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Saturday, July 30, 2011

Hard Bargain

As most people know, the PERS Board voted yesterday (July 29) to keep the assumed rate at 8%.  The local media seemed surprised by this decision and focused on a random comment made by one of the Board members that he didn't think the 8% was sustainable, but that he respected the wisdom and judgement of the Mercer actuaries.

Most reports didn't discuss some of the issues raised in the actuary report.  One issue is that the mean, median, and modal assumed rate across the public employee pension plans typically surveyed (about 120) sat right at 8%.  A few of the higher assumptions (8.5%) had been dropped to 8%, but over all public plans surveyed, 8% remains the prevailing assumption.  Mercer also makes its own analysis and its capital markets survey forecast that over the next 20 years, the likely rate of return using the asset mix similar to the PERS portfolio is 7.88%, while another actuarial firm, SIS, using the same data predicts returns of 8.16%.  As you can see, the central value between these two highly respected firms is about 8%.

The Board discussed other rates including 7.50% and 7.75%, but were confronted with the conundrum that by lowering the assumed rate, the employers (and hence the taxpayers) would be on the hook for even higher contributions.  The Board attempted to balance the need for long-term stability in rates against the short-term shock that lowering rates would result in.  In the end, the Board voted 4-1 to retain the 8% rate.

Many argue that the Board is foolish, is a tool of the unions, and a variety of other things.  In fact, 4 of the 5 Board members are from outside the system and work for large or small private companies with their own pension plans.  The public would have you believe that the last 5 years have been harsh and that returns are well below 8%.  This is true but misleading.  Only 2008 had the strongly negative returns of -27% that skew results significantly lower.  Leaving out 2008, PERS returns have been well above 8%, and the 7 year average return - the closest to the actuarial prediction range is 7.6%.  So, while 8% might seem high against the average, the average includes -27%, surrounded by years of 13% and 20%, and 15%.  The long-term PERS average continues to bump close to the 8% mark.  I suspect if I were on the Board, I might have pushed for an assumption of 7.75%, but that would have been reevaluated in two years anyway.  I know most people would have been unhappy with me for doing so, but I think it would have struck a fine balance between the need to have stability and the need to keep employer rates stable.

On the whole, I think the PERS Board did the only rational thing it could do given the information available.  Each PERS member owes the Board a thank you and I would encourage each of you to write to a Board member (or two or five) and thank them for their vote to retain the 8%.  It was a hard bargain and the Board made a sensible decision, deciding not to throw members to the wolves of the public and the media.




Unknown said...

Who is at risk for having their benefit changed, future PERS retirees or all PERS retirees? Or are they at risk? I haven't seen this addressed in any of the news reports.

mrfearless47 said...

Only future retirees on or after 1/1/12. This is due to the changes coming in the mortality factors.

Anonymous said...

What are the changes to the mortality tables and how will that effect Tier 1 employees who retire after 1/1/12?

mrfearless47 said...

The changes to the mortality factors haven't been published yet because the Board just approved the assumptions last Friday. Actual experience data from PERS retirees over the past four years suggests longer life expectancies and require a setback of the current tables by about 18 months. So, if you are 61 when you retire, the mortality factor used would be roughly that at 59.5. Estimates are that they will affect retiree benefits for the cohort retiring on or after 1/1/12 by about 1% to 2% depending on age at retirement.

mpguy said...

It's AMAZING that in the past few years, according to the actuaries, life spans have lengthened so remarkably. If only it were so.

mrfearless47 said...

@mpguy. This is based on actual experience data. Apparently, the cohort retiring in the past 20 years has been healthier and lived longer than previous cohorts.

Mr Fearful said...

I heard that HB 2456 only repealed one of the two 1991 tax remedy rules and that if you weren't in PERS until after 1980, the tax remedy rule most favorable to me was still in effect. Any truth to this?

Any idea when they will announce the new actuarial tables?

mrfearless47 said...

@Mr. Fearful. You are partly correct. HB 2456 only repealed HB 3349 (1995) for new retirees who live out of state and retire after 12/31/11. The older benefit (SB 656) applies primarily to members who retired before 1991. Whether SB 656 applies to anyone who retired after SB 656 went into effect is not clear.

Actuarial tables will be announced at the late September meeting as I understand it. They also take effect on 1/1/12.