tr><td>Texas</td><td>15.1</td></tr><tr><td>Colorado (current)*</td><td>19.13</td></tr><tr><td>Maine</td><td>19.29</td></tr><tr><td>Massachusetts Teachers</td><td>19.61</td></tr><tr><td>Colorado (proposed)*</td><td>21.13</td></tr><tr><td>Alaska Public Employees</td><td>24.84</td></tr><tr><td>Louisiana Teachers</td><td>26.3</td></tr><tr><td>California</td><td>26.58</td></tr><tr><td>Alaska Teachers</td><td>29.27</td></tr><tr><td>Connecticut Teachers</td><td>30.35</td></tr><tr><td>Kentucky non-University</td><td>30.755</td></tr><tr><td>Illinois Teachers</td><td>36.64</td></tr><tr><td>Louisiana State Employees</td><td>37.8</td></tr><tr><td>Illinois State Universities</td><td>45</td></tr></tbody></table></figure>



*More detailed information on PERA contribution rates may be found in this <a href="https://www.copera.org/real-return-investments-for-inflation-protection" target="_blank" rel="noreferrer noopener">fact sheet</a>. Note that while the SAED is paid by employers, it is to be funded by foregone wage increases. The figure here is for the State Division, the AED and SAED, minus 1.02 percent which is dedicated to the Health Care Trust Fund. Contribution rates shown in this table generally reflect teachers, higher education faculty, school employees, and regular state employees.



The multiplier in a defined benefit plan is a factor used to determine the monthly benefit. An example of PERA’s multiplier is 2.5 percent times years of service times the Highest Average Salary (HAS). For a member with 30 years of service credit, the monthly benefit would be 75 percent (30 times 2.5 percent) multiplied by the HAS. (The PERA Board reviewed changes to the multiplier, but decided to maintain the current 2.5 percent factor.)



<figure class="wp-block-table"><table><tbody><tr><td colspan="2">Benefit multiplier by state</td></tr><tr><td>State</td><td>Benefit multiplier*</td></tr><tr><td>Maine</td><td>2</td></tr><tr><td>Connecticut Teachers</td><td>2</td></tr><tr><td>Ohio Teachers</td><td>2.2</td></tr><tr><td>Illinois State Universities</td><td>2.2</td></tr><tr><td>Illinois Teachers</td><td>2.2</td></tr><tr><td>Nevada</td><td>2.25</td></tr><tr><td>Texas</td><td>2.3</td></tr><tr><td>California</td><td>2.4 (varies by age)</td></tr><tr><td>Alaska Public Employees</td><td>2.5 (varies by service)</td></tr><tr><td>Alaska Teachers</td><td>2.5 (varies by service)</td></tr><tr><td>Colorado (current and proposed)</td><td>2.5</td></tr><tr><td>Louisiana State Employees</td><td>2.5</td></tr><tr><td>Louisiana Teachers</td><td>2.5</td></tr><tr><td>Massachusetts State Employees</td><td>2.5</td></tr><tr><td>Massachusetts Teachers</td><td>2.5</td></tr><tr><td>Ohio Public Employees</td><td>2.5 (varies by service)</td></tr><tr><td>Ohio School Employees</td><td>2.5 (varies by service)</td></tr><tr><td>Missouri</td><td>2.5</td></tr><tr><td>Kentucky non-University</td><td>3 (varies by service)</td></tr></tbody></table></figure>



*Where noted, plans have variable multipliers based on age or years of service at retirement. Those listed are the highest possible multipliers earned.



