Florida Lawmakers to DB Plan: I'm Just Not That Into You

A bill to close Florida's massive defined benefit pension plan to new members will soon go before state lawmakers--some of whom have put 'Pension Reform' high on their 2013 to-do lists.

(March 4, 2013) – The 2013 legislative session commences tomorrow in Florida, when lawmakers will take up, among other proposals, a bill to close the state’s $131.9 billion defined benefit (DB) pension plan.

House Bill 7011, if passed in its current form, would close the DB plan to new members effective January 1, 2014, and prohibit current members of the state’s defined contribution (DC) plan from switching into the pension system.

Legislators will soon receive copies of an auctorial study comparing cost projections of continuing the DB plan versus switching to DC, according to a staff member from the Florida Retirement System. The study was commissioned by House Speaker Will Weatherford—who lists pension reform as one of his five goals for the 2013 session—and prepared by actuarial firm Milliman.

The Florida Retirement System’s unfunded pension liabilities sit at $19.3 billion as of July 1, 2012—a figure which Milliman foresees rising over time due to longevity increases if the DB plan remains open. However, the study also found that closing the DB plan alone would not be an effective way to deal with that shortfall. “If the plan is closed,” Milliman’s researchers stated, the unfunded liability “is not expected to be lower than the current amount until 25 years later. If the plan is kept open, it is not expected to be lower during the projection period. The growth in the unfunded liability is a function of the funding policy,” which, the study asserts, would lead to a rise in unfunded liabilities over the medium-term.

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Over the long term, Milliman concluded that closing the DB plan would in fact cut Florida’s unfunded pension obligations. The study estimated the figure would fall to $16.1 billion by 2041, whereas the state would face a $74.5 billion shortfall that year with an open DB plan.

A closed plan, or “soft freeze” in Milliman’s terms, would likely force the fund’s CIO (currently Ash Williams) and investment team to change their tact: “Over time, the State Board of Administration may lose the ability to invest with a long-term perspective as annual cash flow becomes more and more negative … This will possibly necessitate future changes in asset allocation in order to provide sufficient sources of cash for benefit payments, which in turn could impact the rates of return earned by the fund’s assets.”

In a pre-session meeting on February 7, the Government Operations Subcommittee approved the bill by a vote of nine to three, with one abstainer. The bill has been sent on to the Appropriations and State Affairs committees for review, which can commence when the legislative session opens tomorrow.

Five or six corporations crossed the $20 billion pension liability threshold in 2012, according to Russell research, including 3M, Johnson & Johnson, Delta Airlines, and Federal Express.

(March 4, 2013) – Falling interest rates have triumphed over strong equity markets to make Russell’s $20 billion club—that is, $20 billion in corporate pension liabilities—the hottest thing around.

Five or six corporations crossed that threshold in 2012, according to Russell’s Chief Research Strategist Bob Collie, marking at least a 25% increase. SEC filings from 2011 show just 19 members belonging to the group at the end of the year. Benefit obligations rose from $860.1 billion for those 19 at the start of 2012 to $914.8 billion at its close. The group’s net funding shortfall likewise climbed from $182 billion to $220 billion.

“The surprising part of it is that we track funded status throughout the year and didn’t expect a major change,” Collie told aiCIO. “Yet when the number came in, we saw this fairly significant drop.” He cautions against taking the rise in unfunded obligations too seriously, however: “It’s just sort of this technical thing. It washes out over the long term.”

The technical thing Collie remarked on is the discount rate-based calculation used to formulate corporation’s funded statuses. Despite a strong year for investment performance overall and substantial contributions from plan sponsors to their pension funds, the funding gap failed to narrow due to persistently low interest rates.

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Collie’s look at what happened in the corporate pension space in 2012 turned up another notable trend: an uptick in risk transfer activities. “There were the unusual ones—GM and Verizon—who grabbed the headlines,” he said, “but the simpler versions—such as paying out lump sums—are happening at a lot of corporations, and they make sense for them.”

Collie called the outflow of capital in the form of lump sum payments a “serious” shift, but declined to forecast what 2013 would bring in the risk transfer space. “It’s very hard to predict,” he said “If you would have asked me last year if we were going to see $40 billion in risk transfer, I wouldn’t have foreseen it. That said, I think a lot of corporations are going to be very interested in it.”