Home > News > Newsmakers > South Carolina Governor Calls for Closure of Defined Benefit Pension

NewsmakersJanuary 28, 2020

South Carolina Governor Calls for Closure of Defined Benefit Pension

Gov. Henry McMaster’s proposed plan would move all new employees into a defined contribution pension.

South Carolina Gov. Henry McMaster wants to close the $32 billion state retirement system’s defined benefit pension plan and move all new state workers into a defined contribution plan.

“I’m asking that we – at the end of this year – close enrollment in the current defined benefit plan,” McMaster said during his State of the State address last week. “Putting money into an open system like that is like trying to fill a bathtub with the drain open. We must close enrollment first.”

According to the South Carolina Retirement System’s (SCRS) most recent valuation report, the system had unfunded liabilities of just under $23 billion as of July 1. That is up from just under $22.1 billion at the same time the previous year.

McMaster’s budget for fiscal year 2020-2021 includes proviso language that closes enrollment in the South Carolina Retirement System (SCRS) to new members. A new employee eligible to become a member of SCRS after Dec. 31, 2020 would instead join the State Optional Retirement Program (State ORP) administered by the South Carolina Public Employee Benefit Authority (PEBA).

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

McMaster said that although adopting the reform will require a “concerted expenditure of political willpower” by the general assembly, he said it pales in comparison to the cost of doing nothing.

“It is time for the legislature to make some hard decisions and implement systemic reforms to correct this problem,” McMaster wrote in his budget. “We must maintain our commitment to the 11.5% of South Carolina’s population that relies on state retirement systems, while protecting taxpayers from bearing any additional financial burden caused by inaction or indecision. That means enacting a date-certain transition away from defined benefit pension plans to defined contribution retirement plans for new state employees.”

The State ORP is a defined contribution retirement plan PEBA administers for employees of state agencies, public and charter school districts, and public higher education institutions in South Carolina. The defined contribution plan participants are solely responsible for their retirement account and they choose how to invest and manage their money.

Like South Carolina, Kentucky proposed a pension reform plan in 2017 that included closing the defined benefit pension and moving new employees to a defined contribution pension plan. An analysis of that proposal released in late 2019 said, however, that the move would have saved the state money in the short term, but would have been more expensive over the longer term.

Head of Canada’s Largest Pension Warns Against Illiquid Assets

CPPIB CEO Mark Machin ‘rings the alarm bell’ about not being too invested in the asset class.

By Steffan Navedo-Perez

Canadian Pension Plan Investment Board (CPPIB) CEO Mark Machin warned investors against pouring their capital into illiquid assets, particularly private markets holdings, in an interview with Bloomberg at the World Economic Forum in Davos, Switzerland.

“I do ring the alarm bell on not to be too invested in illiquid assets,” Machin said. “We do have half the portfolio in illiquid assets. We are very comfortable with our risk models and what we would do in various lurches down markets, but I do worry about the expansion of a lot of funds like us around the world into private illiquid assets.

“I think people have to be very careful to make sure that they truly understand their liquidity positions, truly understand that thing they’re relying on to be liquid, turns out not to be liquid, that they can cope with that and still fulfill their fiduciary obligations.”

CPPIB’s investment portfolio returned 2.3% net of costs during the second quarter of fiscal 2020. That raised its total net asset value to C$409.5 billion ($307.4 billion) from C$400.6 billion at the end of the previous quarter.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

Machin asserted that he and his team will continue to delve into private equity, given that the asset class offers attractive characteristics for CPPIB’s portfolio.

“The trends with private equity is still pretty robust,” Machin said. “When you look at different returns with asset classes, private equity’s still quite robust.”

Machin clarified that he doesn’t forecast a fall in the asset class anytime soon, but noted if a wide variety of investors were transitioning from public to private markets investments at around the same time, “it’s one of the things that could create a systemic issue down the road.”

Machin added that venture capital provides a clear avenue to disparage the information asymmetry that’s typically existed between investors and the companies that stay private for a little bit longer than anticipated.

“We find that by not being in some of those earlier companies, we’re a little less clear-eyed on those changes than we’d like to be. I wouldn’t say we’re blind to it, we have a lot of investment strategies that get closer to it. But getting into venture capital is one way that we hope we can partner with them to get insight on these trends.”

CPPIB’s illiquid portfolio includes a variety of holdings, including an Indonesian infrastructure investment executed last September, and a stake in an Indian logistics provider.

Canada’s CPPIB Doubles Renewables Investment

CPPIB Announces First Indonesian Infrastructure Investment

Tags: Canada, Canada Pension Plan, Canadian Pension Plan Investment Board, CPPIB, illiquidity, Investment, Mark Machin, Pension, portfolio

« Ill-Starred Investing Ace Bill Miller Posts Whiz-Bang 2019 Returns