<figure class="wp-block-table"><table><tbody><tr><td colspan="3">Annual increase provisions by state</td></tr><tr><td>State</td><td>Rate as percent of payroll</td><td>Notes*</td></tr><tr><td>Ohio Teachers</td><td>0</td><td>Fixed/Simple</td></tr><tr><td>Texas</td><td>0</td><td>Ad hoc</td></tr><tr><td>Illinois Teachers</td><td>1.25</td><td>Indexed/Simple</td></tr><tr><td>Illinois State Universities</td><td>1.375</td><td>Indexed/Simple</td></tr><tr><td>Colorado (proposed)</td><td>1.5</td><td>Fixed/Compound</td></tr><tr><td>Kentucky non-University</td><td>1.5</td><td>Fixed/Compound</td></tr><tr><td>Louisiana State Employees</td><td>1.5</td><td>Ad hoc/Typically simple</td></tr><tr><td>Louisiana Teachers</td><td>1.5</td><td>Ad hoc/Typically simple</td></tr><tr><td>Missouri</td><td>1.5</td><td>Indexed/Compound</td></tr><tr><td>Connecticut Teachers</td><td>1.75</td><td>Indexed/Compound</td></tr><tr><td>Alaska Public Employees</td><td>1.95</td><td>Indexed/Compound</td></tr><tr><td>Alaska Teachers</td><td>1.95</td><td>Indexed/Compound</td></tr><tr><td>California</td><td>2</td><td>Fixed/Simple</td></tr><tr><td>Colorado (current)</td><td>2</td><td>Fixed/Compound</td></tr><tr><td>Maine</td><td>2.2</td><td>Indexed/Compound</td></tr><tr><td>Massachusetts State Employees</td><td>3</td><td>Ad hoc, Indexed/Simple</td></tr><tr><td>Massachusetts Teachers</td><td>3</td><td>Ad hoc, Indexed/Simple</td></tr><tr><td>Nevada</td><td>3</td><td>Indexed/Compound</td></tr><tr><td>Ohio Public Employees</td><td>3**</td><td>Fixed/Simple</td></tr><tr><td>Ohio School Employees</td><td>3</td><td>Fixed/Simple</td></tr></tbody></table></figure>



*Annual increase provisions vary by state. Those that are indexed are tied to various measures, including <a href="https://www.copera.org/real-return-investments-for-inflation-protection" target="_blank" rel="noreferrer noopener">Consumer Price Index</a> (CPI), or <a href="https://www.ssa.gov/oact/cola/colaseries.html" target="_blank" rel="noreferrer noopener">Social Security benefit increases</a>. Ad hoc increases may be recommended by a board or set by the state legislature. The COLA PERA pays is compounding, increasing the base benefit each year. However, some systems pay COLAs that are not compounded (simple interest) and do not increase the base benefit for the next year’s COLA payment.



**This figure does not reflect the recent decision of the Ohio Public Employees Retirement System to recommend a reduction in its cost of living adjustment to a 2.25 percent cap.

Colorado PERA Plan Design Compared to Other Non-Social Security Public Employee Retirement Plans

Traditional pension-type retirement plans play a critical role in recruiting and retaining good teachers and save districts money, according to new research from the <a href="http://www.nirsonline.org/index.php" target="_blank" rel="noreferrer noopener">National Institute on Retirement Security</a> (NIRS).



In <a href="https://www.copera.org/pensions-play-critical-role-in-recruiting-and-retaining-teachers-research-shows" target="_blank" rel="noreferrer noopener">Revisiting the Three Rs of Teacher Retirement Systems: Recruitment, Retention and Retirement</a>, NIRS finds that:



<ul>
<li>Defined benefit (DB) pension plans like Colorado PERA’s <a href="https://content.copera.org/commitment-public-service-themes-guide-peratour/" target="_blank" rel="noreferrer noopener">hybrid plan</a> help retain teachers, increasing their effectiveness as they become more experienced.</li>



<li>The retention effects of DB pension plans save school districts money – between $131 and $284 million nationally in 2009 – through reduced teacher turnover costs.</li>



<li>When compared to defined contribution (DC) accounts, DB plans help to recruit high quality teachers and retain highly productive teachers longer.</li>
</ul>



Multiple examples of research findings across industries and sectors, including but not limited to public school teachers, show that employees highly value pension-type retirement benefits, making them both a strong recruitment and retention tool.



The research brief explains that teacher effectiveness increases with experience, meaning that great teacher retention creates higher overall teacher productivity. Teachers become more effective as they gain experience, with effectiveness increasing sharply within the first three to five years of teaching. The youngest, least experienced teachers have the highest turnover.



The research found that in 2009, DB plans helped to retain 30,000 teachers nationwide. Because the cost of teacher turnover, which includes recruitment, hiring, and orientation, is substantial, the retention effects saved school districts between $130.7 million and $284.4 million nationally in teacher turnover costs.



As the research brief notes, “because DB pensions play an important role in the retention of highly productive teachers, pensions have the dual benefit of both increasing the overall quality of our public education system while also reducing the costs to taxpayers.”



Review a NIRS presentation about the research <a href="https://www.copera.org/pensions-play-critical-role-in-recruiting-and-retaining-teachers-research-shows" target="_blank" rel="noreferrer noopener">here</a>.

