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.

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!

After five years of shared sacrifice, PERA is making progress toward becoming fully funded. That’s according to a new <a href="https://www.copera.org/new-report-compares-inflation-to-annual-increase" target="_blank" rel="noreferrer noopener">report PERA released</a><a href="https://www.copera.org/new-report-compares-inflation-to-annual-increase">&nbsp;</a> as required by Senate Bill 10-001.



Known as SB 1, this landmark legislation was a response to the Great Recession that required sacrifice from members, retirees, and employers alike in order to return PERA to long-term sustainability.



The report shows that PERA has saved about $15 billion to date in unfunded liability as a result of SB 1 changes. Over 90 percent of that savings is a result of the reduction of the Annual Increase. But even with the reduction, PERA benefit recipients have kept up with inflation over the last five years.



For PERA’s two largest member divisions, the State and School Divisions, the actuarial funded ratios, or the ratios between PERA’s assets and promised benefits, are slightly ahead of the original projections made when SB 1 went into effect five years ago.



Take a look at a brief <a href="https://www.copera.org/five-years-after-the-great-recession-pera-continues-progress-toward-full-funding" target="_blank" rel="noreferrer noopener">fact sheet</a>&nbsp;explaining how SB 1 has allowed PERA to continue delivering the benefits earned by Colorado’s public workforce, making Colorado stronger for everyone.

Five Years After the Great Recession, PERA Continues Progress Toward Full Funding

In 2010, PERA was one of the first public retirement plans in the country to proactively recommend responsible reforms based on the concept of shared sacrifice – where all members gave up something – in order to ensure PERA’s long-term sustainability. In a bipartisan fashion, the Colorado General Assembly enacted SB 1 to make PERA stronger for everyone.



SB 1 also required that PERA report to the General Assembly on the effectiveness of SB 1 every five years. PERA will release the first report before January 1, 2016.



A few key legislators reflect on this landmark legislation five years after its enactment. <a href="https://youtu.be/WlCmdghXdqI" target="_blank" rel="noreferrer noopener">Watch video.</a>


<a href="https://www.youtube.com/watch?v=WlCmdghXdqI">https://www.youtube.com/watch?v=WlCmdghXdqI</a>

SB 1 Report Due to General Assembly by Year-End

In 2010, PERA was one of the first public retirement plans in the country to initiate responsible reforms based upon an approach of shared sacrifice to ensure PERA’s long-term sustainability. Former Senate Minority Leader Josh Penry called Senate Bill 1 &#8220;a leadership moment&#8221; where the Colorado General Assembly, in a bipartisan fashion, enacted this legislation to protect PERA’s financial stability for past, current, and future public workers.



A few key legislators reflect on this landmark legislation five years after its enactment. <a href="https://youtu.be/WlCmdghXdqI" target="_blank" rel="noreferrer noopener">Watch video.</a>

Video: A Leadership Moment

There has been considerable commentary on the sustainability of Colorado PERA. Using a simple definition, PERA is sustainable. In this instance, meaning able to pay future retirements without depleting the trust funds.



But digging a little deeper, there are <a href="http://www.nirsonline.org/index.php?option=com_content&amp;task=view&amp;id=613&amp;Itemid=48" target="_blank" rel="noreferrer noopener">additional criteria</a> pension plans should meet to be considered sustainable:



<ul>
<li>A sustainable pension plan has a reasonable benefit design. According to a recent <a href="https://www.copera.org/sustainability-digging-deeper-to-understand-how-pera-will-pay-benefits-over-the-long-run" target="_blank" rel="noreferrer noopener">study</a> completed by Gabriel, Roeder, Smith &amp; Company, PERA’s hybrid defined benefit plan design delivers a higher percentage of income in retirement than other plan designs – and does so at a lower cost.</li>



<li>A sustainable pension plan has a commitment from the plan sponsor (public employers, in PERA’s case) to regularly fund the plan. The Colorado General Assembly and the Governor, through the passage and enactment of 2010’s <a href="https://www.copera.org/preview?pageid=41010" target="_blank" rel="noreferrer noopener">Senate Bill 1</a>, have ensured that the contributions received by PERA’s employers will achieve this goal when the contribution increases contained in SB 1 are fully recognized in 2017 and 2018.</li>



<li>&nbsp;A sustainable pension plan has a strong governance process. PERA is overseen by a 16-member <a href="https://www.copera.org/recap-of-pera-boards-june-2021-meeting">Board of Trustees</a> consisting of three Trustees appointed by the Governor and confirmed by the Senate; four members from the School Division; three members from the State Division; one member from the Local Government Division; one Judicial Division member; two PERA retirees; a non-voting representative from the DPS Division; and the State Treasurer as an ex officio, voting member. All Trustees are <a href="https://www.copera.org/2018-board-election-underway" target="_blank" rel="noreferrer noopener">fiduciaries</a> bound by law to act solely in the best interest of the PERA membership.</li>
</ul>



By these additional measures, Colorado PERA is, in fact, sustainable.



But what about the retirement system’s unfunded actuarial accrued liability (UAAL)? Doesn’t that prove that PERA is unsustainable?



In a word, no.



Having an unfunded liability does not mean that a pension plan is unable to pay the benefits for which it is presently obligated or to meet current cash flow requirements. Because of the long-term nature of pensions, funding gaps can be filled gradually, over time. Most of the current unfunded liability is a result of the market decline in 2008 and a reduction of the <a href="http://www.nasra.org/files/Issue%20Briefs/NASRAInvReturnAssumptBrief.pdf" target="_blank" rel="noreferrer noopener">investment rate-of-return assumption</a>. Think of the unfunded liability as a hole which needs to be filled. Unsustainable plans are those with a deficit which are either failing to fill in the hole, or continuing to dig it deeper. PERA is not one of those plans.



One final thing to keep in mind is that sustainability isn’t measured in weeks, months, or single years. Measuring the sustainability of a hybrid defined-benefit pension plan such as PERA must reflect the nature of the liabilities which are long-term. Pension plans operate on a long time horizon where members work 10, 20, 30, even 40 years, and draw a pension for many years after retirement.



If you only focus on a few points in time or take raw data out of context to assess sustainability, you’re likely to see a distorted picture. Like with a 30-year mortgage, PERA is paying down the unfunded liability over time. Just as with a mortgage, it takes many years to see a significant reduction in the principal owed, it will take time for the unfunded liability to show large declines. There is no basis for surprise or concern that the outstanding balance does not decline materially for many years.



PERA is sustainable.



This article is based on a <a href="https://www.nhrs.org/" target="_blank" rel="noreferrer noopener">New Hampshire Retirement System</a> publication. We thank them for their willingness to share information with PERA.

Tag Archives:

Poked, Prodded, and Perused: PERA Passes!

Five Years After the Great Recession, PERA Continues Progress Toward Full Funding

SB 1 Report Due to General Assembly by Year-End

Video: A Leadership Moment

Sustainability: Digging Deeper to Understand How PERA Will Pay Benefits Over the Long Run

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