Pensions Play Critical Role in Recruiting and Retaining Teachers, Research Shows

PERA is classified as a “hybrid” defined benefit plan which means it has characteristics of a traditional pension plan as well as some additional features that are more commonly associated with defined contribution plans, such as 401(k) plans. One of the least understood elements of the hybrid plan is PERA’s Money Purchase Benefit option – (C.R.S. § 24-51-605.5). The Money Purchase Benefit is available to every member of PERA but generally is applied to members who work less than a full career with a PERA employer. Here is how it works: <ul> <li>Every dollar contributed by a member (8 percent of every check, 10 percent for State Troopers) is placed in an account of the individual participant.</li> <li>The contributions are credited with interest at a set annual rate that cannot exceed 5 percent by law (currently 3 percent).</li> <li>So long as a member has left their member account with PERA (i.e. does not refund and take out their money) until they have reached the age of retirement eligibility, they are eligible to receive the Money Purchase Benefit.</li> <li>The Money Purchase Benefit amount is calculated by taking the member account balance (contributions plus interest), adding a 100 percent match to that balance, and calculating the monthly amount that can be paid out for life assuming a 7.25 percent (currently) earnings expectation.</li> </ul> The following table shows the how the PERA plan design works for a PERA member who begins work at age 25 and then works three different career lengths. As indicated below, whether the member chooses to refund their account when they leave public service or leave their contributions in the plan until retirement eligibility, the member always receives more in benefits than the accumulated member contributions. <a href=""><img decoding="async" loading="lazy" width="564" height="348" class="alignleft size-full wp-image-1377" src="" alt="Money Purchase"></a>                   <a href="https://peraontheissues.com/wp-content/uploads/2017/03/Money-Purchase-Examples-1.pdf">Money Purchase Examples</a>

Money purchase feature of the PERA plan design explained

The Thomas B. Fordham Institute recently issued a report critical of many teacher retirement plans across the country. (The Fordham Institute, with offices in Ohio and Washington D.C., is an education reform policy think tank and should not be confused with Fordham University in New York.) You may have seen this report’s conclusions reported on as fact lately in the New York Times, and education reform-oriented bloggers have echoed the report’s findings.



The report gets a number of facts wrong when it comes to understanding how Colorado PERA works, and indicates that a Jeffco teacher would need to remain in the PERA system for 21 years to receive ANY return on retirement contributions.



But in fact, any teacher (or PERA member) leaving PERA-covered employment is eligible for:



<ul>
<li>a refund/rollover of their contributions plus interest at any point; or</li>



<li>a 50 percent on match on contributions plus interest after earning five years of service credit;* or</li>



<li>a 100 percent match on contributions plus interest or a lifetime monthly benefit once retirement eligible.</li>
</ul>



For PERA members, benefits paid out always exceed contributions put in, regardless of vesting status or years of service.



Public school teachers in Colorado PERA – including Jeffco teachers – participate in a hybrid defined benefit retirement plan, meaning that their plan includes features of both a traditional pension-type retirement plan and a 401(k) style plan. (We’ve written before about some advantages of hybrid defined benefit plans on <a href="https://www.copera.org/financial-security-future-retirees">PERA on the Issues</a>.) One of these features is the option for any member to refund or rollover their contributions at any point after leaving PERA – whether that’s after one day of work or 10,000.



Members who have five years or more of service credit and choose to refund or rollover their account also receive a 50 percent match on their contributions plus interest. Members who are retirement eligible and choose to refund or rollover their accounts receive a 100 percent match on their contributions plus interest. And all members who leave PERA-covered employment but choose not to refund or rollover their contributions become eligible for a monthly PERA benefit at age 65.



A study commissioned by the Colorado General Assembly in 2015 showed that the PERA hybrid plan provides the most income replacement at retirement at the lowest cost compared to other types of retirement plans in use today, including 401(k)-type defined contribution plans. The study concluded that regardless of age or length of service, no plan “provides a more effective level of benefits than the PERA Hybrid plan.” (Read more about the independent Gabriel, Roeder, Smith &amp; Company report on <a href="https://www.copera.org/fordham-institute-gets-wrong">PERA on the Issues</a>.)



*Refund and rollover provisions are somewhat different for DPS Division members who began membership prior to January 1, 2010. For details, see the <a href="https://www.copera.org/fordham-institute-gets-wrong">Refund/Rollover Request: Terminating PERA-Covered Employment</a> brochure.

Fordham Institute Gets it Wrong

The <a href="http://www.nirsonline.org/index.php">National Institute on Retirement Security</a> (NIRS) has issued a brief evaluating the federal Pension Protection Act of 2006. While the federal legislation’s goal was to ensure better retirement outcomes for working Americans through the strengthening of private sector <a href="http://www.investopedia.com/terms/d/definedbenefitpensionplan.asp?lgl=no-infinite">defined benefit</a> and <a href="http://www.investopedia.com/terms/d/definedcontributionplan.asp?ad=dirN&amp;qo=investopediaSiteSearch&amp;qsrc=0&amp;o=40186">defined contribution</a> plan provisions, new research has found just the opposite.



Notable findings include:



<ul>
<li>Employers are now less likely to offer defined benefit plans because of increased costs due to a switch in how plans determine funded health. This has resulted in less predictability in funding and the closing of private sector defined benefit plans.</li>



<li>Overall retirement security has been eroded because private sector employers replaced frozen defined benefit plans with less effective defined contribution plans.</li>
</ul>



What does this research mean for PERA members and retirees? It further confirms that the defined benefit plan design is the best at achieving real retirement income security.



<a href="http://files.constantcontact.com/616c3589001/6d5042b1-0cb9-4295-b0f0-3141cc06476f.pdf">Read</a> the NIRS brief.



For more detail on the PERA hybrid defined benefit plan design and the cost effectiveness of the plan, see the <a href="http://leg.colorado.gov/sites/default/files/documents/audits/1409s_colorado_public_employees_retirement_association_pera_hybrid_defined_benefit_plan_study.pdf">GRS report</a>.

New research: 10 years after the Pension Protection Act

Recruiting, retaining, and providing for great workers: How PERA portability makes it a good deal for employees at any point in their careers



Retirement plans have modernized over time to attract and retain valuable human capital assets.



Employee turnover is a statistic that is used to gauge the desirability of a work environment. Employers like to retain good employees because it’s expensive to recruit and train new employees. Benefits, such as paid time off, health care packages, and even retirement plans play an important role in attracting and retaining great employees, which reduces employee turnover. Improving the efficiency and effectiveness of the workforce by having loyal and productive employees ultimately improves the employer’s bottom line, or in the case of public employers, the delivery of public services.



Because retirement savings are accrued over the course of a career but are actually used after a career is over, employers have to consider both the current value of the retirement benefit to today’s employees as well as the value it will provide in the future, when employees have long since stopped working and come to depend on retirement savings for income. This is true regardless of whether an employee plans to quickly gain experience and then advance to a new position or hopes to stay with the same employer for decades.



PERA’s <a href="http://www.nasra.org/hybrid">hybrid defined benefit plan</a> is a particularly strong recruitment and retention tool because of the value it offers to employees regardless of the length of their career. While some critics claim that retirement plans like PERA shortchange employees who do not work a full career, if they look closely at PERA’s plan design, they will see how PERA has evolved to serve both long-service employees as well as those who only work for a short time in public employment. That’s not according to PERA, but what an <a href="https://www.copera.org/financial-security-future-retirees">independent, third-party firm</a> reporting to the Colorado General Assembly’s Legislative Audit Committee found.



A <a href="http://leg.colorado.gov/sites/default/files/documents/audits/1409s_colorado_public_employees_retirement_association_pera_hybrid_defined_benefit_plan_study.pdf">recent analysis</a> of the PERA Hybrid DB Plan design was conducted by an independent actuarial firm at the direction of the General Assembly’s Legislative Audit Committee. This review, performed by the firm Gabriel, Roeder, Smith &amp; Company (GRS) and the Office of the State Auditor, found a high degree of portability and value in the PERA Hybrid DB Plan, noting, “This study could find no plan that provides a more effective level of benefits than the PERA Hybrid Plan.”



The Colorado PERA Defined Benefit (DB) Plan has changed over time to meet the needs of Colorado’s public employers. In the 1990s, PERA employers were competing for employees who often went to work for employers who offered defined contribution (DC) plans where employees immediately <a href="http://www.investopedia.com/terms/v/vesting.asp">vested</a> in both their and their employer’s contributions to a DC retirement account. One of the key features of DC retirement accounts was their <a href="http://www.investopedia.com/terms/p/portability.asp">portability</a> – that is, employees could take the savings from their retirement accounts with them when they changed employers and presumably continue to grow their retirement savings in a new job.



Because it was difficult to retain a talented public workforce when competing with private sector employers during this time, the Colorado General Assembly modified the PERA DB Plan design to allow for similar rights to employer contributions that were in DC plans. Today, because of these and other changes made by the Colorado Legislature over the years in response to Colorado’s changing public workforce, the PERA DB Plan is the lowest cost way of providing retirement savings for public employees – no matter the length of their career.



The GRS report illustrates these findings.


<div class="wp-block-image">
<figure class="alignleft"><a href=""><img decoding="async" src="https://content.copera.org/pera-portability-good-deal-employees/"PERA Portability" class="wp-image-325"/></a></figure></div>


According to the <a href="http://www.nirsonline.org/index.php?option=com_content&amp;task=view&amp;id=937&amp;Itemid=76">National Institute for Retirement Security</a> (NIRS) in its report, “<a href="https://www.copera.org/research-can-use">Preserving Retirement Income Security for Public Sector Employees</a>,” when it comes to financing retirement, Americans have two key concerns, “a steady and adequate retirement income that won’t run out, and the ability to move retirement plans from job to job.”



NIRS goes on to document how nearly all state retirement systems allow for the preservation of retirement income benefits even for employees who change jobs. But the GRS study shows that in Colorado, a member who earns PERA retirement benefits for even just three years will accrue more savings than another type of retirement savings plan would provide.



Retirement savings plans are just one component of an employee’s total package of salary, leave, health care, and other benefits. But it’s a critical piece in attracting great employees to public service and keeping them on board for successful careers.



PERA on the Issues posts are written and compiled by the staff of Colorado PERA under the direction of Executive Director Greg Smith and the PERA Board of Trustees. We encourage you to comment with your thoughts and feedback.

PERA Portability = Good Deal for All Employees

Recent news about PERA’s 2015 investment performance has prompted a few calls for changing the PERA plan design from a defined benefit plan to a defined contribution or 401(k)-like plan. We remind PERA on the Issues readers about what <a href="https://www.copera.org/pension-changes-offer-cautionary-tale">others have said</a> about switching plan designs and we invite you to review what an independent, third-party analysis found about the cost effectiveness of PERA. The next time you hear someone say that a defined contribution plan would be better for Colorado’s public employees, you’ll have these excellent resources to use.



In July 2015, the Colorado General Assembly’s Legislative Audit Committee released a report determining that the cost to&nbsp;fund PERA benefits is&nbsp;lower than the cost of other plans in the public and private sector. Independent actuarial firm Gabriel, Roeder, Smith &amp; Company (GRS), with oversight from the Office of the State Auditor, examined the plan design of Colorado PERA and released the <a href="https://www.copera.org/financial-security-future-retirees" target="_blank" rel="noreferrer noopener">report</a>. The report also found that when costs are held constant, PERA’s Hybrid Defined Benefit Plan delivers the highest percentage of salary replacement income in retirement – for short-term as well as career public employees in Colorado.



The GRS study findings have not gone unnoticed. Gregory W. Smith, PERA’s Executive Director, joined Leslie Thompson from GRS to share the study’s conclusions with members of the <a href="http://www.nirsonline.org/index.php" target="_blank" rel="noreferrer noopener">National Institute on Retirement Security </a>(NIRS). Smith noted during the webinar that the GRS study found that PERA “truly serves every single member in the plan.” He went on to say, “it’s important to quantify the trade-offs between the PERA DB Plan and other plan designs, and this report does that.”



<a href="http://leg.colorado.gov/sites/default/files/documents/audits/1409s_colorado_public_employees_retirement_association_pera_hybrid_defined_benefit_plan_study.pdf" target="_blank" rel="noreferrer noopener">Read</a> the GRS report.



NIRS is the nonprofit research and education organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole.



<a href="https://www.copera.org/independent-analysis-pera-wins-gold" target="_blank" rel="noreferrer noopener">Studies Handout</a>

Independent Analysis: PERA Wins Gold

The studies have been completed and the results are in: PERA is the most cost effective, efficient retirement plan available, is on-track to achieve full funding, and has saved $15 billion as a result of the shared sacrifices in SB 1.



As 2015 comes to a close and we prepare for the next legislative session in January, we wanted to summarize the various studies and reports on PERA conducted this year in order to objectively inform the discussion about Colorado PERA. Three independent studies on PERA were released in 2015 as a result of legislation passed in 2014 (<a href="http://www.leg.state.co.us/clics/clics2014a/csl.nsf/fsbillcont2/DE9404F7F0E17CC587257C600001DF7C/$FILE/214_enr.pdf" target="_blank" rel="noreferrer noopener">SB 14-214</a>), and 2015 marks the five-year anniversary of the passage of the landmark PERA reform bill (<a href="http://www.leg.state.co.us/clics/clics2010a/csl.nsf/fsbillcont3/DD3F57C1B220E34A872576A80029E75E?open&amp;file=001_enr.pdf" target="_blank" rel="noreferrer noopener">SB 10-001</a>), which requires a report to be issued every five years on the impact of the reforms. Let’s review each study in the order of release throughout the year.



SB 14-214



Prior to the start of the 2014 Colorado legislative session, the Governor’s Office included funding in the Governor’s budget to perform an independent analysis of the retirement plan offered to public employees. The General Assembly appropriated $500,000 and unanimously passed SB 14-214 to:



<ul>
<li>Perform a total compensation study for State employees that includes the retirement benefits provided by PERA (released January 2015).</li>



<li>Complete a study comparing the cost and effectiveness of the current hybrid defined benefit plan to alternative plan designs in both the public and private sector (released July 2015).</li>



<li>Conduct a sensitivity analysis to determine when actuarial model assumptions are meeting targets and achieving sustainability (released October 2015).</li>
</ul>



The <a href="https://www.copera.org/poked-prodded-and-perused-pera-passes" target="_blank" rel="noreferrer noopener">first study</a> in SB 14-214 required the State Personnel Director to contract with a “third party compensation consulting firm with actuarial expertise and national standing to perform a total compensation study that includes the retirement benefits provided by the public employees&#8217; retirement association (PERA).” From the Executive Summary of the report:



This study requires a comparison between the State and similar workforce structures including private companies and other states. For the retirement benefits that we explicitly valued…the State’s total retirement compensation package is equivalent to 15.7% of pay (15.4% defined benefit and 0.3% retiree health care), relative to the market median of 14.7% (combined sources: defined contribution, defined benefit, Social Security, and retiree health care).



Comparing Colorado to 23 peer organizations (including 18 states and five other private employers like Wells Fargo, IBM, and the University of Denver), the study found the State is just slightly below the prevailing market in total compensation, and the retirement package offered is about 1 percent higher than market peers. As the Milliman report concludes, “The State’s offerings are generally consistent with market trends of survey participants.”



The <a href="https://www.copera.org/state-pension-reform-mixed-results" target="_blank" rel="noreferrer noopener">second study</a> in SB 14-214 required the State Auditor to contract with a “nationally recognized and enrolled actuarial firm” to analyze PERA and compare it to alternative plan designs in the public and private sector. From the Executive Summary of the report conducted by GRS:



This in-depth look at the PERA Hybrid Defined Benefit Plan (PERA Hybrid Plan) illustrates that PERA is within norms for benefits when compared to its non-Social Security state peer group members. PERA benefits are also comparable to the private sector. This study found that the current PERA Hybrid Plan is more efficient and uses dollars more effectively than the other types of plans in use today. Alternative plans implemented for new hires require greater contributions in order to replace the same retirement income than the current PERA Hybrid Plan. If contributions are kept the same, alternative plans will provide a lower retirement benefit/replacement ratio. Alternative plans studied included defined contribution, cash balance, a combination of defined benefit and defined contribution, plus Social Security private sector model plans. PERA’s costs for new hires (future hires) are lower than under any alternative plan.



Bottom line from the 217-page report: The PERA hybrid defined benefit plan is the most cost effective, efficient plan available, and provides more income at retirement than the alternative plan designs for all ages and career paths. If costs are held constant among the alternative plan designs, PERA provides the highest amount of benefits for the given cost. If benefits are held constant among the alternative plan designs, PERA provides those benefits at the lowest cost. The study could find no plan that is more effective and efficient at providing a retirement benefit than the PERA Hybrid Plan.



The <a href="https://www.copera.org/poked-prodded-and-perused-pera-passes" target="_blank" rel="noreferrer noopener">third study</a> in SB 14-214 also required the State Auditor to contract with an independent actuarial firm with experience in public sector plans to conduct a sensitivity analysis of PERA’s actuarial assumptions. From the Report Highlights:



The PERA Hybrid Defined Benefit Plan is currently on track to be fully funded by 2052-2053 based on current actuarial assumptions. Prior to the changes in Senate Bill 10-001, insolvency was projected. Investment return has the widest range of variability and has the biggest impact on the full funding date. PERA should utilize the proposed signal light reporting annually to give policymakers an assessment of the current projected full funding dates compared to the objective.



A new signal light tool shows that, prior to reforms passed in SB 1, PERA’s major divisions would have been all red or dark red (projected to be insolvent), but after the impact of SB 1, the signal lights improved and all have been light green or better since that time (projected to be fully funded in less than a 40-year period). In addition, the report validated PERA’s actuarial assumptions and projections (including demographic and economic assumptions like investment return, salary increase, payroll growth, and inflation) and calculated a very high likelihood of all funding objectives to be met in a reasonable period of time.



More information: <a href="https://www.copera.org/poked-prodded-and-perused-pera-passes" target="_blank" rel="noreferrer noopener">https://peraontheissues.com/index.php/2015/10/28/independent-studies-offer-expertise-and-insight/</a>



SB 10-001



As part of the changes implemented in SB 1, PERA is required to report to the General Assembly every five years “regarding the economic impact of the 2010 legislative session changes to the annual increase provisions on the retirees and benefit recipients as compared to the actual rate of inflation and the progress made toward eliminating the unfunded liabilities.”



From the Key Findings of <a href="https://www.copera.org/new-report-compares-inflation-to-annual-increase" target="_blank" rel="noreferrer noopener">the report released December 2015</a>:



<ul>
<li>As a result of the SB 1 reforms, PERA is sustainable.</li>



<li>Over the past five years, SB 1 reforms saved PERA approximately $15 billion in unfunded liability.</li>



<li>The SB 1 reform with the most significant impact over the last five years is the reduction in Annual Increase provisions which accounts for over 90 percent of the $15 billion in savings to date.</li>



<li>Even recognizing the SB 1 reforms which changed the Annual Increase provisions, PERA benefit recipients kept up with U.S. inflation over the last five-year period.</li>



<li>The funded ratios of the two largest Divisions of PERA (State and School) are slightly ahead of the original projections developed at the time SB 1 was implemented in 2010.</li>
</ul>



Overall, the report highlights how shared sacrifice, fiscal discipline, and legislated reforms provide PERA with the resources it needs to deliver the benefits earned by Colorado’s public workforce, making Colorado stronger for everyone.



More information: <a href="https://www.copera.org/puerto-rico-and-pensions" target="_blank" rel="noreferrer noopener">https://peraontheissues.com/index.php/2015/12/11/five-years-after-the-great-recession-pera-continues-progress-toward-full-funding/</a>

Poked, Prodded, and Perused: PERA Passes!

A digest of timely information and insight about finance, investing and retirement



<a href="http://www.bizjournals.com/denver/blog/finance_etc/2015/12/pera-changes-to-the-states-pension-plan-over-5.html" target="_blank" rel="noreferrer noopener">PERA: Changes to the state pension plan over 5 years have saved billions</a>&nbsp;|&nbsp;<a href="http://www.bizjournals.com/denver" target="_blank" rel="noreferrer noopener">Denver Business Journal</a>



By most accounts, Colorado’s state pension plan is healthy and on track to solvency in the wake of a massive overhaul by lawmakers five years ago.



PERA executive director Greg Smith <a href="https://www.copera.org/puerto-rico-and-pensions">reported Friday to the Joint Finance Committee</a> that in the past five years, SB 1 reforms have saved PERA about $15 billion in unfunded actuarial accrued liability. Most of the savings, he said, is from decreasing the Annual Increase provisions for current and future retirees – which accounts for 90 percent of the $15 billion in savings.



<a href="https://www.copera.org/retirement-roundup-pera-on-the-path-to-full-funding" target="_blank" rel="noreferrer noopener">Fighting inflation in retirement</a>&nbsp;|&nbsp;<a href="http://www.morningstar.com/" target="_blank" rel="noreferrer noopener">Morningstar</a>



The news that Social Security beneficiaries won’t receive an inflation adjustment next year has renewed debate about how we measure the cost of living for seniors. A strong case can be made that the current formula driving Social Security&#8217;s cost-of-living adjustment (COLA) is out of whack.



The COLA is tied to the <a href="https://www.copera.org/retirement-roundup-pera-on-the-path-to-full-funding" target="_blank" rel="noreferrer noopener">Consumer Price Index for Urban Wage Earners and Clerical Workers</a> (CPI-W), which gauges a market basket of goods and services of working people – who tend to be younger and spend less on health care than seniors. What can you do to hedge against the negative effects of future inflation in retirement?



<a href="http://www.investmentnews.com/article/20151210/BLOG05/151219997/rethinking-retirement-income-replacement-rules" target="_blank" rel="noreferrer noopener" class="broken_link">Rethinking retirement income replacement rules</a>&nbsp;|&nbsp;<a href="http://www.investmentnews.com" target="_blank" rel="noreferrer noopener">Investment News</a>



Some research suggests that the traditional target for retirement income is too high, based on 80 percent of gross earnings in prime career years before retirement. Others say it is too low, given rising out-of-pocket health care costs. But a <a href="https://www.transamericacenter.org/docs/default-source/retirees-survey/retirees_survey_2015_report.pdf" target="_blank" rel="noreferrer noopener">new study</a> from the Transamerica Center for Retirement Studies shows that planning to work longer as a way to forestall retirement and minimize savings needs may only be wishful thinking.



<a href="http://www.fool.com/investing/general/2015/12/06/the-average-american-is-woefully-unprepared-for-re.aspx" target="_blank" rel="noreferrer noopener">The average American is woefully unprepared for retirement</a>&nbsp;|&nbsp;<a href="http://www.fool.com" target="_blank" rel="noreferrer noopener">Motley Fool</a>



This year’s results from the annual Retirement Confidence Survey conducted by the <a href="http://www.ebri.org" target="_blank" rel="noreferrer noopener">Employee Benefit Research Institute</a> (EBRI) are sobering. Only 22 percent of Americans are very confident that they’ll have enough money for a comfortable retirement. And more than a quarter of working Americans have set aside $1,000 or less for their golden years.



<a href="https://content.copera.org/retirement-roundup-pera-on-the-path-to-full-funding/" target="_blank" rel="noreferrer noopener">Tips for people who will retire in 2016</a>&nbsp;|&nbsp;<a href="https://www.copera.org/retirement-roundup-7-reasons-to-volunteer-during-retirement" target="_blank" rel="noreferrer noopener">U.S. News &amp; World Report</a>



Retirement is a transition into a new phase of life that requires changes to your finances and lifestyle. Taking care of a few preparations in the months leading up to retirement can make that adjustment smoother.



<a href="http://www.cnbc.com/2015/12/10/what-the-looming-fed-rate-hike-means-for-your-retirement.html" target="_blank" rel="noreferrer noopener">What the looming Fed rate hike means for your retirement</a>&nbsp;|&nbsp;<a href="http://www.cnbc.com" target="_blank" rel="noreferrer noopener">CNBC</a>



An interest rate hike from the <a href="http://www.federalreserve.gov" target="_blank" rel="noreferrer noopener">Federal Reserve</a> looks to be on the horizon this season. A recent survey found more than half of American investors say the economy is their top financial concern, fueled in part by worries over market volatility and interest rates.



Experts say the first increase in interest rates since 2006 might not have much of an impact, but if interest rates continue to climb seven or eight times in the next three or four years, you’ll start to notice it in your wallet and your investments.



<a href="http://www.nytimes.com/2015/12/14/business/economy/in-denver-worries-that-the-fed-will-chill-a-sizzling-recovery.html?ref=economy" target="_blank" rel="noreferrer noopener">The little guy feels anxious as the Fed is set to lift rates</a>&nbsp;|&nbsp;<a href="http://www.nytimes.com" target="_blank" rel="noreferrer noopener">The New York Times</a>



Around Colorado and across the nation, decisions made by the <a href="http://www.federalreserve.gov" target="_blank" rel="noreferrer noopener">Federal Reserve</a> in Washington have large consequences. William Harris tapped his retirement savings to open <a href="https://www.copera.org/retirement-roundup-pera-on-the-path-to-full-funding" target="_blank" rel="noreferrer noopener">A-Town Pizza</a>, a Neapolitan pizzeria, in Aurora three years ago. On a good Friday, his shops sell 1,200 pies. In such stories, the Fed finds evidence that its seven-year campaign to reboot the American economy is succeeding. But Mr. Harris is not ready.

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